What Is Going Concern Value in Real Estate?

Going concern value is a fundamental concept in business valuation that assumes an entity will continue its operations for an indefinite period into the future. This premise implies that the business will not be forced to liquidate or cease its activities. It is a foundational assumption for assessing the true financial health and overall worth of an operating entity. This contrasts sharply with a liquidation value, which considers what assets would sell for if the business were to shut down immediately.

Understanding Going Concern Value

Going concern assumes a business will continue to operate for the foreseeable future, without liquidating assets or significantly curtailing operations. This premise is crucial in accounting principles, including both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Under GAAP, specifically Accounting Standards Codification (ASC) 205-40, management is responsible for evaluating whether there is substantial doubt about an organization’s ability to continue as a going concern. Similarly, IFRS (IAS 1 and IAS 10) mandates that financial statements be prepared on a going concern basis unless management intends to liquidate or has no realistic alternative but to cease operations.

This assumption dictates how assets and liabilities are valued and presented on financial statements, typically at their historical cost less depreciation, rather than their immediate liquidation value. For instance, a long-term asset like a piece of machinery is valued based on its expected future cash flows and ongoing usefulness, not what it would fetch in a quick sale. The going concern assumption is important for investors, creditors, and business owners in assessing a company’s financial health and future viability, influencing lending decisions and investment risk assessments.

Going Concern Value in Real Estate Operations

While many real estate properties, such as residential homes or undeveloped land, are valued based on their physical attributes or market comparable sales, “going concern value” applies to real estate that is an integral part of an ongoing business operation. This valuation approach recognizes that the property’s value is intertwined with the successful functioning of the business it supports. Separating the physical asset from the operating business would diminish its overall worth.

Going concern value is important for properties designed and operated to generate income through specific business activities. Examples include hotels, motels, hospitals, nursing homes, and senior living facilities, where the real estate provides the setting for a service-based enterprise. Other properties valued on this basis include specialized manufacturing plants, car dealerships, theme parks, large-scale operational farms, convenience stores, car washes, quick-serve restaurants, bowling facilities, and golf courses.

For these types of properties, the value extends beyond just the land and buildings. It encompasses the entire operational business, including its established revenue streams, existing customer base, operational efficiency, and management structure. The market value of such properties is often associated with their net income and their capacity to generate ongoing revenue.

Key Elements of Real Estate Going Concern Valuation

The going concern value of a real estate operating business is a comprehensive assessment that considers both its physical assets and the operational elements that drive its income and success. This holistic approach captures the full economic value generated by the integrated business and property. It recognizes that the sum of the parts, when operating together effectively, is greater than their individual liquidation values.

Tangible assets form an important part of this valuation. These include the physical real estate itself, such as land, buildings, and fixed improvements permanently attached to the property. Additionally, specialized equipment and machinery essential for the business operation, often categorized as Furniture, Fixtures, and Equipment (FF&E) and Operating Supplies and Equipment (OS&E), are considered. For instance, the medical equipment in a hospital or the kitchen and laundry facilities in a hotel are tangible components of the going concern. For tax purposes, land is generally not depreciable, while buildings and equipment are considered depreciable assets.

Intangible assets are also a significant component of going concern valuation, often representing a substantial portion of the overall value. Goodwill is a prominent intangible asset, reflecting the value of a business’s reputation, established customer loyalty, and market presence that enables it to generate future revenue. Goodwill arises during an acquisition, generally calculated as the purchase price minus the fair market value of tangible and other identified intangible assets. It is regularly tested for impairment.

Intangible assets also include:
Brand recognition: Contributes value through a recognized and trusted name that attracts customers and commands market share.
Efficient operational systems and processes: These encompass established workflows, management systems, and standard operating procedures. Well-structured processes often achieve predictable, scalable, and stable revenue streams.
Skilled management and staff: Represents an experienced and competent team.
Existing contracts and licenses: Such as ongoing customer agreements, supply arrangements, and necessary operational licenses or permits. State-issued operational licenses are integral to the valuation of facilities like senior living centers.
Strong customer base: Characterized by established and recurring client relationships, providing stability, predictability, and potential for cost-effective growth.