Gas Station Valuation:

Distinguishing the Real, Personal and Intangible Property

Appraisal Institute Annual Meeting Indianapolis, Indiana July 24, 2013 Michael F. Kurschat, ASA, M.S.F., MAI Kurschat & Company, 2075 W Big Beaver, Ste 222, Troy Michigan Phone: 248-816-9166 Kursuchat@kurschatco.com

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

2075 W. Big Beaver, Ste 222, Troy, MI 48084 Phone: (248) 816-9166 kurschat@kurschatco.com www.Kurschatco.com

Speakers 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

Speakers 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, were talking about gas stations, not politics. Some of those gas stations are in Detroit.

Overview
1.

Whats There
Classifying It

a. Physical Characteristics b. Traffic Count/Competition a. Real Property b. Personal Property c. Intangible Property d. Going Concern

2.

3.

Methodology for Valuation

a. Income Approach b. Cost and Sales Comparison Approaches

4.

Data and Cases

Whats There Physical Characteristics

Convenience Store Fast Food Sales/Seating Lighted Canopy and Dispensers Underground Storage Tanks
Bare Steel, with Cathodic Protection Least Desired Fiber Coated Steel Double Wall Fiberglass Most Desired

Car Wash

Whats There Locational Characteristics

Trend toward High Traffic Intersection

Traffic 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 Location

Typically a wildcard in evaluating location

Locational Characteristics

Competition

Summarize superior or inferior stations in area x mile radius Number of Competitors Rating of Competitors - Quality

Brand and Market Strategy of Competitors

Sams 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. Real Property Personal Property

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

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)

Mikes TOP 10 List

1. 2. 3.

of personal property for a gas station

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

4.
5. 6. 7. 8.

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

Intangible Property

Real Property

Personal Property

Fixtures, Building, Land, Site Improvements (Permanently attached) Interests: Leased Fee, Fee simple, leasehold, easement, etc

Trade Fixtures Furniture, Movable things (Chattel)

Patents, Contracts, Trained and assembled workforce, Copyrights,

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 Stool The 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 subjects sales information

Compare with Average Price

http://www.eia.gov

Comparable Income
In. Traffic Ct No Comp # per day 1 9-064 59,518 2 0-003 31,638 3 0-024 46,846 4 0-031 42,580 5 0-048 27,200 6 0-065 44,264 7 0-079 54,902 8 0-098 31,055 9 1-005 48,012 Subject 61,024 Average $42,891 Median $44,264 Competation Store SF Low/Avg. 2,139 Avg./High 1,270 Avg./Low 1,675 Avg/Low 4,836 Low/Avg 1,344 Avg./High 1,350 High 1,653 Average 1,153 High 1,347 High 1,465 1,863 1,350 Gallons per mo 140,796 96,170 146,545 170,000 160,000 71,677 91,278 55,000 53,000 105,000 109,385 96,170 Store Traffic Store Sales Mult Sales/sf $60,013 2.37 $28.06 $51,430 3.04 $40.50 $71,894 3.13 $42.92 $90,000 3.99 $18.61 $92,956 5.88 $69.16 $24,080 1.62 $17.84 $56,614 1.66 $34.25 $40,000 1.77 $34.69 $55,000 1.10 $40.83 1.72 $60,221 $56,614 2.73 2.37 $36.32 $34.69

Gasoline Margins

Margins are based on area competition Check margins based on gas prices Analyze subjects 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 ApproachConvenience 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 Cigarettes/Tobacco Beverage Lottery Candy Chips Fountain Coffee Groceries Milk/Dairy Auto Oil General Merchandise Fast Food Car Wash Totals Revenue $101,372.37 51,600.56 8,590.20 15,628.86 7,531.55 2,584.36 17,177.69 16,175.14 6,311.18 11,982.32 4,386.17 10,997.36 42,661.85 $296,998.00 Cost of Goods $73,035.17 33,379.20 6,242.64 9,376.77 4,569.31 529.11 9,414.12 10,689.92 5,525.34 6,163.65 3,962.30 8,628.64 6,222.27 $177,738.00 Gross Margin $28,337 18,221 2,347 6,252 2,962 2,055 7,764 5,486 786 5,189 424 2,368 36,436 $119,260 % 28% 35% 27% 40% 39% 80% 45% 34% 12% 49% 10% 22% 85% 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

Gal 67,334 Price $3.85 C store, other/mo $131,245 %credit card 50.00% charge 2.50% Total Charges Annual Sales 808,008 $3,110,831 $1,574,940 $2,342,885 $58,572.14 $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 $45,000 /mo C-Store Total Gross Profit Expenses Real Estate Taxes Bank Charges Variable Exp (25%) Management (10%) Total Expenses NOI Cap Rate: $0.08 30% $76,800 $162,000 $238,800

$9,900 $38,040 $59,700 $23,880 $131,520 $107,280 = 13.41%

$107,280 NOI $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 Size, Frontage, corner location Traffic Count Typically from County Road Commission Competition

Site Valuation

Allocation Real, 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

Allocation Real, 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