Appraisal Matters

When appraising automobile dealerships, I’d venture to say that the Sales Comparison approach is one of the most used and abuse approaches to value.  Before we explore why, let’s discuss what comprises a comparable automobile dealership sale.

Making Sure Comparables are Comparable

As stated in an earlier post in this series, older dealerships are frequently required by the manufacturer to upgrade their facilities to a newer design.  This is an expensive proposition and chain dealership construction managers I have spoken with have stated that this is reflected in the prices paid to purchase them.  As a result, I consider older dealerships to be a separate and distinct market from newer designed dealerships.  This is one of the most abused aspects of the sales comparison approach.  Selection of comparable sales should consider this, otherwise a whole bunch of large and unreliable adjustments need to be made to the comparables.  They wouldn’t receive primary weight for this reason, so why bother?  It’s better to expand the search radius.

Separating Business and Real Estate Values in Sale Comparables

So now we have a set of comparables.  This is where it starts to get interesting.  If the comparable is a dark sale, we’ve got the value of the real estate.  Or do we?  This is where spending the time in due diligence pays dividends.  The question to be asked of the buyer, seller, broker or other participant to the transaction is how much of this sale is distressed?  Verifying this with more than one party becomes important.  You may not get a definitive answer to this question, but the only way to find out is to try.

If we have one or more sales that had operating businesses at the time of sale, we must determine how much of the sale price is real estate and how much is business value and goodwill and inventory (owned used cars).  Unlike most property types where a going concern sells with the real estate, I’ve found that a higher percentage of purchasers actually have an opionion on business value.  I don’t have an explanation why, although I suspect it has to do with accounting.

Separating business from real estate is important due to the dollar amount and percentage of total business enterprise value associated with an operating automobile dealership sale transaction.  Strangely, this is also the area of greatest weakness I’ve seen in appraisal reports.  Rarely are they separated and instead appraisers simply report the conclusion as real estate and going concern; naturally, the sales comparison approach comes in higher than the Cost or Income Approaches as a result.  So when the definition of market value only includes real estate, what good is a Sales Comparison Approach with no separation of business and real estate in the data?

The Unit of Measure

So price per square foot of gross building area is the accepted standard, right?  Not so fast.  In Part 4 of this blog series, I discussed how low the lot coverage and floor area ratios are for facilities that were not “downtown dealerships”.  Price per square foot (or acre) of land should also be reported and analyzed.  The key here is to pick a unit of measure that would result in materially smaller adjustments.  It is not uncommon to see variances for price per square foot of building areas that are double that if land is used as the unit of measure.  My preference is price per square foot of land since most of the value of the real estate is vested in the land.

Adjustments

Adjusting the comparable sales to the subject follows standard appraisal principal and the items to adjust are fairly self-evident.  There are two exceptions, however.

• About every 8 to 10 years, the distributor proposes a new dealership “look” and image.  The distributor also privides subtle “influence” for a dealership to upgrade.  It is not uncommon for the factory to offer fewer numbers of the “hot” cars and more of the less desirable ones.  As a result, the design of a building can suffer from a higher degree of functional obsolescence faster than traditional real estate (this is also another reason to match newer dealerships sales to a newer subject property and vice versa).  For this reason, the building quality adjustment must consider functional obsolescence.
• The floor area ratio should receive more consideration than typical real estate.  Dealers put a premium on parking for new cars, used cars, employee vehicles and automobiles being repaired, so more of an emphasis should be placed on this adjustment.

Part 6 of this series will explore the income approach followed by parts on business value.

John Simpson, MAI