I am often asked how
commercial brokers determine
the market value of a
property. In order to
perform that task, a
detailed analysis and report
should be prepared. Here is
how you do it.
Property Inspection: If
you're performing an
exterior inspection and the
property is open to the
public (retail store, office
building, etc.), then you
should enter the building to
gauge the condition and
occupancy but please do not
make contact with the
property owner or tenant. In
an interior inspection of a
multi-tenant property,
please assert your right to
view individual units. Note
the condition of all units,
with special attention paid
to items of deferred
maintenance.
Photographs: Take a
sufficient number of
photographs to properly
capture the entire subject
property and important
neighboring aspects. This
includes, but is not limited
to, front, rear, each side,
parking lot, street scenes
(all directions), areas of
deferred maintenance and any
other nearby conditions that
influence the subject.
Photographs may also be used
to document the occupancy of
the building by taking
pictures of tenant's signs
or any tenant directory.
Property Identification:
Research the borrower names,
property address and
Assessor Parcel Number
(APN). Note the previous
market sale and current tax
values and tax assessments.
Local Market and
Value Trends: Research
current trends in the market
and explain market
conditions, direction of
market values, development
stage of the submarket,
market activity (buyer or
seller's market), average
time on market for like-kind
properties, population and
employment trends, and
overall level of demand.
Discuss area foreclosures,
boarded-up properties,
crime, or anything that
would have effect on values
in this area.
Real
Estate Taxes: This should be
based on the current
assessment per taxing
authority.
Condition
/ Location Ratings:
Determine the appropriate
rating for the property
keeping in mind that these
ratings are relative to how
the subject property
compares to the balance of
the submarket. Typically the
range of quality includes a
simple four category scale
of poor, fair, average good.
When making these ratings,
be sure to remember that
adjustments will be needed
to equalize the researched
properties to the subject
property.
Listed for
Sale or Lease: Determine if
the subject property is
listed for sale or lease and
obtain any MLS, Loopnet, or
other listing data flyers to
your CMA. Listing data of
the subject should normally
set the upper limit to
market rent and value.
Property Comments /
Description: Note the entire
property characteristics
including all buildings, the
parking lot, ingress and
egress. Also discuss
external factors (positive
or negative) such as
vehicular or pedestrian
access, visibility, zoning,
neighboring property types,
crime, vandalism, and stage
of the market (growth,
stability, decline,
revitalization).
Deferred Maintenance /
Vacancy Issues: Determine
the specific deferred
maintenance issues and the
overall maintenance level of
the building(s). Note all
observable problems such as
broken windows, roof issues,
potholes in parking lot,
etc. To the extent possible,
determine the potential or
known vacancies in the
building(s). Note obvious
signs of vacancies which
include stark, curtain-less
apartment windows, missing
electric meters, broken
windows, for rent signs,
etc.
Comparable
Sales: Research the sales of
similar property types
within the same or similar
submarket. Comparables
should be selected based on
the type of real estate
rather than tenancy. Retail
buildings should be compared
to retail buildings, office
to office, industrial to
industrial, and so forth. If
recent comparable sales do
not exist in the same
submarket, extend your
search further back in time
and then further away in
other, similar markets. Next
rate the comparability of
the particular sale (for
age, size, condition,
location, etc.) by
indicating whether it is
superior, inferior or
similar in the appropriate
field. Be cautious not to
use sales that have business
value, FF&E or any
leased-fee component
included in the sale price.
In the absence of comparable
sales, include comparable
listings. If using listings
in your analysis, then base
your value conclusions (for
the subject) on what you
think the listed properties
will sell for, not their
listing prices. Document
your analysis with any
supporting data sheets with
your CMA, including copies
of the MLS or other listing.
Comparable Rentals:
Comparable rentals should
show support for your
estimates of market rent for
the various units in the
building. Note in your
comparable rentals findings,
which party is responsible
for expenses – landlord or
tenant. Listing data may be
used as comparables if
actual comparable leases are
not available. Document your
analysis with data sheets
(MLS listings, Loopnet,
other data sources) to your
CMA.
Income
Approach: This is a
multi-step process to
estimate the value of the
property based on its
ability to generate income.
The income approach should
be based on your Comparable
Rentals and knowledge of the
local market. First, using
estimates of market rent
calculate the Potential
Gross Income (PGI). PGI is
the total income of the
building(s) at full
occupancy. Then deduct a
market based estimate of
Vacancy and Collection Loss
(V&C). Vacancy estimate
should be based on the local
market, not the subject
property. Add an estimate of
any Other Income that the
property may generate
(garage rentals, parking
revenue, reimbursed
operating expenses, etc. PGI
less V&C will generate
Effective Gross Income
(EGI). From EGI deduct the
sum of the real estate taxes
and operating expenses to
calculate Net Operating
Income (NOI). Divide the NOI
by an estimated
capitalization rate to
estimate the value via the
Income Approach. Make sure
the capitalization rate you
choose is within a range of
capitalization rates as
extracted from comparable
sales. Your result here will
be a stabilized income
approach value.
Rent
Loss represents an estimate
of the total amount of rent
not collected for a vacant
unit(s) while awaiting
future occupancy. For
example, if six of 12
apartment units are
undergoing a six-month
renovation/re-leasing
program and typically rent
for $500 then the rent loss
for these vacant units would
be estimated as 6 units x
$500 x 6 months or $18,000
(assuming all get rented at
the end of the program).
This amount may be less if
units are renovated and
leased over the course of
the renovation project. In
the case of a multi-tenant
building with an estimated
one-year lease-up scenario,
it is fair to assume that
some units will get rented
before others. In other
words, units would get
rented as they are absorbed
by the market so rent loss
may be less than a full
year. Estimating rent loss
requires you to estimate the
number of months it will
take for a unit to get
rented and multiply that
number by the estimated
monthly rental rate.
Tenant Improvement
deductions represent the
costs associated with making
a unit rent-ready and are
commonly associated with,
but not limited to, office
and retail properties. Costs
may include new carpet,
interior paint, interior
alterations, etc.
Leasing Commissions account
for brokerage costs for
leasing vacant space.
Amounts should be estimated
by whatever is typical for
the local market.
Deferred Maintenance
represents costs associated
with bringing the building
back to useable condition.
These costs include items
such as the roof,
foundation, repair/replace
HVAC, interior/exterior
repair/renovation, parking
lot and any other item
necessary to make the
building rentable. If these
costs are substantial, then
you must get a contractor's
estimate. If minor, estimate
these costs as best you can.
Properties that require
extensive, lease-up,
renovation, or cost to
complete should be accounted
for by estimating these
values and subtracting it
from the above Income
Approach figure to determine
the as-is income approach
value.
The income
approach is not always
relevant to the valuation of
the subject.
Reconciliation: This is the
phase where the two market
value indications are
resolved into a final value
estimate. Do not average the
two approaches. Rate the
strengths and weaknesses of
the Sales and Income
Approaches to value and
estimate a final value by
giving weight to whichever
approach was more reliable.
Your final value estimate
should fall between the two
approaches to value. If you
conclude the Income Approach
does not provide a valid
indication of value, then
you should rely solely on
the indication from your
Sales Comparison Approach.
If the subject property is
listed for sale then the
list price should normally
set the upper limit to
value. Your reconciled value
estimate should assume a 12
month marketing period.
If you were able to
determine the "As Is" and
"As Stabilized" value
estimates (unless the
subject is REO and displays
significant vacancy and/or
deferred maintenance), you
should estimate the “As Is”
value only.
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