15 November 2019/ sale_commercial_property_guide

How do you value a commercial building?

Valuing a commercial property can be fairly straightforward, or a complex process involving the calculation of the business’ net income and other financials. It all depends on the type of method you use to reach your final figure.

Commercial property appraisals are used for a range of different purposes

A property valuation might be requested if a building is in the process of being sold, developed, mortgaged, taxed or insured. Having an accurate idea of the property’s value helps buyers, sellers and other property professionals make the right decisions. Here are several of the possible reasons why a commercial property valuation might take place:

  • If a prospective seller wants to know how much to advertise their property for
  • If a prospective buyer or rental tenant wants to know that the price is fair – and whether there is any room for negotiation
  • If a mortgage underwriter wants to confirm that the property is worth the amount they’re lending the buyer
  • If the government is acquiring the property for public use
  • If the owner wants to liquidate the business, merge with another company, initiate property renovations or work out how damage has affected the value of the property

What are the different types of appraisals?

There are a number of ways you can assess the worth of a commercial property. Some are more suited to certain situations, so you should consider the purpose of your valuation when choosing the one you’ll use. For instance, you can work out a property’s value in terms of its asking price or rental income potential.

While residential property valuations take the condition of the building and land and construction costs into account, commercial property appraisals usually involve more factors. If you just want a ballpark figure, one of the quick and easy methods will suffice, but for a more accurate valuation, you’ll need to spend some time compiling financial information.

So, what are the different valuation methods?

  • Cost – This is probably the simplest way to determine a building’s worth. It combines the land and construction costs to generate an approximate figure.

  • Sales comparison – This method involves matching the property to similar buildings in the area. If you’re using this approach, try searching for commercial properties with the same number of floors, rooms, square footage and parking spaces, for example. Using this technique should give you a fairly quick answer to your question, but it won’t be a particularly precise one – especially if the building has its own quirky features.

  • Value per door – If you’re trying to ascertain the value of a property made up of single apartments or lots, you could use this approach. Take the price of one lot (the “value per door”) and multiply it by the total number of commercial spaces within the building. Conversely, if you know the value of the building as a whole, you can divide it by the number of lots to find the price of one on its own.

  • Income capitalisation – This method calculates the rough value of a property by looking at the revenue of the businesses occupying it. First, take the property’s net annual rental income and divide it by your estimate of the building value, based on sales of similar ones in the local area. This will give you your ‘capitalisation rate’ – or the rate of return. Then, take your net operating income and divide it by that figure.

  • Gross rent multiplier – This tells you how long it will take to pay off property payments based on gross rental income. All you have to do is take the estimated property value (or total borrowed amount) and divide it by the gross annual rental income.

If you want to calculate a commercial property’s annual rental costs, you’ll need to know the net profit of the business occupying it. To calculate net profit, take all business expenses, including staff salaries, away from the company’s total income. Then, find out how much annual rental costs amount to by halving the net profit.

What do appraisal professionals take into account?

Property valuations can be complicated, so you may want to get in touch with an appraisal professional, who will be able to do the job for you. They should look at all aspects of the building, including the heating, plumbing, roof and other key features.

They’ll also take the property’s location into account, and whether it’s near to other commercial properties, such as shopping malls or office blocks. A commercial property appraiser will determine the building’s income potential by judging its location and establishing how many tenants and employees it can accommodate.

What are the three types of appraisal report?

When you get information back from a property appraiser, it will be in one of three formats:

  1. A self-contained report: This is the most comprehensive document you can get; it will describe the appraisal findings in full.

  2. A summary report: As the name indicates, this is a shorter document that summarises the outcomes of the appraisal. If you want to find out more, extra information is available in a separate report.

  3. Restricted-use report: The cheapest and most limited appraisal file, this document just lists the appraiser’s conclusions. But you can read more about them in an independent file.

Whichever report you require, you should always make sure you read through the data carefully to make sure nothing has been missed. Check that the appraiser has taken every room into account, as well as any outdoor space. If they’ve overlooked any unique features or renovation work you’ve completed, be sure to bring it up with the appraisal professional.

What is the average cost of a property appraisal?

Because professional appraisers carry out a full analysis of the building, their services can be expensive. Usually, the cost of a commercial property appraisal will depend on the building’s value. For this reason, it’s difficult to say exactly how much an individual property valuation might cost, but it could be anything from £800 to over £5,000.

Shawbrook Bank provides a table for its valuation fees, according to the property price:

Valuation up to

Fee paid by/for client

£200,000

£875

£300,000

£1,025

£500,000

£1,325

£800,000

£1,700

£1,000,000

£1,950

£1,250,000

£2,250

Fees for higher value propositions may be subject to negotiation

Subject to negotiation

£1,500,000

£2,500

£2,000,000

£3,050

£3,000,000

£3,830

£5,000,000

£5,380

Of course, these are just the fees set by one bank. The cost of appraisals at other organisations might differ significantly, but this should give you an idea of the sort of costs you can expect to pay.

See more of our blog posts about the commercial property sector or find out what properties we currently have available.