Saturday, April 16, 2016

Commercial Property Listings, How to Tell If they are at Market Value

Commercial RE falls into two categories, owner-occupant or investor

Prices paid for owner-occupant properties are primarily based on two valuation techniques, the Sale Comparison Approach and/or the Cost Approach.

Owner-occupant commercial properties include office condo, restaurant, auto repair, small office-warehouse, church, day care, small retail, etc. This property category is discussed here.

Flyer on LoopNet says Auto Repair Shop for sale, 5,000 SF steel frame metal building with 10% AC office constructed in 1995.  Site contains 25,000 SF site with primary road frontage, AVAILABLE for $900,000.

Step 1: Determine the underlying land value by talking to appraisers and RE Brokers in the area.  Send a "Tax Map" of the property by email to an appraiser and ask what similar sites sell for.  Let's say the land is worth $10 PSF, site value is then $250,000.

Step 2: Subtract $250,000 from the asking price of $900,000 and you get $650,000 allocated to the "improvements" which consist of both building and site improvements such as paving, lighting, etc. Next, divide $650,000 by 10,000 of enclosed or heated building area and you get $65 PSF.

Step 3: Call a contractor who constructs this type of building and ask how much it cost to build new.  Or, call an appraiser, send photos of the building and ask him or her to check their Marshall Valuation Service (MVS) cost estimating manual.  Also, ask how much depreciation is appropriate.

Step 4: Last, add the depreciated cost of the building and site improvements, also called the contributory value of improvements, to the land value.  

Knowledgeable builders use this technique very effectively since they often purchase sites on behalf of their clients and they therefore often know land value. Also, since they price buildings for clients, they know replacement costs. The recap is as follows:

Listing or Asking Price           $900,000
Less: Land Value of                $250,000
= Residual to Improvements  $650,000 / 10,000 SF = $65 PSF (unit-of-comparison)

Sales Comparison Approach
Using the technique just described, let's look at comparable listings found on LoopNet, Commercial Search or the MLS (Multiple Listing Service) and now-be-able to make sense of the information.

Step 1: Subtract the estimated land value from the asking price and you get to the asking price of the improvements.  Divide the asking price of the improvements by the sq. ft. (SF) of enclosed or heated area.  Make sure to be consistent with enclosed area, this is called your unit-of-comparison.

Try to avoid using a unit-of-comparison that includes land and improvements, these are called "blended" PSF figures and can be very misleading since the underlying land value of a given site can vary dramatically (on a PSF basis) and/or the land-to-building ratio may be very different.

Daniel Peele is a licensed State Certified General RE Appraiser RZ 887 and a Commercial Realtor Associate with Charles Rutenberg Realty of Orlando.  Dan is the founding member of Central Florida Appraisal Consultants located in north Orlando, FL  Please go to for more......

1 comment:

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