Most appraisers will go an entire career without appraising a going concern property correctly, and a fair number will do it wrong without ever finding out. Bruce Jones, MAI, has spent the last decade teaching the courses that fix that, and in this episode he lays out the analysis that separates the real estate from the equipment from the business.
If you have ever taken a restaurant, a car wash, a gas station, or a hotel assignment and reached for your standard commercial template, this conversation is about why that template produces the wrong number.
Jump to a chapter
| 00:00 | Introduction |
| 03:18 | Sixteen years in brokerage, then a bad appraisal on his own building |
| 10:23 | The course where an instructor called the textbook the Bible |
| 16:03 | The demonstration report and the 4 a.m. club |
| 19:45 | Dodd-Frank, AMCs, and the decision to go somewhere else |
| 24:22 | Where the excess earnings method came from |
| 34:10 | The one thing a business appraiser cannot do |
| 35:52 | Why old restaurants keep becoming urgent care clinics |
| 39:03 | Teaching the courses, and the literature catching up |
| 46:49 | Building a national practice by saying no |
| 51:11 | What sophisticated lenders are actually underwriting |
| 52:03 | Florida hotels and rebutting business appraisers |
What you will take away
- Why the sticks and bricks approach gives you the wrong answer on a going concern property
- Where the excess earnings method came from, and why business appraisers dislike a method real estate appraisers now rely on
- The one thing a business appraiser cannot do, and why that makes you necessary rather than optional
- How restaurant square footage collapsed from 8,000 to 3,500, and what that did to functional obsolescence
- How Bruce built a practice across 18 states by turning down the small assignments
Sixteen years in brokerage, then a bad appraisal on his own building
Bruce came out of college a finance major who wanted to be a financial planner, sat through a few interviews that turned out to be whole life insurance pitches, and took a friend up on an offer to try real estate instead. He stayed sixteen years: six as a residential agent, ten on the commercial side. By the end he was New Jersey broker of record for a company large enough that a publicly traded firm later acquired it.
What moved him was a cash out refinance on a property he owned, two houses on one lot, one 2,100 square feet and one 1,600. The appraiser arrived and warned him the only comparable he could find was a small duplex a couple of miles away. Its two units rented at roughly $650 and $700. Bruce was collecting $2,000 and $1,600. He sent the appraiser away and ordered a different one.
The course that started it
In 1997 he sat in a graduate level appraisal course taught by an attorney who was also an MAI. The instructor held up the ninth edition of The Appraisal of Real Estate and called it the Bible.
“So it is not about whoever expresses their opinion with the most force. No, there is actually a rule book. And I thought, that is kind of cool.”
Bruce Jones, MAI | 10:49
Coming from brokerage, where the loudest opinion often wins, the existence of a standard was the draw. He did not act on it for another seven years. He entered the appraisal field in 2004 by partnering with an MAI to form a joint brokerage and appraisal company, which let him keep earning as a broker while logging his hours.
The demonstration report and the 4 a.m. club
Bruce took his MAI coursework at Rutgers on weekends, then drove six or seven hours to Pittsburgh for the final course because New Jersey was not offering it. He finished the entire curriculum before sitting for state certification, which made the state exam easy, and passed the comprehensive on the first attempt.
The demonstration report took two years. He went to a week-long workshop in Texas built to get candidates started, and the instructor asked how many people in the room of about twenty had been working toward the MAI for a decade with only the demonstration report left. A quarter of the hands went up. Then he asked who had been at it for twenty years. Four or five hands.
Bruce chipped away at it every morning before work for two years and got it done. Within a year of earning the designation he opened his own firm, in 2011.
Dodd-Frank, AMCs, and the decision to go somewhere else
The timing was rough. Dodd-Frank arrived in 2010, and the relationships Bruce had built with small and mid-sized banks across the tri-state area went progressively to appraisal management companies. The market he knew reorganized itself around fee and turn time.
In 2014, partly out of frustration, he signed up for a business valuation course in Texas run by the International Society of Business Appraisers. It ran two weeks. He and the rest of the class were up past midnight reading to keep pace, which he notes was not his habit as a man normally in bed by 9:30.
Sitting next to a fellow attendee from Miami, the light went on for both of them when the instructor got to the excess earnings method.
Where the excess earnings method came from
The U.S. Treasury Department developed the excess earnings method in the wake of Prohibition. Breweries had lost enormous business value and were writing it off, and Treasury needed a way to separate the value of the business from the value of the real estate.
Business appraisers largely regard it as a poor method, too subjective to defend. Bruce wrote an article on exactly that tension, opening with quotes from well known business valuation professionals criticizing the method, and submitted it to NACVA. That same criticized method is what real estate appraisers now use to appraise going concern properties.
Mechanically, excess earnings are the earnings left over after the tangible assets have received a return on and return of investment. Total revenue is conceptually split three ways: a stream that supports the real estate, a stream that provides a return on and of the equipment, and whatever remains. The remainder supports the business.
Bruce is clear that this is an iterative process rather than a formula you run once. If nothing is left over for the business, the answer is not that the business is worthless. The answer is that the whole pie has to shrink, because the business has to clear enough to be sustainable. He compares it to a shopping mall after the anchors leave. Asking what the mall is worth on a price per square foot basis misses the question entirely.
“The value of the real estate and also the value of the equipment is based on its contribution to the enterprise. It is not the sticks and the bricks.”
Bruce Jones, MAI | 30:04
The one thing a business appraiser cannot do
Every real estate appraisal turns on highest and best use. A business appraiser cannot perform it. Not will not, cannot: no data, no training, no license.
“Business appraisers cannot do highest and best use for real estate. They cannot. They do not have the data, they do not have the training, they do not have the license.”
Bruce Jones, MAI | 34:10
Bruce’s example: a restaurant clearing roughly half a million a year, sitting on three and a half acres that CVS would like to have. A real estate appraiser sees the answer immediately. The highest and best use may be to knock it down. A business appraiser working alone will never get there.
Which cuts both ways. A real estate appraiser using the excess earnings method has to be able to analyze the business, then turn the corner and ask what the site would be worth cleared. Competency in one discipline is not enough in either direction, and Bruce’s position is that these assignments need an interdisciplinary approach rather than two specialists working independently.
Why old restaurants keep becoming urgent care clinics
Restaurants built twenty to twenty five years ago commonly ran 7,000 to 8,000 square feet. New construction now averages around 3,500.
That is a functional obsolescence problem sitting across a very large inventory of buildings. Bruce has watched older restaurants get bought and converted to medical facilities, and watched others get split, with half becoming an urgent care and half staying a restaurant. Owners are right sizing the box.
Teaching the courses, and the literature catching up
Bruce teaches both American Society of Appraisers courses on valuing going concern properties, three and a half days each, and has done so for three years. His students are mostly experienced appraisers, twenty to forty years in, who have never handled these property types, and they come from across the country and increasingly from outside it.
The question he hears most often in class is who has the template set up. There is not one, because the analysis is different. Conceptually he does not think it is that complicated. You just have to look at it differently, which is harder than it sounds when you have run the same approach for thirty years.
He also notes that the appraisal literature took a long time to catch up. Earlier editions of The Appraisal of Real Estate handled going concern poorly, including the thirteenth, which was current when the course he now teaches was written. By his read the fifteenth edition finally gets it right.
Building a national practice by saying no
Bruce has now appraised in 18 states, having started out wanting to work in his own county and the two or three next to it. He jokes that friends call looking for local comps and he has not worked in his own area in a long time.
The mechanism was not marketing. He has written eight or nine articles and says he should post more. What built the practice was a small core of people who knew him from his institutional work, where he had appraised complex property types including charter schools, plus a few reports in circulation that demonstrated what he could do.
The harder part was capacity discipline.
“I had to stop bidding on the little stuff, and basically keep myself available so that when I got those calls, I had the time and had plenty of bandwidth.”
Bruce Jones, MAI | 46:49
What sophisticated lenders are actually underwriting
Bruce’s referral flow comes largely from brokers and mortgage brokers working on financing that covers the business, the equipment, and the real estate together. They come to him because a wrong number on these property types is expensive, and because selecting on fee and turn time does not account for competency.
His observation on the lending side deserves attention. Many real estate appraisers instinctively frame the question as what the property is worth if the business goes dark. That is not what a sophisticated lender is underwriting. The lender is underwriting the likelihood that this operator keeps servicing the mortgage, which depends on revenue clearing enough to support the real estate and still leave the operator a living.
Florida hotels and rebutting business appraisers
Bruce has been retained by Orange County, Florida to rebut business appraisers in hotel tax appeal matters, part of the wave that followed the early Disney cases. The pattern he describes is a real estate appraisal paired with a business appraiser opining that hundreds of thousands of dollars of hotel value is intangible, produced without the two disciplines collaborating.
That work is what has him energized for the next several years, and it puts the whole argument in one place. When the analysis crosses disciplines and nobody bridges them, the number comes out wrong and somebody has to prove it.
About Bruce Jones
Bruce Jones, MAI, is a New Jersey based appraiser specializing in going concern and special use properties. Sixteen years in real estate brokerage came first, including a decade on the commercial side as a New Jersey broker of record, before he entered the appraisal profession in 2004. The MAI designation followed, and in 2011 he founded [CONFIRM: firm name].
His work now spans 18 states. Bruce teaches both American Society of Appraisers courses on valuing going concern properties, and Orange County, Florida has retained him in hotel tax appeal matters. His published articles cover the application of the excess earnings method to real property assignments.
The file that does not fit your template
Bruce’s students ask who has the template set up. There is not one, because the analysis is different. That is true of more than going concern work.
When a file crosses into territory that needs an analysis you do not run every day, a contested tax appeal, an estate where the heirs do not agree, a matter heading toward testimony, you have two options. Turn it down, or hand it to a firm that will take it and give the client back to you.
PahRoo takes complex and contested assignments from other appraisers. Cook County tax appeals in front of the Assessor and Board of Review. Estate and trust matters. Divorce and marital property division. Partition actions. Litigation support where the report gets read by someone looking for a reason to throw it out.
You keep the client. You stay the point of contact.
Frequently Asked Questions
What is a going concern appraisal?
A going concern appraisal values a property where the highest and best use is continued operation of the real estate together with a business and, usually, its equipment. Restaurants, car washes, gas stations, and hotels are common examples. The appraiser has to determine what portion of the enterprise revenue supports the real estate, what portion supports the equipment, and what remains to support the business, rather than valuing the physical components on their own.
What is the excess earnings method?
The excess earnings method separates the value of a business from the value of the real estate by identifying earnings in excess of what the tangible assets require to receive a return on and return of investment. It was developed by the U.S. Treasury Department after Prohibition to help breweries account for lost business value. It is closely related to the parsing of income method, with the difference being that the excess earnings method prioritizes the real estate first.
Can a business appraiser determine highest and best use?
No. Highest and best use analysis requires real property data, training, and licensure that business appraisers do not hold. This is why going concern assignments benefit from an interdisciplinary approach, with the real estate appraiser and the business appraiser collaborating rather than working independently. A site’s highest and best use may be redevelopment even while a profitable business operates on it, and only a real estate appraiser can reach that conclusion.
Do I need a business valuation designation to appraise going concern properties?
Not necessarily, but you do need competency in analyzing a business, not just a template. The American Society of Appraisers offers two courses on valuing going concern properties, each running three and a half days. Coursework gets you started rather than making you proficient. As with real property appraisal generally, competency develops through practice, not from a licensing class.
Why can’t I use my standard commercial template on a restaurant or gas station?
Because the analysis is different. A general purpose property template values the physical components, typically on a price per square foot basis. A going concern property derives the value of both the real estate and the equipment from their contribution to the enterprise. Starting from the sticks and bricks produces the wrong number and misses the possibility that the site is worth more cleared than it is occupied.
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Appraisers on Purpose features appraisers and industry professionals talking about how they built their careers, what they learned, and what they are doing now for their teams, their clients, and the profession. Hosted by Michael Hobbs, President of PahRoo Appraisal & Consultancy.
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