Ultimutt Pet Spa
How to value special-use properties
Business owners create properties that function for the unique needs of their business. Recently Argianas was called upon to assist the owners of a pet spa in the Midwest. While we are often engaged to appraise the real estate only (the land, structures, and improvements), the success and demand for the business services have a contributory factor to the real estate. If there’s no demand, the property may not be operating at its highest and best use.
Barking Up The Wrong Value Proposition | Real Estate Subordinate to the Business
In the current instance, the operators were looking to divest from the business (and property) to pursue alternative opportunities. As is often the case, when a special-use property like a pet spa is bought and sold, it is not purchased on the basis of real estate alone. Instead, the buyers are purchasing the business with the real estate subordinate to the business’s revenue earning potential. As was the case for the operators, the endeavor was a labor of love. There was evident and consistent demand for the business’s services which included revenue sources beyond the standard kennel and grooming services. The property featured multiple areas for geriatric pet treatment, swim therapy, medical treatment, massage/physical therapy, and large fields for running and even an obstacle course.
Spotting the Value Approaches
While the business was viable and produced income, the property was an ‘owner-user’ operation, put differently it was not leased to an outside party and it did not warrant an income approach. In addition, the property was dated and had operated for many years so the cost approach was not appropriate as buyers and sellers of such properties would not predicate their decision on the depreciated asset value, although it could be completed.
The Sales Comparison Approach best represented the approach to value for such special-use properties. While the real estate does sell, it is often sold when the business is sold. As a result, the sale includes the real estate, the going concern (business value), and FFE (furniture, fixtures, and equipment). The contributory value of the real estate may not be proportionate to other like-kind sales, therefore, the appraiser must assess the market and identify a benchmark to use. Even so, Argianas selected sales from a wide-reaching database to reflect like-kind pet spa services throughout the Midwest. With limited real estate only sales for kennels, we reviewed and analyzed demographics, population, income, and traffic count. The subject was situated in a superior location where income level in the immediate area exceeded that of the surrounding area population, translation, the population could afford auxiliary services
Is It Paw-sible? | Financing the Dream
Buyers for a special purpose property must still make financial sense. Were a buyer to purchase a property worth $1 million with 70% borrowed at approximately 5% and 20-year term debt service would be approximately $4,700 (monthly debt service). Assuming the buyer was not a cash buyer with industry-standard borrowing, you would also have to account for real estate taxes, payroll, accounting, food, personnel and supplies. The expenses add up. With a special-use property tied to a unique business, the considerations for the continued operation of the business must be considered and indeed helped assist ownership in marketing the property to potential buyers.
Argianas Makes Sense of a Ruff Situation | Beyond Appraisal
In the middle of the Covid-19 Pandemic, property owners are concerned about making the right financial decision. This assignment was no exception. Argianas’ services go beyond a simple appraisal report and include consultations; in this instance, this included a breakdown of real estate fundamentals and marketing.
Multiple parties were well situated as buyers for the property and business. Knowing who these groups were and how to market to them was vital to a successful transaction. Multiple franchise operators, veterinary clinics, and animal hospitals were the most likely buyers for the subject as the purchase would allow for expansion of services, expansion in new regions, and build upon the superior reputation the owners had cultivated in the community.
Creativity is part of what we do, and this subject was no exception. With a special-use property and economically challenging period, unique financing packages could make the purchase/sale of the business and property more attractive to potential buyers. It is also possible that the facility could be leased to a space user familiar with pet-spa type properties. The current owners benefited from a steady lease revenue until a future time where the sale of the property made more economic sense. Alternatively, in the case of our clients, they were able to provide seller financing to their prospective buyer. In the end, all parties benefited and the Argianas team played a role in securing ownership a pathway to exit their business and property.
Do you have a special-use property leaving you feeling like you’re caged in? Call the expert team at Argianas at 630.390.0113 or email us at [email protected] for some liberating and insightful advice. You can also stay in the know by joining our mailing list to receive our e-newsletter featuring case studies, industry events and news, as well as informational real estate valuation topics.