Large Group Home Appraisal

[Rob Lentz]

I have been contacted to appraise a large group home for a private individual.

The property is for sale, my contact is an interested party who runs a small group home out of his private residence.(<6 beds).

My client is asking for an opinion of RE value and also Going Concern. Personal property is also supposed to go with the sale (beds, furniture, appliances, dishes, pots/pans, linens, wheelchairs, etc.).

It is my belief that this is common among large group homes; that personal property and tenants/clients are often part of the sale. Without the clients, the home is larger than most SFR buyers would want, and there would be considerable conversions to be undertaken - so HBU would appear to remain the same.

Pitfalls to avoid?

Anyone done one of these recently?

Comps to share?

As for determining the RE value - a cost approach would not be out of the question, because the structure is not very old, and it is in pretty good condition. There is the issue of functional obsolescence to deal with, though. (Zoning is Residential, it's located in a rural neighborhood). I have one comparable from which to begin to develop a Sales Approach (another large group home). I also have income data - actual rents from the subject and comparable rents from other small & large group homes.

Thanks in advance for your insights.
Rob Lentz

 

[PropertyEconomics]

Rob .. are your rents for the real estate or for the business of operating a group home? ie ... bed rents?
I think there is a distinct difference between the value of the real estate (which as you note would suffer from functional obsolescence due to size, configuration, etc ... only you would know these things as you know your market.) and that of the VALUE IN USE ... which would represent the value of the real estate unaffected by the functional items.
Going Concern in my mind, as in other threads, would value the business which comprises more than just the realty.
I just finished valuation of a day care center .. I certainly did not use the amount charged per child on a weekly basis as the foundation for my income approach.
One must be very careful to separate realty and business ... personally I have no competency in valuation of businesses and as such I dont do those types of assignments.
It seems to me your client has asked for a value of Realty and also a value of his business ....
I wish you the best of luck.

 

[Rob Lentz]

Definition of Value in Use

Found this and thought it would be helpful to help hone in on the nuances of Value-In-Use...from the ASA:

Proposed Definition
Based on the support of the foregoing research and papers, it is recommended
that the College of Fellows suggest to the members of the American Society of Appraisers the following definition for value-in-use appraisals:

Value-in-use is the market value of a going concern that reflects a value to a particular (emphasis added) user, recognizing the extent to which the property contributes to the enterprise and/or profitability of the enterprise. Included in this value are installation costs, engineering design and layout fees, and miscellaneous cost savings resulting from an assembled operation.

Special criteria to be reviewed before completing an appraisal under the value in-use definition are as follows:

1. Is the property fulfilling an economic demand?
2. Does the property have a remaining useful life?
3. Is there responsible ownership?
4. Would a diversion of the property to an alternate use be economically feasible?
5. Has consideration been given to the property’s functional utility?
6. Are the net earnings of the business sufficient to show a fair return on the
tangible asset’s value?

--In a situation like the one I'm looking at, there is a real benefit to buying an existing operation: less risk, employees in place, clients in place, equipment in place, time, licensing that will be grandfathered, permits (and all the fees, inspections, delays, re-inspections that go along with them). Turn-key.

--I spoke with a local broker that has dealt in commercial properties and businesses for 20+ years and he said that in determining what price to offer a business at he uses the following: Gross Income - Expenses = Net x (multiplier) = Business Value. He stated that in his experience, the multiplier ranges from 3 to 5, based on the risk and track record of the business. The less risk the closer to 5; the more risk, closer to 3. He's sold several businesses using this method, so I am thinking that if other brokers use a similar method, then all that is needed is an analysis of the risk to determine the multiplier. Or since this is for a buyer (not financing) provide a range - he will then determine from that what his first offer might be and from the range also what number he would not go above.

--I think that oftentimes (at least in my rural market) the correlation of value to realty and going concern is done after the fact based on a "look at the books". In other words, a business buyer looks at the business and the real estate as a single package - negotiates a deal for the whole thing. Then gets an appraisal to determine how much to allocate to the real estate. The rest is allocated to the business. If the would-be buyer does not have the capital to pay the difference, then he might try to borrow it, or sometimes the seller will hold a contract for the remainder. Do you guys see this happening, too?

 

[Stephen J. Vertin MAI]

Rob:

The term "group home" is pretty genaric. What type of care do they provide if any? Further I have done many a nursing home, dependent and independent living facilities in Michigan but most have been in the UP. Where are you in Michigan?

 

[Rob Lentz]

Stephen,
This property is in St. Clair county. I'm doing research today and have about half a dozen leads so far for facilities that have sold - "under the bridge" (lower peninsula). I've talked with a few operators/owners about rents, etc. Quite a variance between "state pay" and "private pay".

The subject is a large group home facility: licensed for up to 20 clients. there are 10 bedrooms, 4 baths, a large industrial-type kitchen, common dining room, living room, etc. Large utility room for laundry. This facility was built in the last 20 years or so, explicitly for this use - good functional design for its use, good condition. Rural site (about 10 acres). Approximately 4,500
square feet.

Some have cautioned against looking at the income the property is generating. I am not sure I agree: the subject is not likely to be converted to any other use, because it meets a need in the community and is functionally suited to the group-home use. I would not ignore the income potential of an apartment building - the assumption being that the management is capable of managing the property with acceptable practices to keep it minimally vacant. Couldn't the argument be made that the subject is very similar to an apartment building/boarding house/etc? And that the licensing (up to 20 clients) level is similar in nature to units in a multi-family setting.

PE made the comparison between this and a day care facility and said he wouldn't count the potential income in that case - and I agree, in that case. Most day care facilities are just SFR homes by design with a fenced in play area and there are few modifications that need be done to be licensed. When you have a large group facility - you have many more modification/design elements to make - ADA baths, handicap accessible rooms/doors, etc. Secruity systems (so your 90 yr. old alzheimer patient don't go for a walk), battery-back up hardwired fire alarms, large laundry and kitchen facilities to handle 20 persons food/wash needs. Plus there is the need for 24 hour staffing - and more specifically nurses that can administer medications, etc.

One of my sales was in Sanilac county, a couple months ago - facility licensed for up to 15 clients. The 13 current clients all stayed, and so did a bunch of personal property (beds, appliances, etc.). The sale price was called all realty...hmm.

How have you handled the realty/value-in-use/going-concern problem in the past?


Thanks,
Rob

 

[Rob Lentz]

Talking to a lender client about one that they wrote a loan on...the one that was mentioned earlier (including 13 clients and personal property, etc.)...she had it appraised as a SFR, no income.

But my comment to her was -where the heck did the appraiser come up with SFR sales to support that value- $280,000 in a $150,000 neighborhood. My point being that whether they called it business value, or not - there is some business value in there. She said (without giving away the comps) that there were a mix of group home sales and SFR sales - with the group homes being the upper end of the range and weighed the heaviest. I had one of the other sales already, she provided a new one that I was not aware of - now I have 3 sales within the same county, same use, and past 24 months. I think I'm getting close to being ready to write this one up.

 

[PropertyEconomics]

Rob .. my Daycare facility was constucted as a daycare ... with ADA baths (including small little toilets that are expensive), a full commercial kitchen, containing just under 7,000 square feet total with large covered portals and playground equipment. I thought you had a facility ... I didnt know you had a home converted .. heck that seems to me to just be more bedrooms for use. Not much more.
I have several of those within a few miles of my home ... all single family residences which were purchased at full list price in every instance.
Heck I thought you had a real building ..... not some house.

 

[Rob Lentz]

...large covered portals...

beam me up, scotty....also having a good time imagining the teenie-weenie toilets (couldn't help it, been a long day)

The subject is basically a "U-shaped" building - South wing (bedrooms/sitting room/medication room), North wing (bedrooms/sitting room/office) and inbetween is the LR/Dining/Laundry facility and large kitchen. Approximately 4,000 square feet on a crawlspace, 1 story.

At first glance, I thought it was built for its use-its laid out well. Upon talking with the assessor, it was originally a SFR.

physically possible - yep
legally permissible - yep
financially feasible - yep
maximally productive - yep

HBU would be for it to remain a group home as it is a viable business that has been established for over a decade.

 

[Rob Lentz]

PE -
If your day care center was built for that use, what was the highest and best use? It sounds like a more or less specific construction type. Was the location SFR? or something else (retail)?

Rob

 

[PropertyEconomics]

PE -
If your day care center was built for that use, what was the highest and best use? It sounds like a more or less specific construction type. Was the location SFR? or something else (retail)?

Rob

The location is commercial, second tier, and while the constrution was specifc regarding installation of a kitchen, door placement, window size, restrooms, the building could be easily adapted to office use or retail use.