Reevaluating Property Valuation of Chain Restaurants in Texas

This article delves into a distinct form of valuation assessment concerning chain restaurants as property classes in Texas, primarily focusing on the predominant valuation method—the cost approach.

In the Dallas-Fort Worth region, locations of fast-food chains often sell for a fraction of their original construction costs after they cease operating as chain establishments or are transferred to secondary non-chain operators. However, appraisal districts in Texas generally adopt an opposing viewpoint. They equate every dollar spent with a dollar’s worth of taxable market value. This raises several questions: How can it be demonstrated that this perspective is flawed? Is the cost approach truly the optimal method for valuing chain locations? Does it not accurately determine the basic taxable market value for such establishments? Furthermore, are income and sales comparison approaches inappropriate when evaluating new chain properties? How do appraisal districts account for the operational goodwill associated with these restaurants? These inquiries form the core discussion points explored in this piece.

The Cost Approach: Is It Truly Superior?

Is assuming that the cost approach is ideal when appraising a chain restaurant justified? According to this analysis, no. The cost approach should not stand alone as the definitive method for determining taxable real estate value for these properties. Moreover, alternative approaches—income and sales comparisons—should be adapted to genuinely evaluate these restaurant markets.

John D. Emory emphasized in a 1990 edition of Commercial Assessment Reporter that business evaluation encompasses rights inherent in owning commercial enterprises engaging in economic activities. Real estate evaluation focuses on land assessment along with improvements and associated rights but does not effectively handle intangible business assets like patents or goodwill which significantly contribute to revenue generation.

The Role of Intangible Assets

Robert Reilly noted in January 1993’s issue from American Society of Appraisers that real estate evaluations often ignore intangible assets crucial to location-dependent businesses like licenses or franchises—which are essential alongside physical assets (i.e., “sticks and bricks”). Ignoring these elements could overestimate actual market values linked exclusively with tangible property components.

Challenging Traditional Approaches

This writer’s experience indicates that Texas appraisal districts rely heavily on using purchase prices plus personal property costs alongside both soft/hard improvement expenses (less depreciation) underlining assumptions based largely upon “substitution.” According to The Appraisal Institute’s publication “The Appraisal Of Real Estate,” substitution principles assert rational investors won’t pay more than acquisition/building equivalent sites without undue delay; thus making initial constructions closely related between pricing versus market valuations especially relevant where minimal depreciation exists post-construction representing highest/best use scenarios if vacant lands were considered anew today instead directly aligning past project expenditures against current comparative analyses available elsewhere simultaneously capturing ongoing potential earning capabilities beyond mere physical presence alone now projected forward instead!