Is it going concern or fee simple?

[PropertyEconomics]

Stephen ... do you have any friends in the Iowa market you might speak with? Iowa is one of the leading states with respect to this type of "enterprise" with the Fed. Govt being a very large lender / guarantor of similar types of uses.

Contacting a friend you know in Iowa or perhaps calling the USDA state office in Iowa could well offer you some additional thoughts on how others appraise these types of properties.

I find your questions very important in the determination of your assignment ... and frankly one of the more difficult decisions to often make regarding commercial valuation.

 

[Stephen J. Vertin MAI]

I don't get. It so highly specialized that the only buyer would be someone who would run the operation as designed in anticipation of the income. Like a solar power plant.

You do get it. That is precisely what it is. When only manure was used its operations were pretty much restricted to the farm that had the livestock. It was a no brainer when this occurred. It was simply value in use. However, what is throwing me is the fact manure is no longer the main methane producer. Garbage can be substituted opening the asset to a whole group of buyers. Does this now open it to going concern or market value?

Again the division of real estate and personal property is easy. That is not my sticking point.

Iowa is one of the leading states with respect to this type of "enterprise" with the Fed. Govt being a very large lender / guarantor of similar types of uses.

Actually Wisconsin beats all other states hands down. While other Midwestern states and California are catching up there are continued lags. Further the government is giving huge tax incentives towards development. They have not actually gotten involved with direct lending. Further at least 98 percent of the first developed were financed via investment pools (non-bank related).

I have appraised five methane digester systems used in the production of commercial electricity and considered self-sustaining. The simple truth, whether accepted or not, is the technology is so new I may have appraised more of these then anyone in the US. There is no one to turn to. My interview process has been exhaustive. It covers two pages in my scope of work.

With that said it is helpful to write out my questions. It draws my attention to what I know and don’t know.

I find your questions very important in the determination of your assignment

So do I

 

[CBBoston]

How is the generator different from anyother piece of equipment if it can be moved? In general you don't value an industrial building based on the type of business and equipment the occupant has. If the occupant moved out and took the equipment, the building is like any other industrial property and that's how you would value it. Granted some of the improvements left with the building may have little use to anyone else. Is that the case here? In that case you have to look to a cost to cure. That could be so high that the remaining improvements have little value or even an negative impact on the land value. With the exception of retail or hotel properties the revenues geneated by the occupant don't directly determine the rental rate.

 

[hastalavista]

It seems to me that the value-in-use analysis simplifies the appraisal process and would eliminate the uncertainty of the removal of the generator from the equation.

But does a value-in-use opinion satisfy the intended use objectives of the client/intended users?

 

[nstanbru]

Stephen, I have read your posts several times, especially #1, which has your original questions. I agree that there is a very fine line in your scenario between value in use and going concern value with respect to the income approach. I am leaning in favor of going concern value regarding the IA. Just my opinion, but it seems to me that the property owners are, or will be, in the "business" of producing and selling a "product", in this case, electricity. Therefore, the income they receive is directly related to this business (going concern). As you pointed out, there is no "proven property operation". But this is true whether it's value in use or going concern value so HC would apply in either case. As CAN pointed out, who would buy this property if the generator was removed? Although a replacement generator could be purchased, which as you stated represents 25% of the cost to set up the operation, without one, there is no production of "product" to sell. Therefore, there is no business or going concern. This leads me back to my first thought that any income, and the resultant IA, is attributed to the going concern value.

Just my 2 cents. Good luck on this one, it's a tough one to say the least.

 

[Stephen J. Vertin MAI]

Granted some of the improvements left with the building may have little use to anyone else. Is that the case here? In that case you have to look to a cost to cure.

Only the actual generator is personal property. The manure or garbage processing system (which is about 75 percent of cost) is definitely real estate. They are made of concrete and on foundations within a building cemented to the ground. If the personal property were removed buyers would simply have to put in a gas driven generator (cost to cure). It is similar to a gas-station selling without pumps. These are also easily replaceable personal property items. It should not mean the gas-station has no value for intended use.

But does a value-in-use opinion satisfy the intended use objectives of the client/intended users?

The use objectives would be satisfied.

Just my opinion, but it seems to me that the property owners are, or will be, in the "business" of producing and selling a "product", in this case, electricity. Therefore, the income they receive is directly related to this business (going concern). As you pointed out, there is no "proven property operation". But this is true whether it's value in use or going concern value so HC would apply in either case. As CAN pointed out, who would buy this property if the generator was removed? Although a replacement generator could be purchased, which as you stated represents 25% of the cost to set up the operation, without one, there is no production of "product" to sell. Therefore, there is no business or going concern. This leads me back to my first thought that any income, and the resultant IA, is attributed to the going concern value.

This is well thought out. My only sticking point is the definition of going concern.

Going Concern Value
The value created by a proven property operation; considered a separate entity to be value with an established business.

It says "proven property operations" and "an established business". Can there be an "as proposed" going concern value? While value in use makes no such requirements.

Value In Use
This is the value indication of a particular piece of property for a specific use.

I am not sure there is a wrong or right answer here but it is a lot to think about.

 

[Stephen J. Vertin MAI]

Can there be an "as proposed" going concern value?

So I research this question and find this in The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.

going-concern value
The value of a business in operation,taking into account the goodwill and the value of the income, in addition to hard assets, such as real estate and equipment. When appraising a project to develop income-producing property,the appraiser will usually provide two numbers—one for the project on the day of completion,with no tenants,and one when it reaches stabilized occupancy and is a going concern. Lenders who take mortgages on income-producing property with intensive management aspects—such as hospitality properties—usually obtain a going-concern rider for the title insurance so that coverage will be increased above the value of the real property.

This clearly indicates requisite are expected under going-concern value. Ergo "as proposed" going concern value is an acceptable valuation practice. This source tends to put me in agreement with you nstanbru

 

[nstanbru]

This has been an interesting discussion (at least to me). Give us a post when you've completed the assignment to let us know how it turned out. Good luck.

 

[UpstateNY]

Fwiw

FWIW, I grew up in a small city that built a garbage-burning plant (not for electricity production) just as a way to burn garbage instead of putting it in the ground. After about 3 months it was shut down. A total waste of money. Why? Because it stunk.

IMHO, I think you are right to do a value in use, because it might produce revenue, but it might not. Unless you have a crystal ball, then CYA. That will eliminate about 95% of the ambulance-chasers in case it goes south.

 

[Terrel L. Shields]

There was a fellow in TN near a Little Debbie (McKee Baking) plant who used the left over whey from the plant to make ethanol....at the time he was converting 4 bbl Holley carburators to alchohol fueled cars. He has a small tank for gasoline running to one pair of the barrels and one pair to the regular tank with ethanol. He had to change the rubber lines out to flex metal. A Holley has separate fuel intake lines and pumps. He started the car on gasoline and after a few minutes it was warm enough to run the alchohol.
This was way back in the early 80s. His big problem then was that he was making 200 gallon of alcohol fuel a day and having problems marketing it. My how times change.

As for your project, I'd run like the wind. I get exasperated trying to deal with "BEV" in a poultry farm...frankly, I am a land residual sort of guy.