Winning Convenience Store Appraisal Reports

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  • 1.Convenience Stores & TRPs in Condemnation:Special Valuation Issues in the Application of the Income Approach Robert E. Bainbridge AUTHOR, INSTRUCTOR, APPRAISER C – S T O R E V A L U A T I O N S www.cstorevalue.com 1
  • 2. 1. Convenience Stores + TRPs 2. 4 Critical Valuation Factors 3. Income Approach: Comparable Rentals v. Earnings Next 40 Minutes 2
  • 3.TRPs = Trade Related Property Special-Built Properties Single Economic Purpose R.E. built to generate earnings Cannot be Easily Converted Value Extremely Sensitive to Access Value Extremely Sensitive to Visibility Not Your Usual Appraisal 3
  • 4.Not Your Usual Appraisal 4
  • 5. A trade related property is any type of real property designed for a specific type of business where the property value reflects the trading potential [earnings capacity] for that business. Examples include hotels, fuel stations, restaurants, casinos, cinemas and theatres. The essential characteristic of this type of property is that it is designed, or adapted, for a specific use and the resulting lack of flexibility means that the value of the property interest is normally intrinsically linked to the returns that an owner can generate from that use. The value therefore reflects the trading potential of the property. It can be contrasted with generic property that can be occupied by a wide range of different business types, such as standard office, industrial or retail property. Definition of TRP 5 International Valuation Standards, Standard 232
  • 6.Not Your Usual Appraisal Where does NOI to Real Estate come from? 6
  • 7.1. The Nature of Convenience Stores & TRPs NOT YOUR USUAL APPRAISAL 7
  • 8.C-Store & TRP Appraisals: 1. Supply & Demand 2. Customer Demographics 3. Traffic Count 4. Hypermarket Competition Four Critical Factors 8
  • 9. Just 3 Factors: (a) Supply & Demand (b) Customer Demographics (c) Hypermarket Statistical Study Example 9
  • 10. Just 3 Factors: Statistical Study Example 10 Norm: $1,000,000 Low: $700,000 High: $2,000,000
  • 11. Just 3 Factors: Statistical Study Example 11 Norm: $1,000,000 Low: -30% High: +35%
  • 12. Just 3 Factors: Statistical Study Example 12 TOTAL VALUE VARIATION: 65% !
  • 13.1. Supply & Demand Four Critical Factors 13 Few Competitors Many Competitors
  • 14.Four Critical Factors 14 2. Customer Demographics Shopping Potential Index
  • 15.Four Critical Factors 15 3. Traffic Volume
  • 16.Four Critical Factors 16 4. Hypermarket Competition Selling gasoline 6 CPG below street price.
  • 17. Just 3 Factors: Statistical Study Example 17 TOTAL VALUE VARIATION: 65% !
  • 18.3. The Income Approach and the Kansas Decision NOT YOUR USUAL APPRAISAL 18
  • 19.Current Legal Arguments 19 The Income Valuation Approach: Comparable Rentals v. Earnings Allocation
  • 20.Current Legal Arguments 20 2013 Kansas Case Presta Oil, Inc. v. KDOT An Appraiser’s View
  • 21.The Income Approach and the Kansas Decision 21 Income Approach RENTAL COMPARABLE ANALYSIS EARNINGS ALLOCATION
  • 22.The Income Approach and the Kansas Decision 22 Income Approach RENTAL COMPARABLE ANALYSIS BEST FOR: Apartments Mini-Storages Multi-tenant Retail Offices
  • 23.The Income Approach and the Kansas Decision 23 Income Approach BEST FOR: (ALL TRPs) Convenience Stores Gas Stations Car Washes Fast-Food Restaurants Motels & Hotels EARNINGS ALLOCATION
  • 24.The Income Approach and the Kansas Decision 24 Problems with Rental Comparable Analysis for TRPs Good rental comparables are difficult to find. The location adjustment is difficult and should reflect all four Critical Factors.
  • 25.The Income Approach and the Kansas Decision 25 Problems with Rental Comparable Analysis for TRPs Supply & Demand Customer Demographics Traffic Volume Hypermarket Competition (Cross-Channel Competition)
  • 26.The Income Approach and the Kansas Decision 26 Problems with Rental Comparable Analysis for TRPs Supply & Demand Customer Demographics Traffic Volume Hypermarket Competition (Cross-Channel Competition) TOTAL VALUE VARIATION: 65% !
  • 27.The Income Approach and the Kansas Decision 27 Problems with Rental Comparable Analysis for TRPs
  • 28.The Income Approach and the Kansas Decision 28 Earnings Allocation “The methodology of the earnings capitalization parallels the way industry participants view real estate. The real estate, like all other assets, is considered in its context of its contribution to earnings.” Robert E. Bainbridge, Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues, Second Edition 2012, (Appraisal Institute, 2012):
  • 29.The Income Approach and the Kansas Decision 29 Earnings Allocation “Because it is a component part of these assets, the value of the real estate is dependent on earnings capacity. This is the fundamental premise of value for a convenience store.” Robert E. Bainbridge, Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues, Second Edition 2012, (Appraisal Institute, 2012):
  • 30.The Income Approach and the Kansas Decision 30 Earnings Allocation “The income approach is applied to a trade related property by estimating the amount that a reasonably efficient operator could afford to pay as rent for the property after deducting other operating expenses and a reasonable profit margin for the operator from the gross income that can be generated from the property…” International Valuation Standards Council (IVSC), Proposed New International Valuation Standards (IVS), “Standard 232” (2010).
  • 31.The Income Approach and the Kansas Decision 31 7 STEPS IN EBIDITA ALLOCATION PROCEDURE  1. Gross Sales 2. Less: Cost of Goods Sold 3. Equals: Gross Profit 4. Less: Operating Expenses 5. Equals: Adjusted EBITDA 6. Allocate Earnings to:  REAL ESTATE PERSONAL PROPERTY INTANGIBLE ASSETS   7. Capitalize Allocated Earnings to each Asset Class:  REAL ESTATE VALUE PERSONAL PROPERTY INTANGIBLE ASSETS VALUE
  • 32.The Income Approach and the Kansas Decision 32
  • 33.The Income Approach and the Kansas Decision 33 Earnings Allocation ADVANTAGES: Most nearly reflects the actions of the market. Allows the separate valuation of all three classes of assets. Abundant published industry bench-marking data. Less prone to error (i.e. under-value good locations or over-value poor locations).
  • 34.34 Presta Case Kansas Decision The Income Approach and the Kansas Decision Earnings Allocation Analysis REJECTED
  • 35.35 Presta Case Kansas Decision The Income Approach and the Kansas Decision “An Order in Limine is hereby entered precluding introduction of evidence …of any valuations based on a capitalization of EBITDA …”
  • 36.36 Presta Case Kansas Decision The Income Approach and the Kansas Decision An Appraiser’s View
  • 37.37 Presta Case Kansas Decision The Income Approach and the Kansas Decision
  • 38.38 Presta Case Kansas Decision The Income Approach and the Kansas Decision Mistake 1 EBIDTA is business Profit
  • 39.39 Presta Case Kansas Decision The Income Approach and the Kansas Decision Mistake 1 EBIDTA is business Profit Income EBIDTA Business income Profits Business Profit
  • 40.40 Presta Case Kansas Decision The Income Approach and the Kansas Decision Mistake 2 “Earnings are inherently a measure of the business acumen of the… business owner.”
  • 41.41 Presta Case Kansas Decision The Income Approach and the Kansas Decision Mistake 3 “…location alone… does not create revenue.”
  • 42.42 Advice for Attorneys 1. Use a knowledgeable appraiser when earnings-based procedures are required (i.e. if the property is a TRP).
  • 43.43 Advice for Attorneys 2. When using an earning-based procedure, describe the allocation to real estate as “economic rent”.
  • 44.44 Advice for Attorneys 3. Augment an EBITDA allocation procedure with other “earnings-based” techniques.
  • 45.45 Advice for Attorneys 4. In any challenge, make sure you know what the appraiser did in the cases cited.
  • 46.46 Robert E. Bainbridge, MAI reb@cstorevalue.com www.cstorevalue.com