California Eminent Domain Report

Gas stations and car washes are primarily owner-occupied convenience businesses, typically located near freeway off-ramps and at the intersections of well-traveled roadways.  As a result, they're frequently involved in eminent domain acquisitions for freeway expansions or road widenings.  A common question is how should such properties and businesses be valued to satisfy California's requirement of "just compensation"?

A recent article by Retail Petroleum Consultants, Condemnation: Appraising Gas Stations and Car Washes, How to Ensure Just Compensation for Business and Goodwill, provides some interesting insights.  According to the article, it is typical -- but probably inaccurate -- for eminent domain attorneys, public agencies, and gas station owners to retain two appraisers, one for the real estate and one for the business goodwill.  Retail Petroleum Consultants explains that this dual appraisal methodology does not arrive at the correct value for a number of reasons, including:

• gas stations and car washes are sold based on their cash flow potential, not physical units of comparison, such as a price per square foot that you would typically see with a commercial property;

• buyers of gas stations do not separately purchase business goodwill, fixtures and equipment, and real property -- they pay an agreed price for the entire going-concern based on the business' potential cash flow; and

• there is little available data in the marketplace about recent, arm's-length rental rates and capitalization rates for gas stations and car wash properties.

These are all valid points, but what is the solution?  Retail Petroleum Consultants suggests that gas stations and car washes are "special use properties," and parties should retain an appraiser that has access to confidential proprietary market data, including sales volumes, profit and loss statements, expense ratios, fuel margins, car counts, operations by brand, car wash type, and cost comparables and going-concern sale comparables.  Again, unlike typical commercial properties, they suggest there is little, if any, relationship between the number of dispensers or building size and how much cash flow a gas station generates.  Market participants instead value such owner-occupied properties based on cash flow, focusing on gross profit multiples and capitalization rates to convert income to value.

If you're interested in learning more about gas station or car wash valuations, check out Retail Petroleum Consultants' article.  Something for all of us involved in the right of way industry to consider.