Restaurant Cap Rates

[Gobears81]

I'm a little confused as to whether the OP is trying to arrive at a business value or a real estate value. If real estate, I wouldn't be capitalizing the business income at all. I do, as others suggest, look at gross business revenue compared to rent as a test of reasonableness for contract and market rent (ie does real estate rent represent approximately 6-10% of business revenue), but I wouldn't be capitalizing business revenue (either gross or net) unless I was arriving at business value. I often look at business value when appraising hotels, campgrounds, car washes and the like, but not usually restaurants, as it is possible to find real estate rents for restaurants, as opposed to these other property types.

I am doing real property. However, on properties of this type, the business performance is not entirely exclusive of real property, and I am giving consideration to its performance as evidence of whether the property is feasible if constructed new. As mentioned initially, this is a unique property, and I am not sure whether typical rules regarding rents being a percentage of sales apply. They might, but lets ask-why would restaurant rents typically be between 6% and 10% of revenue? Because there is some similarities and expectations regarding typical expense ratios. Thus, if a property an extremely high expense ratio, rents at even 5% - 6% may not work, and vice versa. I am not going to cap out the NOI from operations and call it real property-I am trying to make sure that the route I take here is the appropriate one.

 

[Gobears81]

In hindsight, trying to identify typical restaurant expense ratios from operations would have been just as good or better of a question.

 

[DREA Dean]

Ok. It makes sense to look at the big picture, for sure. May I ask a pertinent question: is the unique aspect related to the property or the business? In other words, does any variance from the norm reflect the location, site or building, or the business operation?

 

[CANative]

Nacho/ Michael-I've historically done something similar to what you mentioned. In particular, evaluate market rent based on comps and compare it to gross sales as a percentage for rent.
Nstanbru-No, it is owner occupied.

Guys, I haven't told the whole story and with my worries of confidentiality, I am a little hesitant to say much more. But, I am in receipt of the gross sales, and they don't support project costs based on rents determined from typical sales percentages. It is a quite unique property, and the business has a higher margin than say, an Arbys. I am mainly trying to add support to my valuation approaches since there isn't a lot of great data on like-kind properties. I have support for, say, a 7-8% of gross sales percentage on rents, but I didn't want to blindly go higher without support.

Just realized that I put this in the review forum-apologies.

Is this a theme restaurant?

 

[Gobears81]

To respond to both Dean and CANative,it is a unique property from the perspective of the property itself, not the business. I'll try to adequately describe in a way that doesn't give away the property for confidentiality purposes-it is a good, marketable site and the land value is pretty high relative to typical retail/ restaurant sites for this market. The site is of adequate size to support a larger building, but this is a quite small structure. Nearly new building and site improvements. Despite the high L: B ratio, given the building placement, no excess land could be realistically recognized. The sales are underwhelming, but I believe the profit margin to be a little higher than average.

 

[Michael P Jacobs MAI]

This thread makes no sense, sorry.