How to value commercial real estate

In the United States, small commercial real estate is classified as property worth up to $5 million. There are five factors that determine the valuation of commercial property:

  • Income Expense Ratios: Rental income should cover at least 1.2 to 1.3 times the cost of property maintenance, which may include taxes, insurance, sewage charges, etc. Generally commercial property is valued around 8 to 12 times the gross income generated from the property. However, valuation may also depend on the expected capital gains from property acquisition and sale.
  • Tenancy Mix: Multitenant commercial property lowers vacancy risk and boosts valuation over single tenant properties. In the case of mixed use tenancy, higher valuation is given to properties with 51 percent of the income generated from the commercial tenancy.
  • Anchor Tenant: An anchor tenant with a AAA lease and 25 to 30 percent property occupancy increases the overall value of the property by at least 10 to 15 percent. A well-known principle tenant generates foot traffic and increased sales for all tenants, increasing rent and property value.
  • Property Taxes: High property taxes not supported by high rental incomes decrease the value of the real estate. Typically, taxes account for about 1 to 3 percent of the overall property value but vary according to state. For example, taxes in Midwestern states hover around 1 percent, but most property owners in Michigan, Florida and New Jersey pay around 3 percent. However, properties that are more than 51 percent occupied by commercial tenants can qualify for federal and state tax refund programs.
  • Location: Like other types of real estate, location is key. Commercial real estate located near a national highway or a big shopping mall is valued more than those in remote locations.
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