Zoning, title, deferred maintenance and NOI are among the many factors that influence real estate values.
Whether it be raw development land, a shopping center, an industrial building or an office building, there are any number of factors that play into the complexity of valuing such properties.
Here are eight key considerations that a property owner and/or the commercial real estate agent should not overlook in the process.
- Zoning – Some uses in the market are heavily restricted by certain zoning regulations. If, for instance, there is a very limited supply of General Industrial (GI) zoned properties, it adds an extra boost to the demand factor. On the other side of the coin, there may be a large supply of Limited Industrial (LI) Flex space, which far exceeds the current demand.
- Title Issues — Consider such things as easements, covenants and deed restrictions that may encumber uses for the property beyond zoning. Surprisingly this can happen more than one may think.
- Physical Condition – Has the property been maintained well? Or have essential issues been deferred? Buyers in today’s market are more cost conscience than ever – despite the fact that the contractor market is extremely competitive. Bottom line is that the numbers to improve or develop a property have got to make sense.
- Net Operating Income – Buyers are going to take a hard look at the leases and other revenue sources on an income property, but also related expenses. Are the rates at market or is there room for improvement? Are the leases full-service or triple net? What expenses are controllable … utility and common areas costs that are not passed through to the tenants can be a real problem.
- Tenant Mix – If this is an investment property, value will be seriously impacted by the stability of the tenants. Vacancies in some sectors (as in the case of LI Flex) can really pull values down. For the investor, it’s all about risk.
- Development Costs – While contractor costs have become extremely competitive, it’s no longer just about getting a plat approved and then building roads and improvements. Today’s regulatory environment has become more complex adding new requirements and increasing processing time. Consider issues like contaminated soils, the potential of archaeological studies, forestation requirements and preservation of historical structures.
- Financing – Lenders are still cautious about what kind of properties they will finance. Consider that a low volume of real estate closings in a market can create challenges for appraisers to justify strong sales prices. This may put the “fortunate” seller in the awkward situation of having to renegotiate the price so as to make the loan and equity package work.
- Resale value – While many purchasers are hung up about determining current market value, savvy investors and developers are also looking ahead to exit strategies. In an unstable market sometimes that is anybody’s guess.
In a market that is more price sensitive, it is incumbent on the owner and the commercial real estate broker to use all the above information to construct a profile of the ideal purchaser for the property.
Throw all this into the mix, with comparable sales and active inventory, to price the property accordingly.
Rocky Mackintosh, President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland, has been an active member of the Frederick community for over four decades. He has served as chairman of the board of Frederick Memorial Hospital and as a member of the Frederick County Charter Board from 2010 to 2012. He currently serves as chairman of the board of Frederick Mutual Insurance Company. Established in 1843, it is one of the longest enduring businesses in Frederick County.