Industrial Plant Appraisal - Factory Appraisal

Definition

Industrial Plant Appraisal – Factory Appraisal – LOGAN has completed industrial plant appraisals in Mexico, Costa Rica, Colombia, Peru and other countries. Industrial plants are industrial buildings that are designed to manufacture a product such as a car or automobile. Typically, these projects can be expansive and often very specialized. They are unique because they require special zoning, access to labor, and connectivity to infrastructure. These valuations have been done of existing facilities, as well as projects that are planned or that are build to suits – facilities that are specially designed for tenants and their production needs.

In Mexico, there is substantial production/factories that are for automotive, aeronautical, electronic, chemical, and other uses. In Costa Rica, there are factories or plants that produce pharmaceuticals, medical products, and medical devices.

Types

Automotive plant – these plants or factories are often located in Mexico, which has a thriving auto production industry. Areas include Baja California, Sonora, Chihuahua, Coahuila, Nuevo León, and San Luis Potosí. These plants are not only for the production of the cars themselves – they also include the suppliers of car parts for use in manufacturing.

Chemical plant – chemical plants are often located near production plants of other uses – and act as a supplier to such factories. Also, they are typically located near refineries of petroleum, or near costal cities, where chemicals can easily be exported.

Aeronautical factory – these industrial plants are highly specialized and are only located in certain regions in Latin America. Mexico is a top producer of aeronautical products and airplanes. These plants usually are located in Tijuana, Mexicali, and Queretaro – which account for the main production in Mexico.

Pharmaceutical production facility, medical device manufacturing facility

These projects are often located in industrial parks that are designed for such production. The infrastructure of such parks is very high quality and have backup systems in case of power outages. Security in such parks is also extremely tight, due to the proprietary nature of the products produced. Companies that have major operations in Mexico and Cost Rica include: Merk, Abbott, Pfizer, Roche, among others.

Electronics factory – Major electronics production only takes place on a large scale in Mexico, which is the number #1 producer of flat screen televisions, and a major producer of other electronic components – especially associated with automobiles and airplanes.

Cement plant – These plants are located throughout Latin America and need to be located close to the construction projects being developed. These plants are located on expansive land parcels in rural areas. Usually, the plant itself can be moved, and the majority of value is comprised of land value. Companies in Latin America that own and operate these facilities include Cemex, Argos, Holcim y Cementos Moctezuma.

Approaches, Relevance

Cost – an important approach, however, a plant or factory may be very customized. There may be some improvements that do not have value on the open market.

Sales comp or market approach – sales of plants and factories does occur, however, due to the unique design of most facilities, it is difficult to compare the sales of production plants. This especially applies when plants are sold with machinery and or equipment that cannot be moved.

Income capitalization – this is a relatively reliable method of estimating the value of an industrial plant. Often rent is paid based on the structure itself, and most of the machinery and equipment within the plant is owned by the tenant. The downside to this approach, is that only one year is taken into account.

DCF – the most reliable approach to valuation of an industrial plant, this approach allows for the appraiser to estimate future cash flows and adjust for a potential lease turnover in the future.

Value Impacting Factors

Location

Near public transportation for commuting employees, which tend to be of a lower social economic status and do not own their own vehicles.

Within an industrial park that has zoning which allows for heavy industrial uses. Often, there are also amenities of the park which workers can utilize. These include cafeterias, medical facilities, entertainment uses, and convenience stores.

Area with heavy industrial zoning. Sometimes these areas are very limited, especially in large-growing cities. Municipalities sometimes do not prefer heavy industrial zoning due to the potential environmental risks associated with it.

Important Inputs

Size – including ceiling height. This impacts manufacturing possibilities.

Special improvements – rail connections, boilers, backup systems

Park amenities – cafeterias, shops, convenience stores, gyms

Tenant credit quality – sometimes tenants are multinational corporations that offer guarantees that imply high confidence in the future rental cashflows. These guarantees range from a local entity guarantee to a much stronger international guarantee provided by the home office.

Recent Trends

Nearshoring – move of production from Asia to Latin America and especially Mexico

Pandemic and impact on logistics – increased need for production facilities closer to the United States in order to rely less on complex supply chains.