|
Article Excerpt
ABSTRACT
A show cave is one example of where real estate is so intertwined with a business that the appraiser cannot properly value the real estate without also considering the enterprise. One solution to the real estate appraisal problem is an income residual technique, The capitalization rate applied to the residual income is determined by weighting the required return on and return of the capital for the real property excluding the caverns with the capitalization rate to the enterprise's total invested capital excluding the real estate.
**********
With most real estate, any typical tenant could replace any other typical tenant. Such is the case for our appraisal firm and the plain-vanilla, Class B office space we rent. We could find other Class B space, and an accountant or manufacturer's rep or almost anyone else could be satisfied with the space we now occupy. In this type of relationship, the renter receives quiet enjoyment and the services provided in the lease, and all the owner can expect is the timely rental payment. Consequently, although the landlord is in the business of renting real property, he or she has no involvement in the renter's business. This is the situation for the vast majority of real estate across most property types and in most market areas.
On the other hand, some real property is uniquely related to a specific enterprise, in which case the value of the real estate is dependent on the economic well-being of that enterprise as a going concern. This is generally true when there is very little adaptive reuse of the improvements because they have been designed to be useful only to the particular business carried out via the premises. It is also the case when some component of the real property itself is a unique attribute of the business. Valuation assignments in these cases involve the market value of the real estate in use or as a going concern. (1)
Show Caves
Show caves are tourist attractions, and they compete for discretionary dollars with amusement parks, water slides, movies, bowling alleys, and other family-oriented amusements. The number of visitors to caverns directly depends on media advertisements, the historical relationship with tour services, the goodwill created from a long exposure to the market, and a large base of satisfied customers. These factors are more important than the natural beauty or locations of the caverns themselves and speak to the importance of competent management of the company operating the cave.
Show Cave Components
The tangible real estate components of a show cave include the following:
* The land within which the cave is located
* The cave
* Cave improvements, such as the walkways, elevators, tunnels, lighting, communications systems, and water pipes, which constitute the difference between a show cave and a wild cave
* Buildings, such as the restaurant, gift shop, sluices for "panning for gold or jewels," climbing walls, slides, and other ancillary improvements
* Site improvements, such as the parking lots, signage, landscaping, waste disposal system, and balance of utilities.
The non-real estate assets of a show cave include the intangibles and the furniture, fixtures, and equipment (FF&E) typical of a retail facility, lunchroom, or in some cases, an amusement park. The intangibles include the following:
* The brand
* The reputation and pool of satisfied former visitors now willing to take their own children to see the cave
* The organized workforce
* The experienced management
Real estate appraisers have sufficient tools to appraise the land as if there were no cave and to appraise the contributory value all of the surface improvements. This article focuses on estimating the contributory value of the developed cave as a part of the overall value of the real estate. As such, the approach described may be helpful when considering other real estate assets that have a contributory value, such as a proven reserve of merchantable minerals in situ or a merchantable, potable water well. The approach also may help in valuing real estate assets that, like caves, are inextricably intertwined with the business that the real property asset makes possible, such as a continuing care retirement community (CCRC) or a fast food restaurant.
Show Cave Business-Real Estate Relationship
There may be no other situation where the value of the business and the value of the real estate are more closely interrelated than with a show cave. The business enterprise is the dominant part of the show cave's business-real estate partnership. However, the relationship between the show cave business and the real estate is similar to that of a convenience store, a hotel, a nursing home, a day care, or other real property for which there is very little adaptive reuse. The cave may enhance the value of the land within which the cave is located, but that enhancement can only be recognized as a function of the receipts from the business of operating the cave.
Suppose, for example, that a show cave has a market real estate rent equal to about 10% of all cave revenues and that the appropriate capitalization (cap) rate for the stream of income to land containing a cave is 15%. That would mean that if there were 100 acres improved with a show cave (and its supporting infrastructure), the real estate market value would be $2,000,000 if the cave generates $3,000,000 in gross sales, i.e., $3,000,000 x 0.10 = $300,000/0.15 = $2,000,000. However, the value would only be $1,000,000 if the show cave sold $1,500,000 in goods and services, i.e., $1,500,000 x 0.10 = $150,000/0.15 = $1,000,000. This means that show caves can be distinguished from most other real estate where the fortunes of the landlord are not as directly tied to the fortunes of the tenant.
Real Estate Value and Business Value
The unique characteristic of a show cave is that the value of the land is enhanced by the unusual hole in the ground as compared to otherwise similar real estate that does not contain a show cave. From the...
|
