Quick Lube / Carwash

[Stephen J. Vertin MAI]

“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.”

Yes that is exactly what I am saying. I am saying if buyers buy and seller sell the real property and business assets together based on 6 months gross, appraisers should value the properties in the same manner as the market. Other wise the appraiser’s analysis is meaningless. I use 6 months gross because it was the original example. The gross figure is market derived of course.

My contention is the real property and business assets can not be separated nor should they be because the market does not recognize a separation. No one in the market, with the exception of a few appraisers, is saying here is the value of one and there is the value of the other. The price paid for both falls under one price in the deed transfer statement. So if the market is not separating them why are we?

Why do you have a problem with that?


Steve Vertin

 

[Fred]

Yes that is exactly what I am saying. I am saying if buyers buy and seller sell the real property and business assets together based on 6 months gross, appraisers should value the properties in the same manner as the market.

Sure, if you are appraising both the business assets and the realty, then 6 months gross is your value (or something close). If you are appraising only the real estate, how could it be?

My contention is the real property and business assets can not be separated nor should they be because the market does not recognize a separation.

I don’t think this is a reasonable inference. If the available sales don’t contain the differences, that surely doesn’t mean prudent parties would not recognize the differences if they existed. That’s what appraisers are for. If all you had were sales of 3-beds, you would not assume the market does not recognize any difference for a 2-bed. You would adjust or “allocate.”

Give the market a choice between buying
1 a business with fee title and
2 an equivalent business subject to a landlord-favorable lease
and prudent parties will recognize the difference.

Give the market a choice among buying
1. a going concern including realty with special improvements and special FFE, or
2 a vacant improved real property containing the same special improvements and special FFE in place, and
3 an equivalent vacant improved property containing no FFE
and prudent parties will recognize the differences.

Not only would these recognize the separation of realty from going concern, but another distinction many appraisers also overlook, the difference between market value and use value (market value in existing use).

 

[Austin]

Steve Vertin:
About 4 years ago there was an article in “The Appraisal Journal” about the theory of business appraising. This was one of those articles in which the author says what I have been thinking and addressed my specific concerns about business appraising.
His premise is that to do a business appraisal properly each component must be valued separately. Real estate, inventory, FF&E, and going concern value. In my mind, to do otherwise is to ignore the principle of H & BU and USPAP requirements. For example, if you valued the package based on 6 months gross then how do you know that the value of the components of the enterprise are not worth more if sold separately? How do you comply with USPAP when you lump all components together? You are essentially lumping a real estate, personal property, goodwill value or business value, and reporting one lump sum that included all without regard for a H & BU consideration or USPAP appraising and reporting requirements of each component. If you do a highest and best use analysis and determine the use is a going concern, then why don't you have to report on each component's value because you essentially had to appraise each component to make the H & BU determination?
Just after the above referenced article came out I took a CE class at the AI chapter on “Appraising Nursing Homes.” The instructor was the authority on the subject. I asked him the same question and he refused to address it.

 

[Stephen J. Vertin MAI]

Steve:

I love this, we are finally touching the heart of this issue. This is where the rubber hits the road. You state: I don’t think this is a reasonable inference. If the available sales don’t contain the differences, that surely doesn’t mean prudent parties would not recognize the differences if they existed. That’s what appraisers are for.

I believe, most likely the same as you, appraisers are to interpret and analyze the data presented in the market and come to reasonable conclusions about the data. You are correct in stating just because something is not recognized does not mean non-existence. However, just because something is not recognized does not mean something is hidden either. It may not be recognized because it does not exist. So please allow this latter possibly in our discussion.

But first we need to define terms because I think it is important.

Appurtenance: Something that has been added or appended to a property and has become an inherent part of the property, usually passes with the property when title is transferred.

FF&E: Furniture, fixtures and equipment. It is typically considered non-realty.

It is my understanding there are literally hundreds of thousands of court cases concerning what are in fact FF&E and what are appurtenance. This is a battle that continues in our courts daily. There are entire real estate law classes on the subject and each state varies. Most appraisers and in fact most lawyers are not qualified to distinguish the two.

I suspect most of what you are calling FF&E I would consider and believe the market recognizes as appurtenance. In the property type discussed there are few items of FF&E. This is inherent in the definition “the property is usually passed when title is transferred”. This is the definition I use because it is directly out of the Dictionary of Real Estate Appraisal. Can it be argued the definition is an over simplification of a very complex subject? Yes it can. However, bar taking a real estate attorney, licensed in the State the appraisal is taking place, I am limited by the tools in my profession.

Thereby, I believe the typical buyer would not recognize the difference because they attribute little or no value to any so called FF&E.

Steve Vertin

 

[Fred]

His premise is that to do a business appraisal properly each component must be valued separately. Real estate, inventory, FF&E, and going concern value. In my mind, to do otherwise is to ignore the principle of H & BU

I never heard of HBU per se, in Biz Val, but I love this insight.

Austin, this is dovetailing with that other thread. First on 'existing use value' and your point goes to what I said in that thread about "break-up value" could be hgiher than "market value" of the whole It would be absolutely necessary to appraise the pieces individually to see if there is (and here is one of your favorite words) synergy if the business ownerhsip interest you are appraising has the option to break up the whole and sell off the pieces.

 

[Austin]

Steven:

I had that dovetailing in mind when I wrote the above. Actually it is not dovetailing, it is the essence of the matter. In the case of business appraisals, two concepts are required, MV and value in use. Whichever one is highest value or return or whatever would appear to be the H & BU or maximally productive use. Maybe we should form our own “business raider outfit” and follow some of these business appraisers around gobbling them up based on their going concern value and selling off the pieces. Every time I ask the above question of a person that does business appraisals, I get ignored. Why do you think that is Steven? When I asked the instructor at the AI nursing home appraisal class he just smiled and moved right along.

Do you see where this subject of different concepts of value is leading us? One day we clarify the value conflict and the next day the prime example of the conflict surfaces. By the time we finish we will be back to 1924. The intervening time was all just a bad dream. The new international situation of one universal system of multiple value concepts as discussed on the other thread may have found its first victim; business appraising. It requires all three concepts which is one of the reasons I don't do business appraisals. The other reason is that there is no accepted method or theory of doing business appraisals, or least according to the business valuation books I purchased. That being the case, what is the appraiser's liability? Another little problem I have had is that selling for example at 6 times the gross is not a measure of profitability or productive use. Six times the gross could have a net business loss. What idiot would base a purchase decision on what a business is grossing without relating it to the net?

PS: Back in my younger days I ran a big tobacco farm. In about 1976, I grossed over $100,000. My wife was a young bank employee and one of the girls asked her if we were not kind of young to have that kind of money in our checking account. That year my net was about -$20,000. See what I mean? Hell, I would have sold out for 80% of the gross.

 

[Stephen J. Vertin MAI]

Austin:

What idiot would base a purchase decision on what a business is grossing without relating it to the net?

People do it all the time, i.e., income producing real estate is essentially a business. People buy on gross rent multipliers. The theory behind it is it is hard to increase gross income given markets but expenses are controllable up to a point. Multipliers are tools. That is not to say it should be used exclusively. It is simply one of the tools in the valuation tool kit.

Steve Vertin

 

[H.B. Userman]

Thank you to all who responded. This has been the most beneficial forum yet for me. All of your insight is appreciated.

When I originally said "quick lube 1/2", I meant the 1/2 of the building, not 1/2 of the revenue.

Every response to my post was a good one. Thank you all again!

 

[Fred]

Your welcome Gatlin, but I have a few more for my other colleagues.

Austin, You’re killing me. :rainfro:

By the time we finish we will be back to 1924. The intervening time was all just a bad dream.

Too may private jokes floating around. You should check this thread for related stuff.
The Entrepeneurial Factor

The other reason is that there is no accepted method or theory of doing business appraisals, or least according to the business valuation books I purchased.

That is not really true, but if you can afford buisness appraisal books, you must be doing well. I would agree that before 1995, you would have had trouble finding much of “the market method” beyond “rules of thumb.” I suspect there is still a lot of “built-up” rate appraising going on.

What idiot would base a purchase decision on what a business is grossing without relating it to the net?

If you ask them they will say things like, “We have owned these things all over and the expenses are always 50-55%.”

Posted by Steve V

FF&E: Furniture, fixtures and equipment. It is typically considered non-realty.
I suspect most of what you are calling FF&E I would consider and believe the market recognizes as appurtenance.

I don’t want to debate these terms, but I think the second “F” in FF&E or “fixture,” means assets that are so intertwined with the land that they might become real property. Of course, it is not possible to concoct a single, brief set of ideas that explains every circumstance while leaving no room for reasonable difference of interpretation.

You say this is what the “market recognizes,” but you also acknowledge all of your transactions are business sales. Suppose you could find these things shut down, sitting like any piece of RE waiting to be used. I think you would acknowledge the shut down ones would sell for less. The price of the shut down ones would be more indicative of what the “market recognizes” as the RE value, even counting all FF&E as realty.

The implication of your approach is that the business has zero value because 100% of everything that goes into the cash register goes to creating realty value.
Let’s say there is a shop doing $60k per month. At our multiplier the business and realty together would sell (or be worth) for $360k.
Suppose there is a second shop that is doing 65k per month. That owner wants to “semi-retire,” sell the business, and just be a landlord for say $5k month rent. Does “the market” pay 6 65k or 390k or does it account for the rent and say 6x 60k or $360k? And if the market still pays either one, how would you argue that this amount goes to realty when there is a landlordt?

 

[Stephen J. Vertin MAI]

You say this is what the “market recognizes,” but you also acknowledge all of your transactions are business sales. Suppose you could find these things shut down, sitting like any piece of RE waiting to be used. I think you would acknowledge the shut down ones would sell for less. The price of the shut down ones would be more indicative of what the “market recognizes” as the RE value, even counting all FF&E as realty.

I agree the property would most likely sell for less. But I think the same holds true for any real estate type. For example, if I find a shut down apartment building the same holds true. Even though an apartment building may be fully functional, if it is boarded and empty I will most likely get less money. I think this has to do more with curb appeal and the buyers preconceived idea of the seller’s financial position or the location of the property.

The implication of your approach is that the business has zero value because 100% of everything that goes into the cash register goes to creating realty value. Let’s say there is a shop doing $60k per month. At our multiplier the business and realty together would sell (or be worth) for $360k.

Suppose there is a second shop that is doing 65k per month. That owner wants to “semi-retire,” sell the business, and just be a landlord for say $5k month rent. Does “the market” pay 6 65k or 390k or does it account for the rent and say 6x 60k or $360k? And if the market still pays either one, how would you argue that this amount goes to realty when there is a landlord?

In most cases the sales comparison approach and income capitalization approach should be some what reflective of one another in value indications. The reason is they both reflect the market from different prospective. If this were not the case appraisal theory would be somewhat meaningless. Most likely the differences in your example would be corrected using a modified multiplier. It would be incorrect to use a gross income multiplier on sales and apply it to rents. You are not comparing apples with apples.

I have thought this out for a while and yes my implication is the business has zero value because 100 percent of everything goes to creating realty value. The reality of this statement is reflected in the price paid. The deed transfers reflect this statement; I simply am stating what I am seeing in the market.

Steve Vertin