VALUATION Viewpoint Fall/Winter 2020 Vol 25 No 3 The Complexity of Valuing Greenhouses by Henry Walter The experience of driving through the fall countryside and seeing farmers tractors harvesting crops may soon be replaced with visions of large industrial buildings packed with fully autonomous watering, air circulation, and advanced lighting systems. Global food and technology changes have accelerated this movement, which presents unique real estate valuation challenges for appraisers. According to the Food and Agriculture Organization of the United Nation (FAO), border closures, nationwide quarantines, and supply chain strains from the 2020 Global Pandemic have limited communities’ access to food. Additionally, the growing global population is predicted to reach 9.1 billion people by 2050, which the FAO predicts will necessitate an increase in food attention, entrepreneurs and investors are experimenting with ways to maximize yields while decreasing their footprint. production of 70% globally. With supply chain disruptions, Conventional farming uses manpower, heavy machinery, food access, and the growing global population gaining and farm animals to till the soil in large agricultural fields. National Market Trends & Value Indicators Over time, this process degrades soil, depriving it of vital nutrients and minerals required to maintain high plant Value D Over Past 12 Mo. yields. Technological advancements in farming can improve -8% this process and produce higher yields, as demonstrated Mall -28% by agricultural output in the Netherlands. A nation that is Strip Retail -14% approximately the size of Connecticut, the Netherlands is the High Qual. Institut’l Grade Office Industrial 10% Apartment -5% Health Care -6% Lodging -25% Manufactured Home Park 8% Self-Storage -5% Student Housing -11% YoY Change New Housing Starts – Q3 Midwest* Productivity** U.S. Unemployment*** Consumer Confidence Index**** second largest agricultural exporter, by value, in the world thanks to the use of high-tech greenhouses. In addition to producing higher yields, high-tech greenhouses are more environmental-friendly compared to conventional farming since they use a fraction of the water, fertilizers, and land. These facilities also benefit from lower labor and transportation costs because they can locate closer to metropolitan areas. 26.8% 4.1% 92% -19.60% Real Estate Indicators from Green Street Advisors CPPI Report, *Source: St. Louis FRED, ** 3Q 2019/3Q 2020 – Source: Bureau of LaborStatistics, *** Oct 2019/Oct 2020 – Source: Bureau of Labor Statistics, **** Nov 2019/Nov 2020 – Source: The Conference Board continued on page 4 More in this Issue:  COVID-19 and Currency Circulation…..2 Real Estate Transaction…………………..6 Business Transaction………………………7 2 Valuation Viewpoint COVID-19 and Currency Circulation by Emma Niemela Across the United States, businesses are displaying signs information on consumer payment choices in their stating, “no cash”, “credit or debit only”, or “exact change supplemental Diary of Consumer Payment Choice (Diary) only”. These signs appeared in July, seemingly connected which was published in July of 2020, including data from to COVID-19. Concerned about whether cash is becoming April and May of 2020. This supplementary Diary was extinct, I investigated why these signs are appearing and created to examine consumer habits during COVID-19 what it means for the future of coins and cash in America. because of the increased demand for currency and claims At a high-level, this issue is rooted in the national that consumer payment habits were dramatically changing. reaction to COVID-19. Ever since March, people have The July 2020 Diary asked participants about their cash changed their habits, making efforts to stay isolated, holdings, changes in payment behavior, and cash avoidance. doing more shopping online, and using touchless The Diary data supports four main conclusions: many payment methods. As a result of these actions, coin people did not make in-person payments, most people are circulation in the United States has dramatically declined. not avoiding cash, people are holding more cash, and online To clarify, there is not a shortage of currency in the payment behavior does not appear substantially different. United States. There is actually currently more currency The participants answered questions between April 15, in circulation than in recent years. This is illustrated 2020 and May 12, 2020. During this time period, 63% of in the following chart from the Federal Reserve Bank participants reported they had not made any in-person of San Francisco. The chart below documents the payments since March 10, 2020. The fact that a majority accelerated increase in currency issued by the Fed of participants went a month, or perhaps two without beginning in March of 2020, compared to the annual making a single in-person payment shows the dramatic increase in currency circulation from 2017 through 2019. effect of initial social distancing efforts. However, it is noteworthy that only 28% of the total participants stated they were avoiding cash, a much smaller number than the 63% which had not made in-person payments. On average, participants carried $81 in cash, an increase from $69 in 2019. The average amount of cash stored elsewhere also rose to $483, compared to $257 in 2019. This tendency to hold onto cash has contributed to the fewer coins in circulation. The Image: Federal Reserve Bank of San Francisco It is important to note the above chart includes both cash and coins. Looking specifically at coins, the U.S. Mint has increased coin production from the 2019 average of 1 billion coins per month to about 1.6 billion coins in June and expects to produce about 1.65 billion coins monthly through the year end. The Federal Reserve Bank of San Francisco also provided impact of business re- opening is not captured well by this data set. A majority of states began to re-open throughout May, whereas the last Diary participants responded on May 12. This limits the data’s use in predicting future habits, as the majority of businesses were closed during the study period. Some businesses have struggled to react to the coin shortage, especially if their customers tend to make smallvalue payments. The 2019 Diary of Consumer Payment Valuation Viewpoint 3 COVID-19 and Currency Circulation continued from page 2 Choice found cash represented 49% of payments under $10 circulation. in October of 2019. Chipotle is one business falling into this the category and facing a potential class action lawsuit as a result. Community Plaintiffs in Pennsylvania accuse Chipotle employees of repeatedly shortchanging customers; for example, one customer paid with a $20 bill and received $4 in change instead of $4.49. The plaintiffs ask the Court to stop Chipotle from refusing to provide cash-paying customers with correct change, require Chipotle give cash-paying customers a credit toward future purchases if they lack correct change, stop Chipotle from charging consumers more for not The American taskforce Bankers Bankers includes members Association, of America, of Independent Credit Union Associations, Department of the Treasury (U.S. Mint), Armored Carriers Industry, Food Marketing Institute, Coin Aggregator Industry, and the Federal Reserve System. This taskforce is collaborating to strategically allocate coin inventories by simplifying the process consumers use to deposit loose change, discouraging stockpiling by individual institutions, and working with the Mint to determine necessary coin supply levels. using a credit card, and to award any other relief deemed appropriate. These accusations highlight the struggles some companies have faced while responding to the lack of coins. It appears the shortchanging may have been a store-specific issue and result of miscommunication among employees. Chipotle‘s Chief Corporate Affairs and Food Safety Officer, Laurie Schalow responded to Delish, a website focusing on food news and recipes, with the following statement: “Chipotle’s policy is to give customers the exact change they are owed when making a cash purchase in our restaurants. If a restaurant is low on change as a result of the nationwide coin shortage, our policy is to only accept exact change or other noncash forms of payment. Restaurants that are impacted have signage posted on the door as well as inside, and employees have been instructed to alert guests prior to ordering. We encourage customers to contact us immediately with any concerns so we can investigate and respond quickly to make things right.” Given that coins will take some time to get back to normal circulation, it is important that businesses have a plan in place to deal with the present situation. Many companies have created plans similar to Chipotle, though there are also stories of business owners who needed coins and drove many miles to get them or organized a community coin drive. The U.S Coin Taskforce was created to make recommendations to resolve the issue of low coin Image: US Coin Taskforce It does not appear that coins and cash are about to become extinct, simply that they, like all of us, have been affected by COVID-19. at maximum production, The U.S. Mint is running and many stakeholders are working together to return coin circulation to normal. The most impactful recommendation from the U.S Coin Taskforce is for consumers to bring in change to trade for cash. It will take time, but currency circulation is expected to return to normal. 4 Valuation Viewpoint The Complexity of Valuing Greenhouses continued from page 1 High-tech greenhouses are a newer form of real estate, which The sales comparison approach uses the presents challenges for valuing these assets. The advanced principle of substitution to determine how much design and technology featured in these specialized properties a buyer would pay for a comparable property. require a detailed and diligent analysis in order to provide a reliable and well-supported opinion of value. The appraiser must develop a thorough understanding of how these special-use buildings function in order to understand the value potential. Oncetheappraiserhasidentifiedandfullyresearchedthevarietyof features present in a greenhouse being appraised, he or she must then consider these unique property features when applying all applicable approaches to value. Real estate appraisers may employ three approaches to value: the cost approach, the sales comparison approach, and the income capitalization approach. • The income a buyer should pay for real estate based on the cost of building an equivalent building. The costs include acquisition of land and total construction costs, less economic depreciation. Valuing high-tech greenhouses requires more due diligence from the appraiser for several reasons: the income capitalization and sales comparison approaches lack sufficient reliable market data. This is due to the fact that many facilities are owneroperated, and typically, the owner is leasing the real estate back to a related company. Rental rates in these situations do not reflect market rents, so rents must be adjusted to reflect the value of a property by analyzing its income the appropriate market rates. However, without reliable streams market data, it is challenging to accurately adjust rents. The its potential approach The cost approach is a valuation method estimating the price estimates and/or capitalization to produce income. application of the income capitalization approach depends What does an automated greenhouse look like? Greenhouses are encased by double polymer sheeting or laid with acrylic glass that allows for maximum light penetration to the plants. The double polymer sheeting is a lower end feature that is cost conservative but requires a higher level of maintenance and more rapid replacement compared to acrylic glass which is sold at a premium price, but does not require the same level of maintenance and has a longer useful life. Typically, at the base of either the polymer or glass structure lies concrete flooring, sometimes with elaborate plumbing systems below for flood floors. There are several autonomous systems that enable the farmer to produce high-quality products. Hydroponic systems utilize water as the soilless medium, in which plants float on the surface while the root systems absorb nutrients, as needed. Automated drip irrigation feeds each plant through a series of tubes after sensors calculate the necessary amounts and distribute it to the root system. Facilities equipped with state-of-the art HVAC systems can utilize evaporative cooling, where water acts as the coolant to hot dry air and releases cool humid air that feeds the plant. These systems are best fitted for desert-like climates. Smaller scale greenhouses may install mist irrigation, a system that releases a fine mist that cools the hot air trapped at the top. Flood floors are a cost-effective alternative, that rely on plumbing below the concrete that quite literally floods the floor to deliver water and nutrients to the plants and then drains the excess after a designated period. Valuation Viewpoint 5 The Complexity of Valuing Greenhouses continued from page 4 on if data sufficient to support this approach is available. An appraiser may elect to apply a sales approach, but like other approaches to value, he or she may be limited by the availability of data. Shenehon tracks the sale of specialized real estate assets such as high-tech greenhouses. For example, we have been tracking several Real Estate Investment Trusts (REITs) that are actively acquiring mechanized medical marijuana greenhouses through sale-leaseback arrangements. REITs are interested in these medical marijuana greenhouses because the supply of these property types is limited, and there is a growing demand for their use. Medical marijuana is legal in only 33 states, all of which require several permits million with $22.2 million in tenant improvements to operate and may have state mandated limits to how in Massachusetts. These sales provide useful data many greenhouses can grow this plant. The sale-leaseback for program allows medical marijuana companies to reinvest the proceeds of the sale into their operations since obtaining financing is often tricky for such companies as their product is federally prohibited from utilizing traditional financing sources. determining value using the sales approach. The cost approach is one of the more accurate ways to value the greenhouse due to highly specialized buildouts, but only if records of construction costs were kept. If the sworn construction statement is available, a thorough In 2020, Industrial Innovative Properties, Inc. (IIPR) acquired analysis of the building’s physical depreciation, as well as several medical cannabis greenhouses, with the intention estimating the functional and economic obsolescence of improving and expanding capabilities and capacity present in the property, must be completed. In cases of improvements. where construction statements are unavailable, estimating According to IIPR’s sale-leaseback program, they aim for: the building construction costs can vary widely, resulting each facility through their tenant Deals in the $5 million to $30+ million range. Lease terms for 10 to 20 years on a triple net lease. Initial base rent that is 10% to 16% of the total investment. Rental rate annual escalations of 3% to 5%. in significant differences in opinions of value. The plant intended to be grown in the greenhouse also has a major impact on the cost to build the structure. For example, Bayer CropScience built a 300,000 square foot automated greenhouse in Marana, Arizona for their corn-genetics Their acquisitions ranged from $5.5 million with $29.5 research for $100 million compared to Bright Farm’s million in tenant improvements in New Jersey to $26.8 280,000 square foot specialized greenhouse in Sellingrove, Pennsylvania designed to grow lettuce, which was built for $20 million. Different light cycles, temperatures, and carbon dioxide levels of plants require varying degrees of automation and sophistication in the buildouts. From rural farm to city center, acrylic to polycarbonate, hydroponic to flood floors, and tomatoes to marijuana, no one high-tech greenhouse is the built the same. The limited market data and the difference in tenant improvements, purchase price, and construction costs highlight the complexity of evaluating such a unique asset. Understanding that complexity and valuing unique properties is one of things Shenehon does well. 6 Valuation Viewpoint Market Transaction Real Estate Buyer: Seller: Property: PID: Sale Price: Website: CBRE Glober Investors Ltd dba CPUS Millwright, LP Artis Real Estate Investment Trust and Ryan Companies US, Inc. dba Artis/Ryan Millwright, LP Millwright Building, 533 S 3rd Street, Minneapolis, MN 23-029-24-34-0718 $51,200,000 millwrightmpls.com Sale of the Millwright Building In September, the Millwright Building, a multi-tenant office Park, Gold Medal Park, and the iconic Stone Arch Bridge. building located in the Downtown East neighborhood, sold Over the past few years, this neighborhood has undergone for $51,200,000, or $295.14 per square foot. CBRE Global a transformation from the significant capital investment that Investors Ltd through CPUS Millwright, LP purchased the surrounded the construction of U.S. Bank Stadium and the Millwright Building from Artis/Ryan Millwright, LP, acting for redevelopment of the former Star Tribune offices into a new the Artis Real Estate Investment Trust and Ryan Companies corporate campus for Wells Fargo. US, Inc. The three-year-old building sits on 1.00 acre of land and contains 173,476 square feet of Class A office space. At the time of sale, the building was 97% leased, as reported by the buyer. Tenants include Ryan Companies, one of the prior owners and the developer and builder of the Millwright Building, who has headquartered from the space since its completion in 2017. Other tenants in the building include Provation and Rally Health. This transaction was the first significant sale in the downtown area since the onset of the COVID-19 pandemic, and it is the only marquee downtown office sale since then that has closed. The sale also garnered attention for bringing such a high price in its submarket for a couple reasons. The property sold with a mix of local business tenants who, while reputable, do not have institutional credit, and sales of this type and at this price have historically been relegated to the Central Located at 533 South Third Street on the eastern side of Business District or North Loop neighborhoods. A high value downtown Minneapolis, the Millwright Building is blocks sale in the Downtown East/East Town neighborhood bodes from U.S. Bank Stadium, the Mississippi River, Mill Ruins well for future developments in the area. Millwright Building Source: Costar Valuation Viewpoint 7 Market Transaction Business by Jim Clancy, Managing Director, Hennepin Partners Substantial Economic Rebound Following Initial Halt Due to COVID At the beginning of the 2020 global pandemic , economic ac ti v it y s t ate loc al and slowed quarantine signif ic antl y, order s were as put in place and travel was suspended. Initiall y, unemploy ment rates sk y rocketed and the s tock mar ket plummeted. Since then, equit y mar ket s have rebounded pas t pre – COV ID levels – – w hile unemploy ment rates have improved to 7.9 % , dow n f rom 14 .7% at the height of COV ID 1 but s till much comfor t able w ith conduc ting diligence meeting s and even facilities v isit s v ir tuall y. Across day- to day business , we all k now that v ideo – conferencing plat for ms have become the “new nor mal ”, and it is no dif ferent in the deal wor ld. Despite the uncer t aint y COV ID has presented to the wor ld, the US M& A mar ket has proven ex tremel y resilient – and continues to be at trac ti ve to inves tor s. 1US Bureau of Labor Statistics US Aggregate Deal Value ($ in billions) higher than the 3. 5% pre – COV ID level. Now that we have nav igated our third quar ter of li v ing w ith Aggregate transaction value is up over 780% since April 2020 this pandemic , the US is beginning to adapt to it s “new nor mal,” and economic ac ti v it y has picked $120.9 up signif ic antl y in many indus tr ies. $117.8 $84.1 W hile COV ID cur t ailed M& A ac ti v it y deepl y in $59.3 A pr il – June 2020 across mos t indus tr ies , ac ti v it y the char t below, ag gregate US M& A trans ac tion Feb-20 Mar-20 Apr-20 May-20 Jun-20 value in Augus t was $170 billion, representing a F ebr uar y 2020. W ith the resurgence in deal $24.2 $19.3 has roared back since May 2020. A s show n in 4 0 % increase in ag gregate value v s. pre – COV ID $169.8 Jul-20 Aug-20 Source: FactSet Research ac ti v it y, the r ules of engagement bet ween bu yer s HP Transaction Spotlight and seller s has needed to adapt , including get ting In a recently closed transaction, Hennepin Par tners ser ved as the sell-side advisor to S&P 500 Index Bedford Technolog y, a por tfolio company of ($) Hillcrest Capital Par tners, on Bedford’s sale to S&P 500 index has now surpassed pre-COVID levels Tangent Technologies, a por tfolio company of the Sterling Group. Bedford Technolog y conver ts rec ycled plastics into various t ypes of plastic lumber, including furniture grade, standard plastic, and structural plastic. The buyer, Tangent Technologies, did not have standard plastic capabilities but was the clear market leader in the manufacture of furniture-grade plastic lumber. Feb-20 Mar-20 Source: Yahoo Finance Apr-20 May-20 Jun-20 Jul-20 Aug-20 Bedford’s additional capabilities in standard plastic made it ver y attractive to Tangent who ultimately prevailed in the sale process. Hennepin Partners LLC is a boutique investment bank that provides M&A advisory services and strategic advice to entrepreneurs, private equity firms, and corporations. Member FINRA/SIPC. For more information, visit www.hennepinpartners.com 88 South Tenth Street, Suite 400 Minneapolis, Minnesota 55403 612.333.6533 Fax: 612.344.1635 www.shenehon.com RETURN SERVICE REQUESTED VALUATION VIEWPOINT NEWSLETTER INSIDE SHENEHON COMPANY IS A REAL ESTATE AND BUSINESS VALUATION FIRM, serving both the private and public sectors throughout the United States. Our unique combination of real estate and business valuation expertise allows us to provide a wide range of services to offer innovative solutions to difficult valuation issues. Shenehon Company is commited to equipping its clients with the tools necessary to make informed and knowledgable decisions regarding their capital investments. Allocation of purchase price Gift tax evaluations Marriage dissolution Asset depreciation studies Going public or private Mortgage financing Bankruptcy proceedings Highest and best use studies Multifamily residential properties Charitable donations Industrial properties Municipal redevlopment studies Commercial properties Insurance indemnifications Potential sales and purchases Condemnation Intangible asset valuation Railroad right-of-ways Contamination impact studies Internal management decisions Special assessment appeals ESOP/ESOT Investment counseling Special purpose real estate Estate planning Land development cost studies Tax abatement proceedings Feasibility analyses Lease and rental analyses Tax increment financing General limited partnership interests Lost profit analyses Utility and communication easements Contributors: Robert Strachota, President Jim Clancy, Managing Director, Hennepin Partners Henry Walter, Valuation Analyst Emma Niemela, Valuation Analyst Copyright 2020. Valuation Viewpoint is prepared and published by Shenehon Company. Opinions regarding business and real estate valuation issues have been carefully researched and considered by the authors. While we hope you find the information relevant and useful, it is important to consult your own advisors before making business decisions.

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