Commercial Real Estate Valuation 2

Approaches used to value real estate from an appraisal perspective determine the possible sale price a property would fetch on the open market given adequate time to market by an informed seller who is not under the hood, fully informed of the market conditions and an informed buyer who agrees to consume the purchase also without undue duress to act. The range of values ​​derived from the methodologies used and the final conclusion after implementing adjustments for different variables represent processes used to determine the market value of the property in question under specific conditions and at a specific time. Changes in variables eg. vacancy factor, comparable sales, depreciation due to economic or functional obsolescence, etc. invariably alters the values ​​derived from the processes and the conclusion obtained. The three methods used to find a range of property values ​​from which the final conclusive value is obtained are: – Income Approach, Cost Approach and Comparable Sales Approach. Each has its own process to calculate the value of a property and is assigned a variable value or relevance in the final value attributed to the property.

Income Approach – Establishes the value of real estate as a derivative of its net operating income relative to the prevailing capitalization rate associated with the asset class in its submarket. Net Operating Income (NOI) which represents the amount after gross income broken down through cash income, aggregated miscellaneous income, etc., less expenses associated with operating the property. Some professionals consider the value calculated from this approach to be more indicative of the real value of the property compared to the other two approaches below from an investment perspective.

Cost approach: establishes the value of real estate by calculating the present value to recreate improvements at cost less depreciation for functional and economic obsolescence; the underlying land is not depreciable. Technological advances, procedural changes, more adaptable efficient materials, user-friendly space design plus changes in industry and end user desires, etc., can diminish the attractiveness of buildings or leaseable spaces that some They were once highly sought after in connection with the newer inventory. This results in a lower market value being assigned to the property considering its reduced appeal to a broad-based market.

Comparable Sales Approach – establishes the value of real estate based on historical sales of similar properties in the submarket with adjustments for dissimilar characteristics with these properties; assign values ​​for these characteristics or the lack of them and add or subtract dollar amounts that reflect the increase or decrease of the imputed value. This process pulls your data from market sales activity and historical purchases/sales of properties of the same CRE type, eg, multi-family, retail, industrial, etc. who have sold transactions at arm’s length, including financing structure that does not suppress the selling price

The collective information obtained from each approach is analyzed giving weight to the respective methods according to the nature of the property in question, the quality of the data available for the approach and the purpose of assigning value. The nature of the property in question influences which method is considered most applicable for determining value, for example, is the property a vacant lot, a stalled mixed-use development, a working hotel, etc. However, from an investor’s perspective, the income focus generally receives more consideration than the other two in relation to commercial properties that are income-earning or potentially income-earning. Even the value of the land is tied to its use or potential use mobilized through zoning and titling and the revenue stream that can be derived from added improvements. The final value given to the property takes into account all the variables applicable to the property and the experience of the individual, drawing the conclusion of the value of the property.