No matter what your role is in a commercial real estate transaction — whether you’re a buyer or seller, a lender or a property manager, or even a broker or an investor — you are better equipped to make an informed decision after you consider a commercial property assessment.
But just what exactly is a commercial property assessment? Good question. In short, a commercial property assessment is an analysis of everything involved with a property. It can tell you how much money can be made on the property, what the return on the investment could potentially be, and how an investment in this property would compare with an investment in a similar property.
That could mean different things to different parties. For a commercial real estate investor, it’s a way of knowing whether they can make money by buying the property and renting it out (and ultimately selling it later). For a lender, the analysis might tell them whether they can reasonably expect a borrower to be able to pay the mortgage after they buy the property.
The commercial property assessment will look at both quantitative and qualitative aspects of a property. As far as quantitative data goes, important numbers to consider will be the potential sale price, how much square footage the property offers, the number of rentable units that are available and how much property tax will be owed.
When a potential buyer is looking at a commercial property, that buyer should consider both income and expenses. The income will encompass not only rent from each tenant but also late fees or service charges. Expenses will be costs like utilities, repair work, property management, snow removal, janitorial service, taxes and insurance. Note that the mortgage is not considered part of the expenses.
The difference between the income and the expenses is called the net operating income (or the NOI for short), and a greater NOI means a more valuable property. If the net operating income is zero or — worse — negative, this means the expenses exceed the income, and this is certainly not a worthwhile investment.
However, assuming a property has a positive NOI, subtracting the mortgage from that will give you an idea of your cash flow. This is the actual profit an investor will make off the property. Look at the NOI and the cash flow before you invest in a property.
But it’s not merely the black-and-white numbers you need to consider when you’re looking at a commercial property. A real estate assessment will also take into account what are known as narratives — parts of the property’s history that will affect the way the property is used. The assessment will also look at the previous owner and what other properties they own. If the property owner owes any money relating to the property in question — for example, to a contractor who did renovations on the property and is still waiting to be paid — those outstanding expenses will affect the value of the property.
A well-rounded commercial real estate assessment will consider the potential that the property has. How many units does the property have, and how many tenants can you accommodate? Based on market value, what sort of rent income can you expect from each unit per month? How much does rent typically rise annually in your area? For that matter, how much do property taxes rise?
When considering numbers like these, it’s also wise to consider how long a lease will be, and whether tenants in your area typically renew their lease at the end of their term or whether they move on to bigger or better properties.
Finally, when you go to sell the property, how much can you expect to make from it? Can you reasonably expect the property to increase in value?
Other qualitative aspects you should consider are the demographics in the area. Is the population steadily increasing? If so, what sort of people are moving to the area? Is the average income high and the unemployment low? What are the housing vacancy rates and the median cost of living? When it comes to capital real estate, these aspects of a community can bode well for the success of a business.
It should go without saying, but don’t just look at everything on paper. It can be tempting to buy up a commercial property investment with confidence that it will pay for itself, but you should pay a visit to the property in person before buying it.
Commercial real estate assessments aren’t limited to one property. An investment analysis can help you compare one property to another and decide which of them is the more valuable investment. Similarly, a portfolio analysis will look at many properties included in an investor’s portfolio, and a market analysis will compare the commercial property to similar ones in the market.If you need help assessing the value of a commercial property, Murphy Commercial Real Estate can help. Visit www.murphycre.com or reach out to a member of the team today by calling 410-266-1113.