A hotel is sold as an operating business, including its real estate, furniture and equipment, staff and brand-related intangibles. The total value of this operating enterprise is called:
Correct Answer
D) Going-concern value
Going-concern value is generally the total value of an operating business enterprise, including real property, tangible personal property, labor, marketing operation and intangible assets. The real property is only one component of it.
Why This Is the Correct Answer
Option D is correct because going-concern value is generally the total value of an operating business enterprise. It includes the real property, tangible personal property such as furniture and equipment, labor, the marketing operation, and intangible assets. A hotel sold as an operating business fits this definition.
Why the Other Options Are Wrong
Option A: Insurable value
Option A, insurable value, is wrong because insurable value concerns the amount of insurance coverage for the insurable components of a property. It does not measure the whole operating business, including staff and brand intangibles.
Option B: Liquidation value
Option B, liquidation value, is wrong because liquidation value reflects a sale under compelled, short-time conditions. The hotel here is sold as an operating business, which is the opposite of a liquidation.
Option C: Real property value
Option C, real property value, is wrong because it covers only the land and building. The sale includes furniture and equipment, staff and brand-related intangibles, and the value of the whole operating enterprise is going-concern value.
Going concern is the whole
A going concern is the whole running business: building, equipment, staff, operations and brand together.
How to use: Use this when a question describes a property sold as an operating business with all its parts.
Exam Tip
If the sale includes real estate plus personal property, labor and intangibles of an operating business, the total is going-concern value.
Common Mistakes to Avoid
- -Treating a hotel's going-concern value as real property value only
- -Confusing going-concern value with liquidation value
- -Forgetting to separate personal property and intangibles when required
Concept Deep Dive
Analysis
This question tests the definition of going-concern value. When an operating business like a hotel is sold with its real estate, furniture and equipment, staff and intangibles, the total value of that enterprise is its going-concern value. The real property is only one component of it.
Background Knowledge
Properties like hotels, restaurants and nursing homes are often sold as operating businesses. Their going-concern value combines real property, personal property and intangible business value. Appraisers may need to separate these components, since lenders and tax authorities often require the real property value alone.
Real-World Application
A lender asks an appraiser to value a branded hotel being sold as an operating business. The appraiser estimates the going-concern value, then allocates it among the real property, furniture and equipment, and business intangibles so the lender can identify the real estate portion.
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Neighborhood closed sales and their list prices: Sale 1 sold for $485,000 (listed $500,000); Sale 2 sold for $441,000 (listed $450,000); Sale 3 sold for $456,000 (listed $480,000); Sale 4 sold for $408,000 (listed $425,000). What mean sale-to-list ratio is indicated (sale price ÷ list price for each sale, then average)? Use the indicated individual-ratio arithmetic mean, not the ratio of price totals.
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A house sold for $350,000 and resold 12 months later for $392,000. Between the sales, the owner added a bathroom that cost $20,000; market evidence shows it contributes $14,000 to value. No other changes occurred. Based on the first sale price, what annual market-conditions change does this resale pair indicate?