| Many restaurant owners have been shocked to learn that they are unable to sell or lease their restaurant property for an amount equal to its tax assessment value. The market value of a recently built restaurant is usually less than its construction cost. When an owner attempts to set a sales price or lease rate, he is unable to recoup his costs. Excess property taxes result from improper use of the cost approach to market value.
The cost approach is an excellent valuation methodology for some types of new properties. It works better for properties that can be utilized by a large number of users without alteration as opposed to special-use properties. Apartment complexes are an example of properties where multiple users can use the same property with few, if any, alterations. Restaurants are a category where extensive renovations are typically required to convert a restaurant from use by one operator to use by another operator. This is particularly true where chain restaurants are involved. For example, how much would it cost to convert a restaurant built for McDonald's to be used by Pizza Hut?
Randy Dishongh, of the Mason Jar Restaurant Group, recently purchased a 8,250 square foot restaurant that has been used by another operator and altered for use by his firm. It cost $400,000 ($48.48 per square foot0 to convert the restaurant. Phil Kensinger, of Kensinger & Company, recently purchased an 8,000 square foot restaurant that cost $300,000 ($37.50 per square foot) to convert his tenant's requirements. Kensinger reports, "improvement in a restaurant built-to-suit often has little or no value to a successor tenant."
Part of the business value developed by restaurants is dependent upon a distinctive architecture that is recognizable to restaurant patrons, who believe they can expect a reliable quality of food and service for a set price at this establishment. It is important to restaurant operators that all operating units have this recognizable architecture. It is the primary reason large restaurant operators such as McDonald's, Pizza Hut, and Whataburger have distinctive restaurant design with distinctive signage.
Signage is a good example of one of the high-cost conversion items. McDonald's golden arches are distinctive and well serve the purpose of announcing to its patrons the presence of the McDonald's restaurant. However, they are not easily converted for use by another restaurant, perhaps not even with extensive conversion costs. The same is true for changing the elevation (exterior appearance), interior layouts and redoing the interior finish.
The unique architecture of chain restaurant facilities makes it difficult to convert a facility built for one chain to use by another chain. It costs less to convert them from use by a major chain to a local nonchain operator. Examples of national chains with distinctive architecture include: McDonald's, Pizza Hut, Burger King, Taco Bell, Long John Silvers, Pizza Inn, Jack in the Box and Whataburger.
Definitions Determine Methodology
The first steps in determining the proper valuation methodology includes, reviewing a series of definitions, determining how they apply to restaurants, and reviewing the laws that apply in your jurisdiction. However, continual refinement is essential to the growth of the appraisal profession. A current economic definition of market value is stated as follows:
The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress. (The Appraisal of Real Estate, 20th ed., published in 1992 by The Appraisal Institute)
The following definition has been agreed upon by agencies that regulate federal financial institutions in the United States, including the Resolution Trust Corporation (RTC):
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price in not affected by undue stimulus. Implicit in this definition is the consummation of a sale of a specified date and the passing of title from seller to buyer under conditions whereby:
buyer and seller are typically motivated
The appraisal division of O’Connor & Associates is a national provider of commercial real estate appraisal services including insurance valuation, commercial real estate appraisal, cost segregation studies, due diligence.
http://www.protest-tarrant-county-property-taxes-appraisals.com/Appraisal/index.cfm
http://www.protest-tarrant-county-property-taxes-appraisals.com/Articles/insurance_valuation.cfm |
