Flea market valuation

[Ken B]

If the lender forecloses on the property being operated as a flea market, its future operation as a flea market could be questionable. Lenders aren't in the flea market operation business.

Success or not as a flea market regardless, the question concerns the nature of the income from the lease of vendor booths and whether a portion of that income is attributable to the flea market business operation or if it is entirely attributable to the real property.

I am receiving an overwhelming opinion that the flea market is a business operation and there is BEV associated with that operation. If the flea market is a raging success that BEV could be substantial. Even the previous appraisal reports that there was unspecified business value in the value reported within the appraisal. The problem with the previous appraisal is that the scope of work required an opinion of the leased fee interest in the property and that there was no allocation of business value and market value of the real property in the report.

I have been engaged to provide an opinion of the market value of the real property. I will be estimating that value utilizing market data for typical big box retail properties. I am seeking clarification of the scope of work to determine if the client also desires an opinion of the value of the going concern. If so, I will estimate that value while considering those factors identified in Post #13.

 

[Terrel L. Shields]

It seems to me the asset would be over valued using flee market booth rents. I am assuming they are higher then general commercial rents is that correct?

I would hate to assume that. The booths I am familar with are leased on dual basis. A commission is charged on sales but there is a "booth rent" and yes, on a strict SF basis much higher rents than for a warehouse BUT...(big but) the warehouse leases the gross SF. A booth rents only a small part and counter space and hallway/isles are "common" to all. The management is more intense but I would argue that the percentage charged on sales is a benefit to management, not the real estate. The booth monthly lease is the real estate contribution. The management requires employees to manage the sales unlike triple net warehousing.

Lenders aren't in the flea market operation business.

They are not in property management business either...We appraise "as is" and "as is" is a flea market...we are speculating trying to value a property on the basis of some future foreclosure that might not happen. It is the banks job to vet the risk of lending.

 

[Stephen J. Vertin MAI]

It is the banks job to vet the risk of lending.

I am not sure we are venting risk. I look at it more as testing highest and best use. But that is another issue.

I am receiving an overwhelming opinion that the flea market is a business operation and there is BEV associated with that operation.

As I am sure you know BEV = GC -RE -PP

BEV = Business Enterprise Value
GCV = Going Concern Value
RE = Real Estate
PP = Personal Property

There is only one way to tell if BEV exist. Value the going concern then deduct the real estate and personal property. The remainder is your answer. As far as operations as a flea market being a going concern value, now defined as:

"Market value of the total assets both tangible and intangible as if sold in aggregate as a going concern"

It sounds as if you believe there is BEV. So value the GCV using post #13, deduct the value of the real estate as simple commercial and any PP and there is your answer.

 

[John Glass]

I've appraised two flea markets in the past year. Both were improved with shack-type structures about ready to implode. Neither market value (one sold) exceeded land value. I'd probably look at improved sales of similar properties re-used as something else (religious, fitness center, etc.) then take a stab at a direct cap as the flea market, comparing that to religious and fitness center pro formas.

 

[Terrel L. Shields]

I'm still saying the BEV is the sales percentage income and the booth monthly rents are attributed to the RE only. It should be easy to separate that income into its two components since you can calculate the number of booths and the monthly flat fee.

I am not saying that warehouse rental isn't a proxy, but typically a warehouse is going to be in an industrial park but a flea market needs a high traffic roadside commercial (retail) site. So the big box rental is a more appropriate proxy but again, need, etc. If you have Tractor Supply next door, it likely isn't going to go over as a regional store of similar character like Atwoods. Family Door rarely puts a store next to Dollar General.. etc. So does the flea market represent the most profitable use or not? What would generate higher income? Is it losing money?

 

[Ken B]

What if leases are simply full service gross?

 

[Stephen J. Vertin MAI]

If you had the data Terrel method is good but it sounds like you do not. At this point I would get tax returns. With this data I would simply calculate EBITDA (earnings before interest, taxes, depreciation and amortization) and capitalize it into perpetuity. Remember to use a higher rate then real estate due to greater risk. You know how to the value the real estate. It does not sound like there is much FF&E. In the end just deduct the RE value from the going concern. The difference is BEV.

There are a number of publications that produce business cap rates. Many very specific to the product.

 

[Ken B]

Tax returns? I'll be lucky to get a current rent roll. The property is distressed.

At this point, my questions are basically rhetorical. Thanks for everyone's input.

 

[Stephen J. Vertin MAI]

Tax returns? I'll be lucky to get a current rent roll. The property is distressed.

Fully understand. Maybe the conversation will help others in the future.

 

[Michigan CG]

.....The property is distressed.....

Highest and Best Use issue or bad management?