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Applying going-concern value to landfills.

Going-concern value is the value of an entire business operation. It is the value of the whole, or conceptually, the entire pie. There is general agreement among professionals regarding the definition of going-concern value. For example, The Appraisal of Real Estate defines going-concern value as:

[T]he value of a proven property operation. It includes the incremental value associated with the business concern, which is distinct from the value of the real estate. Going-concern value includes an intangible enhancement of the value of an operating business enterprise, which is produced by the assemblage of the land, buildings, labor, equipment, and the marketing operation.(1)

Distinct from the real estate appraisal profession are professionals who value businesses and may be members of the Appraisal Society of America (ASA). In a book written by one of ASA's scholars, going-concern value is defined as:

The most probable market value, expressed in terms of money, available in the open market for a proven business enterprise that has established patronage, exclusivity or uniqueness, which results in demonstrated earnings or profitability. It incorporates the value of the real estate, machinery and equipment, working capital and all other assets that are in place, operating within and are a part of an established business. Included is the excess of value over cost that arises as a result of earnings capability in a complete and well-coordinated operation.(2)

Basically, the Appraisal Institute and the ASA are in agreement in regard to the definition of going-concern value, which can have two components. The first is real estate (a tangible asset), and the second is business value (an intangible asset). Therefore, for most businesses, the entire pie (going concern value) consists of two components [ILLUSTRATION FOR FIGURE 1 OMITTED]: the value of real estate (REV) and the value of the business enterprise (BV). Intangibles are not a part of the real estate and can be transferred from one site to another.(3)

The Uniform Standards of Professional Appraisal Practice states that:

The appraiser must identify and consider the effect on value of any personal property, trade fixtures or intangible items that are not real property but are included in the appraisal.(4)

This statement clearly indicates that the value of a business (going concern) is made up of various components that comprise tangibles (real estate) and intangibles (business value). In addition, professional appraisal practice guidelines clearly indicate that intangible items must be considered and valued separately from the real estate.


Businesses operating on, or within, space provided by real property can be either location dependent or location independent. Businesses that are locationally dependent have value components that are often confused and inappropriately placed with the real estate rather than with the intangible or business value component.

A locationally independent business, such as a law office, is not tied to the real estate. The business can be located anywhere within certain legal constraints, such as zoning. When an appraiser values the real estate (that is, the office building that provides space to the law firm), there is no relationship between the business enterprise (the law firm) and the real estate business. The office rent paid by the law firm is not a function of its gross business volume.

For a locationally dependent firm, the business enterprise is significantly, or completely, tied to the real estate. Because of the uniqueness of this type of business, it cannot relocate without affecting the property value. Real estate value and business value are intertwined. A common example is a shopping center. Shopping centers are "anchored" by major tenants, such as department stores, and in-line shops are highly dependent on them. If the shopping center is well managed, it will establish a trade area franchise, which allows the tenants and the shopping center landlord to establish unique income flows. These income flows have a real estate and business value component.(5)

A second example of a locationally dependent business is a municipal solid waste operation at a landfill, possibly an old quarry. A permit ties the landfill operation to a specific location. The landfill business's two components are the real estate, on which refuse is stored, and the permit, which gives the owner the right to store refuse in that space. The space for storing refuse is fungible (i.e., refuse can be stored in other vacant quarries in the neighborhood, or above the ground, as is done in many municipalities). But to store the refuse, one needs a permit, which makes the storage of municipal solid waste locationally specific. Therefore, in the case of municipal solid waste storage, the going-concern value consists of the real estate, the permit, and other intangibles.

Before 1993, investors and business establishments pressured the government to rewrite the depreciation schedules for intangible assets. Businesses prefer to have assets depreciated over a very short time frame, but the policy of the U.S. Internal Revenue Service required a longer time frame, or no depreciation. The result was the ratification of the Omnibus Reconciliation Act of 1993 and the inclusion of Section 197 in the Internal Revenue Service code. This section defines several classes of intangible assets, one of those being licenses, permits, or rights granted by the government.(6) Therefore, from a legal and accounting perspective, there is and has been a difference in how permits are treated in comparison to real estate.


Landfills frequently accommodate numerous categories of waste, such as municipal solid waste (garbage) and inert solid waste (clean soil, but also including such things as tires and asbestos). The following case study on a landfill business hypothesizes that:

1. There is no difference between the operating characteristics of a landfill and other real estate. If this is true, landfills would have no intangible value or could be classified as real estate.

2. There is no difference in the value of landfill real estate and other locationally dependent real estate. Landfill real estate and other locationally dependent real estate are scarce commodities and therefore have relatively high and similar values.

Operating Characteristics

If the income from a landfill operation is treated as income to the real estate, then one would expect to find the business operation of a landfill to be similar to the business operation of a real estate company. Seven of the largest publicly traded municipal solid waste (landfill) companies and 10% of the largest real estate investment trusts (REITs) in the United States were selected. Publicly traded companies were chosen because of the availability of their financial information and the standard accounting practices they use in reporting information to the public. Published financial information, principally in the form of "10-Qs" was obtained on these companies (in all cases but two) for the June 30, 1996, reporting period. The financial data on each company is shown in table 1.

This table disaggregates the total reported assets of these companies into four categories: current assets, fixed assets (real estate), intangibles, and other. In addition, net sales are reported. Table 1 shows that there are clear differences between the two kinds of companies. A significantly higher proportion of a real estate company's assets is real estate (90%) compared with that of waste companies (64%). In addition, a significantly small percentage (2%) of a real estate company's assets is reported as intangibles or other (the category for permits, franchises, etc.). For waste companies, approximately 22% of assets fall into the intangible and other categories.

It is also interesting to note that these two kinds of companies have different - but not significantly different - returns on assets. Real estate companies' assets are somewhat higher at 3.1% than waste companies' assets at 2.8%.

These results show that the financial characteristics of real estate companies and landfill (solid waste) companies are significantly different. The principal difference is that real estate companies have nearly all their assets in real estate, whereas landfill companies have a much smaller percentage of their assets in real estate and a much higher percentage in intangibles, such as permits. This difference would suggest that the revenue generated by a waste company is a return on several categories of assets, both tangible and intangible. Therefore, in valuing the real estate part of a waste company, it would be necessary to separate the income and expenses attributable to the real estate and attributable to the business value.



In determining locational dependence, the appraiser must consider the nature of the waste business in northeast Los Angeles County in terms of the two unique aspects of going-concern value: the value of the real estate and the value of the business enterprise. The focus of the analysis is on distinguishing the economic character of the real estate and the intangibles, principally the permit, from a locational standpoint.

A landfill operation consists of (1) space to store waste and inert materials, (2) contracts to collect the waste, (3) equipment and material to pick up the waste, transport, and store it at the landfill, (4) management to run the operation and (5) various permits. These functions comprise the going-concern value.

The value of the real estate is related to its utility and scarcity (i.e., if real estate has utility, it will have value, and the amount of that value depends on the scarcity of the real estate).(7)


Space to store waste, among other things, in northeast Los Angeles County is readily available. Therefore, because the utility of this space is not scarce, the value for the space is relatively low. For example, land available for open storage rents at approximately 40 cents per square foot and yields a value of approximately $3 per square foot. In contrast, good corner locations for such locationally dependent businesses as fast-food restaurants and banks are in short supply and are valued between $15-$30 per square foot.

Approximately 12.32 million tons of Class III waste and inert material for the entire Los Angeles County are stored in various waste disposal facilities in the area each year.(8)

Ten quarries in northeast Los Angeles extract more than 7.8 million tons of aggregate per year.(9) If all the waste generated by Los Angeles County were to be deposited into these quarries, there would be a scarcity. Remember that the waste is collected from the entire Los Angeles County and the 10 quarries are clustered in northeast Los Angeles County.

The 10 quarries currently have approximately 456.5 million cubic yards of space available for the storage of material, assuming that only 50% of the quarry space is available, and the quarries would be filled only to their original surface level. This is equivalent to a capacity of 593.5 million tons, which is equivalent to 48 years' worth of storage space at current disposal rates (12.3 million tons per year). This amount does not take into consideration the space being added to quarries because of extraction operations, which exceed 7.8 million tons of waste per year.

This analysis indicates that space to store waste is not scarce, and consequently would have little value. In fact, storage space generally has minimal value (approximately $3 per square foot) unless something unique happens to that space. A permit for a unique land use, such as a casino or a landfill, would provide new and added utility to that space when the permit is issued. The scarcity and therefore the value of the space (real estate) would increase. If only a few permits are issued for that location, the space would become even more valuable. Likewise, as the number of permits issued increases, the value of that space would decrease.

In conclusion, the space to store waste is not scarce and consequently has little value. The permit gives significant value to the going concern, as it could increase value at any of the 10 quarries. The permits provide the quarries with locational dependence.

A recent court case in Los Angeles County involving a Class III municipal solid waste permit further illustrates the economic and financial aspects of the value of the real estate versus the value of the permit. The waste company's permit was recently revoked because, according to the court, there had been inadequate environmental documentation before the permit was issued.(10) The loss of the permit will significantly affect the cash flow and therefore the going-concern value of the business. Cash flow from operations will dramatically decrease, as will the value of the going concern [ILLUSTRATION FOR FIGURE 2 OMITTED].

The real estate has not changed; it has the same topographical features, quantity of storage area, access, traffic patterns, and visibility as before the revocation of the permit. Because no physical properties influencing the value of the real estate have changed, the value for the real estate as storage remains unchanged. But the intangible value has changed. The right granted by the permit to bring waste onto the site for storage purposes has been extinguished, along with the flow of income associated with that right, affecting the value of the real estate vis-a-vis the going concern [ILLUSTRATION FOR FIGURE 3 OMITTED].


The study shows that the operating characteristics of REITs and landfills are very different and that there is probably a business value component to the going-concern value of a landfill.

Second, the values of locationally dependent real estate and landfill space without a permit are very different. The test showed that landfill space was in great supply, was locationally independent, and had a low relative value compared with locationally dependent real estate.

From an economic perspective, space (real estate) to store waste - be it automobile bodies or refuse - is a relatively fungible and easily available product in northeast Los Angeles County. But while this type of space does have utility, it is in great supply, and therefore has minimal value, especially compared with other forms of real estate. On the other hand, because permits to store waste in Los Angeles County are relatively scarce, the business component of the going concern is valuable.

1. Appraisal Institute, The Appraisal of Real Estate, 11th ed. (Chicago, Illinois: Appraisal Institute, 1996), 26.

2. Lloyd R. Manning, Valuing the Small Business (Scottsdale, Arizona: Todd Publishing, Inc., 1993), 6-7.

3. James D. Brown, "Going-Concern Value in the Congregate Care Industry and R41C," The Appraisal Journal (April 1987): 287; Joseph Rabianski, "Going-Concern Value, Market Value, and Intangible Value," The Appraisal Journal (April 1996): 184.

4. The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (Washington, D.C.: The Appraisal Foundation, 1998), 12.

5. Jeffrey Fisher and William Kinnard, "The Business Enterprise Value: Component of Operating Properties," Journal of Property Tax Management, v. 2, no. 1 (1990): 19-27; Jeffrey Fisher and George Lenz, "Business Enterprise Value in Shopping Malls: An Empirical Test," Journal of Real Estate Research, v. 5, no. 1 (Spring 1990): 167-175; and Jeffrey Fisher and Robert S. Martin, Income Property Valuation (Chicago, Illinois: Real Estate Education Company, 1994), 4-5, 26, 37-39.

6. Gordon V. Smith and Russell L. Parr, Valuation of Intellectual Property and Intangible Assets, 2nd ed. (New York, New York: John Wylie & Sons, Inc., 1994), 64.

7. Jerry Z. Mueller, Adam Smith In His Time and Ours: Designing the Decent Society (Princeton, New Jersey: Princeton University Press, 1993), 74; Paul A. Samuelson and William D. Nordhaus, Economics, 15th ed. (Princeton, New Jersey: McGraw Hill, 1995), 82.

8. Los Angeles County Department of Public Works, Los Angeles County, Countrywide Sitting Element, preliminary draft, (Los Angeles, California: Los Angeles County Department of Public Works, Environmental Programs Division, January 1996), 7.

9. Reclamation Plans filed with appropriate jurisdictional authority (i.e., City of Irwindale, City of Arcadia, City of Upland, City of Azusa, etc.) in conformance with California's Surface Mining and Reclamation Act of 1975.

10. Main San Gabriel Basin Water Master v. State Water Resources Control Board, 12 Cal. App. 4th 1371 (1993).

Bill Mundy, MAI, PhD, is president of Mundy & Associates, Seattle, Washington. He specializes in the valuation of conservation, preservation, and contaminated properties, and has published numerous articles in various professional and academic journals.
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Author:Mundy, Bill
Publication:Appraisal Journal
Date:Apr 1, 1998
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