Appraisers should understand and correctly use methods and techniques employed by investors to determine the value of restaurants, according to an article published in The Appraisal Journal.
The Appraisal Journal is the quarterly technical and academic publication of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. The materials presented in the publication represent the opinions and views of the authors and not necessarily those of the Appraisal Institute.
“Restaurant Valuation,” was written by Brock Rule, chief operating officer and managing director of the restaurant division for Hopkins Appraisal Services, which specializes exclusively in real estate and business valuations for restaurants and retail petroleum facilities.
The article looks at the valuation parameters used by restaurant operators, lenders and intermediaries in actual transactions in the real estate market and argues that appraisers should incorporate these considerations in the approach into valuation of restaurants. Rule proposes that appraisers use an excess earnings approach, which takes into consideration the market rent, a real estate capitalization rate and a business multiple.
Although the excess earnings method is ubiquitous across the industry for developing a credible opinion of value, the author explains that there are different accepted valuation techniques appraisers should employ when appraising chain restaurants — established brands with a regional or national presence — versus concept restaurants, which are local, one-off businesses. Rule clarifies that the main distinction between chain and concept is highest and best use (i.e., the comparable rentals, capitalization rates and sales for a chain are chains; the comparables for local concepts are other local concepts).
According to a popular commercial real estate database cited in the article, as many as 22,000 restaurants sold during the period 2010-2012, and the dollar value of the sampled transactions totaled nearly $11 billion, indicating there is considerable need for appraisal experience in this specialty market.
Read “Restaurant Valuation” in the Spring 2014 issue of The Appraisal Journal.