What is my commercial property worth?

Broker opinion of value or appraisal: which one you need

Owners often ask us for an “appraisal” when what they really need is a pricing opinion to decide whether to sell. The two documents answer different questions and are prepared by different professionals.

You need an appraisal when a lender, court, taxing authority, estate or partnership agreement requires one. You want a BOV when you are deciding whether, when and how to sell, or when you need a market reality check before talking to a lender or partner. Plenty of owners get both: a BOV to plan the sale and, later, the buyer’s lender orders the appraisal. Knowing how a BOV and an appraisal might differ helps you avoid surprises during the buyer’s financing.

The income approach: valuing a property by what it earns

Investors buy income. For leased property, the income approach is usually where the value conversation starts and ends.

Step one: net operating income

Net operating income (NOI) is the rent and other income the property collects, minus vacancy and credit loss and the operating expenses an owner pays. Operating expenses include taxes, insurance, repairs, management, utilities the owner covers and common area costs. NOI does not include mortgage payments, depreciation or the owner’s income taxes.

We rebuild NOI the way a buyer will. That means using market vacancy rather than assuming 100 percent occupancy forever, adding a management fee even if you self-manage, resetting property taxes to what a new owner is likely to pay after a sale, and using current insurance quotes. On leases, we check whether tenants actually reimburse what the lease says they should. Expenses on a tax return rarely match what a buyer underwrites.

Step two: the capitalization rate concept

A capitalization rate (cap rate) is the relationship between NOI and price. Buyers use it as shorthand for the return they expect and the risk they see. A lower cap rate means buyers will pay more for each dollar of income, which happens when the income looks safe and is likely to grow. A higher cap rate means buyers want more return because they see more risk: short leases, weak tenants, an old building, an expensive insurance picture or a soft location.

Cap rates are not a fixed number for a city or property type. They move with interest rates, lender appetite and buyer demand, and they vary widely within the same street depending on the lease and the building. We set the cap rate range for your property from recent sales and active buyer feedback, not from a published average.

When income alone is misleading

Below-market rents, a vacancy you are about to fill, a tenant about to leave or a lease with a large upcoming rent increase all change the picture. For those, we may look at value on current income and on stabilized income, and explain what a buyer will pay for the difference (usually less than the full upside, because they carry the risk).

The sales comparison approach

Comparable sales show what buyers have actually paid for similar property. We look for closed sales of the same property type, in the same submarket, as recent as possible. Then we adjust for what differs: size, age, construction, condition, frontage and visibility, parking, ceiling height and loading for industrial, lease status and the terms of the sale.

Comparable sales can be expressed per square foot of building, per unit for multifamily, or per buildable square foot or per acre for land. Each measure has blind spots. A price per square foot for a fully leased building and a vacant one of the same size can be far apart, so we never use a per-foot number alone.

In thin markets, such as a specialty building in a smaller city or a unique Brooklyn mixed-use property, good comparables are scarce. We say so in the BOV and lean more on the income and cost approaches, along with direct conversations with active buyers.

The cost approach and replacement cost

The cost approach asks what it would cost to build the same building today, less depreciation, plus the value of the land. Appraisers use it mainly for newer buildings and special-purpose properties. For owner-users, it is also how they think: if building new costs about the same as buying yours, they will often choose new construction unless yours is cheaper or available sooner.

This is where our construction background earns its keep. Our principal holds a Florida Certified General Contractor license and a Florida plumbing contractor license, so our replacement cost estimates come from building experience, not a cost manual alone. We look at what it would take to replicate the structure under current codes, including today’s wind load, flood elevation and energy requirements in Florida, or current building and zoning rules in New York. We also estimate what a buyer would spend to bring an older building up to the standard they need: roof, HVAC, electrical service, restrooms, ADA access, fire protection.

That improvement estimate matters as much as the replacement cost. Buyers deduct it from their price, often with a cushion. When we can show a realistic, contractor-backed number, the deduction is usually smaller than what a buyer would guess.

Land value and highest and best use

Sometimes the building is not the point. An older single-story retail building on a corner lot, a small industrial building on a large parcel, or a Brooklyn property with unused zoning floor area may be worth more to a developer than to someone who wants to keep running it as it stands.

Highest and best use is the legally permitted, physically possible, financially feasible use that produces the highest value. To test it, we look at:

• Zoning: permitted uses, density, height, setbacks and parking requirements, and whether a rezoning or variance is realistic.
• Site conditions: size, shape, access, utilities, wetlands, flood zone and any environmental history.
• Market demand: whether there are buyers for what could be built, such as housing, self-storage, medical or industrial.
• Cost and time: construction cost, approvals and impact fees, and how long it takes to entitle and build.

Developers value land by working backward: what the finished project will be worth, minus construction, soft costs, financing and profit. The remaining number is what they can pay for the land. If that number is higher than the value of your building as an operating property, your buyer pool is developers, and we market accordingly. See our development sites service for more.

What pushes commercial value up or down

Location, access and visibility still matter most of all, but these are the factors owners can often improve or document before a sale. Our BOV tells you which ones are worth working on.

Valuing property in Florida versus New York

We work in both states, and the same building type can be valued very differently in each. These are the differences that come up most often. Rules and tax rates change, so confirm current details with your attorney and CPA.

Older Florida condominium buildings also face milestone inspection and structural integrity reserve requirements, and Miami-Dade and Broward have long required recertification of older buildings. If your property is a commercial condo or sits in an older building, we ask about those reports early. Foreign sellers in either state should talk to a CPA about FIRPTA withholding before listing.

What to send us for a valuation

We can give a preliminary range from the address alone, but the BOV is only as good as the information behind it. Here is what helps, by property type:

Income property (office, retail, industrial, multifamily, mixed-use)

• Current rent roll with lease start and end dates, rents, options and deposits.
• Copies of leases and amendments, or at least the key terms.
• Operating statements for the trailing 12 months and the prior year.
• Property tax and insurance bills.
• Any capital work in the last five years, with permits.
• For New York buildings with apartments: rent stabilization status and registration history.

Owner-user buildings

• Building size, year built, construction type and site size.
• Roof, HVAC and electrical age, and any recent upgrades.
• How you use the space (office, warehouse, shop, clinic) and any specialized improvements.
• Whether you would stay as a tenant after a sale.

Land

• Parcel numbers, survey, zoning, utilities and any prior site plans or environmental reports.

Send it to us through the contact page or call 239-256-5005. We keep your numbers confidential.

How we deliver the BOV

After we receive your information and walk the property, we prepare a written BOV. It includes:

1. Property summary: location, building, site, zoning and tenancy.
2. Income analysis: our rebuilt NOI and the cap rate range we believe buyers will apply, for income property.
3. Comparable sales and active competition: what has sold, what is listed, and how your property stacks up.
4. Cost and improvement notes: estimated work a buyer will price in, from our construction experience.
5. Value range and recommended pricing strategy: a range, not a single number, with an explanation of what would move you toward the top or bottom of it.
6. Likely buyer pool and marketing plan: who we expect to pay the most, and how we would reach them.

We then review it with you by phone or in person. The BOV carries no obligation to list. If you decide to hold, it is still useful for refinancing conversations, partnership planning or a future sale.

Two hypothetical valuations

These examples are hypothetical and do not describe real clients or properties.

Hypothetical income property: a Brooklyn mixed-use building

Picture a four-story building with a ground-floor store and apartments above, some of them rent-stabilized. The commercial lease expires in two years. We would value the residential income under current stabilization rules, without assuming increases the 2019 law no longer allows, and treat the store as a lease-up opportunity at market rent with a cost and time allowance for a new tenant. We would check the certificate of occupancy, open DOB and HPD violations, and whether the lot has unused zoning floor area. If it does, a developer or a buyer planning an enlargement could become the top bidder, and we would test that value alongside the income value.

Hypothetical owner-user building: a Fort Myers flex building

Picture a single-tenant flex building with office in front and warehouse with roll-up doors in back, occupied by the owner’s contracting business. There is no rent roll, so we would compare it to recent sales of similar flex buildings, estimate the market rent a tenant would pay, and check replacement cost against current construction costs in Lee County. Roof age, wind mitigation and flood zone would drive the insurance conversation. If the owner wanted to stay, we would also price a sale-leaseback, where the rent the owner agrees to pay largely sets what an investor will offer.

From a value to a sale

A BOV is often the first step toward listing. When you are ready, our seller pages explain how we run the sale in each market: selling commercial property in Southwest Florida, selling in Brooklyn, selling in Miami and selling in Fort Lauderdale. If you are selling to buy again, see our 1031 exchange advisory and investment sales pages.