Analyzing the complex commercial real estate sometimes involves the identification of intangible assets and sourcing a real estate appraiser who is familiar with business valuation practices. For business appraisers, “intangible assets” are defined as:
• “Nonphysical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges, and have value for the owner.” Source: ASA Business Valuation Standards
• “A non-monetary asset that manifests itself by its economic properties. It does not have physical substance but grants rights and economic benefits to its owner.” Source: RICS Guidance Notes
• “Nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment.” Source: USPAP
Real property is considered to be “all rights, interests and benefits related to the ownership of real estate, including any negative rights, interests or benefits (i.e., obligations, encumbrances or liabilities) relating to the interest being valued.” Source: RICS Guidance Notes
The most common intangible asset identified in commercial real estate is leasehold interests and how they affect real estate values for our clients. Leasehold interests represent the value of future cash flows under the in-place contractual lease terms that are either above or below current market rents. All in-place leases must be reviewed in order to identify those that have contractual lease rates that are above or below market. Once identified, an above- or below-market lease would then be valued utilizing a discounted cash-flow approach. This valuation approach is based on the difference between contractual rents under the current lease terms and the estimated market rates for the duration of the lease. The difference is then discounted to the date of acquisition by utilizing a risk-related discount rate.
While representing clients who acquire distressed real estate, it is imperative that the client quantifies any above- or below-value leases that encumber the property. If the property’s cash flow is negatively impacted by troubled financing, yet has strong fundamentals, then analyzing intangible values will greatly increase your client’s negotiating prowess.
The acquisition of distressed real estate will differ from location to location and by property type. Core properties in core markets are doing well, but non-core properties in secondary or tertiary markets still offer the investor some opportunities.
Technology is affecting commercial real estate in many ways. Average required office space per employee has decreased significantly over the past several years. Teleworking, growth in self-employment, and startups and incubators are all changing the nature of workplaces. This affects new office development along with occupancy rates, specifically in the tertiary markets.
Retail real estate investors understand the impact that technology has on their tenants. Landlords have experienced electronic store bankruptcies such as Circuit City and bookstores such as Borders, which have left vacancies, decreased NOI and lowered valuations of their properties. Reportedly 80 percent of consumers now use their devices to research products and services and compare items either prior to or during their visit to a store; therefore, it is understandable why “Internet commodity” stores are performing poorer than necessity stores. Landlords are faring well with tenants like grocery stores, restaurants, dry cleaning, and hair and nail salons. Other demographic-resilient tenants such as dollar stores, liquor stores, check-cashing and pawnshops also provide NOI stability.
Assisting clients in distressed real estate investments requires an understanding of any intangible leasehold interests for real estate investments, which are key. It is suggested that clients hire real estate appraisal experts who understand business valuation methodologies.