Commercial Real Estate Appraisal


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We appraise numerous types of commercial properties, but what does such an appraisal involve?

Commercial real estate appraisal encompasses a broad range of elements, some of which, or combinations of which, can create unique conditions and complex circumstances for a particular property.

The following paragraphs include some of the elements that may be considered, depending on the assignment.

Site conditions affect the usefulness of real property. For example, slope, configuration and access to a site to be developed can affect its development potential. Wetlands generally require buffer setbacks and reduce the function of sites.

Zoning controls the legal use of land and improvements.  Existing improvements or uses may be permitted, legal nonconforming or not permitted, depending on the local code. (Legal nonconforming uses are uses permitted under a former zoning classification that has since been reclassified; the former use is still legal and permitted by the local jurisdiction even though it no longer conforms to the current zoning.)

Comprehensive plans outline future intended uses by planning authorities (of a city or county for example).  These intended uses are often similar to, or the same as, current zoning classifications.  Sometimes, however, the comprehensive plan designation of a property is different from its zoning, creating circumstances that require special attention in an appraisal analysis.

Title restrictions, recorded and unrecorded, may restrict the usefulness of land or improvements.  For example, buildings on adjoining land may encroach onto the land of the subject property ("subject property" being the property that is to be appraised).  Access easements are another common example.  The area occupied by these easements encumbers the subject property for the benefit of surrounding sites and generally cannot be used for any other purpose other than access.

Location of property is a primary influence on value.  Street exposure, ease of access, and proximity to employment centers and commercial areas such as shopping, restaurant and entertainment facilities can be major considerations.

Size of parcel, building, or number of units may affect the price per unit paid in a transaction for a property comparable to the subject property.  The size of a property, according to the most common unit measurement, may affect the affordability of the property to a typical buyer.  As an example, a small investor cannot purchase a 600,000 SF office building under ordinary circumstances.  The large purchase price limits the number of potential buyers due to affordability and acts to reduce the price per unit paid by the typical buyer.  The affordability of property typically relates to categories of sizes.  An office building of 660,000 SF may be considered just as affordable as a 600,000 SF structure (and in the same size category) to a group of typical buyers.  No adjustment would be warranted due to size in this example.

Quality/condition/age is a composite element that encompasses the level of property maintenance, the effective age of structures, and the type of materials used to construct the building.  Architecture and attention to construction detail by the original designers/contractors of the building play a part in the overall quality of building and its ability to age slowly.  Attractive architecture and good design of structural, mechanical electrical and landscape elements tend to establish and preserve quality.

Sometimes a building with a useful physical remaining life contributes a negative value to overall property worth.  In such a case, the building's economic life has expired even though the structure itself may be still physically useful.  The capitalized value of the market rent of the land and building combined may be less than the value of the land as though vacant (less demolition costs).  The highest and best use as improved may be vacant land ready for redevelopment into a more intensive (and more valuable) use if such development is permitted in the short-term under the lease agreements.  Sophisticated buyers look for these types of opportunities.

Urbanization of neighborhoods over the decades, with increased population densities per square mile, requires more intensive uses of land.  Urbanization generally lessens the economic life of structures.  (Increased use of structures also leads to physical depreciation, but this may be offset by maintenance, renovation or remodeling.  Renovation or remodeling may also increase economic life if it adds to building area.)

The terms of a lease control the cash flow of investment property, affecting both the rental and expense flows experienced by the landlord.  Leases, however, are not the sole determinant of a property’s cash flow and return to its owner. Quality of building, property management and effective marketing of the property all contribute to variances in return.  For example, a building with an outdated HVAC (heating, ventilation and air conditioning) system is more expensive to operate.  The amortized capital cost of a new HVAC system may be less than normal HVAC operation expenses of an outdated system.  The landlord who decides to upgrade his HVAC in this case may achieve a greater net operating income.

Property management staff who handle a tenant family with attentive, responsive service will encourage long-term occupancies by tenants, reducing negative cash flow due to vacancies. Good leasing brokers who help maintain occupancies and lessen negative cash flow due to vacancies are well worth their fees.