Whether looking to sell or just doing some financial planning, owners of commercial real estate should always have an accurate idea of what their investment is worth in the current market. How is that property valued? There are actually a number of factors that commercial realty brokers and appraisers use to determine the figure. Based on these various methods of valuation, a single business property could actually have multiple valuations.
Income Production Method
Some commercial real estate is valued according to how much income it is currently producing. A proper assessment is determined by considering the future benefits that the building owner could gain by leasing the property. Real estate that is currently producing income is always worth more than the property on which it is located, as it proves there is a demand for the space where it is located. Similarly, a facility that is fully rented or leased is worth more than one with many vacancies.
By anticipating future cash flow and operating expenses as well as other market indicators, appraisers then determine the market value of the investment as rental or income-producing real estate.
Cost of Replacement Method
The second method of determining the value of commercial real estate is considering its replacement cost. This method is usually applied to real estate that is under construction, has only recently been built, or has undergone significant improvements to increase the income-producing capability of the building. This method assumes that the value of the investment is the cost to replace the land and any improvements on the building site.
Land suited for commercial development is also valued according to what it would cost to replace it, as appraisers look at what improvements could be made on that land to make it income-producing. Based on location, demand, and how the property is zoned, land is assessed to assume that certain types of buildings will be constructed on the site.
Comparable Market Value Method
The third accepted method of determining commercial property is to consider its worth in comparison to other properties for sale in the same market. Based on the building's location, its improvements and condition, local taxes, how the site can be used, and many other specifics, a business real estate appraiser can compare it with similar properties to determine a competitive market price. Of course, that value is fluid and subject to supply and demand as well as the rise and fall of the current commercial real estate sales market.
Considering these three accepted methods for determining the worth of commercial real estate, appraisers will apply the method that is most suitable based on how the building is being used, its current income production, and other factors. When seeking an accurate representation of commercial property value, investment owners should seek the expertise of an appraiser who is familiar with the local business market and can provide the most accurate estimation of the worth of the building!