Commercial Real Estate Valuation 2

 By: Pierre McLean
The approaches used to value commercial real estate from an appraisal perspective determines the possible sale price a property would yield on the open market with adequate time for marketing by a knowledgeable seller who is not under duress, fully informed of market conditions and a knowledgeable buyer agreeable to consummate 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 represents processes used to determine the market value of subject property under specific conditions and at a specific time. Changes in the variables e.g. vacancy factor, comparable sales, depreciation for economic or functional obsolescence, etc invariable alters the values derived from the processes and the obtained conclusion. The three methods used for finding a range of property values from which the final conclusive worth is attained are the: - Income Approach, Cost Approach and Comparable Sales Approach. Each has its own process for calculating a property's value and is given varying worth or relevancy in the final value attributed to the realty.

Income Approach - establishes the value of real estate as a derivative of its net operating income in relationship to the prevailing capitalization rate associated with the asset class in its submarket. The Net Operating Income (NOI) representing the amount after gross income drilled down through effective income added miscellaneous income, etc minus expenses associated with operating the property. The value calculated from this approach is deemed more indicative of the true worth of the property by some practitioners in comparison to the other two approaches below from an investment perspective.

Cost Approach - establishes the value of real estate calculating the current worth to recreate improvements at cost minus depreciation for functional and economical obsolescence; the underlying land is not depreciable. Technological advancements, procedural changes, more adaptable efficient materials, user friendly space layout plus industry changes and the desires of the end user, etc can diminish the appeal of once highly sought buildings or leasable space in relation to newer inventory. This results in a lesser market value being assigned to the property factoring its reduced appeal to a broad base market.

Comparable Sales Approach - establishes the value of real estate from the historic sales of similar properties in the submarket with adjustments for dissimilar characteristics with these properties; assigning values for these features or lack thereof and adding or subtracting dollar amounts reflective of the increase or decrease in value attributed. This process draws its data from the sales activity in the market place and the historical purchases/sales of properties of the same CRE type, e.g. multifamily, retail, industrial, etc that have sold under arms' length transactions including financing structure which does not suppress the sale price.

The collective information obtained from each approach is analyzed with weight given to respective methods depending on the nature of the subject property, the quality of the data available for the approach and the purpose of assigning value. The nature of the subject property influences the method which is considered most applicable to determining value, e.g., is the property vacant land, stalled mixed use development, operational hotel, etc. However, from an investor's perspective the income approach is usually given more consideration than the other two in relationship to commercial real estate income producing or potentially income producing properties. Even land's value is tied to its use or potential use mobilized through zoning and entitlement and the income stream that can be attained from the improvements added. The final value given to the property factors all the variables applicable to the realty and the experience of the individual drawing the conclusion of property value.
loading...
Author:
Artice Source: http://www.articlesphere.com

Related Articles in Commercial Real Estate


People interested in the above article are also interested in the related articles listed below:

Buying or selling commercial real estate can be a complicated process. There are many factors to take into account for the optimal transaction. Educating yourself ahead of time is the best way to make the process go smoothly, easily, and profitably. The following tips are geared to get you started on the path to success.
Take your time when handling commercial real estate! If you are buying it, you need to get what best suits you. If you are selling it, you need to consider the buyer's needs to make it appealing. If you are trying to maintain it, then pursue the best value for your budget. No doubt, a tip or two could provide to be useful to you. Read the following article below for more information.
Many Americans are concerned about the current commercial real estate market. In the past, many believed that it was a good investment market, but these days people are shying away from it. The following article has several tips to help you out if you are looking to invest in the current market or even if you yourself are a homeowner.
loading...

More in Commercial Real Estate

Excellent, Larry. Thank you for taking the new article directory technology and making it work to the max. I encourage everyone to keep contributing and contributing regularly. I can attest to the fact that this site is already a strong directory in a field of many. Kudos to Larry!

Matthew C. Keegan
The Article Writer

 

I find it a delight to use both as an author and a publisher. It is full of nice little surprises that make the whole process of writing, reading and publishing articles a complete delight. This is one that comes out tops and beats the rest hands down.

Eric Garner
Managing Director
ManageTrainLearn

 

I did a Google search and came across your site. It was exactly what I was looking for and was elated to find such a broad range of articles. As I am launching a free magazine in a small town in Florida, I wanted to be as resourceful as possible while still being able to provide some content that is interesting and well written. Your site has all the variables in the mix. Excellent Site hitting all the notes in the scale sort of speak.

Mo Montana
Florida, USA

Article Topics

 
Copyright © 2005 - by Larry Lim, Singapore - Article Search Engine Directory at ArticleSphere.com™
All Rights Reserved Worldwide. All Trademarks and Servicemarks are the property of the respective owners.
ArabicBulgarianCatalanChinese (Simplified)Chinese (Traditional)CzechDanishDutchEnglishEstonianFinnishFrenchGermanGreekHaitian CreoleHebrewHindiHungarianIndonesianItalianJapaneseKoreanLatvianLithuanianNorwegianPersianPolishPortugueseRomanianRussianSlovakSlovenianSpanishSwedishThaiTurkishUkranianVietnamese