commercial properties

Book Review

A Guide to Appraising Automobile Dealerships
by Bradley R. Carter, MAI
Appraisal Institute, Chicago, IL 60606
Soft cover, 180 pages
$50 non-members, $40 members
(888) 756-4624; FAX (313) 335-4400

A Guide to Appraising Automobile Dealerships provides up-to-date information on:
• Market, site, location, and improvement analyses;
• Highest and best use and land valuation;
• Application of the cost, sales comparison, and income capitalization approaches to value;
• Report writing for auto dealership valuation assignments.

Other topics covered are economic trends and locational issues that affect dealerships.

Each time I buy an automobile I am filled with apprehension because I don’t understand how dealerships actually work. I can’t understand how they claim they sell their cars for a few thousand dollars or less above their costs, yet they support what appears to be large and expensive real estate, big staffs, expensive TV advertisements, etc.

I was surprised to read that new car dealerships have decreased in the United States from 49,200 in 1949 to less than half as many (17,838) in 2013. Since then, they have leveled out. In Connecticut where I live they seem to be increasing with the addition of many single brand foreign car dealerships that use to be combined with American automobile dealerships.

A chart in the book shows that the average dealership in 2013 grossed $23,599,234 from new car sales and that the average sale price for a new car was $31,762. I worked this out to be 744 cars. This seems like a lot of cars for a dealership to sell! These sales represented 57.1% of the total gross income. The rest (31.3%) came from used car sales, with 11.6% from service and parts sales.

The book tries to address the complex problem of how to determine what portion of the total value of the dealership is derived from the value of the real estate and how much derives from the non-real estate property and how much for the good will. This is critical information when the sales comparison approach is used,as the sale price of the comparable sales is often not broken down into these categories.

The book points out the importance of knowing the purpose of the appraisal, and whether it is for tax purposes, condemnation proceedings, or some other value such as insurable value or going concern value, which considers the value of the personal property plus the good will value of the dealership.

Chapter 11 addresses this problem and offers suggestions on how to word statements that make it clear as to what is and is not included in the final estimated value. The author also includes a discussion of how business appraisers estimate “blue sky” value.

Appraising an automobile dealership is a complex assignment. The author presents a case for the real estate component of the dealership to be considered a special purpose property. This would make the cost approach a useful tool in the valuation process

However, a major portion of the book covers how to value the dealership that occupies the real estate. Somehow, appraising automobile dealerships reminds me of the song sung by Elvis Presley: "Fools Rush in Where Angels Fear to Tread”.

Ask Henry

Leased Fee Appraisals

Dear H2,

I am appraising a four unit property that has all four units rented. Page 1 asks me the property rights. Do I check leasehold, fee simple, or other. There are some education courses stating that if one of the units is rented, then it is leased fee and the appraiser should check the box “other” on page 1 and call it leased fee.

Leasehold estate is defined as the right to use and occupy real estate for a stated term and under certain conditions that have been conveyed by a lease. Leased fee is defined as an ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others; usually consists of the right to receive rent and the right to repossession at the termination of lease. In theory, this would be true, as the subject is rented at time of appraisal report.

My question is what is the appraiser supposed to mark at this time? If it is a leasehold, or leased fee, does the appraiser then mark the comparables as leased fee if the appraiser can verify leases? What if the appraiser cannot verify the leases for the comparables — are they then marked "fee simple"?

What is page 1 asking? Aren't they asking for the rights that transfer if the property sells? Would it not be common for the complete rights to be transferred with the Leased Fee interest referring back to the Leaseholder at the time of transfer; therefore, wouldn't the transfer be fee simple as the whole bundle of rights are transferred to a new owner?

What is the correct way in the eyes of Fannie Mae to complete page 1 if the subjects 4 units are under lease? I need some definitive clarification on this as I am seeing many different takes on this. I have always considered such properties "fee simple" because the duration of the leases are short term. I am not addressing land leases. Owner of land is also owner of the improvements, who is leasing four units to renters on a yearly lease. Please help!

Thank you,
Ron Coffman

Dear Ron,

It sounds like you are doing a mortgage appraisal that is going to be sold to Fannie Mae or Freddie Mac. They are only interested in property that is owned in fee simple, so that is what you should indicate on the form. If there is a long lease on the property, at some rent other than market rent, you would have to deal with the possibility that there is a leasehold interest on the part of the tenant. That is very unusual in a four family dwelling.

However, when you appraise any property that is leased, you have to be careful that there is nothing unusual in the lease. I recommend — as part of your dialogue with the lender/client — that you tell them you must have copies of all the leases. If they are not obtainable, you are going to have to say this in the appraisal report, and then make some about the key features of the leases. This is not going to make anyone happy. If you decide go this route, you should get permission in writing to do this from the lender/client before you proceed, only to find out later that the appraisal is not acceptable to them. If you are, in fact, doing a leasehold interest appraisal, you need to have a clear understanding with the lender/client as to what you are doing and for whom!



Ask Henry

Vacancy Rate Calculation

Hello Henry!

Great Mag & Blog. Thanks for your hard work.

Let me ask you, do you calculate vacancy based on a time period or unit basis for muti-family/commercial properties. I have a 20 unit mixed use building, with 3 retail spaces and 17 apartments. One of my retail spaces and 2 apartments are vacant going on 3 months now. So is my vacancy rate 6.6% or 24.9%?

G James Gervas

Dear James:

Thanks for your kind words.

Normally vacancy rates are reported on an annual basis. It is not based on your current rate but rather on an historical fact. It is like the income and expense statement where you are forecasting a typical year, rather than reporting a "blip". Most likely it will not be either of the figures you are suggesting, but rather, a composite of the past years average vacancies. For example, if your monthly vacancy rate is approximately 24.9% of the total space, for 3 months, but nil for the rest of the year, the vacancy rate would be 6.2% for the past year. (24.9% x 3 months = 74.7 + 0 divided by 12 months = .0622). However, you should be considering more than a single previous year.