Process: Post-criticism of property - Phase: Valuation


🏗️ Appraisal: The Three Approaches

Appraisers use three valuation methods (per USPAP standards) when underwriting gas stations or any commercial property:

1. Cost Approach (Replacement Cost)

  • What it does: Estimates what it would cost to rebuild the entire property today, minus depreciation.
  • Useful when: The property is newer or unique, and sales comps are scarce.
  • Formula: Land Value + (Construction Cost - Depreciation) = Appraised Value

✅ Often used for insurance, not buyer negotiation.

2. Sales Comparison Approach (Comps)

  • What it does: Compares the property to recent sales of similar gas stations nearby.
  • Adjustments made for: location, lot size, building condition, income potential.
  • Formula: Adjusted $/sq ft or Cap Rate from comparable properties

✅ Best when recent local transactions exist.

3. Income Approach (Capitalization)

  • What it does: Based on the income-producing ability of the property.

a. Cap Rate Method

Net Operating Income / Cap Rate = Appraised Value

b. Gross Profit or SDE Multiple Method

Gross Profit × Multiple = Enterprise Value

✅ This is most common for gas stations with real estate.

💡 Why Gross Profit Multiple?

Unlike most businesses, gas stations have:

  • High revenue
  • Low fuel margin
  • Complex tax-adjusted income

So, appraisers/lenders prefer Gross Profit for consistent, tamper-resistant valuation.

💵 Net Cash Flow vs. SDE

MetricUse Case
SDEHow much YOU make running it
Net Cash FlowWhat’s left after loan payment
EBITDAUsed for comparing to large biz

✅ Use Net Cash Flow when you’re leveraging SBA/loans.

🧮 DSCR — Debt Service Coverage Ratio

DSCR = SDE / Annual Debt Service

  • 1.25 ✅ SBA loan eligible

  • 1.0–1.24 ⚠️ Risky
  • < 1.0 ❌ Likely rejected

A DSCR of 1.27 means for every $1 of loan payment, you generate $1.27.

🧾 Calculation Walkthrough

Based on your numbers:

  • Normalized OpEx: 348,444 - 0 - 0 - 0 = $348,444
  • Net Income (Norm.): 974,142 - 348,444 = $625,698
  • SDE: 625,698 + 23,000 = $648,698
  • EBITDA: 625,698 + 0 + 0 = $625,698
  • Down Payment: 6,150,000 × 20% = $1,230,000
  • Loan Amount: 6,150,000 - 1,230,000 = $4,920,000
  • Monthly Payment: $4.92M @ 8.8% for 300 months = $40,449/mo
  • Annual Debt Service: $40,449 × 12 = $485,393
  • Net Cash Flow: 648,698 - 485,393 = $163,305
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