Quick Lube / Carwash

[H.B. Userman]

Wonder lube and car wash. Now is the income generated by the carwash real estate dependant? I would say YES. BUT! is the income generated from the oil change 1/2 dependant on the real estate. That is my question.

In the valuation of the real estate, would the income from the total operation be capitalized, or is that then valuing enterprize value?

 

[Stephen J. Vertin MAI]

Gatlin:

The first question I have is what is the scope of your assignment? In most of these assignments there are typically two types of lenders/clients. The client that wants the value of the equipment and real estate separated? The client who is only concerned with what the property will sell for if the deal goes belly up?

Here is the reality of your property type. Going concern and market value are usually equal. There are very few cases, at least in the Midwest, where the two are different. People buy real estate to generate income from a special use improvement. The improvements are the business and the business are the improvements. You find few sales where the market participants have separated the two. If you have a client that wants value separated I will do a follow-up post. However, if your client is the latter, do not worry about allocation. Further, if the client does not know what he/she wants explain how the market works and let them make the choice after.

Steve Vertin

 

[Travis McGee]

Originally posted by Stephen J. Vertin, MAI@Mar 23 2004, 12:48 PM
Gatlin:

The first question I have is what is the scope of your assignment? In most of these assignments there are typically two types of lenders/clients. The client that wants the value of the equipment and real estate separated? The client who is only concerned with what the property will sell for if the deal goes belly up?

Here is the reality of your property type. Going concern and market value are usually equal. There are very few cases, at least in the Midwest, where the two are different. People buy real estate to generate income from a special use improvement. The improvements are the business and the business are the improvements. You find few sales where the market participants have separated the two. If you have a client that wants value separated I will do a follow-up post. However, if your client is the latter, do not worry about allocation. Further, if the client does not know what he/she wants explain how the market works and let them make the choice after.

Steve Vertin

First of all, I believe that USPAP requires a separation of value components, i.e., real estate vs. non, whether the client wants it or not.

Secondly, I disagree with your contention that going concern and market value are the same. "Going concern" is actually an outmoded term for a property right. The correct term is "Total Assets of the Business" (TAB) and represents the value of the real estate, FF&E, as well as any enterprise value.

Market Value can, and often does, mean many different things, depending on the definition. It does not specifically reference a property right. You can have a market value for a fee simple, leasehold, leased fee, etc.

"The improvements are the business and the business are the improvements" No way, no how would I agree with that statement. Inherent in the business is a significant management component which, in combination with the locational and physical factors included in the real estate, result in the previously mentioned enterprise value.

Buyers and sellers of these car washes/oil change/c-stores/gas stations, etc. are keenly aware of the differences between real estate value and non-real estate. Interview the market participants and they'll give you a pretty good allocation, if for no other reason than varying depreciation schedules on their IRS forms.

 

[Stephen J. Vertin MAI]

Linasnor:

You are welcome to disagree. I have no problem with that. I stand by my statement there is little value difference between going concern value and market value. Secondly, I believe you are correct USPAP requires use to separate personal and realty. I believe it could be argued personal property is the inventory. The remainder is appurtenance or has no resale value. I appreciate the clarification. So let me correct the statement by saying, some lenders require separate value of the appurtenance.

Steve Vertin

 

[Travis McGee]

Steve, one of my main points was terminology. "Going Concern" refers to the RIGHTS BEING VALUED. Market Value is what the value of those rights is.

You can have a Market Value of Going Concern, Fee Simple, Leased Fee, Leasehold, Life Estate, etc.

The statement that a Going Concern equals a Market Value does not make any logical sense from a terminology standpoint.

 

[Stephen J. Vertin MAI]

Linaser:

Let me clarify some things. I had to run out to the post office to mail a report so I answered your post with the readers digest version. First I assume Gatlin has some knowledge of appraising and is in fact an appraisers. I assumed the appraisal being preformed was the fee simple market value. Market value defined by the Comptroller of Currency. My reply was not intended to be a lesson or text in appraisals. I have a tendency to loose precision while in the forum since the setting is less than formal.

Secondly, going-concern value is defined as the value created by a proven property operation: considered a separate entity to be valued with an established business. Going-concern may have a new definition and I applaud you for keeping up with current terminology. However, I think many still use and understand the old term also. So I hope Gatlin was not confused. Additionally, may statement “Going concern and market value are usually equal”, assumes the typical property of this sort and not something other than. Finally, if there was something unusual with respect to Gatlin’s property I assumed my question concerning the clarification of scope would modify any future response.



Steve Vertin

 

[Stephen J. Vertin MAI]

Linaser:

I understand what you are saying and I have never thought of it that way. I think your point is interesting. What I simply mean is the two numbers are many times equal.

Steve Vertin

 

[Travis McGee]

Originally posted by Stephen J. Vertin, MAI@Mar 23 2004, 04:13 PM
I have a tendency to loose precision while in the forum since the setting is less than formal.

Steve, I think precision in language, especially in appraisal terminology, is vital to our profession. We make our livings giving various values under very precise circumstances.

A great deal of the confusion that arises in reading reports is caused by the imprecise use of language by the appraiser, or by the reader not understanding the precision which is implied by the appraiser.

 

[moe cohen]

My hat to both of you. Discussions like these make the forum so valuable.
Moe

 

[Fred]

As if terminology was not enough of a problem in RE appraising.

Going Concern equals a Market Value does not make any logical sense from a terminology standpoint.

Agree. Market Value is s type of value. Going Concern is a type of intangible asset.

Going Concern Value would generally mean the Market Value of the Going Concern. (Actually if would generally mean the Fair Market Value because anyone who appraises a business for Market Value is probably several sandwiches short of a picnic). However, it is also possible to appraise the Use Value of the Going Concern – in which case the term Going Concern Value is probably not good.

Posted by Gatlin

In the valuation of the real estate, would the income from the total operation be capitalized, or is that then valuing enterprize value?

That’s easy! The answer is “it depends.”
The “what does it depend on part” is never easy. There are four categories of variables that can affect or determine whether capitalized business “income” contains realty value. 1) what is “income” 2) who owns what, and how much is the rent, if any 3) where did you get your rate or multiplier and 4) accounting policy

I don’t mean to be a pain, but you probably won’t find too many baners, accountants or business appraisers saying “income” that way. There’s revenue (also, known as sales), which an RE appraiser might call “gross income. Revenue is reduced is certain ways to derive what some call discretionary cash flow.

Wonder lube and car wash. Now is the income generated by the carwash real estate dependant? I would say YES. BUT! is the income generated from the oil change 1/2 dependant on the real estate. That is my question.

Gatlin,
Why don’t you solve the problem directly by using rents in the area or rents from other such facilities? That is better.

I don’t think you can attribute 50% of revenue to real estate. No one could pay 50% of renenue to a landlord and stay in business. Rent/revenue percentages for most business would be a small fraction of that. I have a database of several thousand business sales and it is possible to sort by rent %.