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The basics of commercial property valuation

On Behalf of | May 13, 2019 | Commercial Real Estate |

Commercial property can be appealing to anyone in California looking to either find the perfect spot for a business or make a profit renting out a desirable space. One of the most important pieces of information that perspective buyers want to know before investing in a commercial property is how much it’s worth. There are several ways to accomplish this goal.

Based on factors such as the cost of construction materials and the land, the cost approach to commercial property valuation involves determining how much money it would take to build from the ground up. With the income capitalization approach, comparable properties are evaluated to determine how much money an investor could earn from the property. Maintenance expenses and other property-related costs would also be taken into account. The market or sales comparison approach considers recent sales of similar properties for the purpose of determining value. This method may not be reliable during slower market times.

The gross rent multiplier method is based on the price of the property divided by the potential income expected from that property. This is essentially a calculation of how long it would take the property to pay for itself. Lastly, there’s the value per door method. It breaks down a building’s worth according to its number of units. For example, a $5 million apartment complex with 20 units available would be valued at $250,000 per door. Location and local laws are additional factors that could affect a property’s value.

The role of a commercial property attorney is to help an investor complete a purchase in a way that’s fair and cost-effective. This often involves negotiating the asking price, if possible, and reviewing contracts before property ownership officially changes hands. A lawyer may also recommend that an impartial appraiser assess the property, especially if there’s some doubt about its current listed value.