Closed Restaurant for sale - how do I assess that?

Question

I've got a lead from a seller who is delinquent on taxes and I would like to hear some advice if/how I should proceed.

The property is a currently closed restaurant with all the appliances and things still inside but the business shut down while the owner was in the hospital. I'm really in a rut on how to assess the value of this property. I can't use the income approach, its a small town with maybe 3 restaurants or so, comps are nonexistent (I think)  and its been vacant for a few years now.

According to the assessor the land and building value is $50,500 (I'm using that as a ball park number) although the current owner did pay 300,000 for it previously. I'm not sure where to begin, since this is an isolated piece of property, but low. Perhaps there is a way can navigate the discussion?

I'd love the input.

Jon Holdman · Answer

There is a real possibility that the value of this property is the value of the land, less the cost to raze the existing structure plus any possible resale value of the equipment.

If there is demand for a restaurant, it might be worth more to the right person.

If the building can be reconfigured for some other user that might add some value, too.

David Krulac · Answer

Steven J.

Restaurants are tough businesses.  Many don't make any money and the failure rate is higher.  Many business owners work 80 hours a week for essentially minimum wages.

Used equipment particularly years old is worth cents on the dollar.  Sitting unused for years can make them outdated as well as non-functional.

How are the 3 other restaurants doing?  You should visit all of them and any other competition at various times of the day and days of the week and see how they are doing.  Is the parking lot full?  Maybe 3 restaurants are all that the small town can support?  Is the business seasonal?  Some places close for the winter?

You not only need to figure out what it would take to buy the property, but also what it would take to keep the property and what would sell for when you want to sell?

Steven J. · Answer

Thanks all for the helpful comments.

Bill Gulley I like your books.

@Jon Holdman I'm more or less thinking what you're suggesting. I've driven by the place between where I am now and my parents house and its been empty for years. I can't remember it being open. I'll give a call to the other local restaurant owners in that town and see if they are interested. Or perhaps the town is in need of a new rec center or something. I'll try to get a rough idea of what a cost approach assessment might be on this property.

@David Krulac Good call on the seasonal. I forget how seasonal this MN frozen tundra forces us to be at times. There is actually another lake property that might make a good investment but its in a tourist town where people live in their second home for a few months out of the year.

Thanks for all the helpful answers again! I appreciate it.

Chad Carson · Answer

Great question and replies! I learned a lot from all of them. Thanks everyone.

Jon Holdman · Answer

My guess would be the equipment is worthless other than scrap value.

The fact its been empty for years is a clue there's no demand for it as a restaurant.

Is there other vacant land in the same area?  Any new or recent construction?  If this is one lot in an area that's heavily built up and used then it may have value.  But if there's plenty of other vacant land nearby then there's probably not even much land value.  I grew up in rural MO and have been back there several times in the last two years.  Driving on some of those roads you see closed restaurants outside of towns and wonder what someone was thinking when they built that.  Even in a urban area, purpose built buildings have little value when the specific tenant leaves.

Bill Gulley · Answer

My first thought, is the place for sale? Being behind on taxes doesn't mean it's for sale. Would the owner have redemption rights from any tax sale.

Next, what he paid is irrelevant, is it free and clear. Many, no, most small town restaurants are sold as RE/Business and are seller financed in some manner. Conventional financing is tough for small town, non-franchised eateries.

Small town may mean aspects of commercial assessments like traffic count, location, tax issues, permits and regulatory matters in that business may not be too appropriate. You're looking at net income from the business not so much as RE.

Consider the market for the business type. Either you're going to start rolling dough or frying burgers or someone else will be. If it's you, you're in the business then you'll need to look at it from that side and your RE expenses and equity as part of the business. If you're leasing it out then you're on the RE side.

Leasing that you can go to the sq ft market rents and you can go to a lease plus arrangement where you take a percentage of sales with a base rent. Doing that means you need to know the food business too.

So, you need to identify what options you'd take.

If there is existing financing, with the business closed and less than half the note paid, you might get in for the loan assumption and a token on equipment. Restaurant equipment less than 5 years old might be 50 cents on the dollar, over 5 to 10 years 25 or as much as 10 cents on the dollar depending on condition. Gotta net out the value from the RE.

Look to the old sales generated, but you also need to take into consideration what kind of operation will replace the old business, a significant change in menu won't be the same and consider the blue sky falling since it's been closed.

If that owner has medical issues, seller financing may help him save on his estate preservation, if he gets cash it could be required to pay medical expenses and lose what he gets, financing it will usually take him to a discounted market value of his note, savings can be significant and save in keeping other assets. Just saying, know who the seller is, if you can understand their financial horrors it will be beneficial to you.

No more books...LOL :)

J Scott · Answer

First, you need to determine what the highest and best use of the property is.  Is it another restaurant?  Another commercial space?  Rezoned for a different use?

Once you figure out the highest and best use, you can estimate the potential income it would throw off (or it's potential sale price if it wouldn't be an income property and someone were to develop and sell), and then do the analysis from there to determine value.

Closed Restaurant for sale - how do I assess that?

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