Re: Thank you for your replies, however, I may not have made myself clear. - Posted by ray@lcorn
Posted by ray@lcorn on January 20, 2000 at 13:41:23:
Sorry I missed your point. You got the Pavlovian response imbedded in my brain with the trigger word of restaurant. I’ve calmed down now (Look Nurse Ratchit, I’m being nice) and will try to answer your question!
In so far as a real estate deal makes sense as a real estate deal, a business that sits on it can be looked at as something that produces a stream of cash flow. As with any income property. the value of the real estate/business is determined by the risk and effort required to maintain the income stream. The higher the risk and/or effort, the higher the expected return should be, and the lower the price. That is the basic thinking that goes into determining an appropriate cap rate.
In the case of a piece of real estate with a business on it, the value then is determined by how many ways that building can produce income other than the way it is producing it now. In short, the more specialized the use, the higher the cost of adapting the building to some other use, therefore the higher the risk and effort to maintain the cash flow, and hence the higher the price. Certain factors, like the credit of the tenant, can mitigate the risk/effort involved. That will decrease the amount of return necessary to justify the investment, and produce a higher price.
On an average commercial property (e.g. convenience store, laundromat, beauty shop, tanning parlor, etc.), I look at the property in terms of what other kind of business could be successful there if my present tenant fails. the more different kinds of businesses that could utilize the location, the more that location is worth, just as a real estate deal. A site that was useful to a number of different businesses will command a higher rental rate than others, and since our value is a function of the income, a high demand site is worth more. Make any sense? (I get the feeling I am not explaining this very well.)
In the case of whether or not it is profitable to attempt to also sell the business, I would think it would be a matter of particular circumstances. I certainly would not want to be in the position of having to run the business if the buyer failed. I would set the deal up to make sense as a real estate investment first. Surprise, surprise. I would want to sell the business in such a way that any financing carried would be otherwise secured. Beyond that I would just have to evaluate on a case by case basis.
Hope this helps.