Robert E. Bainbridge AUTHOR, INSTRUCTOR, APPRAISER C – S T O R E V A L U A T I O N S
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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
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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. Convenience Stores + TRPs 2. 4 Critical Valuation Factors - PowerPoint PPT Presentation
Transcript of Robert E. Bainbridge AUTHOR, INSTRUCTOR, APPRAISER C – S T O R E V A L U A T I O N S
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. Convenience Stores + TRPs
2. 4 Critical Valuation Factors
3. Income Approach: Comparable Rentals v. Earnings
Next 40 Minutes
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
Not Your Usual Appraisal
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
International Valuation Standards, Standard 232
Not Your Usual Appraisal
Where does NOI to Real Estate come from?
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1. The Nature of Convenience Stores & TRPs
NOT YOUR USUAL APPRAISAL
C-Store & TRP Appraisals:1. Supply & Demand2. Customer Demographics3. Traffic Count4. Hypermarket Competition
Four Critical Factors
Just 3 Factors:
(a) Supply & Demand(b) Customer Demographics(c) Hypermarket
Statistical Study Example
Just 3 Factors:
Statistical Study Example
Norm: $1,000,000
Low: $700,000
High: $2,000,000
Just 3 Factors:
Statistical Study Example
Norm: $1,000,000
Low: -30%
High: +35%
Just 3 Factors:
Statistical Study Example
TOTAL VALUEVARIATION:
65% !
1. Supply & Demand
Four Critical Factors
Few Competitors Many Competitors
Four Critical Factors
2. Customer Demographics
Shopping Potential Index
Four Critical Factors
3. Traffic Volume
Four Critical Factors
4. Hypermarket Competition
Selling gasoline 6 CPG below street price.
Just 3 Factors:
Statistical Study Example
TOTAL VALUEVARIATION:
65% !
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3. The Income Approach and the Kansas Decision
NOT YOUR USUAL APPRAISAL
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Current Legal Arguments
The Income Valuation Approach:
Comparable Rentalsv.
Earnings Allocation
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Current Legal Arguments
2013 Kansas Case
Presta Oil, Inc.v.
KDOTAn Appraiser’s View
The Income Approach and the Kansas Decision
Income Approach
RENTAL COMPARABLE ANALYSIS
EARNINGSALLOCATION
The Income Approach and the Kansas Decision
Income Approach
RENTAL COMPARABLE ANALYSIS
BEST FOR:
• Apartments• Mini-Storages• Multi-tenant Retail• Offices
The Income Approach and the Kansas Decision
Income Approach
BEST FOR: (ALL TRPs)
• Convenience Stores• Gas Stations• Car Washes• Fast-Food Restaurants• Motels & Hotels
EARNINGSALLOCATION
The Income Approach and the Kansas Decision
Problems with Rental Comparable Analysis for TRPs
1. Good rental comparables are difficult to find.
2. The location adjustment is difficult and should reflect all four Critical Factors.
The Income Approach and the Kansas Decision
Problems with Rental Comparable Analysis for TRPs
Supply & Demand Customer Demographics Traffic Volume Hypermarket Competition (Cross-Channel Competition)
The Income Approach and the Kansas Decision
Problems with Rental Comparable Analysis for TRPs
Supply & Demand Customer Demographics Traffic Volume Hypermarket Competition (Cross-Channel Competition)
TOTAL VALUEVARIATION:
65% !
The Income Approach and the Kansas Decision
Problems with Rental Comparable Analysis for TRPs
The Income Approach and the Kansas Decision
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):
The Income Approach and the Kansas Decision
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):
The Income Approach and the Kansas Decision
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).
The Income Approach and the Kansas Decision
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
The Income Approach and the Kansas Decision
The Income Approach and the Kansas Decision
Earnings AllocationADVANTAGES:
• 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).
Presta CaseKansas Decision
The Income Approach and the Kansas Decision
Earnings Allocation Analysis
REJECTED
Presta CaseKansas 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 …”
Presta CaseKansas Decision
The Income Approach and the Kansas Decision
An Appraiser’s View
Presta CaseKansas Decision
The Income Approach and the Kansas Decision
Presta CaseKansas Decision
The Income Approach and the Kansas Decision
Mistake 1EBIDTA is business Profit
Presta CaseKansas Decision
The Income Approach and the Kansas Decision
Mistake 1EBIDTA is business Profit
• Income • EBIDTA• Business income• Profits• Business Profit
Presta CaseKansas Decision
The Income Approach and the Kansas Decision
Mistake 2“Earnings are inherently a measure of the business acumen of the… business
owner.”
Presta CaseKansas Decision
The Income Approach and the Kansas Decision
Mistake 3“…location alone… does not
create revenue.”
Advice for Attorneys
1. Use a knowledgeable appraiser when earnings-based procedures are required (i.e. if the property is a TRP).
Advice for Attorneys
2. When using an earning-based procedure, describe the allocation to real estate as “economic rent”.
Advice for Attorneys
3. Augment an EBITDA allocation procedure with other “earnings-based” techniques.
Advice for Attorneys
4. In any challenge, make sure you know what the appraiser did in the cases cited.
