Robert E. Bainbridge AUTHOR, INSTRUCTOR, APPRAISER C – S T O R E V A L U A T I O N S

1. Convenience Stores & TRPs in Condemnation:Special Valuation Issues in the Application of the Income Approach Robert E. Bainbridge AUTHOR, INSTRUCTOR, APPRAISER C – S T O R E V A L U A T I O N S www.cstorevalue.com

2. 1. Convenience Stores + TRPs • 2. 4 Critical Valuation Factors • 3. Income Approach: • Comparable Rentals v. Earnings Next 40 Minutes

3. Not Your Usual Appraisal TRPs = Trade Related Property Special-Built Properties Single Economic Purpose R.E. built to generate earnings Cannot be Easily Converted Value Extremely Sensitive to Access Value Extremely Sensitive to Visibility

4. Not Your Usual Appraisal

5. A trade related property is any type of real propertydesigned for a specific type of business where the property value reflects the trading potential [earnings capacity] for that business. Examples include hotels, fuel stations, restaurants, casinos, cinemas and theatres. • The essential characteristic of this type of property is that it is designed, or adapted, for a specific use and the resulting lack of flexibility means that the value of the property interest is normally intrinsically linked to the returns that an owner can generate from that use. The value therefore reflects the trading potential of the property. It can be contrasted with generic property that can be occupied by a wide range of different business types, such as standard office, industrial or retail property. Definition of TRP International Valuation Standards, Standard 232

6. Not Your Usual Appraisal Where does NOI to Real Estate come from?

7. 1. The Nature of Convenience Stores & TRPs NOT YOUR USUAL APPRAISAL

8. Four Critical Factors C-Store & TRP Appraisals: 1. Supply & Demand 2. Customer Demographics 3. Traffic Count 4. Hypermarket Competition

9. Statistical Study Example Just 3 Factors: (a) Supply & Demand • (b) Customer Demographics • (c) Hypermarket

10. Statistical Study Example Just 3 Factors: Norm: $1,000,000 Low:$700,000 High: $2,000,000

11. Statistical Study Example Just 3 Factors: Norm: $1,000,000 Low:-30% High: +35%

12. Statistical Study Example Just 3 Factors: TOTAL VALUE VARIATION: 65% !

13. Four Critical Factors • 1. Supply & Demand Few Competitors Many Competitors

14. Four Critical Factors • 2. Customer Demographics Shopping Potential Index

15. Four Critical Factors • 3. Traffic Volume

16. Four Critical Factors • 4. Hypermarket Competition Selling gasoline 6 CPG below street price.

17. Statistical Study Example Just 3 Factors: TOTAL VALUE VARIATION: 65% !

18. 3. The Income Approach and the Kansas Decision NOT YOUR USUAL APPRAISAL

19. Current Legal Arguments The Income Valuation Approach: Comparable Rentals v. Earnings Allocation

20. Current Legal Arguments 2013 Kansas Case Presta Oil, Inc. v. KDOT An Appraiser’s View

21. The Income Approach and the Kansas Decision Income Approach RENTAL COMPARABLE ANALYSIS EARNINGS ALLOCATION

22. The Income Approach and the Kansas Decision Income Approach • BEST FOR: • Apartments • Mini-Storages • Multi-tenant Retail • Offices RENTAL COMPARABLE ANALYSIS

23. The Income Approach and the Kansas Decision Income Approach • BEST FOR: • (ALL TRPs) • Convenience Stores • Gas Stations • Car Washes • Fast-Food Restaurants • Motels & Hotels EARNINGS ALLOCATION

24. The Income Approach and the Kansas Decision Problems with Rental Comparable Analysis for TRPs Good rental comparables are difficult to find. The location adjustment is difficult and should reflect all four Critical Factors.

25. The Income Approach and the Kansas Decision Problems with Rental Comparable Analysis for TRPs • Supply & Demand • Customer Demographics • Traffic Volume • Hypermarket Competition • (Cross-Channel Competition)

26. The Income Approach and the Kansas Decision Problems with Rental Comparable Analysis for TRPs • Supply & Demand • Customer Demographics • Traffic Volume • Hypermarket Competition • (Cross-Channel Competition) TOTAL VALUE VARIATION: 65% !

27. The Income Approach and the Kansas Decision Problems with Rental Comparable Analysis for TRPs

28. The Income Approach and the Kansas Decision Earnings Allocation “The methodology of the earnings capitalization parallels the way industry participants view real estate. The real estate, like all other assets, is considered in its context of its contribution to earnings.” Robert E. Bainbridge, Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues, Second Edition 2012, (Appraisal Institute, 2012):

29. The Income Approach and the Kansas Decision Earnings Allocation “Because it is a component part of these assets, the value of the real estate is dependent on earnings capacity. This is the fundamental premise of value for a convenience store.” Robert E. Bainbridge, Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues, Second Edition 2012, (Appraisal Institute, 2012):

30. The Income Approach and the Kansas Decision Earnings Allocation “The income approachis applied to a trade related propertyby estimating the amount that a reasonably efficient operator could afford to pay as rent for the property after deducting other operating expenses and a reasonable profit margin for the operator from the gross income that can be generated from the property…” International Valuation Standards Council (IVSC), Proposed NewInternational Valuation Standards (IVS), “Standard 232” (2010).

31. The Income Approach and the Kansas Decision • 7 STEPS IN EBIDITA ALLOCATION PROCEDURE • 1. Gross Sales • 2. Less: Cost of Goods Sold • 3. Equals: Gross Profit • 4. Less: Operating Expenses • 5. Equals: Adjusted EBITDA • 6. Allocate Earnings to: • REAL ESTATE • PERSONAL PROPERTY • INTANGIBLE ASSETS • 7. Capitalize Allocated Earnings to each • Asset Class: • REAL ESTATE VALUE • PERSONAL PROPERTY • INTANGIBLE ASSETS VALUE

32. The Income Approach and the Kansas Decision

33. The Income Approach and the Kansas Decision Earnings Allocation • ADVANTAGES: • Most nearly reflects the actions of the market. • Allows the separate valuation of all three classes of assets. • Abundant published industry bench-marking data. • Less prone to error (i.e. under-value good locations or over-value poor locations).

34. The Income Approach and the Kansas Decision Presta Case Kansas Decision Earnings Allocation Analysis REJECTED

35. The Income Approach and the Kansas Decision Presta Case Kansas Decision “An Order in Limine is hereby entered precluding introduction of evidence …of any valuations based on a capitalization of EBITDA …”

36. The Income Approach and the Kansas Decision Presta Case Kansas Decision An Appraiser’s View

37. The Income Approach and the Kansas Decision Presta Case Kansas Decision

38. The Income Approach and the Kansas Decision Presta Case Kansas Decision Mistake 1 EBIDTA is business Profit

39. The Income Approach and the Kansas Decision Presta Case Kansas Decision Mistake 1 EBIDTA is business Profit • Income • EBIDTA • Business income • Profits • Business Profit

40. The Income Approach and the Kansas Decision Presta Case Kansas Decision Mistake 2 “Earnings are inherently a measure of the business acumen of the… business owner.”

41. The Income Approach and the Kansas Decision Presta Case Kansas Decision Mistake 3 “…location alone… does not create revenue.”

42. Advice for Attorneys 1. Use a knowledgeable appraiser when earnings-based procedures are required (i.e. if the property is a TRP).

43. Advice for Attorneys 2. When using an earning-based procedure, describe the allocation to real estate as “economic rent”.

44. Advice for Attorneys 3. Augment an EBITDA allocation procedure with other “earnings-based” techniques.

45. Advice for Attorneys 4. In any challenge, make sure you know what the appraiser did in the cases cited.

46. www.cstorevalue.com Robert E. Bainbridge, MAI reb@cstorevalue.com