Convenience Stores  & TRPs in Condemnation:
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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

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Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

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


Next 40 minutes

  • 1. Convenience Stores + TRPs

  • 2. 4 Critical Valuation Factors

  • 3. Income Approach:

  • Comparable Rentals v. Earnings

Next 40 Minutes


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Not Your Usual Appraisal

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


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Not Your Usual Appraisal


Definition of trp

  • A trade related property is any type of real propertydesigned 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


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Not Your Usual Appraisal

Where does NOI to Real Estate come from?


1 the nature of convenience stores trps

1. The Nature of Convenience Stores & TRPs

NOT YOUR USUAL APPRAISAL


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Four Critical Factors

C-Store & TRP Appraisals:

1. Supply & Demand

2. Customer Demographics

3. Traffic Count

4. Hypermarket Competition


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Statistical Study Example

Just 3 Factors:

(a) Supply & Demand

  • (b) Customer Demographics

  • (c) Hypermarket


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Statistical Study Example

Just 3 Factors:

Norm:$1,000,000

Low:$700,000

High:$2,000,000


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Statistical Study Example

Just 3 Factors:

Norm:$1,000,000

Low:-30%

High:+35%


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Statistical Study Example

Just 3 Factors:

TOTAL VALUE

VARIATION:

65% !


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Four Critical Factors

  • 1. Supply & Demand

Few Competitors

Many Competitors


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Four Critical Factors

  • 2. Customer Demographics

Shopping Potential Index


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Four Critical Factors

  • 3. Traffic Volume


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Four Critical Factors

  • 4. Hypermarket Competition

Selling gasoline 6 CPG below street price.


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

Statistical Study Example

Just 3 Factors:

TOTAL VALUE

VARIATION:

65% !


3 the income approach and the kansas decision

3. The Income Approach and the Kansas Decision

NOT YOUR USUAL APPRAISAL


The income valuation approach comparable rentals v earnings allocation

Current Legal Arguments

The Income Valuation Approach:

Comparable Rentals

v.

Earnings Allocation


2013 kansas case presta oil inc v kdot

Current Legal Arguments

2013 Kansas Case

Presta Oil, Inc.

v.

KDOT

An Appraiser’s View


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

The Income Approach and the

Kansas Decision

Income Approach

RENTAL COMPARABLE ANALYSIS

EARNINGS

ALLOCATION


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

The Income Approach and the

Kansas Decision

Income Approach

  • BEST FOR:

  • Apartments

  • Mini-Storages

  • Multi-tenant Retail

  • Offices

RENTAL COMPARABLE ANALYSIS


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

The Income Approach and the

Kansas Decision

Income Approach

  • BEST FOR:

  • (ALL TRPs)

  • Convenience Stores

  • Gas Stations

  • Car Washes

  • Fast-Food Restaurants

  • Motels & Hotels

EARNINGS

ALLOCATION


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

The Income Approach and the

Kansas Decision

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.


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

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)


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

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 VALUE

VARIATION:

65% !


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

The Income Approach and the

Kansas Decision

Problems with Rental Comparable Analysis for TRPs


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

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):


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

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):


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

The Income Approach and the

Kansas Decision

Earnings Allocation

“The income approachis applied to a trade related propertyby 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 NewInternational Valuation Standards (IVS), “Standard 232” (2010).


Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

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


  • Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    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).


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision

    Earnings Allocation Analysis

    REJECTED


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision

    “An Order in Limine is hereby entered precluding introduction of evidence …of any valuations based on a capitalization of EBITDA …”


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision

    An Appraiser’s View


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision

    Mistake 1

    EBIDTA is business Profit


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision

    Mistake 1

    EBIDTA is business Profit

    • Income

    • EBIDTA

    • Business income

    • Profits

    • Business Profit


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision

    Mistake 2

    “Earnings are inherently a measure of the business acumen of the… business owner.”


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    The Income Approach and the

    Kansas Decision

    Presta Case

    Kansas Decision

    Mistake 3

    “…location alone… does not create revenue.”


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    Advice for Attorneys

    1. Use a knowledgeable appraiser when earnings-based procedures are required (i.e. if the property is a TRP).


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    Advice for Attorneys

    2. When using an earning-based procedure, describe the allocation to real estate as “economic rent”.


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    Advice for Attorneys

    3. Augment an EBITDA allocation procedure with other “earnings-based” techniques.


    Robert e bainbridge author instructor appraiser c s t o r e v a l u a t i o n s

    Advice for Attorneys

    4. In any challenge, make sure you know what the appraiser did in the cases cited.


    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

    Robert E. Bainbridge, MAI

    [email protected]


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