Gas Station Valuation: Distinguishing the Real, Personal and Intangible Property Appraisal Institute Annual Meeting Indianapolis, Indiana July 24, 2013.

Gas Station Valuation: Distinguishing the Real, Personal and Intangible Property

Appraisal Institute Annual MeetingIndianapolis, Indiana

July 24, 2013

Michael F. Kurschat, ASA, M.S.F., MAIKurschat & Company,

2075 W Big Beaver, Ste 222, Troy MichiganPhone: 248-816-9166

[email protected]

Contact Information Michael F. Kurschat, ASA, M.S.F., MAI

2075 W. Big Beaver, Ste 222, Troy, MI 48084

Phone: (248) 816-9166 [email protected] www.Kurschatco.com

Speaker’s Background Michael F. Kurschat, ASA, M.S.F., MAI

Appraiser, 25 years President, Kurschat & Company, with 4 other appraisers Bachelors Degree In Business Administration Masters Degree Finance Past President of the Detroit Chapter of ASA Appraisal experience: Mortgage Financing, Condemnation,

Litigation support, Tax Appeal, Estate/Gift Tax Wide Variety of Property types: Shopping Centers, Industrial,

Apartments, Offices, Development Property, Specialties Expert Witness Testimony, Circuit Court, Tax Tribunal Purchased, leased and sold commercial shopping center

property

Speaker’s Background Michael F. Kurschat, ASA, M.S.F., MAI

Appraiser, 25 years Kurschat & Company, Troy, MI Bachelors Degree In Business Administration Masters Degree Finance Past President of the Detroit Chapter of ASA Appraisal experience: Mortgage Financing, Condemnation, Litigation

support, Tax Appeal, Estate/Gift Tax Wide Variety of Property types: Shopping Centers, Industrial, Apartments,

Offices, Development Property, Specialties Expert Witness Testimony, Circuit Court, Tax Tribunal Purchased, leased and sold commercial shopping center property Cub Scout Den Leader, Caught a 27” Northern Pike Computer Skills - Performed several “fdisk.exe” operations I Invented the Internet

Detroit, Michigan

Yes, Detroit just filed for bankruptcy, making it the largest municipal bankruptcy in US History.

Professional group, we’re talking about gas stations, not politics.

Some of those gas stations are in Detroit.

Overview1. What’s There

a. Physical Characteristicsb. Traffic Count/Competition

2. Classifying Ita. Real Propertyb. Personal Propertyc. Intangible Propertyd. Going Concern

3. Methodology for Valuationa. Income Approachb. Cost and Sales Comparison Approaches

4. Data and Cases

What’s TherePhysical Characteristics

Convenience Store Fast Food Sales/Seating Lighted Canopy and Dispensers Underground Storage Tanks

Bare Steel, with Cathodic Protection – Least DesiredFiber Coated Steel Double Wall Fiberglass – Most Desired

Car Wash

What’s ThereLocational Characteristics

Trend toward High Traffic IntersectionTraffic Count – Cars/Day, Typically from County Source

Corner – Count two Roads Divided Highway

Effective Traffic Exposure, Typically half of Far Side of Road

Freeway Interchange LocationTypically a “wildcard” in evaluating location

Locational Characteristics

CompetitionSummarize superior or inferior stations in area – x mile radiusNumber of Competitors Rating of Competitors - Quality

Brand and Market Strategy of CompetitorsSam’s Club Gas, Kroger Gas, Speedway Loyalty Programs

Classifying It – Defined Tangible Property Intangible Property Personal Property (Tangible and

Intangible) Going Concern (or not?)

Tangible Property

Defined: Property that can be perceived with the senses; includes land, fixed improvements, furnishings, merchandise, … and other items of working capital used in an enterprise.

The Dictionary of Real Estate Appraisal, 5th Ed., Appraisal Institute

Real Property Personal Property

Intangible Property

Nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment. (USPAP 2012-2013)

Intangible Property – Examples (gas stations) Customer Relationships Non-Compete Agreements Franchise Agreements Trade Name / Trademark Assembled Workforce Liquor License Other Goodwill

Real Property

Real Property: The interests benefits, and rights inherent in the ownership of real estate. Sounds like the Intangible aspect, but NOT

Real Estate: an identified parcel or tract of land, including improvements, if any. (USPAP 2012-2013)

Sounds more Tangible aspects - Physical

Fixture

An article that was once personal property but has since been installed or attached to the land or building in a rather permanent manner so that it is regarded in law as part of the real estate. The

Dictionary of Real Estate Appraisal, 5th Ed., Appraisal Institute

Is It Real Property or Personal Property? Plumbing Fixture – Real or Personal?

Trade Fixtures

Articles placed in or attached to rented buildings by a tenant to help carry out the trade or business of the tenant are generally regarded as trade fixtures. The Dictionary of Real Estate Appraisal, 5th Ed., Appraisal Institute

Personal Property

Identifiable tangible objects that are considered by the general public as being “personal” - for example, furnishings, artwork, antiques, gems and jewelry, collectibles, machinery and equipment; all tangible property that is not classified as real estate.

(USPAP 2012-2013)

Mike’s TOP 10 List of personal property for a gas station

1. Fountain Drink Dispenser (24)2. Cash Registers / Checkouts (19)3. Gondola Shelving (12)4. Coffee Maker / Coffee dispenser (11)5. Ice Maker (10)6. Carbonator and tanks(9)7. Slush Machine (8)8. Movable tables/chairs (7)

Intangible Real Property

Nope. Real Property is always classified

as a tangible asset by the real property discipline.

Does that make the most sense?

Tangible Property

Real PropertyPersonal Property

Intangible Property

Fixtures, Building,

Land, Site Improvements

(Permanently attached)

Trade FixturesFurniture,Movable things

(Chattel)

Patents, Contracts,

Trained and assembled workforce,Copyrights,

Interests: Leased Fee, Fee simple, leasehold,

easement, etc…

Real – Personal – Intangible 1 acre of land Convenience Store Building A Brick A Trained and Assembled Workforce Car Wash Building Toilet/Sink Liquor License Walk-in Cooler

Real – Personal – Intangible

Light Pole Compressor lines Canopy Car Wash Blowers Brushes 10,000 gallon underground fuel tank Plumbing for toilet

Real – Personal – Intangible

Piping for dispensers Furnace Fuel Dispensers Traffic Count Sign Branding Established client base

Going Concern

A business having the ability to continue functioning as a business entity into the future. The Dictionary of Real Estate Appraisal, 5th Ed., Appraisal Institute

Composed of a mixture of Real, Personal, and Intangible Assets

Three-Legged StoolThe whole is not necessarily the sum of the parts.

Going Concern

Valuation of a Going Concern

When is it appropriate to value of the real estate only?

Estate tax return? Property tax assessment/appeal? Mortgage financing? These issues need to be resolved at

the time of engagement with the Client.

Examples – Going Concern “Valero” gas station, 4 dispensers,

high traffic intersection, with convenience store.

BP Station, 8 dispensers, car wash, freeway interchange.

BP Station/McDonalds, 8 dispensers, freeway interchange near theme park.

Urban gas station with liquor license.

Valuation

Income Approach Gasoline Sales Convenience Sales Other: Car wash, liquor, fast food

franchise, rental units Sales Comparison Approach Cost Approach

Income Approach

Gasoline Sales Traffic Count Multiplier =

Gallons/Mo divided by Traffic Count

Dependent upon Competition Compare with the subject Weigh reliability of the subject’s

sales information

Compare with Average Price

http://www.eia.gov

Comparable Income In. Traffic Ct Competation Store Gallons Store Traffic StoreNo Comp # per day SF per mo Sales Mult Sales/sf

1 9-064 59,518 Low/Avg. 2,139 140,796 $60,013 2.37 $28.062 0-003 31,638 Avg./High 1,270 96,170 $51,430 3.04 $40.503 0-024 46,846 Avg./Low 1,675 146,545 $71,894 3.13 $42.924 0-031 42,580 Avg/Low 4,836 170,000 $90,000 3.99 $18.615 0-048 27,200 Low/Avg 1,344 160,000 $92,956 5.88 $69.166 0-065 44,264 Avg./High 1,350 71,677 $24,080 1.62 $17.847 0-079 54,902 High 1,653 91,278 $56,614 1.66 $34.258 0-098 31,055 Average 1,153 55,000 $40,000 1.77 $34.699 1-005 48,012 High 1,347 53,000 $55,000 1.10 $40.83

Subject 61,024 High 1,465 105,000 1.72

Average $42,891 1,863 109,385 $60,221 2.73 $36.32Median $44,264 1,350 96,170 $56,614 2.37 $34.69

Gasoline Margins Margins are based on area competition Check margins based on gas prices Analyze subject’s income statement for actual

margins for the subject BEWARE – how are sales taxes reported

Often shown as “overhead”, should be Cost Of Goods Sold, results in inflated margin.

Reliability of “Cash Business” Science vs Art

Income Approach- Convenience Sales

Sales/SF store area Compare with actual sales Beer/Wine/Liquor Prepared foods Margins and Industry Norms Services – ATM, Check Cashing, etc.

Compare Actual Margins To Standards for the industry

Items

Revenue

Cost of Goods

Gross Margin

%

Cigarettes/Tobacco $101,372.37 $73,035.17 $28,337 28% Beverage 51,600.56 33,379.20 18,221 35% Lottery 8,590.20 6,242.64 2,347 27% Candy 15,628.86 9,376.77 6,252 40% Chips 7,531.55 4,569.31 2,962 39% Fountain 2,584.36 529.11 2,055 80% Coffee 17,177.69 9,414.12 7,764 45% Groceries 16,175.14 10,689.92 5,486 34% Milk/Dairy 6,311.18 5,525.34 786 12% Auto Oil 11,982.32 6,163.65 5,189 49% General Merchandise 4,386.17 3,962.30 424 10% Fast Food 10,997.36 8,628.64 2,368 22% Car Wash 42,661.85 6,222.27 36,436 85% Totals

$296,998.00

$177,738.00

$119,260

40%

Income Approach – Summary of Gross Profit Gallons x Margin

= Gross Profit Fuel Sales/SF x SF X Margin

= Gross Profit Store

Income Approach - Expenses

Fixed Expenses – Property Taxes Variable Expenses – Most others Credit Card Fees, 2.5% to 3% of

credit card sales Amount of Detail – subjective

requirement

Develop NOI

Income Approach – Credit Card Fees

Annual SalesGal 67,334 808,008Price $3.85 $3,110,831C store, other/mo$131,245 $1,574,940%credit card 50.00% $2,342,885charge 2.50% $58,572.14Total Charges $58,572.14

Extracted Overall Cap Rates

Extract from sales where sales and margins are available

EXPENSES – Calculate using same methodology.

Consistency, equilibrium, balance in the universe

Sample Extracted Cap Rate

Annual Income 80,000 /mo gal fuel $0.08 $76,800

$45,000 /mo C-Store 30% $162,000 Total Gross Profit $238,800 Expenses Real Estate Taxes $9,900 Bank Charges $38,040 Variable Exp (25%) $59,700 Management (10%) $23,880 Total Expenses $131,520 NOI $107,280 Cap Rate: $107,280 NOI = 13.41% $800,000 Price

Sales Comparison Approach Sale Allocations – goodwill/covenants Unit of Comparison

Price per SF of What? Preferred method is total price Comparison Factors for adjustments

Land size / Dispensers Building Size Traffic Count Competition Sales Volume

Cost Approach

Improvements Building Tanks, dispensers, piping

Site Valuation Size, Frontage, corner location Traffic Count – Typically from County

Road Commission Competition

AllocationReal, Personal, and Intangible

Personal Property – Depreciated Cost Approach, or Sales Comparison

Intangible Assets – based on Contribution, or sales (when available)

Example of Liquor License Selling at $100,000 Contributes $150,000

AllocationReal, Personal, and Intangible

Example of Liquor License Selling at $100,000 Contributes $150,000

How should it be allocated? For a Mortgage Appraisal For a Divorce Settlement? For Property Tax Assessment? Does it matter?

Special Situations

Fast food lease Car Wash Gift Shop Diesel Fueling Stations The Jerky Outlet Leased Facility

Sources of Data

US Dept. Of Energy - Historical Gasoline Prices

State Dept. of Environmental Quality – tank information

County Road Commissions – Traffic Counts

Wholesale Gasoline Prices: OPIS opisnet.com