Total Excess Earnings Model

There are many ways to figure out the value of real estate property. However, one method that is extremely efficient at determining the value of tangible and intangible assets is the Total Excess Earnings Model (TEEM). TEEM allows you to make asset allocations when you are valuing a going concern that is complex and includes multiple parts.

Also, since we live in a time where the workforce is a huge component of whether or not a business can stay standing, using TEEM to value both the tangible and intangible assets of a complex going concern can make all the difference in determining the real estate value. Read on to learn more about this valuation method!

What is Considered a Tangible Asset

Before we get into how TEEM can be used, let’s break down tangible and intangible assets.

Tangible assets are the physical parts of the property. These are the easiest to add value to because you can use sales comparisons to determine them. For example, an apartment building, office space, dealership, and item sales are considered to be tangible. You can simply look at the cost of rent or how much the items were sold for and then compare them to similar buildings/items to determine the total tangible asset value.

What Are Some Intangible Assets

Intangible assets are a little bit harder to determine, especially in the case of complex going concern valuation.

For example, an office space or apartment building on its own would not necessarily have intangible assets attached to it. However, in complex valuations, you have to look at all of the pieces, including the intangible assets attached to the other properties in the valuation. There are four parts to intangible assets:

  • Assembled workforce
  • Brand/name and the website
  • A dealership/franchise agreement
  • Goodwill/customer list

Each of these parts can bring positive or negative value to the property, so it is important to make the best determination possible to ensure the total property value is correct.

Intangible and Tangible Asset Valuation

In order to determine the total value of a complex property, it is a good idea to break it down into tangible and intangible assets. There are a few reasons for this:

  1. It allows you to see the separate values of each
  2. You have the ability to adjust the value (if needed)
  3. You can determine if the intangible assets are providing a negative value

Let’s break down these reasons regarding intangible and tangible asset valuation a bit more.

1. Separate Values of Tangible and Intangible Assets

As mentioned above, it’s better to determine these values separately before coming to the total property value. That way, you can determine whether (if at all) one value is causing a negative impact on the property’s value.

2. Adjusting the Value

Using the TEEM allows you to adjust the property value (if necessary) because it gives a separate value to tangible and intangible assets. For example, if a seller places a higher value on the tangible property, they can make more money off of the property. On the other hand, some sellers may choose to skew the valuation to entice buyers with a lower price but higher intangible value.

Additionally, you may want to adjust the value if comparable sales come in at a different price than your valuation. This can be very profitable for both sellers and buyers as they can plainly see how their real estate price compares to similar ones around them. The only time this may not work is when there is a complex property without comparable sales, but that is why separating out and then adding together the value of the different components of a complex property can be beneficial.

3. Can Intangible Assets be Negative?

Due to the COVID-19 pandemic, there was a huge hit on the assembled workforce. In return, that may have led many businesses to have a negative intangible asset value. This means that they had to spend more money on marketing, finding more staff, and increasing wages to entice new hires. There may also be a drop in efficiency or extra costs to keep the business running due to the lack of workforce.

Additionally, intangible assets can also be negative if the business does not have goodwill. If they are seen as negative by the public, it lowers their intangible asset value.

Using TEEM to Determine A Complex Going Concern’s Value

When it comes to determining the value of a real estate property, Total Excess Earnings Model allows you to separate and look at all of the factors. This is extremely beneficial for complex properties with many moving parts. For example, the article “The Total Excess Earnings Model Revisited– It’s Not Just for Going Concerns” discusses how TEEM could be applied to a marina property. In their example, they separate out each property type in the appraisal form. Slip and dock income, boat sales, boat service, apartment rent, and office rent all get their own value.

Once the value of tangible and intangible assets is determined and given an appraisal value, the Total Excess Earnings Model can be used to determine the net earnings of the business and the capitalization rate. Next, it’s important to compare the sales of similar properties to determine the total value of the property. In the example of the marina, this complex property did not have any similar properties to compare. However, that’s where the appraiser’s best determination comes into play and they can compare individual values for each part of the property and come to a valuation that takes those (and intangible assets) into consideration.

Total Excess Earnings Model and the Strength of a Going Concern

In addition to using the Total Excess Earnings Model for complex properties, it’s also beneficial for properties of varying levels of going concern. In fact, the strength of the occupant of the property does (and should) matter. When a property is owned by a successful, well-established business, it should have a lower capitalization rate vs. a newer business property that is financially inferior. Using other methods, both types of businesses would receive the same capitalization rate, regardless of any other factors. However, there is clearly a higher real estate value for a business that is established and has proven the value of its property over time and so it should be able to earn that lower capitalization rate.

Determining a Property’s Value

Overall, determining what a property should be valued at has many different factors to consider. When it comes to complex going concerns, the appraiser should take their time and do the necessary research to come to a total property value. It’s extremely important to use the best data that is available so as to come up with the most accurate property value. Total Excess Earnings Model allows you to break up the tangible and intangible assets to make sure that this value is as accurate as possible.

Have questions about property appraisal or would like to use our appraisal management services? Contact CES today.

By |Published On: May 7th, 2022|Categories: Latest Articles|