Appraisal Matters

When appraising automobile dealerships, the appraiser must recognize that this is a special purpose property.  This simple conclusion has a great bearing on the appraisal process and the appraiser’s conclusions, as I shall illustrate.

Unique Aspects of Dealership Valuations

• The number and type of alternate uses are limited and therefore the number of potential purchasers or users of the site is also greatly constrained.
• When a dealership has failed and most of the potential dealers who would purchase it cannot do so due to franchise trade radius conflicts or simply the age of the improvements, it is common to see the site redeveloped.  This is a sign straight from the market that this is a special purpose property.
• A dealership is used as part of a larger going concern, that of the automobile sales business.  A franchise agreements typically present and a used car inventory can also be part of the facility, further indications that a business resides within.
• The design of the building is heavily influenced by the automobile distributor.  A wide range of interior and external specifications must be conformed to, otherwise the franchise agreement will not be granted to the facility.
• One of the many trends in the industry has been for multiple dealership ownership.  It is not uncommon for dealers to “diversify” by having different franchises that represent a broad spectrum of market segments, such as an economy line, a luxury line, a mid-price line, a truck line, domestic and foreign brands, etc.  When one line is weak due to unfavorable market conditions, another line may be strong.  Cross-subsidizing weaker lines results in more stability in the portfolio and a lower risk of overall default.  Many forms of real estate do not benefit from cross-subsidization.
• The Market Analysis section of the appraisal is very difficult to write without it being loaded with global, national or industry boilerplate.  Comparisons to total manufacturer production are meaningless because the vehicles are distributed throughout the world.  Sales of trucks versus cars and other items are similarly useless because they are industry-specific, yet a dealership trades on a local basis.  To create relevant market analysis, trade radius analysis should be employed, not unlike what is used in franchise retail and chain store analysis.
• Highest and best use analysis requires, at the very least, implicit analysis and recognition of the business enterprise.  Without it, the facility is dark.  When the appraiser concludes that the highest and best use is for the current use, as an automobile dealership, some consideration of the going-concern should be paid.
• Unlike most property types, the going-concern can be valued using many asset-based or balance sheet methods.  there are also multiple income statement models that can be used as well as industry-specific multipliers.  Yes, you guessed it… appraising the business can be a longer report than the real estate!
• Separating going-concern value from the real estate is difficult, but not impossible with proper due diligence and conversations with industry professionals.

In the next part of this series, we’ll explore difficulties associated with the cost and sales comparison approaches.

John Simpson, MAI