Is it going concern or fee simple?

[Stephen J. Vertin MAI]

The Appraisal of Real Estate indicates that it may be difficult to separate the value of the land and building from the value of the business. So ergo is the term to call the final value. Is it going concern or fee simple?

New types of methane digesters can process both bio-degradable garbage and manure efficiently. Through a process, I see as being similar to making wine, the real estate items produce methane gas to fuel the generator(s) producing electricity which is eventually sold on the grind. Food companies are willing to pay owners to take potential fuel. They are called tipping fees. With this process, methane digesters can go anywhere there is garbage rather than being stuck on farms. Further it allows buyers without live stock.

Generally 75 percent of the cost to constructed methane digesters remains attached to the real estate. No doubt this portion is appurtenance. However, one of the most expensive items is considered personal property. This is the generator(s) which is typically around 25 percent of total construction cost. It is not hard to logically separate real estate and personal property values. Further the process has a predictable income and expense stream with market anticipated returns. It is well suited for income capitalization due to annuities.

Since these are state of the art most projects are proposed construction. Both cost and income capitalization approaches work well together. My inclination is to use the cost approach to indicate value of the real estate in fee simple. It can also be used to value personal property. Further the income capitalization approach would be going concern value. However, there are some sticking points. Going concern value is defined as a "proven property operation". Since it is proposed construction there is nothing proven about it. So am I full of gas (pun intended)?. Is this fee simple of the real estate and personal property or do hypothetical conditions attached to proposed construction cover this?

While it may be a matter of semantics since, at least in this case, the value of both real estate/personal property and its going concern value are close, I would be interested in what others would call the income capitalization method. Is it going concern or fee simple? Maybe I should reduce it to "value in use".

 

[farmguy]

I may not follow exactly what you are asking. The "haul the generater around" kind of threw me.
I assume there are no or very few sales as you say it is pretty new technology. I don't know how you are developing a cap rate, but if the income approach value is very similar to the value derived from Cost then in my way of thinking that kind of implies it is market value. I always think of going concern when some outside agreement, say poultry farm agreement with intergrater to provide briolers, is necessary to create value or someones management is superior to typical management that inflates the income stream. If the going concern scenario is what is expected and would be considered typical for that property wouldn't going conern value be market value.

 

[Stephen J. Vertin MAI]

The "haul the generater around" kind of threw me.

What I am saying is the main fuel to operate a digester use to be animal manure now human garbabge can be used. Since there is no need for a manure source there is no need for a farm. In theory one could be built in Chicago. If the technology continues to be successful, we maybe seeing these things everywhere.

Thanks for your input Farmguy, I appreciate it.

 

[Abester]

That might be a tough one. I thought I was having a bad day.... Did they offer $500 for you to appraise it?

 

[Burney Lightle]

Stephen, couldn't it possibly be both since "fee simple" is an ownership interest and "going concern" is a type of value like "market value", "use value", etc.

 

[Stephen J. Vertin MAI]

Stephen, couldn't it possibly be both since "fee simple" is an ownership interest and "going concern" is a type of value like "market value", "use value", etc.

Burney you are correct. I was using the term fee simple to denote fee simple market value. I am sorry I was not trying to add confusion I was only shortening terms.

 

[Burney Lightle]

The problem is, I am easily confused...

 

[Phil Sarazen]

If you are using market rents to establish the value via the Income Approach, wouldn't that be the "as stabilized" value?

 

[Stephen J. Vertin MAI]

There are values, such as:

Market value
Value in use
Going concern value
Investment value
Insurable value
Assessed value
And so on..........

These are values based on specific definitions. Statements like "as is" or "as proposed" are requisite for the type value indicated. You can have "as is" market value, "as proposed" market value, etc.,. Further as Burney pointed out there are property rights such as fee simple, leased fee, partial interest and so on. Fee simple market value is the most common used by appraisers. I fully understand there is an "as is" and "as proposed" requisite. What I am wondering is what value is presented? Maybe more information is needed.

There is no market rent. Funds to the owner are generated from electrical production and tipping fees (as explained). These are generally set amounts electric companies must pay. They then take the power and resale on the grind to us (the consumer). The unit of measurement is price per kilowatt hour or KwH. There is downtime generally 15 percent. This is basically a vacancy rate. Further there are operating expense deductions (which are surprisingly few) from which an NOI can be obtained. This can either be directly capitalized or discounted over a holding period (DCF).

These type methane digesters are well suited for real estate valuation models. In fact they are similar to landfills or grave yards in the sense no market rent exist. Income is from tipping fees or selling grave sites. The more I think about this the more I believe it to be value in use.

 

[CANative]

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. As to the "personal property" question about the generators, I would think that the plant can't operate without it so why would someone buy this property if the seller intends to run off with the generator? Part of determining how to characterize personal property or fixtures is by determination of the "intent."

It's a unique property and they want your opinion. Who is going to argue with you?