Rationalizing Super-Adequacy

Or...When the Pasta Sauce is Rich

if it doesn’t make sense, there’s more to it

Just like the kid in your high school AP Biology class who told everyone he didn’t study but got the highest grade on the final (not that we’re still salty), if something doesn’t make sense, there’s usually more to it. The same is absolutely true with real estate and the answers often are as simple as asking the right questions.

We learned a long time ago that while most people are passionate about their deal of the century, there’s usually nuanced details that must be teased out. “There’s this sentiment that the appraiser relationship is somewhat adversarial. That is not at all the case, we’re here to understand and explain your deal in terms that make rational sense and translate that into market value so the bank can lend in good faith,” said Vice President Alexander Argianas. “If a loan has gotten to the underwriting stage, very rarely do the numbers of the deal not make sense.” However, this was the case recently when the team at Argianas was faced with rationalizing how a restaurant could justify a price of $400 a square foot. If you’ve picked your jaw up off the ground, we’ll be happy to explain. The answer lies in the nexus of the growing popularity of food delivery apps and the evolution of the traditional dining experience.

Super-adequacy or more than meets the eye

Super-adequacy is identified when improvements cost more than their contributory value to the property. We strive to follow best standards and practices. So, when we encounter a property with metrics that don’t match up with the market, we take that as a sign to dig deeper. In this case the subject was a newly constructed restaurant that included three full-service kitchens, a restaurant dining area, pizza ovens, and a large take-out kitchen. The basement, not normally given as strong consideration, was built out with multiple food prep areas and plenty of room for inventory.

From a big picture perspective, it was clear that the subject consisted of a sit-down restaurant with ghost kitchen food production facilities built to a scaleable to meet three to four times the demand of a normal sit-down restaurant. Often a basement kitchen buildout is subordinate to kitchen and service areas above grade, but in this case, the subject was actually two businesses operating out of the same property. A restaurant and a ghost kitchen, a new concept developed to meet the demands of online food ordering and delivery.

income streams to rationalize super-adequacy

There is cost, price, and value. An appraiser is concerned with finding value, in this case Market Value. While a property owner may want to install the latest expensive amenities (cost) for their property, it must make financial sense. In this case, the owner had something that others may not, a revenue stream that justified the added expense. While it is true that the property was constructed with superior qualities and components, the revenue stream associated with the property justified a price per square foot above what would be standard for a property without the capacity to meet those revenue streams.

contributory value | recognizing value to the property as a whole

Sometimes we have to set the record straight by characterizing a space for what it is, either basement (low cost) or usable and/or finished below-grade space. In our experience with restaurants, all buildings are different and below-grade space can mean anything. Ask yourself the following:

  • Is the space integral to the restaurant’s operations or can both spaces operate independently?
  • Is the space an easily accessible, deep concrete-lined basement enclosure or is it a shallow, usable basement accessed with just a few short steps down?
  • Is the below-grade space elevator-served and/or is the space provided with a dumbwaiter apparatus?
  • How is the space used? — Do they grind sausages down there, peel the potatoes and onions, prepare salads, or bake pies?
  • What is the flow of inventory? — Does street-level bar service (beer, alcohol, carbonated water, and soda cannisters) come through the basement? Savvy restaurant/bar operators will do this to cut down on theft, save space, and sell generic alcohol (well) drinks.
  • If the basement space is usable, what about rental and sale comps? Are they similar with respect to basement/usable below-grade space?

Finally, and perhaps most important, determination of any building’s SF area (whether it be your subject property or your rental and/or sale comparables) always requires critical thinking/analysis and explanation to the reader. If a basement area can operate independently then there is a strong argument that the build-out is not super-adequacy.

conclusions focused on logic (and disclosure)

Often in our industry, no one will know a property as well as the property owner. It is not enough to report on the Market Value at a superficial level. The desire to dig deeper to understand what is being proposed is what experts are hired to do. In this instance we resolved to do the following:

  • Determine and report to the reader whether the property and rental and sale comps have basement or below-grade space
  • Take the time to provide narrative/elaboration as to why we determined that such SF area should be identified and treated as basement or usable lower-level space
  • Carefully consider the value impact, if any, of this below-grade space as basement or usable below-grade space, or part usable, etc.
  • In the end, we were able to provide a report that not only met the needs of the lender but that offered a lending opportunity where the risk associated with the deal was properly disclosed, qualified, and understood.


Trying to digest something that seems a little too rich? We’d be happy to take a seat at the table with you. Reach out to Argianas at any of our locations, call us at 630-390-0113 or email us at [email protected].