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
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1. Convenience Stores + TRPs
2. 4 Critical Valuation Factors
3. Income Approach:
Comparable Rentals v. Earnings
Next 40 Minutes
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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
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4.Not Your Usual Appraisal
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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
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International Valuation Standards, Standard 232
6.Not Your Usual Appraisal
Where does NOI to Real Estate come from?
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7.1. The Nature of Convenience Stores & TRPs
NOT YOUR USUAL APPRAISAL
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17.
Just 3 Factors:
Statistical Study Example
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TOTAL VALUE
VARIATION:
65% !
18.3. The Income Approach and the Kansas Decision
NOT YOUR USUAL APPRAISAL
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19.Current Legal Arguments
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The Income Valuation Approach:
Comparable Rentals
v.
Earnings Allocation
20.Current Legal Arguments
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2013 Kansas Case
Presta Oil, Inc.
v.
KDOT
An Appraiser’s View
21.The Income Approach and the
Kansas Decision
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Income Approach
RENTAL COMPARABLE ANALYSIS
EARNINGS
ALLOCATION
22.The Income Approach and the
Kansas Decision
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Income Approach
RENTAL COMPARABLE ANALYSIS
BEST FOR:
Apartments
Mini-Storages
Multi-tenant Retail
Offices
23.The Income Approach and the
Kansas Decision
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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
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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
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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
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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
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Problems with Rental Comparable Analysis for TRPs
28.The Income Approach and the
Kansas Decision
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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
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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
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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
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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
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33.The Income Approach and the
Kansas Decision
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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).
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Presta Case
Kansas Decision
The Income Approach and the
Kansas Decision
Earnings Allocation Analysis
REJECTED
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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 …”
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Presta Case
Kansas Decision
The Income Approach and the
Kansas Decision
An Appraiser’s View
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Presta Case
Kansas Decision
The Income Approach and the
Kansas Decision
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Presta Case
Kansas Decision
The Income Approach and the
Kansas Decision
Mistake 1
EBIDTA is business Profit
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Presta Case
Kansas Decision
The Income Approach and the
Kansas Decision
Mistake 1
EBIDTA is business Profit
Income
EBIDTA
Business income
Profits
Business Profit
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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.”
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Presta Case
Kansas Decision
The Income Approach and the
Kansas Decision
Mistake 3
“…location alone… does not create revenue.”
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Advice for Attorneys
1. Use a knowledgeable appraiser when earnings-based procedures are required (i.e. if the property is a TRP).
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Advice for Attorneys
2. When using an earning-based procedure, describe the allocation to real estate as “economic rent”.
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Advice for Attorneys
3. Augment an EBITDA allocation procedure with other “earnings-based” techniques.
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Advice for Attorneys
4. In any challenge, make sure you know what the appraiser did in the cases cited.
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Robert E. Bainbridge, MAI
reb@cstorevalue.com
www.cstorevalue.com