How to determine value of a resteraunt? - Posted by Rob

Posted by Craig McCracken (AL) on July 04, 2006 at 09:08:27:


Bare with me here as I’m also new to all this. Is there any genralized rule of thumb for doing a prelim. evaluation of a commercial building ? Something perhaps along the lines of X times annual rents ? I mean it seems that a 2m building with say 4 units that rents for 500 each a month would not be a good investment. :slight_smile:


How to determine value of a resteraunt? - Posted by Rob

Posted by Rob on June 14, 2006 at 23:02:03:

I found a property that is in foreclosure in an upcoming urban area designated as an arts and entertainment district. 15 new liquor licenses have been approved for sale at $15,000 each. There are three storefronts with 4 totally gutted loft apartment above. The owner actually lives in the storfronts and has opened up the first floor to function as one unit. He has updated all electric, heating, roof, plumbing and even installed a sprinkler system. He also has engineering blue prints to finish the loft apartments. I want to open a resteraunt on the first floor and the the apartments will rent for $1,000 each.

How do I determine the value of this property after the rehab is complete. I estimated about 50 people per day at $25 per person 6 days per week for the resteraunt. I am working on the expense for food and staff, but is there a rule of thumb to go off of just in case I need to act quickly to purchase the property.

The asking price is $275,000. I can probably convince him to carry a note. His mortgage is about $120,000 and he is behind in taxes about $9,000. He obviously want some money to walk. If this deal makes since how can I structure it so that we both win. I really don’t want to wait until auction, since the property is in such good shape and has so many updates relative to similar properties.

Re: How to determine value of a resteraunt? - Posted by Rob

Posted by Rob on June 16, 2006 at 18:28:10:

OK. So if the units rent out for a total of $4,000/month and the restaurant rents for $3,250 and the package store rents for $1,000/month, I get a value a little under $700,000 at a 10% cap rate. Each unit is individually metered for electric and gas and there is no common space. Am I correct or is there something I’m missing. Is this how the bank will determine the value.

Re: How to determine value of a restaurant? - Posted by ray@lcorn

Posted by ray@lcorn on June 15, 2006 at 10:42:11:


You need to value the building. Your restaurant business is what you’ll use the building for, not what you’re buying.

My rule of thumb for restaurants is “don’t.” Some people do very well in that business, but I’m not one of them. I don’t like to hear my name and the word restaurant in the same sentence. That said, we own two of them (one as landlord, one as operator), but only because they are part of a larger puzzle.

My personal negative bias aside, industry average expenses are 35% labor, 35% food cost, and 20% admin and general. Higher average tickets can get those down to 30/30/10, but much depends on the market. Within the A&G is space cost, and most operators try to limit that to no more than 10% of gross sales.

If you hit your projections that would translate to a max rent of about $3250 per month. (50 x $25 = $1250 x 6 = 7500 x 52 weeks = $390,000 x 10% = $39000 / 12 = $3250)

However, this is a rehab project, and your total costs are going to be the purchase price, plus the renovation and completion of the lofts (which always cost more and takes longer than anyone thinks), plus the expenses involved in opening the restaurant. My guess is the building is worth something less than replacement cost because you’re basically taking on a development project. Hope you’ve got deep pockets.

An alternative may be to sell the lofts as condos? But only if there is a market for that type of thing, and if regulatory issues don’t run the costs out of sight.


two SEPARATE questions - Posted by Jimmy

Posted by Jimmy on June 15, 2006 at 08:01:48:

there are 2 totally different questions here. The first is the value of the BUILDING. the second is the value of the restaurant enterprise. they are separate assets, and independent of each other

the potential revenue of the restaurant is IRRELEVANT in determining the value of the building. the net rental income from the restaurant space is what you need to know. property values for mixed-use commercial properties are driven by net income, prevailing cap rates, etc.

As for you proposed restaurant. if you are a veteran of this biz, and have launched successful eateries in the past, GO FOR IT. if not, beware. You are entering into a biz with a 90% failure rate.

back to the space. What is the highest and best use of the space? What kind of usage will generate the highest net income. It may be the case that you are better off separating the space into its 4 retail units. But maybe the restaurant will maximize. hard to know. You need to do your homework.

Re: How to determine value of a resteraunt? - Posted by Killer Joe

Posted by Killer Joe on June 16, 2006 at 20:46:28:


If there is no common area then I’m guessing there is no parking lot on the property. This could be a killer for a restaurant. My wife had a restaurant in the late 80’s that fit the description of this building, and although there was municiple parking within walking distance, including the curb, the patrons forever complained about the situation.

In the long run your customer count may be less than anticipated without dedicated parking. This was true in the case of my wifes restaurant so this is just a heads-up if you haven’t considered that ramification up to this point. HTH


Re: two SEPARATE questions - Posted by Rob

Posted by Rob on June 15, 2006 at 08:38:27:

Currently the bottom floor of two units have been opened up to make one space and would serve a restaurant well. The third space can be a seperate store, which I’m planning on putting in a package store with high end wine and beer. Since I would own all the space and the businesses in the building, do I just base the rent on the market in the area (price/sq ft) or determine it based a percentage of sales and price/sq ft? What would the bank want to see?

Re: two SEPARATE questions - Posted by Jimmy

Posted by Jimmy on June 16, 2006 at 15:42:19:

Ray articulated it better than I did, because he’s been there and done that. Here is a final thought, from my years of dealing with business appraisers and commercial real estate appraisers from my position as transactional attorney:

the value of the restaurant is its enterprise value (also known as its going concern value). basically, its average, normalized, net profit times some multiple (which prevails for this type of eating/drinking establishment). A business appraiser could tell you a LOT about how these busiensses are valued, what kind of multiple is appropriate, how to calculate and normalize earnings. But the underlying real estate is not part of the calculation. The only place where the real estate enters into this appraisal is the lease expense.

if the business is new, it has NO (or minimal) enterprise value. just liquidation or “break-up” value–the salvage value of the inventory, fixtures, equipment and removable items.

Likewise, in appraising the building, the restaurant, as an enterprise, is irrelevant. Because the appraiser is trying to assess the price at which the property would change hands between unrelated buyer and seller.

tha bank needs to know the value of the bldg, even if your restaurant folds up. if you build it out as a restaurant, they will be very interested in knowing the rental value of the place, should they need to bring in a new tenant.