With recent accounting reporting policy changes and a more theoretical understanding of the value of a business enterprise, among bankers, accountants, appraisers and the general public, more appraisers are being asked to provide appraisals addressing the “Market Value of the Going Concern” (MVGC). This is sometimes more specifically referenced as “Market Value of the Total Assets of the Business”.

The scope of the MVGC exceeds merely the value of real estate. Historically, real estate has been the most common collateral used by lenders. That said, many loan officers prefer the MVGC appraisal because it generates a higher value from which to collateralize a loan, therefore permitting a larger loan to the borrower. There is a time and place for the MVGC vs. Fee Simple Market Value of just the real estate. This is determined by what specific assets are typically used, leased and or sold with a property. There is additional risk assumed when loans are made on Going Concern Properties.

Properties such a restaurants, lodging and healthcare facilities are typically evaluated as Going Concerns. Generally these properties receive revenue streams based on the price of meals or the price of renting a room on a nightly basis. These revenue streams are typically dependant upon other support property in addition to the real estate, such as FF&E, inventories, supplies, franchise contracts, etc. When values are computed based upon these income streams, the resulting property values include not only the real estate, but also that of the personal and intangible property.

Most commercial shopping centers and apartment complexes are not appraised as Going Concerns. They are leased and sold without the additional requirement of providing furnishings, equipment, etc. Lease payments typically represent only the rights to the real property, and no other. With other properties where intangible and personal property rights are to be pledged as collateral, they can add substantially to the overall value of a property. An appraisal reflecting the MVGC is typical, if such rights are to be considered as collateral.

It should be noted that a MVGC is valid only so long as the subject property is actually a Going Concern. When a business such as a hotel or restaurant is shuttered, most, if not all, intangible business value it previously had, goes away. When a property “goes dark”, this not only erases intangible value, but it often can negatively affect the value of the real estate or other personal property used by the business. Therefore, those depending upon the value of the Going Concern to support a loan as collateral, should do so with caution.

Given the above, it makes sense that a lender would order an appraisal that addresses the specific value of a property, which matches the collateral to be assumed. For example, if a lender is lending on a hotel and taking only the real estate as collateral, the appraisal should only address the value of the real estate. If a lien is to be taken on the real estate, all FF&E, all inventory and the franchise, a MVGC should be sought.

One note of caution on lending on Going Concern Properties, is that the value of the Going Concern Property can far exceed the value of the underlying real estate. In some cases the real estate may not make up more than half the MVGC. This condition represents a very healthy Business Enterprise. It could also be a red flag. In the event of a failure of the business, much value is to be lost. An example may be a restaurant property having a MVGC of say, $1,000,000, being represented by $500,000 in real estate value, $100,000 in FF&E value and $400,000 in Intangible value. For purposes of discussion, let’s say a year later a new restaurant moves in nearby and takes away much of the subject restaurant’s business. Given a failure of the business, the lender may find that the only marketable collateral it has is the real estate and the FF&E. Further lets say for purposes of demonstration, the value of a dark real property is reduced by 30% and the value of FF&E is reduced by 75%. Considering the above, the collateral which began at $1,000,000 is now only $375,000 (Real Estate $500,000 x .70 = $350,000 and FF&E $100,000 x .25 = $25,000). A lender who had made an $800,000 or 80% LTV loan, may have felt safe so long as the property remained a Going Concern. Given it’s failure, it is now the “Kiss of Death”, representing a loss of $425,000, or more than half of the loan made. While this example may seem far fetched, Going Concern Properties demonstrating a disproportionate share of soft collateral should be viewed as high risk.

In summary, properties valued as Going Concerns should be approached with caution by lenders considering high LTV loans. Some lenders place little stock in the intangible values of a Going Concern Property. It is recommended that the MVGC appraisal be broken down into subcategories, showing separate values for the real estate, personal property and intangible property, as demonstrated above. This process will permit an underwriter to place weight on the segments of the collateral, such as real estate, showing the most solid value going forward. Yes, MVGC is a legitimate value, and in some properties it may represent a long term source of solid collateral. For other properties, this may not be the case. Risk elements such as management, property location, and business type should be considered in the underwriting of a loan with significant intangible value.