Most commercial real estate appraisals focus on real property value — the value attributable to land, improvements, and lease rights, without reference to any business conducted on the property. Going concern value includes the operating business as well, and the two can differ materially. The distinction arises when a property is integral to a business that cannot easily be relocated or replicated elsewhere: hotels, golf courses, marinas, car washes, senior living facilities, bowling alleys, and certain specialized healthcare properties. For these property types, the income stream being valued is generated by an operating business that happens to be attached to real estate, and valuing only the real estate while ignoring the business — or valuing the business without explicitly decomposing the real estate component — produces results that are unreliable for lenders, buyers, and owners.
Going concern value typically comprises three components. Real property value is the land and improvements at their highest-and-best-use as real property — what the site and building would be worth if the business were stripped away and the property were available to the highest-bidding user. Personal property value is the furniture, fixtures, and equipment that is movable and not part of the real estate — hotel guest room furniture, restaurant kitchen equipment, marina dock hardware, golf course maintenance equipment. Intangible business value is the assembled workforce, operating licenses, trade name recognition, reservation system relationships, and accumulated customer goodwill that enable the property to generate above-market returns that bare real estate alone could not produce. Decomposing total going concern value into these three components requires specialized appraisal expertise and careful analysis of what portion of the income stream each component is responsible for.
Hotels are the most frequently encountered going concern property type in institutional commercial real estate. A hotel generates revenue from room night sales, food and beverage operations, events, parking, and ancillary services — none of which maps directly to a real property market rent that could be extracted and valued independently. Hotel appraisers use the income approach with hotel-specific performance metrics (RevPAR, ADR, occupancy rate, departmental profit margins) normalized against the STR competitive set, then make explicit allocations to furniture, fixtures, and equipment and to intangible management value including any franchise affiliation premium. USPAP requires a clear scope of work statement specifying whether a hotel assignment is going concern, real property only, or a specified combination, and the report must demonstrate the allocation methodology rather than leaving components to inference.
The going concern decomposition has direct consequences for lending and transactions. A lender underwriting a hotel will size the loan against the real property component, not the total going concern value, because mortgage foreclosure remedies operate against real property and the lender cannot easily foreclose on the business or the intangibles. A hotel worth $25 million as a going concern that has $8 million of FF&E and $5 million of intangible value has only $12 million of loan-able real property value, and a lender who confuses going concern value with real property value in their LTV calculation has materially underestimated their collateral risk. In acquisitions, buyers and sellers dispute the going concern allocation whenever the purchase contract specifies the price as covering real property — an allocation that places significant value in FF&E or intangibles reduces the real property portion, affecting depreciation schedules, transfer taxes, financing terms, and, for 1031 exchanges, the portion of the purchase price that qualifies as like-kind property.
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