Terrel Once Said

[hastalavista]

Lease fee: You'er hitting on a point that hinges AI's argument. If you cut to the chase they argue: BEV is the same as entrepreneurial incentives generated by the FF&E. According to the The Appraisal of Real Estate, 12th edition FF&E generate profits. However, I am not sure that would indicate in of itself. I imagine not since there is a symbiotic relationship with the real estate.

(my bold)

Again, great discussion.

Regarding the bolded part, is the FF&E symbiotic or parasitic?
The real property can perform without the FF&E. Without the specialized FF&E, the real property still has buyers and still has a market and can still produce.
The FF&E can only perform with the real property. And its performance isn't tied to the real property (tangibles only); its tied to the ability of the ownership (intangibles) to make it perform.

I'm close to being in agreement (within the context of how we operate as appraisers and how we perform our analysis as appraisers for appraisal assignments) with: BEV is the same as entrepreneurial incentives generated by the FF&E.
But I wouldn't phrase it like that. I see the concept of EI for the FF&E being tied to the going-concern value and all the components working together to generate positive going-concern value. Some might think that is splitting hairs.

 

[Gobears81]

If you cut to the chase they argue: BEV is the same as entrepreneurial incentives generated by the FF&E. According to the The Appraisal of Real Estate, 12th edition FF&E generate profits. However, I am not sure that would indicate in of itself. I imagine not since there is a symbiotic relationship with the real estate.

Stephen-on the quote from below, are you drawing a parallel between BEV and personal property based on the use of the term "intangible personal property"?

The existence of a residual intangible personal property component in certain properties has been widely recognized for years. Among the many terms used to describe this phenomenon, business enterprise value (BEV) is the most widely used. The issue has attracted attention primarily through assessment, condemnation, and damage claim assignments, which require that an estimate of the value of the real estate component be separated from the market value of the total assets of the business (MVTAB).

These assignments necessarily involve an allocation among the component parts of real property and tangible and intangible personalty. The latter can include what has traditionally been called business enterprise value but more recently has become known as capitalized economic profit (CEP), CEP is defined as the present worth of an entrepreneur's economic (pure) profit expectation.

If so, I believe the profession is trying to get away from that term in favor of simply "intangible assets". The reason being that the term intangible personal property is, above all else, confusing.

No one has mentioned the priority of payments issue, and maybe that is important here as well. As in purely real property (non-going concern) assignments, the land gets first return, followed by the building/ site improvements. In the case of a going concern, FFE receives return after the building improvements, and the gravy left over falls into the return to intangible assets. That is why a poorly performing hotel will have nominal business value (in my opinion), as the NOI barely (or doesn't) cover sufficient return to the tangible asset portion, despite the additional entrepreneurial coordination warranting a return in itself.

 

[Stephen J. Vertin MAI]

fairy tale made of fairy dust.

fairy tale made of fairy dust.

Unfortunately can't get those big M.I.A fees with such answers...

Whether we like it or not the division of components of real estate into categories such as intangibles, tangibles, and BEV will always be something client will pay for. Its the nature of the commercial business. While it very well may be a crock of...,understanding the nature of the crock has payoffs.

 

[Stephen J. Vertin MAI]

Stephen-on the quote from below, are you drawing a parallel between BEV and personal property based on the use of the term "intangible personal property"?

I think I understand that there are two types of PP. One is tangible (carwash equipment, gas pumps, hotel furniture, etc.,) and the other intangible which is defined as BEV. The most common expense allocation to BEV is a specialized and trained work force and management group. This work force can take the tangible PP and make intangible profits. In other words AI is saying the work force can take the FF&E and make money. Fairly simple example but workable. Further, according to AI; BEV, Intangible residual income from the tangible assets and entrepreneurial incentives (or profits) are linked as the same.

It appears that it is theoretically possible to isolate BEV by isolating the entrepreneurial profits allocated to tangible PP through the cost approach. If I have the value of the real estate and isolate BEV I can determine an estimated value of the FF&E or any other permutation involving the variables.

Whether any one agrees or disagrees, the, simple but elegant model is theoretically sound and actually fairly neat.

 

[Eli]

Based on your opinion of how AI views it ( I haven't studied their opinion of BEV being tied to intangible PP). I would love to see a case study. ( they probably have one). But if that is true then your approach is theoreticallly correct to develop an indicator of EI. Leased fee gave other examples or indicators of how to develop an opinion of EI.

 

[Stephen J. Vertin MAI]

Eli: AI's opinion on the issue is clearly stated in blue in post 31. There are no case studies (at least that I can find). That is why I developed the example of Joe and Bob. This entire post should be extremely important to appraiser who do a lot of symbiotic properties.

I have been intensely studying this matter (for about a week) because I am writing a book on appraising a specific symbiotic property. This is not something thought of in passing. Given all of the literature that I have read it boils down to post #31. The AI definition is similar to others. I have just taken the definition and made it into an example (Joe and Bob).

Granted I am far from reading all of the literature on the three components of symbiotic properties which are real estate (tangible), FF&E (tangible personal property) and BEV (intangible value generated by a trained work force generating residual income from tangible personal property). Real estate = RE

I do know that the market value of the tangible and intangible business assets up and running as a going concern (symbolized as MVTI) is

MVTI = RE + FF&E + BEV

We can always value real estate (at least we should be able to). If I have a way to measure BEV coupled with knowing RE. Finding FF&E value is simply a matter of subtraction. Further, and most important, it not only finds unknown values, it supports the division of components (the Holly Grail) of symbiotic property appraisers.

 

[hastalavista]

I have been intensely studying this matter (for about a week) because I am writing a book on appraising a specific symbiotic property. This is not something thought of in passing. Given all of the literature that I have read it boils down to post #31. The AI definition is similar to others. I have just taken the definition and made it into an example (Joe and Bob).

(my bold)

I look forward to the book!
I just don't see the relationship between the RE and Going Concern components as symbiotic in many (if not most) cases.

Symbiotic:



The RE can exist without the components that make up the Going Concern within the context of what we real property appraisers do. Indeed, that is the reason to separate it out.

Parasite/Parasitic (my highlight for emphasis):



The Going Concern components do not return anything to the RE and the RE doesn't need the going concern components to function. The RE functions on its own. It is not interdependent on the Going Concern components.
But in order to have a going concern where the the going concern requires RE, then without it, there is no going concern. The going concern does not function on its own (when RE is required).

Although I don't know how well received a book would be if it were titled: Going Concern: The Parasitic Relationship with Real Estate.

As I said, I'm looking forward to it!

 

[Stephen J. Vertin MAI]

RE and Going Concern components as symbiotic

Oh contraire good buddy. You forget the example of a car wash tunnel. Remove the FF&E and you have a useless elongated tube. Or even a gas stations without pumps....useless. They are symbiotic. In fact I am going to reverse the statement. There are very few of the real estate types existing within this category without FF&E.

 

[hastalavista]

Oh contraire good buddy. You forget the example of a car wash tunnel. Remove the FF&E and you have a useless elongated tube. Or even a gas stations without pumps....useless. They are symbiotic. In fact I am going to reverse the statement. There are very few of the real estate types existing within this category without FF&E.

You make a good point!

 

[Eli]

I see Denis's side too. With it being possibly proposed, it's the management factor that worries me the most relative to the "going concern".