Special Skills Crucial for Restaurant Valuation: The Appraisal Journal

CHICAGO (June 12, 2014) – Appraisers should understand and correctly use methods and techniques employed by investors to determine the value of restaurants, according to an article published this week 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,” by Brock J. Rule, MAI, 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 arelocal, one-off businesses. The author 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 2010-12, and the dollar value of the sampled transactions totaled nearly $11 billion, indicating there is considerable need for appraisal experience in this specialty market.

Brock J. Rule, MAI, is 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. Rule earned a bachelor of science degree in chemical engineering, cum laude, from Rose-Hulman Institute of Technology in Terre Haute, Indiana He received the MAI designation in 1991 and the ASA designation in business valuation in 2009.

Read “Restaurant Valuation” in the Spring 2014 issue of The Appraisal Journal.

Also in The Appraisal Journal’s Spring 2014 issue:

“Ground Lease Provisions — A Case Study for Leasehold Valuation,” by Don Guarino, MAI, Cameron Chehrazi, MAI, and Brad A. Bohl, looks at a case study explaining how to develop an estimate of value of an office building subject to a ground lease that is above the current market rate.

“Forecasting Commercial Real Estate Appreciation with Commercial Land Sales,” by Scott Frayn, MAI, offers an economic model showing how the number of commercial land sales can be used as a predictor of the future level of inflation-adjusted commercial real estate appreciation.

“Fair Value of Investment Property and Independent Appraisers: The Experience in the UK and Japan,” by Takashi Yamamoto, Ph.D., discusses the role appraisers play in fair market accounting and clarifies the status of the fair value of investment property of companies in the United Kingdom, which pioneered it, and also provides an analysis of the fair value of investment property of companies in Japan following the recent adoption of accounting standards for disclosure of the fair value.

 

 

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