Appraising interesting holes in the ground.(Report)

ABSTRACT

A show cave is one example of where real estate is so intertwined with a business that the appraiser cannot properly value the real estate without also considering the enterprise. One solution to the real estate appraisal problem is an income residual technique, The capitalization rate applied to the residual income is determined by weighting the required return on and return of the capital for the real property excluding the caverns with the capitalization rate to the enterprise's total invested capital excluding the real estate.

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With most real estate, any typical tenant could replace any other typical tenant. Such is the case for our appraisal firm and the plain-vanilla, Class B office space we rent. We could find other Class B space, and an accountant or manufacturer's rep or almost anyone else could be satisfied with the space we now occupy. In this type of relationship, the renter receives quiet enjoyment and the services provided in the lease, and all the owner can expect is the timely rental payment. Consequently, although the landlord is in the business of renting real property, he or she has no involvement in the renter's business. This is the situation for the vast majority of real estate across most property types and in most market areas.

On the other hand, some real property is uniquely related to a specific enterprise, in which case the value of the real estate is dependent on the economic well-being of that enterprise as a going concern. This is generally true when there is very little adaptive reuse of the improvements because they have been designed to be useful only to the particular business carried out via the premises. It is also the case when some component of the real property itself is a unique attribute of the business. Valuation assignments in these cases involve the market value of the real estate in use or as a going concern. (1)

Show Caves

Show caves are tourist attractions, and they compete for discretionary dollars with amusement parks, water slides, movies, bowling alleys, and other family-oriented amusements. The number of visitors to caverns directly depends on media advertisements, the historical relationship with tour services, the goodwill created from a long exposure to the market, and a large base of satisfied customers. These factors are more important than the natural beauty or locations of the caverns themselves and speak to the importance of competent management of the company operating the cave.