INCOME ANALYSIS : The Income Approach is a method of estimating the Market Value of a property based upon its income producing capabilities over its estimated remaining economic life, with consideration given to current investment requirements. The Income Approach is given emphasis in the appraisal of leased fee properties such as the subject since potential purchasers are primarily concerned with the income the property will produce. The Income Approach in appraising these properties is similar to that in appraising any type of commercial, income producing property.
A stabilized gross income is established from which are deducted all operating expenses to arrive at net income. The net income is then capitalized at an appropriate rate to arrive at an estimate of value. When properties are encumbered with long-term leases, an income stream is established for a typical holding period and a present value of that income stream is calculated.
The last year of the income stream includes the sale of the property itself. This is generally referred to as the Discounted Cash Flow Analysis. The subject properties are being appraised subject to hypothetical long-term leases.
Accordingly, the second method of valuation was utilized. They are being appraised subject to a hypothetical lease for the ... more. less.
following reason. It is not uncommon for fast food restaurants to be sold to investors.<br><br> The investors own and lease the property to franchisees. In fact, there is a national market for this type of transaction and I have done numerous appraisals across the country for exactly this purpose. Since the purpose of this appraisal is to estimate the value of the real estate, it is reasonable to construct a scenario that is common in the marketplace.<br><br> Typically the prices set in these transactions are based upon the rental that the property generates and the rental rates are based upon gross sales. The percentage of sales that is used varies by franchise 3 typically from about 4% of gross sales to 8½ % Burger King, Wendy 9s and McDonald 9s tend to fall at the upper end of the range. The subjects of this report being Burger King franchises would therefore fall at this upper end 3 8½.<br><br> Another of the aspects of the Discounted Cash Flow Analysis is the value of the property at the reversion&that is at the end of the lease term. Since it is impossible to estimate future values at some date distant, I have estimated the present value of the property as though unencumbered with a lease and have assumed that with all other factors being similar to today, the property will appreciate at the marginal rate of about 1%. This is slightly below the prevailing rate of inflation and therefore reflects creal d depreciation.<br><br> I have assumed that the hypothetical lease will call for the property to be maintained and I assume it will be in condition similar, at the future date, to the condition today. The property in xxxx will still have 40 years remaining on its ground lease 3 a period of time that should not significantly diminish the attractiveness of the site. A resume' of some of the sales I considered follows.<br><br> This market data is not offered as independent evidence of the value of the subject property, but rather as some of the transactions I have taken into consideration in arriving at an opinion of value. SALE NO. 1 LOCATION : 1906 Lincoln xxxxxxx, xxxxx SALES PRICE : $600,000.00 DATE OF SALE : August 1998 PRICE/SQ.FT : $187.50 BUILDING AREA : 3,200 square feet LAND AREA : 1.06 acres LAND/BUILDING RATIO : 14.4:1 DESCRIPTION : This is the sale of the Kentucky fried chicken restaurant.<br><br> The transaction included personal property SALE NO. 2 LOCATION : 2501 N Vermilion xxx, xxxxx SALES PRICE : $855,000.00 DATE OF SALE : April 1998 PRICE/SQ.FT : $323.99 per/sq. ft.<br><br> BUILDING AREA : 2,639 sq. ft. COMMENT : This is the sale of a Wendy 9s for continued use as a Wendy 9s SALE NO.<br><br> 3 LOCATION : 601 W. Kilgore Avenue xxxxx, xxxx SALES PRICE : $45,000.00 DATE OF SALE : January 1996 PRICE/SQ.FT : $20.77/ sq. ft.<br><br> BUILDING AREA : 2,166 sq. ft. LAND AREA : 21,083 acres.<br><br> LAND/BUILDING RATIO : 9.73:1 DESCRIPTION : A former Burger Chef, then Hardee 9s restaurant building of frame and masonry construction. The purchaser owns property adjacent to it. SALE NO.<br><br> 4 LOCATION : 4118 Columbus Avenue xxxxxx, xxxxxx. SALES PRICE : $125,000.00 DATE OF SALE : January 1996 PRICE/SQ.FT : $41.67/sq. ft.<br><br> BUILDING AREA : 3,000 sq. ft. LAND AREA : 43,560 sq.<br><br> ft. LAND/BUILDING RATIO : 14.52:1 DESCRIPTION : Built in 1979, this is a former Noble Roman 9s restaurant. The masonry and frame building was purchased by a local American Legion group.<br><br> SALE NO. 5 LOCATION : 5815 Broadway xxxxxx, xxxxxx SALES PRICE : $445,000.00 DATE OF SALE : August 1999 PRICE/SQ.FT : $164.81/sq. ft.<br><br> BUILDING AREA : 2,700 sq. ft. LAND AREA : 28,800 square feet LAND/BUILDING RATIO : 10.67:1 DESCRIPTION : This is a sale of a Popeye 9s Chicken.<br><br> The building was built in 1974 and remodeled into the Popeye 9s Chicken in 1994. SALE NO. 6 LOCATION : 1620 E.<br><br> Commercial Avenue xxxxxx, xxxxxx SALES PRICE : $700,000.00 DATE OF SALE : November 1999 PRICE/SQ.FT : $170.23 sq. ft. BUILDING AREA : 4,112 sq.<br><br> ft. LAND AREA : 24,263 sq. ft.<br><br> LAND/BUILDING RATIO : 5.90:1 DESCRIPTION : This is a sale of a Burger King Fast Food Restaurant. This building was in good condition at the time of sale. SALE NO.<br><br> 7 LOCATION: 1710 Main Avenue xxxxxx, xxxxx DATE OF SALE: April 1996 PRICE: $571,429.00 PRICE/SF: $193.70 LOT SIZE: A mildly trapezoidal shaped parcel, the site has approximately 233 feet of frontage along DeKalb and contains a total of about 46,750 square feet. BUILDING SIZE: 2,950 Square Feet (via field measurements). LAND TO BLDG.<br><br> RATIO : 15.8:1 INGRESS/EGRESS : Good PARKING : Apx. 75 cars OVERALL: The subject is a free standing Burger King on a commercial street nearby commercial development. The subject improvements consist of a Burger King restaurant circa mid to late 1980's.<br><br> It is of average quality improvements and is typical of this vintage Burger King. Typical Burger King finishings with acoustical tiled ceilings, paneled and drywall walls and quarry tile floors. This building has atrium seating.<br><br> Overall seating apx. 75. One drive- thru - good condition Summary of Analysis of Improved Sales Location Price Date Size $/SF xxxx, xx $600,000.00 Aug-98 3,200 $ 187.50 xxxx, xx $855,000.00 Apr-98 2,639 $ 323.99 xxxx, xx $ 45,000.00 Jan-96 2,166 $ 20.77 xxxx, xx $125,000.00 Jan-96 3,000 $ 41.67 xxxx, xx $445,000.00 Aug-99 2,700 $ 164.81 xxxx, xx $700,000.00 Nov-99 4,112 $ 170.23 xxxx, xx $571,429.00 Apr-96 2,950 $ 193.70 General : There are more current sales.<br><br> Those newer sales are, however, located in major metropolitan areas, e.g., Chicago, Indianapolis, St. Louis, & Columbus and are not as representative of value as those that have small town characteristics. The prices cover a very wide range with the higher prices being sales of restaurants sold for continuing use as the same franchise with the lesser prices being those to sold to a different user.<br><br> The major value influencing factors for this property type include location, overall site configuration, population trends, topography, and commercial amenities such as access to major highways, expressways and shopping. Size : Variations in size tend to be influenced by economies of scale, with smaller properties selling at higher unit prices than larger properties, assuming all other factors are equal. Following this line of reasoning, the unit sale prices of the sales, which are larger than the subject, should sell for a lower unit price while the unit prices of the smaller properties should be higher.<br><br> Topography : Properties with highly irregular terrain characteristics are likely to require extensive site preparation and tend to sell at lower unit prices than properties at street grade and level. Location : In general, the locational characteristics of a property influence value to a significant degree. Accessibility, visibility, and high traffic counts are qualities that typically enhance a property's value when present.<br><br> Sales possessing superior locations result in higher sale prices while sales with inferior locations sell for a lower unit price, all other factors being equal. Date of Sale : Typically, an adjustment for a property's date of sale attempts to account for changes in the marketplace, which could potentially impact property values from the date of sale to the date of value. Consideration as to the time of sale, size, location, age, degree of modernization, and utility, as well as other factors that affected value was given to each sale.<br><br> All of the sales listed herein, as well as numerous others, were given consideration in the appraisal of each of the subject properties. Over the years the Gorman Group has had the opportunity to study and appraise numerous fast food restaurants, both as individual sites and grouped in networks. We have developed a developed a rating guide to help in our analysis of locations and values.<br><br> The rating guide follows. It should be expressly noted that this estimate of the reversion value is of real estate only and that if the business value were considered, the ranking may have been somewhat different. Top Tier Locations The ctop tier d (or excellent) locations all have very positive shopping center influences.<br><br> They are generally located on "out-lots" or on the periphery of major shopping centers, e.g., regional malls, power centers or very large community shopping centers. In addition to significant retail activity, these areas also tend to have several nationally recognized hotels/motels nearby as well as most other fast food concepts. Traffic counts are generally very high.<br><br> Usually population densities are high, as is disposable income. Without doubt, another nationally recognized fast food concept would pay a premium for these locations. Many of the otherwise specific site requirements franchises require will be ignored to get these locations.<br><br> Second Tier Locations The csecond tier d (good) locations are all located on very major roadways and are all in high retail density, important local shopping areas - often on the outlot of a successful community shopping center of moderate size or a large neighborhood shopping center. Many other fast food facilities are nearby and population densities are high. A hotel/motel may also be nearby.<br><br> The sites generally have good ingress/egress and adequate area for parking. Traffic counts are high. Third Tier Locations This third level (average) of locations are all located on busy streets, but not as busy as those previously noted.<br><br> These streets are local thoroughfares. Surrounding uses tend to be local types of business 4 although in many cases other franchise restaurants can be found nearby. Many cInterstate interchange d locations fall into this category.<br><br> In fact, generally speaking, most fast food facilities fall into this category. Fourth Tier Locations This fourth level (fair) of locations are located on busy streets, but for differing reasons, are not as valuable as the previously described facilities. Retail uses in these areas are not as dense as in better locations and the local businesses are typically small and in many cases older.<br><br> Many times the site is only minimally adequate, perhaps not even allowing for drive-up facilities. These are locations that have very limited appeal to the franchise market in general. Fifth Tier Locations This fifth level (poor) of locations are generally in areas of minimal retail activity.<br><br> This is not to say the locations are particularly bad, it 9s just that they are entirely local or sometimes rural in nature. Frequently they have physical barriers, e.g., railroad tracks, raised highways, creeks, or other factors limiting access to the community. Also, there is often is a limited population density nearby.<br><br> These are locations where the highest and best use of an existing franchise is likely to be an alternative use if an existing franchise leaves. The subject properties have the following rankings: Address Town Tier 301 N 7 th xxxx 5 1629 Georgetown xxxx 5 Of course, factors other than those noted above impact value. Specific locational attributes can, and do on occasion, make, "third tier properties more valuable than second tier ones. d In addition, the improvements themselves have a significant impact.<br><br> Finally, it is very important to note that this appraisal is of real estate only 4 not the business. If I were appraising these properties on the basis of business value, the rankings would be different. Finally after careful consideration of all factors, I have concluded that the subject properties have the following values, as unencumbered.<br><br> These are the values utilized as base values for the future reversions. Address Town Value 301 N 7 th xxxx $ 200,000.00 1629 Georgetown xxxx $ 250,000.00 LEASE ANALYSIS Each of the subject properties is assumed to be encumbered with a lease (see assumptions). As assumed, the terms of the leases are relatively straightforward.<br><br> It is to be a classic net lease where the tenant pays a market rental amount. Rental rates for fast food facilities tend to be established at a rate that relates to the gross sales of the facility. Rates for fast food restaurants range from about 4% to 8½% of gross sales.<br><br> Burger King facilities tend toward the upper end of the range and in this case I believe that 8½% is appropriate. The leases are generally cabsolute net d meaning that the tenant, in addition to the rental rate, pays all other charges attributable to the building (taxes, insurance, etc.). Therefore, the entire percentage rental flows to the owner.<br><br> Lease 1 Location: 309 Green street xxxx, xxx Type: Burger King Building size: 2,800 SF Base rent: $97,750.00 Overage: Rental rate is based on 8.5% of gross rent. Term: 17 years 3 beginning 1/1991 Lease 2 Location: 1706 S State Street xxxx, xxx Type: Hooters Building size: 6,584 SF Base rent: $102,000.00 Overage: In addition to the base rent, there is a percentage clause at 7.5% above the break point. Term: 20 years 3 beginning 3/2000 The following schedule shows the property, annual gross sales (as provided to me by the client), the calculated rental rate (8.5% of the gross sales), and the lease expiration: Address Town Gross Sales Rental Expiration 301 N 7th xxxx $566,735.71 $48,172.50 2013 1629 Georgetown xxxx $910,788.07 $77,417.00 2012 The average Burger King store has sales of about $1,055,000.00 (fiscal year 2002).<br><br> While the xxxx store is not very far off that mark, the xxxx is obviously very far off. Rentals are generally figured as being absolute net recapture of the investors investment is a part of the lease. The cextra d rental amount for the for the ground lease creates a need to adjust the rental rate for the xxxx store.<br><br> The ground rent of $9,100.00 needs to be subtracted from the hypothetical percentage rent and results in a rental rate to the investor of $68,317.00 per year. In the Discounted Cash Flow Analysis, I have used the gross sales as a basis for future sales, and since inflation has been a part of the economy for some time now and it is not likely to go away, I have adjusted each year 9s sales upward at a rate of 2.0% per year. EXPENSE DISCUSSION I was not provided with historical operating expenses, however, since the leases are absolute net, ones where the tenant is responsible for all charges associated with the building, there would be no expenses.<br><br> Nevertheless, ownership of real estate requires management, bookkeeping/accounting, etc., and so I have assessed each property a two percent (2%) charge. DISCOUNT RATE Generally, the discount rate to use, the rate which investors in that type or class of property require as a condition for purchasing, is an appraisal problem. The rate tends to vary from time to time depending on economic conditions.<br><br> Accordingly, the appraiser must carefully consider competitive market conditions and alternative investment opportunities for the type of investor typically interested in the property being appraised. Market conditions involve the money market. INVESTMENT ALTERNATIVES The following are "Yield Comparisons" as of November 5, 2002, from the Wall Street Journal dated November 6, 2002.<br><br> All figures are percentages. 52 Week 11/5 11/4 High Low Corp.-Govt. Master 4.08 4.07 5.54 3.87 Treasury 1-10 yr 2.35 2.32 4.20 2.16 10+ yr 4.92 4.89 5.96 4.49 Agencies 1-10 yr 2.74 2.73 4.67 2.63 10+ yr 5.49 5.45 6.50 5.38 Corporate 1-10 yr High Quality 3.88 3.87 5.37 3.70 Med Quality 5.64 5.66 6.67 5.35 10+ High Quality 6.38 6.35 7.09 5.91 10+ yr Med Quality 7.44 7.45 7.93 7.01 Yankee bonds 4.77 4.76 6.26 4.58 Current coupon mortgages GNMA 6.50% 5.13 5.13 6.72 4.73 FNMA 6.50% 5.42 5.42 6.70 5.16 FHLMC 6.50% 5.44 5.44 6.72 5.17 High yield Corporates 13.18 13.25 13.96 10.92 New tax-exempts 7-12-yr G.O.<br><br> (AA) 3.84 3.82 4.62 4.32 12-22-yr G.O. (AA) 4.80 4.79 5.32 4.32 22+yr revenue (A) 5.07 5.06 5.46 4.61 While interest rates have fallen dramatically recently, one thing stands out 3 real estate investors have been relatively consistent in their minimum demand for return. The surveys show that the attempts to gain high returns have diminished from about 18% down to 15% and even the average return has diminished from about 14½% to 12.3%.<br><br> However, the minimum acceptable average rate has remained a consistent 10% The "safest" rates available are U. S. Government backed securities which range from about 2.35 to 5.5% depending on the term.<br><br> Corporate rates (rates on corporate issued bonds) are in the 3.8% -7.4% range, depending on the term and risk rating . High yield corporate rates are averaging about 13.18%, but within that broad category individual companies vary (typically) from around 9% to over 20% 4 some corporate bonds classified as "high-yield" fall outside this range. It should be noted that a significant difference between bonds and the income stream being valued is that bonds are very liquid; real estate is not.<br><br> After considering alternative investments, I have concluded that the appropriate discount rate applicable to the income stream is 10% 4 somewhat lower than the chigh-yield bond d indices. In addition to the income stream, the proceeds of the sale of the property at the end of the term also has to be considered. In the case of the subject, we would be looking at a vacant, fast food restaurant building.<br><br> Since there is no way of knowing what the market will be like in ten years, I have used today 9s value (unencumbered) as a basis to estimate future value. Inflation has been a part of the economy for some time now and it is not likely that it will be eliminated in the reasonably near future, if ever. Therefore, I have added, for a future sales date, an inflation factor of 1.0% per year.<br><br> This factor is slightly below the current inflation rate of about 2.0% per year and anticipates a further diminishment of inflation, particularly in commercial real estate. Of course, the disposition of real estate involves costs such as sales commissions, title charges, legal fees, etc. I estimate those charges to be 5%.<br><br> The following pages show the Discounted Cash Flow Analysis for the individual properties appraised. xxxx Gross Rent Net Rent Bldg Value PV of Income PV of Bldg Value Less selling cost Value year 1 Nov-02 Oct-03 $ 68,317 $ 66,951 $ 252,500 $60,864.22 $229,545 $ 218,068 $ 278,932 2 Nov-03 Oct-04 $ 69,683 $ 68,290 $ 255,025 $117,301.95 $ 210,764 $ 200,226 $ 317,528 3 Nov-04 Oct-05 $ 71,077 $ 69,655 $ 257,575 $169,635.12 $ 193,520 $ 183,844 $ 353,479 4 Nov-05 Oct-06 $ 72,499 $ 71,049 $ 260,151 $218,162.24 $ 177,687 $ 168,802 $ 386,965 5 Nov-06 Oct-07 $ 73,948 $ 72,470 $ 262,753 $263,160.11 $ 163,149 $ 154,991 $ 418,151 6 Nov-07 Oct-08 $ 75,427 $ 73,919 $ 265,380 $304,885.41 $ 149,800 $ 142,310 $ 447,196 7 Nov-08 Oct-09 $ 76,936 $ 75,397 $ 268,034 $343,576.15 $ 137,544 $ 130,667 $ 474,243 8 Nov-09 Oct-10 $ 78,475 $ 76,905 $ 270,714 $379,453.01 $ 126,290 $ 119,976 $ 499,429 9 Nov-10 Oct-11 $ 80,044 $ 78,443 $ 273,421 $412,720.64 $ 115,957 $ 110,159 $ 522,880 10 Nov-11 Oct-12 $ 81,645 $ 80,012 $ 276,156 $443,568.82 $ 106,470 $ 101,146 $ 544,715 xxxx Gross Rent Net Rent Bldg Value PV of Income PV of Bldg Value Less selling cost Value year 1 Nov-02 Oct-03 $ 48,172 $ 47,209 $ 252,500 $42,917.30 $229,545 $ 218,068 $ 260,985 2 Nov-03 Oct-04 $ 49,136 $ 48,153 $ 255,025 $82,713.33 $ 210,764 $ 200,226 $ 282,940 3 Nov-04 Oct-05 $ 50,119 $ 49,116 $ 257,575 $119,615.11 $ 193,520 $ 183,844 $ 303,459 4 Nov-05 Oct-06 $ 51,121 $ 50,099 $ 260,151 $153,833.13 $ 177,687 $ 168,802 $ 322,635 5 Nov-06 Oct-07 $ 52,143 $ 51,101 $ 262,753 $185,562.56 $ 163,149 $ 154,991 $ 340,554 6 Nov-07 Oct-08 $ 53,186 $ 52,123 $ 265,380 $214,984.40 $ 149,800 $ 142,310 $ 357,295 7 Nov-08 Oct-09 $ 54,250 $ 53,165 $ 268,034 $242,266.47 $ 137,544 $ 130,667 $ 372,933 8 Nov-09 Oct-10 $ 55,335 $ 54,228 $ 270,714 $267,564.38 $ 126,290 $ 119,976 $ 387,540 9 Nov-10 Oct-11 $ 56,442 $ 55,313 $ 273,421 $291,022.45 $ 115,957 $ 110,159 $ 401,182 10 Nov-11 Oct-12 $ 57,571 $ 56,419 $ 276,156 $312,774.48 $ 106,470 $ 101,146 $ 413,921 11 Nov-12 Oct-13 $ 58,722 $ 57,548 $ 278,917 $332,944.54 $ 97,759 $ 92,871 $ 425,815 Market Conclusion : After careful consideration, it is my opinion that the Market Value(s) of the subject properties as of April 10, 2002: Address Town Leased Fee Value 301 N 7 th xxxx $425,000.00* 1629 Georgetown xxxx $545,000.00* *(allowing for the exposure time estimated in this report 3 see Definition of Market Value)