Appraisal Matters

It’s time to get into some of the nuances of the three approaches to value as they apply to appraising automobile dealerships.  Since the Cost Approach is frequently cited as the best method for appraising most types of special purpose properties, let’s start with it.

The Cost Approach - Land Valuation

The Cost Approach starts with a land valuation.  With the exception of the “downtown dealership”, most dealerships have the following land aspects in common:

• The lot coverage ratio and floor area ratio are both quite low.
• Typically, zoning will allow for materially more gross building area, but the buildings don’t represent anywhere near the fully allowable density.  Most are only a single story or have a partial second story.
• The site is typically located in zoning that allows for one of the greatest number of commercial uses.  Most of the properties I’ve appraised are on sites that have either the greatest or second greatest principal permitted uses.
• Traffic volumes tend to be among the highest in the area.
• They typically have a street-wise facing, meaning that the longest side faces the highway, giving it the best visibility and good access.
• They are on level or almost level sites; visibility is rarely limited due to topography.

Considerations in Valuing the Land

I’m not one to preach what adjustments should be made; that’s the job of each appraiser.  That said, it should be clear from the above that typically automobile dealerships are situated in locations that have a wide variety of strong land marketability factors.  I’ve found that more features need to be considered and adjusted for than other less desirable commercial sites for these reason.  I advocate the following adjustments to be considered:

• Zoning - yes, the difference between Highway Commercial and Local Commercial site need strong adjustments (I used these two generic zoning as examples - they are not specific to one area).  The difference is so material that frequently the buyers are different, so adjustments should reflect the allowable differences.
• Traffic Count - this is a no-brainer.
• Visibility - Although related to topography, setback from the highway (as in a service road paralleling the highway) and shape, visibility should be considered.  Making an adjustment here usually negates the need to make topography and shape adjustments.
• Location - this can be a tough one.  Many dealership sites are situated in auto parks and although they don’t have the traffic volume that a highway dealership has, they benefit from other nearby, synergic uses.  Other than this, much of the need for location adjustments are taken by a traffic count adjustment, so if using this adjustment, only consider differences obvious to a typical market participant.
• Land Size - since there is a general market tendency for materially larger sites to sell for less per square foot or acre, adjustments typically need to be made for properties that are beyond certain size breakpoints.  For instance, a 100,000 square foot subject site and a 120,000 square foot comparable site would not be a sufficient for the market to recognize a per square foot size price differential.  However, a comparable site that is 200,000 or 300,000 square feet in size would clearly be large enough to see a lower price per unit of measure just due to size.

Other Adjustments

I rarely have need for these land adjustments, although I mention them for completeness.

• Corner Lot - not a big deal when you have a large site, especially if the perpendicular street is residential.  Of course, two highways intersection demands consideration (the traffic count might only reflect one of those streets).
• Shape - unless a property has a shape that limits visibility or access, it’s not a factor.
• Utilities - Frequently the same between the subject and the comparables or the difference is not a big deal to a typical market participant.
• Traffic lights - a nice amenity, but it’s tough to tie it to value.

The Cost Approach - Improvements Valuation

Estimating the replacement cost new of the improvements can be a double-edged sword.  Services such as Marshall and Swift provide cost new estimates, but in my opinion they are only accurate for a restricted range of automobile dealerships, specifically those with very generic designs.  I’ve appraised dealerships that had to spend several hundred dollars per square foot for imported Italian marble for the showroom floors as required by the factory.  That was no small expense!  Cost services just don’t cover the specialty requirements very well.

Physical depreciation is fairly easy to estimate, but functional obsolescence can be difficult.  Functional obsolescence in automobile dealership appraisals does not just only consider how functional the improvements are to the current user.  What about the needs of a different chain?  In this respect, examining the “market” to see what trends are shown by dealers is important.  Was that nice building specifically designed for a Jaguar dealership knocked down for a Lexus dealership?   The classic example is when a factory’s design requirements change and the franchise agreement requires upgrading the facility to the new requirements upon sale.  Hopefully that five-year old Italian marble floor is still in style!  If not, I’ll just pull up my U-Haul and graciously take it off their hands.

The next segment of this series will address the Sales Comparison Approach.

John Simpson, MAI