FF&E Included in Market Value?

[Kyle Waites]

I understand that FF&E is really a "Personal Property" and not a "Real Property" item. My previous experience with properties such as Hotels, Restaurants and Car Wash typically include the FF&E within the "Sale" price indicated in data sources for comparable sales. it is fairly clear that in both the "Cost" and "Sales" approach the value of the subject FF&E can be deducted to determine the Market Value for the land and building only. My uncertainitity is in the "income" approach. Here typically only the income and expense amounts are considered without consideration for land or building improvements. From this viewpoint it appears that the FF&E would not effect this outcome although without it the income would not be possible.
Your comments please.

 

[BRCJR]

The income stream is dependent upon the utilzation of FF&E. You are renting a furnished room instead of an unfurnished room.

What happens if you take the dairy farmer's tractor and wagon away? Hard time cutting and putting up the hay. This will have an adverse effect on NOI.

Take away the hotel bed and it will be like a tractor and wagon disappearing.

The income production is tied to the use of PP, in many cases, in appraisals where the Income Approach to Value is applicable.

Discuss the "weakness" of this approach if you beleive it so.

 

[Terrel L. Shields]

There are simply cases where you cannot separate the FFE from the operation. Hotels, would, imho, be one of those. And the problem with the cost and sales approaches is that most sales sans FFE are not orderly liquidations thus are not representative of a "going concern" value of the RE.

 

[CANative]

Good read.

http://federalappraisal.com/Overall Property, Its Part and Three Approaches.pdf

 

[Highlight17]

I understand that FF&E is really a "Personal Property" and not a "Real Property" item. My previous experience with properties such as Hotels, Restaurants and Car Wash typically include the FF&E within the "Sale" price indicated in data sources for comparable sales. it is fairly clear that in both the "Cost" and "Sales" approach the value of the subject FF&E can be deducted to determine the Market Value for the land and building only. My uncertainitity is in the "income" approach. Here typically only the income and expense amounts are considered without consideration for land or building improvements. From this viewpoint it appears that the FF&E would not effect this outcome although without it the income would not be possible.
Your comments please.

If a sale of your property would typically include the FF&E, then you have to include it, otherwise the result is not "Market Value". If your client is a Federally Regulated Institution, remember to report its 'contributory' value to the total assets of the business.

 

[Highlight17]

I understand that FF&E is really a "Personal Property" and not a "Real Property" item. My previous experience with properties such as Hotels, Restaurants and Car Wash typically include the FF&E within the "Sale" price indicated in data sources for comparable sales. it is fairly clear that in both the "Cost" and "Sales" approach the value of the subject FF&E can be deducted to determine the Market Value for the land and building only. My uncertainitity is in the "income" approach. Here typically only the income and expense amounts are considered without consideration for land or building improvements. From this viewpoint it appears that the FF&E would not effect this outcome although without it the income would not be possible.
Your comments please.

One final thought, a word of caution concerning your statement that "FF&E can be deducted to determine the Market Value for the land and building only" Individual allocations involving the contributory values of the components which comprise the total assets of the business are not necessary the same as the Market Value of each of those components if separated from the going-concern. This is well recognized by the Interagency and Appraisal Guidelines in how its address 'going-concern' value. So, it cannot be assumed that deducting the 'contributory' value of the FF&E and intangibles will leave you with a 'Market Value' for the same property interest in the residual real estate.

 

[Terrel L. Shields]

[url]http://www.appraisalinstitute.org/store/p-273-a-business-enterprise-value-anthology-second-edition.aspx[/URL]

A Business Enterprise Value Anthology explores the basic differences between Linnhoff and Rushmore as well as thoroughly making both miserably deficient on some level... Pick a path then defend it.

 

[GregoryK]

Well the issue is it must be accomplished somehow in many instances. The fact that the sum of the various parts does not equal the whole is best summed by the analogy of the three legged stool - without one leg the stool has a significant diminished market value. The question becomes then is that third leg (personal property) more valuable in place (as part of a going concern) or separately?

You will not rent many rooms in an unfurnished motel. The FF&E is necessary to realize the market value of the property. But does the FF&E have a value of less than or equal to its contribution to the whole? Most likely independent of the bricks and sticks, the value of the FF&E is closer to its salvage or liquidation value, but in light of the highest and best use of a hotel, the value is substantially greater.

Such is the measure of highest and best use of a property as improved. the improvements may have a negligible value by their selves, but do the contribute positively to the overall value of the property?

No matter whether you use Linhoffs or Rushmore's methodology to segregate these values, the issue becomes conveying that relationship to the reader. I always begin by stating the segregation of the value of the independent components is a mechanical exercise required by practice and law. That the furnishings for instance, may have a greater contributory value to the property as a going-concern than they have independent of the property as a whole. In reality, the value of FF&E in terms of furniture, fixtures, and equipment may be equal to or close to its salvage value, but greater as part of the whole.

The bigger problem, as I see it, becomes attaching value to the intangible assets. The flag or franchise rights, or goodwill achieved by providing a desired service. To do this requires a deep reliance on economic theory, and not so much reality.

But then again some items of PP are relatively straightforward. A long-term care facility has little value without the Certificate of Need and proper licensing. And what is a building worth without the certificate of occupancy?

 

[CANative]

One final thought, a word of caution concerning your statement that "FF&E can be deducted to determine the Market Value for the land and building only" Individual allocations involving the contributory values of the components which comprise the total assets of the business are not necessary the same as the Market Value of each of those components if separated from the going-concern. This is well recognized by the Interagency and Appraisal Guidelines in how its address 'going-concern' value. So, it cannot be assumed that deducting the 'contributory' value of the FF&E and intangibles will leave you with a 'Market Value' for the same property interest in the residual real estate.

If you're doing a tax appeal (at least as an advocate but maybe even as an appraiser) you can just take the going concern value and deduct the FF&E (depreciated) reported on the taxpayers personal property return. :icon_idea:

It's worked for me dozens of times.

 

[CANative]

Well the issue is it must be accomplished somehow in many instances. The fact that the sum of the various parts does not equal the whole is best summed by the analogy of the three legged stool - without one leg the stool has a significant diminished market value. The question becomes then is that third leg (personal property) more valuable in place (as part of a going concern) or separately?

You will not rent many rooms in an unfurnished motel. The FF&E is necessary to realize the market value of the property. But does the FF&E have a value of less than or equal to its contribution to the whole? Most likely independent of the bricks and sticks, the value of the FF&E is closer to its salvage or liquidation value, but in light of the highest and best use of a hotel, the value is substantially greater.

Such is the measure of highest and best use of a property as improved. the improvements may have a negligible value by their selves, but do the contribute positively to the overall value of the property?

No matter whether you use Linhoffs or Rushmore's methodology to segregate these values, the issue becomes conveying that relationship to the reader. I always begin by stating the segregation of the value of the independent components is a mechanical exercise required by practice and law. That the furnishings for instance, may have a greater contributory value to the property as a going-concern than they have independent of the property as a whole. In reality, the value of FF&E in terms of furniture, fixtures, and equipment may be equal to or close to its salvage value, but greater as part of the whole.

The bigger problem, as I see it, becomes attaching value to the intangible assets. The flag or franchise rights, or goodwill achieved by providing a desired service. To do this requires a deep reliance on economic theory, and not so much reality.

But then again some items of PP are relatively straightforward. A long-term care facility has little value without the Certificate of Need and proper licensing. And what is a building worth without the certificate of occupancy?

What is the capitalized value of a highly trained staff?

It's almost easier to extra a value from a specific flag and their different tiers. This doesn't apply to mom and pop operations and budget/limited service operations like Knights Inn property.