KO Appraisal
Guide

Restaurant Appraisal

A restaurant appraisal has to answer a question that reaches past the real estate: how much of the price is the building, how much is the equipment, and how much is the business. I appraise restaurants throughout California as a certified general appraiser. In these assignments the allocation among real property, tangible personal property, and intangible assets is the core of the problem, and which of the three you need valued depends on why you need the appraisal, so that question has to be answered before the analysis starts.

The three-way allocation is the assignment

A restaurant deal usually conveys three different kinds of asset at once. Real property is the land and improvements. Tangible personal property is the FF&E, trade fixtures, and smallwares. Intangibles include the liquor license, goodwill, the trade name, an assembled workforce, and any below-market leasehold advantage.

USPAP Standards Rule 1-2(e) requires me to identify at the outset the real property interest to be valued, at subparagraph (ii), and any personal property, trade fixtures, or intangible assets that are not real property but are included in the appraisal, at subparagraph (iii). Standards Rule 1-4(g) then requires that when those non-real property assets are included, I analyze their effect on value rather than fold them silently into one number.

The allocation is not academic. A deed of trust secures real property, not goodwill, so a lender needs the real property figure isolated. In a purchase, buyer and seller each file Form 8594 under IRC 1060 using the residual method, the two filings are supposed to agree, and the class-by-class split drives depreciation for years. Since the 2017 Tax Cuts and Jobs Act, IRC 1031 like-kind treatment reaches real property only, so pushing equipment into the real estate has a direct tax cost. And under California Revenue and Taxation Code section 110(d), intangible assets and rights relating to the going concern of the business are not supposed to enhance or be reflected in the value of the taxable property, subject to an important carve-out in section 110(e), discussed below.

Trade fixtures and the second-generation premium

The infrastructure that makes a space a restaurant is expensive and largely immobile: Type I hood with make-up air, grease interceptor, floor sinks, walk-in boxes, gas service capacity, upsized electrical service, and code-compliant restrooms. A vacant former restaurant with that package intact supports rent above generic shop space because the next operator avoids a shell buildout and a long plan-check cycle.

The premium is real but it is not unlimited, and I do not assume it. Under the California Retail Food Code (Health and Safety Code sections 113700 and following), anyone proposing to build or remodel a food facility must submit plans and specifications to the local enforcement agency and obtain plan approval before starting work (section 114380(a)). That is where a new operator learns what actually has to be upgraded. A dated hood package, an undersized interceptor, or a grandfathered condition that will not survive a remodel is a deduction, not an asset. I inspect the equipment, note age and condition, and support the premium with second-generation leasing evidence rather than replacement cost arithmetic.

The liquor license is a separate, transferable asset

An ABC license is intangible personal property. Business and Professions Code section 24070 makes each license separate, distinct, and transferable upon department approval, from licensee to licensee and premises to premises; section 24074 requires that where a purchase price is paid, the parties establish an escrow with a neutral escrow holder and the transferee deposit the full consideration before the transfer application is filed. Section 23816 caps on-sale general licenses at one per 2,000 inhabitants of the county, or fraction thereof, which is why in built-out counties those licenses trade in a transfer market of their own.

I value the license by reference to that transfer market and report it separately. It does not belong inside a real-property-only conclusion, and it is not collateral under a deed of trust. On the assessment side, section 110(d) bars the license's value from enhancing the assessed value of the real property. But section 110(e) expressly permits taxable property to be assessed and valued by assuming the presence of intangible assets or rights necessary to put the property to beneficial or productive use. The assessor may assume the license is there; the assessor may not tax its value.

Income approach: market rent, not the operator's profit

When the assignment is real property only, I capitalize market rent, not the operator's EBITDA. A high-performing tenant does not make the building worth more except to the extent the market will pay for the lease. For an owner-occupied restaurant I develop market rent from triple-net comparables and sanity-check it against occupancy cost as a percentage of sales.

Net-leased and sale-leaseback restaurants behave differently. There the contract rent may sit well above or below market, tenant credit and remaining term drive the capitalization rate, and the difference between leased fee value and fee simple value can be large. I state which interest I appraised, per Standards Rule 2-2(a), and report both when the intended use requires it.

Lender and SBA requirements

For federally related transactions, a commercial real estate transaction above the $500,000 threshold requires an appraisal prepared by a state certified appraiser: the exemption for commercial transactions of $500,000 or less sits at 12 CFR 34.43(a)(13) and the certified-appraiser mandate at 12 CFR 34.43(d)(2), with parallel FDIC and Federal Reserve rules. That figure is not inflation-indexed. It moves by rulemaking, and it was $250,000 until the 2018 interagency rule, so confirm the figure in the regulation before relying on it. The Interagency Appraisal and Evaluation Guidelines are supervisory guidance rather than regulation; they guide the lender's review of the report, they do not themselves impose the appraisal requirement.

SBA financing adds its own rules, and they do not track that federal threshold. Under SOP 50 10 8, effective June 1, 2025, every Standard 7(a) loan secured by commercial real property requires an appraisal by a state licensed or certified appraiser, USPAP-compliant and dated within twelve months of the application for guaranty. There is no dollar trigger on that requirement. Standard 7(a) means a 7(a) loan greater than $350,000 that is not a 7(a) Small, SBA Express, CAPLines or other separately named program loan, and the appraiser must be state certified rather than merely licensed once the commercial property's estimated value is over $1,000,000. For 7(a) Small and SBA Express loans the test is different: an appraisal is required where the parties have a close relationship or where SBA or the lender concludes one is necessary to evaluate creditworthiness, and otherwise the lender obtains an evaluation instead. On the 504 side an appraisal is required when the estimated value of the project property is greater than $500,000, and there too the appraiser must be state certified above $1,000,000. SBA revises this SOP from time to time, so check the edition in force on your deal.

On a change of ownership, the business valuation is a separate deliverable from the real estate appraisal, and the trigger is arithmetic. Where the amount being financed, counting 7(a), 504, seller, or other financing, minus the appraised value of the real estate and/or equipment being financed is $250,000 or less, the lender may perform its own valuation of the business, unless its internal policies say otherwise. Where that figure is greater than $250,000, or where buyer and seller have a close relationship such as existing owners or family members, the lender must obtain an independent business valuation from a Qualified Source. The SOP defines Qualified Source by accreditation: ASA, CBA, ABV, CVA, or BCA. An appraiser is one option among several, not the required one.

The Certified General requirement is narrow and conditional. It applies only where that same financing test is met and the business operates from a Special Purpose Property, which the SOP defines as a limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built. In that case the independent business valuation must be performed by a Certified General Real Property Appraiser who has completed no fewer than four going-concern appraisals of equivalent special use property within the last 36 months, identified in the qualifications portion of the report. That definition, and not any published list, is what the 7(a) question turns on. SBA does publish a list of limited or special purpose properties, but it belongs to the 504 chapter and drives borrower contribution percentages: it runs to amusement parks, bowling alleys, car washes, gas stations, hotels and motels, marinas, nursing homes, theaters and wineries, and it does not include restaurants. The list is expressly not all-inclusive and the CDC must address the question in its credit memorandum, so on a 504 project a single-use, heavily built-out restaurant property can still put the issue in play. Two further rules sit in the 504 appraisal chapter rather than the 7(a) one: where the appraisal engagement letter asks the appraiser for a business enterprise or going concern value, the appraiser must allocate separate values to the individual components of the transaction including land, building, equipment, and business (including intangible assets), and where the collateral is a special purpose property the appraiser must be experienced in the particular industry. The 7(a) parallel is narrower, requiring the business valuation to allocate separate values to land, building, equipment, and intangible assets.

Litigation, testimony, and getting started

I take litigation assignments and am available for deposition and expert witness testimony.

Tell me the intended use and the intended users at the outset. That is what determines the interest appraised, the scope of work, and whether the FF&E, the liquor license, and the goodwill sit inside the number or outside it, and it is the one thing that cannot be fixed after the report is issued.

Commercial line (619) 704-7070, kocommercialappraisal@gmail.com. My office is at 600 W Broadway, San Diego, CA 92101.

Common questions

Does a restaurant appraisal include the value of my business?
Only if you engage me for that and only if the report says so. A real-property-only appraisal values the land and improvements and excludes FF&E, the liquor license, and goodwill. A going-concern appraisal values the total assets of the business and allocates among real property, personal property, and intangibles. SBA treats these as two deliverables: the lender orders a real estate appraisal, and on a change of ownership it must separately obtain a business valuation from a Qualified Source once the financing test is met. A business valuation performed by a Certified General Real Property Appraiser is the narrower case, required where that financing test is met and the business operates from a special purpose property. The two approaches produce different numbers for the same restaurant, so the scope of work has to be fixed before the analysis starts.
Can you appraise a restaurant outside California?
My credential is issued by California: Certified General Real Estate Appraiser, certificate #3005065, issued by the California Bureau of Real Estate Appraisers and listed on the ASC National Registry. There is no national appraisal license. Title XI of FIRREA leaves appraiser certification and licensing to the states. For out-of-state property I will refer you to an appraiser certified in that state.
What documents does the analysis require?
Three years of profit and loss statements and tax returns, monthly sales, the lease and all amendments, an FF&E schedule with equipment ages, the liquor license type and what was paid for it, recent capital expenditures, a floor plan with seat count, the health permit, and any franchise agreement. For a purchase, the purchase agreement and any preliminary allocation. Not every assignment needs all of it, since a real-property-only scope needs far less than a going-concern scope, but the operating data is what separates a supported allocation from an assumed one.
Is my restaurant a special purpose property for SBA purposes?
On the 7(a) side the question turns on the SOP's definition itself: a limited-market property whose unique physical design, special construction materials, or layout restricts its utility to the use it was built for. SBA's published list of limited or special purpose properties sits in the 504 chapter, where it drives borrower contribution percentages, and restaurants do not appear on it. That list is expressly not all-inclusive, though, and SBA may determine that other properties meet the definition. On a 504 project the CDC has to address the question in its credit memorandum and explain its conclusion. A conventional in-line restaurant in a multi-tenant center is a hard case to make; a purpose-built freestanding building with heavy single-use improvements is a much closer call.
How long does it take?
Standard turnaround is one to three weeks, depending on complexity and how quickly the operating data arrives. If you are working toward a closing date, say so when you request the engagement so scheduling can be confirmed before you commit to it.
Who wrote this Kevin O'Brien, MAI, SRA. California Certified General Real Estate Appraiser #3005065, issued by the California Bureau of Real Estate Appraisers (BREA). Practicing in San Diego. This page reflects how these assignments are actually handled, not a summary of other people's summaries.
Where this applies Appraiser licensing is state-specific, there is no national appraisal licence, so appraisal engagements here are California properties, primarily San Diego County. The valuation methodology and the federal tax rules described above apply anywhere in the United States; if your property is in another state, you need an appraiser credentialed there, and this page should still tell you what to ask them for.

Sources

Every statutory and regulatory claim on this page traces to one of the following. Where a source could not be confirmed, the claim was removed rather than softened.

  1. USPAP (2024 Edition, effective January 1, 2024, Appraisal Standards Board), Standards Rule 1-2(e)(ii)-(iii): the appraiser must identify the real property interest to be valued and any personal property, trade fixtures, or intangible assets that are not real property but are included in the appraisal
  2. USPAP Standards Rule 1-4(g): when personal property, trade fixtures, or intangible assets are included in the appraisal, the appraiser must analyze the effect on value of such non-real property assets
  3. USPAP Standards Rule 2-2(a) (required content of a written appraisal report, including at (a)(v) the real property interest appraised and at (a)(viii) a summary of the scope of work used to develop the appraisal)
  4. IRC 1060 and Treas. Reg. 1.1060-1, requiring seller and purchaser each to allocate consideration under the residual method of Treas. Reg. 1.338-6; per IRS, both the seller and the purchaser of a group of assets making up a trade or business must file Form 8594
  5. IRC 1031 as amended by the Tax Cuts and Jobs Act of 2017: 26 U.S.C. 1031(a)(1) limits like-kind exchange treatment to real property
  6. California Revenue and Taxation Code section 110(d): the value of intangible assets and rights relating to the going concern value of a business using taxable property shall not enhance or be reflected in the value of the taxable property
  7. California Revenue and Taxation Code section 110(e): taxable property may be assessed and valued by assuming the presence of intangible assets or rights necessary to put the taxable property to beneficial or productive use
  8. California Business and Professions Code section 24070: each alcoholic beverage license is separate and distinct and transferable upon department approval, from licensee to licensee and premises to premises
  9. California Business and Professions Code section 24074: transfers for consideration require an escrow with a person not a party to the transfer, with the full purchase price deposited by the transferee before the transfer application is filed
  10. California Business and Professions Code section 23816: onsale general licenses are limited to one premises per 2,000 inhabitants, or fraction thereof, of the county
  11. California Health and Safety Code sections 113700 et seq. (California Retail Food Code); section 114380(a): plans and specifications must be submitted to the enforcement agency and approved before new construction or remodeling of a retail food facility
  12. 12 CFR 34.43(a)(13) (OCC): no appraisal required where a commercial real estate transaction has a transaction value of $500,000 or less; 12 CFR 34.43(d)(2): commercial real estate transactions of more than $500,000 require an appraisal prepared by a State certified appraiser (parallel rules at 12 CFR 323.3 (FDIC) and 12 CFR 225.63 (FRB)); threshold raised from $250,000 by the interagency final rule at 83 FR 15019, 15035 (Apr. 9, 2018)
  13. Interagency Appraisal and Evaluation Guidelines, 75 Fed. Reg. 77450 (Dec. 10, 2010), published as a Notice: supervisory guidance, not regulation, addressing lender review of appraisals and evaluations
  14. SBA SOP 50 10 8 (effective June 1, 2025): for all Standard 7(a) loans secured by commercial real property, Lenders must obtain an appraisal by a State licensed or certified appraiser, USPAP-compliant and dated within 12 months of the application for guaranty, with no dollar threshold; the appraiser must be State certified when the commercial property's estimated value is over $1,000,000. For 7(a) Small and SBA Express loans an appraisal is required where the parties have a close relationship or SBA or the Lender concludes one is necessary to evaluate creditworthiness, and otherwise an evaluation is obtained. Appendix 3 defines Standard 7(a) Loans as 7(a) loans greater than $350,000, excluding 7(a) Small, SBA Express, Export Express, CAPLines, EWCP, International Trade and Pilot Program loans. 504: appraisal required where the estimated value of the Project Property is greater than $500,000, State certified appraiser required above $1,000,000
  15. SBA SOP 50 10 8: where the amount financed (7(a), 504, seller, or other) minus the appraised value of real estate and/or equipment being financed exceeds $250,000, or the buyer and seller have a close relationship, the Lender must obtain an independent business valuation from a Qualified Source, defined in Appendix 3 by accreditation (ASA, CBA, ABV, CVA, or BCA); where the business also operates from a Special Purpose Property that valuation must be performed by a Certified General Real Property Appraiser who has completed no less than four going concern appraisals of equivalent special use property within the last 36 months, as identified in the qualifications portion of the Appraisal Report. The 7(a) chapter requires the business valuation to allocate separate values to land, building, equipment, and intangible assets
  16. SBA SOP 50 10 8, 504 chapter: where the appraisal engagement letter asks the appraiser for a business enterprise or going concern value, the appraiser must allocate separate values to land, building, equipment, and business (including intangible assets), and where the collateral is a Special Purpose Property the appraiser must be experienced in the particular industry; the 504 Limited or Special Purpose Property list, which governs Borrower contribution percentages and is expressly not all-inclusive, does not include restaurants, and CDCs must address whether the Project Property is Limited or Special Purpose in their credit memorandum
  17. Title XI of FIRREA, 12 U.S.C. 3331 et seq. (State appraiser certification and licensing; Appraisal Subcommittee National Registry)
  18. California Business and Professions Code sections 11300 et seq. (Real Estate Appraisers' Licensing and Certification Law); California Bureau of Real Estate Appraisers, which issues the Certified General Real Estate Appraiser certificate

Related reading

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