1.5 Going Concern Value, Cost vs. Price vs. Value, and Allocating Intangibles
Key Takeaways
USPAP defines cost as the amount required to create, reproduce, replace, or obtain a property, price as the amount asked, offered, or paid, and value as an opinion of worth at a given time.
The market value of a going concern covers all tangible and intangible assets of an established operating business, including the real property, furniture, fixtures, and equipment (FF&E), and business enterprise value.
Standards Rule 1-2(e)(iii) requires the appraiser to identify any personal property, trade fixtures, or intangible assets included in the appraisal, and SR 1-4(g) requires analysis of their effect on value.
Allocation subtracts the supported value of FF&E and intangible assets from a going-concern price or value to isolate the real property component.
Hotels, senior housing, restaurants, and other operating properties are where allocation questions most often arise on the Certified General exam.
1.5 Going Concern Value, Cost vs. Price vs. Value, and Allocating Intangibles
Note
The 2026 Exam Content Outline lists going concern and cost vs. price vs. value among the types of value, and it separately tests the allocation of value between intangible property and real estate. These ideas come up whenever an operating business, its equipment, and its real estate change hands in one transaction.
1. Cost, Price, and Value Are Different Things
USPAP defines the three terms precisely, and exam questions often turn on mixing them up:
| Term | USPAP Definition | What It Tells You |
|---|---|---|
| Cost | "the actual or estimated amount required to create, reproduce, replace, or obtain a property" | What it took (or would take) to produce or acquire the asset |
| Price | "the amount asked, offered, or paid for a property" | A fact once stated, which may or may not reflect value because of a party's finances, motives, or special interests |
| Value | "the monetary relationship between properties and those who buy, sell, or use those properties, expressed as an opinion of the worth of a property at a given time" | An opinion, always qualified by type (market value, investment value, liquidation value, and so on) |
Example: A developer spends $9,200,000 on land and construction for an office building (cost). The building is listed at $11,500,000 and sells eight months later for $10,400,000 (two prices). An appraiser's opinion of market value as of the sale date is $10,100,000 (a value). The $300,000 gap between the price paid and the value opinion could reflect a buyer's special motivation; the gap between cost and value reflects the developer's realized entrepreneurial profit. None of the four numbers is "wrong," because each answers a different question.
2. The Going Concern
A going concern is an established, operating business with an indefinite future life. The market value of the going concern is the market value of all the tangible and intangible assets of that business as if sold in aggregate. It typically has three components:
- Real property: the land and the improvements, including building fixtures.
- Tangible personal property: furniture, fixtures, and equipment (FF&E), vehicles, supplies, and inventory.
- Intangible assets: what USPAP calls nonphysical assets such as franchises, trademarks, patents, copyrights, goodwill, and contracts. In real estate practice this layer is often called business enterprise value, and it can include an assembled workforce, a brand affiliation, licenses (for example, a liquor license or a state care license), and in-place customer contracts.
Property types where all three layers routinely trade together include hotels and motels, assisted living and skilled nursing facilities, restaurants, golf courses, marinas, bowling and entertainment centers, car washes, and some parking and self-storage operations. A standard office or warehouse leased to tenants usually has little or no business layer, because the owner earns rent rather than operating profits.
3. What USPAP Requires
- Identify (SR 1-2(e)(iii)): the appraiser must identify any personal property, trade fixtures, or intangible assets that are not real property but are included in the appraisal.
- Analyze (SR 1-4(g)): when such items are included, the appraiser must analyze their effect on value.
- Competency: when the scope of work includes appraising the personal property or intangible assets, competency in personal property appraisal (Standard 7) or business appraisal (Standard 9) is required, or the appraiser relies on another qualified professional.
- Report: the type of value must be stated clearly. A report that calls a going-concern value "market value of the real property" is misleading.
4. Allocating Value Among the Components
There are three common ways to isolate the real property component:
- Component deduction from a going-concern value or price: subtract the supported value of the FF&E and the intangible assets from the total.
- Cost approach for the real property: land value plus depreciated cost of the improvements gives a real property indication directly, which can be compared with the going-concern total.
- Income-based deduction: remove business and personal property returns from the operating income before capitalizing (worked in detail in Section 7.5).
Worked Example: A Going-Concern Hotel Sale
A 150-room select-service hotel sells as a going concern for $30,000,000. Verification with the buyer and the closing documents shows:
| Component | Support | Amount |
|---|---|---|
| Total going-concern price | Verified closing statement | $30,000,000 |
| Less: FF&E | Depreciated cost, confirmed by a personal property appraiser | ($2,400,000) |
| Less: intangible assets | Franchise affiliation, assembled workforce, and in-place group contracts, supported by the buyer's purchase price allocation and market evidence | ($1,600,000) |
| Indicated real property component | $26,000,000 | |
| Real property price per room | $26,000,000 ÷ 150 rooms | $173,333 |
An income cross-check supports the allocation. The hotel's net operating income after a market base management fee, franchise fees, and an FF&E reserve is $2,450,000. Deducting a 10% return on the $2,400,000 of FF&E ($240,000) leaves $2,210,000 attributable to the real property. Capitalized at a market rate of 8.5%, that is $2,210,000 ÷ 0.085 = $26,000,000, matching the deduction result.
Tip
Exam Trap: When a comparable sale is a going concern, its price must be adjusted to remove the FF&E and intangible assets before it is used to value a real property interest. Adding $/room prices from going-concern sales to a real-property-only appraisal overstates the real estate.
5. Why the Allocation Is Contested
How much of a hotel's or nursing facility's value is truly "business" is one of the most argued questions in property tax appeals. One school holds that deducting a market management fee and franchise fees removes the business layer from the income; others argue that a separate deduction for remaining business enterprise value is needed. The appraiser does not need to settle the debate on the exam, but must identify the components, use supported methods, avoid double-counting (for example, deducting a franchise fee and the full value of the franchise), and explain the method in the report.
A developer spent $9,200,000 to build an office building, listed it for $11,500,000, and sold it for $10,400,000. An appraiser's market value opinion as of the sale date is $10,100,000. Which statement labels these figures correctly under USPAP definitions?
$9,200,000 is value, $11,500,000 is cost, and $10,400,000 is price
All four figures are prices, because each was stated by a market participant or by the appraiser
$10,400,000 is market value, because an arm's-length sale price is value
$9,200,000 is cost, $11,500,000 and $10,400,000 are prices, and $10,100,000 is a value
A 120-bed assisted living facility sells as a going concern for $18,000,000. The FF&E has a supported depreciated value of $900,000, and the intangible business assets (licenses, workforce, resident contracts) are supported at $2,100,000. What are the indicated real property component and the real property price per bed?
$15,000,000; $125,000 per bed
$17,100,000; $142,500 per bed
$15,900,000; $132,500 per bed
$18,000,000; $150,000 per bed
An appraisal of a full-service hotel includes the FF&E and the hotel's brand affiliation. What does USPAP require of the real property appraiser?
Exclude the FF&E and brand from the report, because USPAP Standards 1 and 2 cover only real property
Value the brand at its franchise fee and add it to the real property value
Identify those items, analyze their effect on value, and be competent to appraise them if they are in scope
Use a jurisdictional exception, because business assets fall outside the scope of Standard 1
Sections you finish are checked off in the contents.