Quick Lube / Carwash

[Stephen J. Vertin MAI]

Steve S.:

As always you bring a unique prospective to the conversation. But there is a major problem in finding rentals. Since most these type facilities are purchased from owner/users by owner/users they rarely lease and the one’s that do are typically tied into percentage of sales. The lack of meaningful rental data is the major problem in income separation. It is my experience buyers and sellers see income generated by the business as the determining factor in price paid for the real estate. They are one in the same. Only when it is understood how these properties are bought and sold can any type of market value be estimated.

You say:

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).

Unless I am missing something, I would disagree. People determine the market value of businesses every day. I see similar properties purchased on gross business income multiplier, before tax cash flows and after tax cash flows of the business and/or a combination of the methods named. It is my opinion people who appraise properties of this sort without considering the cash flow of the business completely miss the point and never grasp how the market actually works. Further, I have never heard or seen a buyer or seller allocate for the difference in values (going concern vs. fee simple) if one exist. I have seen them try to seperate property. Mostly in State's where both real estate and personal property taxes are paid. Then the separation was more for tax benefits then actual accurate allocation of values. Most owners stuff tons of legally defined appurtenance in to the personal property category to lower overall tax effects. Again, I believe it could be argued the only personal property is inventory and the remainder has little or no resale value.

I have seen appraisers meticulously separate what belongs to what. After reading the report I could see the appraiser put a great deal of thought into the methodology. Most of these guys/gals will fight to the death claiming their method is correct/exact and proper. However, I also realize they spent very little time actually talking to people who buy and sell the real estate. Most people who buy and sell gas station/convenience stores, carwash, carwash/gas stations, etc., say it is very hard to find appraisers who actually understand the market.

Linasnor: You state;

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.

I think this is true with most of life issues. Most misunderstandings are mis-communications. But this is why our forum is so great. We get to elaborate on the points and make clear our points of view.


Steve Vertin

 

[Fred]

Steve V. writes

Steve S. As always you bring a unique prospective

And as always, I enjoy having my perspective called “unique.” That’s usually the best thing it ever gets called. So. thanks. Maybe I got this way, because when I was an accountant, I did business appraisals. Later I became an RE appraiser.

I would disagree. It is done every day. I see similar properties purchased on gross business income multiplier, before tax cash flows and after tax cash flows of the business and/or a combination of the methods named

You say you disagree, but the excerpt you disagree with contains points in several areas. So, I don’t know what you disagree with. Maybe we are back on semantics, but when you say “properties, " I have to guess whether you mean the total enterprise with realy, the enterprise net of realty or the realty.

If you mean that assets of a business and the realty are purchased together and priced as one, of course they are - sometimes. I am only discussing asset allocation (realty versus non-realty) under the assumption that is necessary for the purpose and intended use of the appraisal. And where it is necessary, the four variables I mentioned inevitably come into to play.

For example, you mention after-tax cash-flow (ATCF). Fine. If the enterprise in includes realty, and the appraiser’s pro forma statements (or business books) do not include a pro-forma deduction for market rent, then the ATCF includes the realty contribution. Capitalize that by a rate/multiplier based on similarly owned properties and similarly accounted for ATCF and you get the combined value of both asset groups. However, if business is located in leased premises and the appraiser’s pro forma statements (or company books) include an at-market rent expense, the ATCF includes only cash flow attributable to the business. If there is a positive or negative leasehold, then a going concern appraisal should reflect these.

You might want to think of that as “unique,” but I just think of it as common sense. One cannot issue a blanket statement about what “income” includes. If it is book income, one must analyze the books to see what it includes. If it is pro forma income, it includes what the analyst included.

It is my opinion people who appraise properties of this sort without considering the cash flow of the business completely miss the point

Again, I am not clear what you mean by “properties.” Assuming this means straight realty even with good comps, I would go further and argue that appraising commercial RE estate without considering the business income is generally missing the point. Technically, you can’t get to HBU without considering (or assuming) the ability of an end user (eg, highest-and-best user) to pay rent. The ability of a business to generate revenue is directly proportional to its ability to pay rent. The ability of a business to pay rent is directly proportional to the quantity, quantity and duration of the landlord’s income stream. That’s why we identify a trade area (district, neighborhood) at the least to identify the supply of competitive space and the changes in that supply (vacant, not vacant, changes in prices, new construction, category-killers etc). Maybe we even look at demand, the population and purchasing power for a given use category, the number of square feet that demand can support and work down to how may dollars in rent these uses (like lube-wash) can pay.

rarely lease and the one’s that do are typically tied into percentage of sales.

Keep in mind, when I said rent/revenue ratio, I meant exactly that. I did not mean a percentage-of-sales lease. There is always a rent/revenue ratio, whether or not it is stipulated in a lease.

there is a major problem in finding rentals. Since most these type facilities are purchased from owner/users by owner/users they rarely lease

I looked in my smaller database (4,000 business sales) and there were 50+ sales of various combination lube-wash-gas. About a dozen had no rent/revenue percentage, which means the probably included realty. But 40+ had rent/revenue ratios, which means the appraiser who logged the sale is under the impression that there was a lease.

Again, direct comparison is better, but if you are looking for realty value, there is nothing inherently “wrong” with estimating market rent for a subject realty, by applying these rent/revenue ratios to your subject’s business revenues.

Also, if it is realty value, you are appraising a building. Find other sales of buildings. Make adjustments. Find sales of buildings converted to lube-washes.

 

[Stephen J. Vertin MAI]

Steve S.

This morning I edited my above post and clarified some issues. Lets define one more term because I think we will agree on most of this. I could be wrong, but I suspect not. One of my post clarifies the property type I am referring to.

Property Type: Gas station/convenience stores, carwash and carwash/gas stations or any combination of the above.

Gatlin did say carwash/lube. So your presentation of lube rentals is kind of correct within the subject matter. My thoughts were not directed towards stand alone lube facilities nor do I believe Gatlin’s. There may be lube rentals. I have only appraised a couple of these in the past and do not recall the data. However, carwash rents, carwash/gas stations and gas station/convenience store rents are rare. Further, I would venture to say none of your data has a lube/carwash rent. If you do, send it to Gatlin. Further, separating rental or allocation of rents to certain areas of the real estate and not to others is time consuming and guess work at best. In Gatlin’s case I would contend only carwash/lube comparable rental are applicable. So for the moment lets leave out stand alone lube facilities. Unless you have some way to fit them into the equation of the combination. I personally suspect a carwash/lube facility would be purchased much the same way as the defined property types.

The next issue is the sophistication of buyers and sellers of the above property types. Many of these market participant are not college graduates with degrees in business. In Chicago most are men. Most are foreigners who speak English as a second language but are usually above average intelligence. To them gross income is simply the income generated by total operations. Before tax income is simply the gross income less all expenses with the exception of income tax. After tax income is what is puts in the pocket at the end of the day. It does not get much more complicated to them.

Here is how I see them value their purchase or the sales price of their property. Some will take the gross income (from the business) and use a multiplier. Some will do the say with the before and/or after tax income. The really sophisticated one’s will use a capitalization rate on either the before or after tax income. However, most use simple multipliers.

Thereby, my statement fee simple value equals going concern value. Again, I believe carwash/lube facilities would be examined in a similar manner.

Steve Vertin

 

[Fred]

Steve,
Let me echo your sentiment. I am sure we would approve of each other’s work. That said, it is certainly difficult to reconcile both what is needed for this specific assignment and all of the surrounding theoretical issues at the same time.

On the surrounding issues

separating rental or allocation of rents to certain areas of the real estate and not to others is time consuming and guess work at best.

I don’t find it difficult. Even if you have to resort to rent/revenue ratios, we are talking minutes not hours. I don’t see how it is any different than any other extraction; land residual, cap EDRs Nor do I see any difference in degree of “guess" in this allocation versus any other extraction exercise.

I still see the same semantic problem with “property”

Here is how I see them value their purchase or the sales price of their property. Some will take the gross income (from the business) and use a multiplier.

Except they didn’t “purchase” the “property” (real property) with that capitalized amount. They purchased the real property and the business assets.

On the specific issue
I have not idea what your solution is that doesn’t involve allocation. Let’s say sales of going concern lube-etc. businesses with unencumbered fee simple in the real estate title sell for an amount that is equal to 6 months business revenue – and every buyer tells you that is exactly how they figured the price.
What is the value of the real estate? What approach do you take?

 

[Stephen J. Vertin MAI]

I agree we are discussing several concepts including data collection at once. Please bare with me. It is difficult but it will work itself out.

I believe we need to separate the theoretical from the practical at this point. I would agree in theory separation and allocation is absolutely possible. However, in order to separate/allocate prefect data needs to exist or at least better data than exist in most Midwest markets.

I believe rent/revenue ratio allocation would work if owners allocated revenues in records. But offend this is not the case. Most of these guys do not treat each section as profit centers at least not in my experience. Further, you would need other rent/revenue ratios to test the reasonableness of your derived ratio. If you did not have this information it is guess work at best. The bottom line is the theoretical is bumping into the practical. Thereby, in order to obtain good data, time is required. I would agree the application, once the data was obtained, is quick and simple. But gathering the data maybe impractical. That is all I am saying.

You say: I have not idea what your solution is that doesn’t involve allocation. Let’s say sales of going concern lube-etc. businesses with unencumbered fee simple in the real estate title sell for an amount that is equal to 6 months business revenue –– and every buyer tells you that is exactly how they figured the price. What is the value of the real estate? What approach do you take?

I am glad you asked. This is speaking in generalities of course, but this is how I would approach this typical property type appraisal problem using the complete appraisal process. I would do a cost approach. Only because it could be argued this is a special use property. Thereby, the approach is applicable. Secondly I would complete a sales comparison approach (which is a subject all in itself). I would show in the sale comparison approach, in a subsection, that buildings are selling at 6 months business revenue and than form a ratio. Sometimes I add a new section sometimes I complete a subsection in the sales comparison approach. None the less, I would than analyze the subject’s historic business revenue and apply the 6 months ratio.

Bar the time period this is pretty much how I do it. Revenue information is readily available in this market because it is the most common question asked. Further, overall expense information is relatively available since it is the second most common questioned asked. Ba-da-bing-ba-da-bang.

Ok, now how would you approach the appraisal problem?


Steve Vertin

 

[Fred]

Some consideration must go to purpose and intended use of the appraisal. Some solutions are more use value than market value.

My progression would be
Look for sales of properties in this narrow category or very closely related category that were empty and bought by someone who retained the existing use, and special improvements or made only slight modification.
Look over wider potential categories of use; perhaps all light industrial, including properties that were subject to greater modifications. Consider the cost of removing some special improvements so that property is adaptable for a wider range of uses and thus comparable to a wider range of properties.
Find market rent capitalized and adjust that as needed

I would never use the cost approach. The more unusual the use the less likely cost and value are to be close.

It is hard to put out a theory without reference to a specific property and market.

 

[Stephen J. Vertin MAI]

Your approach is fine. I have looked for rents within these categories. Chicago is a very big market and few exist. I can hardly see people in smaller cities or relatively rural areas using it. In this market it would not be feasible to approach the problem using your methodology simply due to lack of data on the rent side. We have plenty of sales. So the sales comparison approach would not be at issue.

Further, I would agree the cost approach has little value for the typical product we are discussing. However, the vast majority of appraisers would consider the report limited without one. Further, I think land value is important to see if a highest and best use problem exist. Once land value is established the remainder of the cost approach is easy. The 12th, whether right or wrong states the cost approach is applicable to special use properties. Until you get that out of hard copy you will have problems. I would personally put the approach in to stay out of any future potential problems with AI and/or the State. Some of these old guys have been valuing these properties using the cost approach for 40 years. They do not like being told they have been wrong all of their career. Again, its inclusion would be more for insurance that final support.

Steve Vertin

 

[Fred]

I would agree the cost approach has little value for the typical product we are discussing. However, the vast majority of appraisers would consider the report limited without one.

They ought to read USPAP. An approach is “not applicable” if it would not provide “meaningful results.” Even if you think it is limited, it is still allowed.

My opinion is that three things will combine to kill the cost approach:

the large consumers of residential appraisal services are going to stop paying for more scope than the 2055 implies,

more automation and standardization in narrative reporting (including more automating of income cap),

the upcoming change of USPAP will cease defining "limited" by the absence of an approach and will leave more burden of proof to the critic to prove the absence of the approach created a loss of appraisal credibility.

If you can’t find comps in Chicago?
A small market buyer with a property use in mind does not have the option of picking properties designed for that use. Market analysis is simplified if choices are homogenous in a lot of ways. Where that doesn’t exist, you have to look at location 1 versus 2 in terms of acquisition price, cost to convert, potential business revenue, and differential expenses. As an appraiser, if you think “comparable’ means “clone” you will never find a sale and will miss the way the market makes decisions. The governing principle has to be “rank substitution.” That is location 1 is better than location 2, but is it better enough that it is worth the additional investment.

I disagree about unsophisticated investors and the apparently over-precise appearance of appraisal methods.
Investing boils down to chunks. It’s the big chunk the investor has to put down, the little chunk that comes back the first year or periodically or the number of years it takes the little chunks offset the big chunk. The survivors may understand the necessary proportions intuitively. Some may use Mini-Max programming. As an analyst I have to use apparently “precise” measurement to explain the relevant range of chunk value. However, I would agree that not working in high-low ranges is silly.

 

[Stephen J. Vertin MAI]

Steve S.

A small market buyer with a property use in mind does not have the option of picking properties designed for that use. Market analysis is simplified if choices are homogenous in a lot of ways. Where that doesn’t exist, you have to look at location 1 versus 2 in terms of acquisition price, cost to convert, potential business revenue, and differential expenses

.

I assume your comment in your first sentence is applicable to an existing market. The buyer almost always has the choice to construct. That is why some say the cost approach is applicable.

Assuming exiting market choices only, I can agree with most of your second sentence up to a point. If you are saying for example, I (the buyer) want a carwash/lube business to buy or rent, but there are none so I will consider a gas station/car wash facilities and adjust, maybe; however........, there is a point where the argument moves out of the comparable property category. At that point you loose accuracy of estimation.

Within this reasoning I see the possibility of moving further and further away from how buyers and sellers actually react and appraisers using convoluted methods of valuation. I would not call them over-precise appearance of appraisal methods. Possibly these issue are not paramount to your focus or possibly I am not privy to your experiences. Further, in your method I do not see how you account for the fact buyers are buying these properties at an amount that is equal to 6 months business revenue (as in our example) or how you are allocating. Finally, what market are you in? Funny, I have never asked.

Steve Vertin

 

[Fred]

The buyer almost always has the choice to construct. That is why some say the cost approach is applicable.

Yes, but USPAP says "meaningful results." I'll worry about the six appraisers on the ASB and what they say.

While there is no easy option to build a new one in a 100% built-up area, there often is an that option. However, I don't see where "the cost approach" actually includes the appropriate steps in figuring that cost. It can sort-of start out that way, except that many use subject's land instead of what is actually available on the date of the appraisal (and in a small market there can be a big difference) - but with "market extracted depreciation" the calculations wander off on another path so as to make the results mirror the results of other approaches. In short, there is a gap in the cost of the "real option" to build and what the cost approach comes up with a lot of the time.

Within this reasoning I see the possibility of moving further and further away from how buyers and sellers actually react

Maybe I just didn't say it well. Since there is nothing else driving my reasoning besides how they "react" in the real world, I don't see how I could easily get off that path except if I make a mistake later along the way.

I work in a small non-conforming market. For example, I had to do a car wash, both going concern and RE value. There hasn't been a sale, business or realty of a car wash, but then I only checked the last 20 years. You just don't have a choice, but to put your feet in the shoes of rational market participants who understand their business, the demographics and the usability of real estate.

The only problem I have with what you say continues to be that you say "the property" sold for 6 months revenue. That's the real property and the busienss assets together that sold for 6 months gross.