To be honest, placing value on commercial real estate is tricky. Commercial property value depends on many variables, including location, building condition, income potential, and maintenance costs.
To arrive at a reasonably accurate valuation, especially if you suspect your property has been over-assessed for tax purposes, you need to figure out the best way to approach the calculation.
There is no single way to go about determining commercial property value. The results are open to interpretation, but you can learn the most feasible method for valuing your commercial building.
Market Valuation of Commercial Real Estate
Market valuation relies on sales data for comparable properties. A comparable property is one of similar size and purpose in the neighborhood or city.
Unfortunately, this straightforward approach does not always apply to commercial real estate because you might not have comparable properties available. Even if similar properties are in the vicinity, they may not have sold for years, and their old sales figures won’t translate to the current day.
If comparable properties with recent sales data are present, then market valuation may be an appropriate choice. A Dallas property tax consultant could help you make this decision.
In the absence of sales data or reliable income projections, commercial property owners sometimes turn to the replacement cost valuation method.
This calculation looks at how much money it would take to construct the building today. Current material and labor costs and permits enter the equation to arrive at a commercial property value.
Income Valuation of Commercial Real Estate
Quite a few commercial properties derive their value from the income that they produce year in and year out. Income valuation methods use some kind of baseline property value, such as its most recent purchase price.
You have some options for how to tackle income valuation.
1. Income Capitalization
If the current market value is known, then the property’s value can be further refined by looking at its capitalization rate (cap rate). Dividing the net operating income by the current market value yields the cap rate.
2. Gross Rent Multiplier (GRM)
A GRM is a figure that results from dividing a building’s value by its annual gross rents. A $1 million property with gross rents of $160,000 would have a GRM of 6.25. You use a GRM by comparing it to GRMs for other similar properties. If it is lower in relation to others, you might find the building more profitable.
3. Value Per Unit
Normally applied to apartment buildings, value per unit or value per door valuations assign an annual revenue to each unit. The whole building’s value then becomes the value per door multiplied by the number of units.
4. Cost Per Rentable Square Foot
By counting the square feet that tenants actually use and benefit from, an appraiser first calculates the annual cost of maintaining the square footage. Next, this cost is compared to the average amount spent to lease the space to arrive at a valuation figure.
Property Valuation in Dallas Made Easier with The Hegwood Group
As you can see, calculating commercial property value requires informed decisions about how to approach the question. A property’s income often impacts its actual value beyond what a previously recorded market value might indicate.
In other cases, a building with no comparable properties might have to be evaluated on its replacement cost.
Regardless of how you decide to approach property value determination, The Hegwood Group can help you make your way to an accurate estimate that ensures you won’t overpay when property tax season rolls around.
Contact us to speak with a Dallas property tax consultant and schedule your free consultation.