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Which 2 Approaches to Value?

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KLJennings

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Certified General Appraiser
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North Carolina
I have received a request to do 2 approaches to value for a national chain restaurant. The current lessee is buying the subject from the lessor. The lessee will be doing some upgrades, so the appraisal is "subject-to-completion".
Since the appraisal is "subject-to-completion", at that point the owner (was lessee) will not be leasing the subject. Should I do the sales and cost approaches to value or sales and income approaches to value? Thanks for your help!
 

AnonApprsr

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Maybe they want an As-Is value and a Subject-To Value?
 

KLJennings

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Of course, when doing the "subject-to-completion" I have to do the "as-is"; but the as is can easily be done as cost approach also, since it is only 6 years old.
 

Kali the Boston Terrier

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Michigan
KL:

If the current buyer was not the lessee, which two appraoches would be applicable. My thought would the Sales and Income. National Chains are bought and sold all the time, and usually for the purposes of an income stream. That being said you should have great info for both a detailed sales and income approach (probably even a DCF if you wanted to get cute...obviosuly if the remaining term on the lease is a few more years).

IMO if the tenant's offer was too low, the current owner would still be able to sell to any other buyer. So it would seem that there is still a market larger than just the tenant. The propsed improvements, are they repairs or just decor? If it is the latter, the tenant would likely do these regardless of buying the property or not...and may have little 'market value'.
 

BRCJR

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Virginia
Of course, when doing the "subject-to-completion" I have to do the "as-is"; but the as is can easily be done as cost approach also, since it is only 6 years old.

I cannot think of anything major that would need to be done to a 6 year old restaurant, unless they are changing the menu and theme of the restaurant.

So it is "subject to" what type of changes done in a workmanlike manner?
 

KLJennings

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North Carolina
$50,000 worth of improvements are being done; mainly things that should have been done when it was built in the first place.
I guess the income approach may be better considering the amount of information that should be available. Is there a source for national lease rates of such chains? I'm sure I can find enough local information; but just for backup ....
 

H.B. Userman

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Nov 11, 2003
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Certified General Appraiser
State
Wisconsin
In cases where two approaches are requested, but ample data is available for all three, I like to complete the primary approach with detailed explanation and summarize both others in a condensed format. If you absolutely must leave one out, I'd probably kick out the cost approach since depreciation would be more sensitive to argument.
 

Kali the Boston Terrier

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Michigan
$50,000 worth of improvements are being done; mainly things that should have been done when it was built in the first place.
I guess the income approach may be better considering the amount of information that should be available. Is there a source for national lease rates of such chains? I'm sure I can find enough local information; but just for backup ....

CBRE has brokered al ot of them, call their investment division. Marcus and Millichap also has a ton of them sold. You could also try one of the many 1031 exchange websites, they will typically have a bunch that sold, given National Chain NNN deals were the sweethearts of the last 5 years or so.
 

Michigan CG

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Michigan
Looking at some high quality stuff available the rates are running 7-8.5%, however Realty Rates is showing all restaurant properties in the 11-12% range.

Depends on the property...lease term left and quality of the tenant. Bennigan's just went into bankruptcy last week....wonder what that cap rate would be?
 

Mountain Man

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Jan 15, 2002
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State
Georgia
At six years old, I wouldn't be too interested in the cost approach. But, I don't see how you can ignore the income approach. Due to the extra finishes and required water and waste filters, every restaurant I've done has rent rates much higher than retail. Even if the tenant is buying it, your typical investor is still going to consider how much $$$ will market rent rates bring.
 
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