Minding Business

Commercial building valuation best practices

Whether buying, selling, borrowing or leasing, knowing the value of the property is key
Posted: June 12, 2019 by Anna Jotham

Whether buying, selling, borrowing or leasing, knowing the value of the property is key

Determining the value of a commercial property is complex. Yet when it’s time to buy, sell or lease a property, valuation is a necessary step. It’s also important to have your property reviewed if you’ve owned it for some length of time to determine whether your insurance is keeping pace. The problem is commercial appraisals can be far more subjective than a residential appraisal. That’s because the value of commercial properties typically depends on a lot of factors over which you have zero control — things like upkeep costs, market value of lease space and how much a buyer would be happy to shell out for the property. For these reasons, pricing a property can be difficult, and it’s important to know exactly how to go about it.


Understanding what the property includes

Property generally refers to anything of value, and it includes both real property (which includes permanent structures, machinery/equipment and the land itself) and business personal property (which includes everything else, typically items that can be moved easily such as computers, office equipment and furniture). 

Now that you know what property includes, when it’s time to price a property, there are several methods to determine valuation.


Methods and best practices for determining property valuation

There are several ways to determine a property’s value; let’s take a look at the three most common ways to do so.


The market approach

This is sometimes referred to as the sales comparison approach. It simply means that determining the value of a commercial property is done by looking at similar properties in the same market that have recently been sold. This is how a buyer or owner can determine the fair market value of the property. Finding a comparable property is an important step and can pose challenges in some markets or under certain market conditions. In addition, you may need to adjust pricing to make up for aspects that are not comparable or to equalize the assets.


The cost approach

The cost approach is an evaluation of what it would cost to replace the assets or to buy a comparable plot of land and construct a similar property. Of course, it’s necessary to adjust the value to account for the age of the building, any depreciation and the condition of the existing property. The thinking behind the cost approach is that investors would not buy a property if they could construct a new property that would have the same value.


The income approach

The income approach to valuation, or income capitalization method, establishes the value based on the income an investor can reasonably expect to draw from the property. That revenue is calculated based on an analysis of other properties in the market that are similar as well as on anticipated maintenance costs. Over time, an owner could anticipate efficiencies or sharing the cost with tenants for certain services and utilities, which would mean that the amount of income an investor could expect to earn could, over time, become more favorable.


Commercial property valuation: complex but essential

Valuation of commercial property can be complicated, but these approaches can help you come to a conclusion that can help you through whatever process you are embarking on: buying, leasing, insuring or selling. It’s an essential first step, and you only need to determine the approach that works best for you.

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