How Do I Determine The Value Of My Property – Which Valuation Approach Is The Best?

There are three primary types of valuation approaches utilized to determine the property value of commercial properties. Each approach has merit for specific situations with the pros and cons outlined below.

  1. Income Approach:
    • Pros:
      • Utilizes the income generated by the property as the primary factor in determining its value, making it especially relevant for income-producing properties such as office buildings, retail centers, and apartment complexes.
      • Considers future income potential, which can be particularly useful for properties with varying lease terms or development opportunities.
      • Takes into account market trends and investor expectations regarding returns on investment or cap rates.
    • Cons:
      • Requires accurate and reliable data on rental incomes, operating expenses, and market capitalization rates.
      • Sensitivity to changes in market conditions and rent levels, which can impact valuation significantly.
      • Valuation may be subjective, as it heavily relies on assumptions about future income streams and market conditions.
  1. Sales Comparison Approach:
    • Pros:
      • Utilizes comparable sales data of similar properties in the market to determine the subject property’s value, making it straightforward and intuitive.
      • Provides a benchmark by which potential buyers and sellers can gauge the property’s market value.
      • Suitable for properties with a significant number of comparable transactions in the market.
      • Tends to represent the most common approach for valuation and often used for owner-occupant properties.
    • Cons:
      • Relies heavily on the availability of accurate and recent comparable sales data, which may not always be readily available depending on the geographic market or property type.
      • Requires adjustments to be made for differences between the subject property and the comparable properties, which can be subjective and may vary between appraisers.
      • Less suitable for unique or specialized properties that lack comparable sales data.
  1. Cost Approach:
    • Pros:
      • Values the property based on the cost of reproducing or replacing it, adjusted for depreciation, making it particularly useful for new or relatively new properties.
      • Provides a baseline value for the property, especially when market conditions are volatile or when there are limited comparable sales data.
      • Offers insights into the cost of land and improvements, which can be beneficial for insurance purposes.
    • Cons:
      • Does not directly consider the income generated by the property or prevailing market conditions, which may result in inaccuracies, particularly for income-producing properties.
      • Relies on accurate estimates of construction costs, depreciation, and land values, which can vary over time and across regions.
      • May undervalue properties with unique or specialized features that cannot be easily replicated.

Realizing each approach has its strengths and weaknesses, the choice of valuation method often depends on factors such as the property type, market conditions, and the availability of relevant data. In practice, appraisers may use a combination of these approaches to arrive at a comprehensive and reliable valuation while a broker primarily uses the Sales Comp Approach and may rely more heavily on properties in closer proximity to the subject property.

Also, it must be noted appraisals are required when bank financing is involved and appraisers tend to have knowledge of the contracted sales price, which provides a safeguard for the bank. A Broker Opinion of Value utilizing a market driven Sales Comp Approach removes any bias tied to a contracted sales price or a past appraisal.

To learn more about the Commercial Property Valuation process and our firsthand experience of the pros and cons feel free to contact Reliant Partners.

Why Should I Hire a Broker & Who Pays the Commission?

Hiring a Commercial Real Estate (CRE) broker to represent a tenant or landlord can offer several advantages. Here are some reasons why businesses or investors often choose to work with a CRE broker when leasing commercial space:

  1. Market Knowledge: CRE brokers have in-depth knowledge of the local real estate market. They can provide insights into current market trends, rental rates, and available properties, helping tenants and landlords make informed decisions.
  2. Negotiation Expertise: Brokers are skilled negotiators who can work on behalf of tenants or landlords to secure favorable lease terms. They can negotiate on aspects such as rental rates, lease duration, tenant improvements, and other important provisions.
  3. Time and Efficiency: Searching for and securing commercial real estate as well as monitoring available, competitive properties can be a time-consuming process. A broker can streamline the process by identifying suitable properties, scheduling viewings, and managing the paperwork, allowing tenants and landlords to focus on their core business activities.
  4. Access to a Network: Brokers often have established relationships in the commercial real estate market whether it be active tenants in the market, property owners or comparable market knowledge of “deals in the market.” This network can be valuable in uncovering off-market opportunities and accessing a broader range of available properties.
  5. Customized Solutions: A CRE broker can tailor their services to the specific needs and requirements of the tenant or landlord. They can help identify properties that align with the tenant’s business goals or advise landlords on the right tenant fit and ensure that the lease terms meet a client’s needs.
  6. Understanding of Lease Terms: Commercial leases can be complex, with various clauses and legalities. A broker can help tenants and landlords understand the terms of the lease, including any potential pitfalls or advantageous provisions. They negotiate various business aspects of the lease, including rent, lease duration, renewal options, modifications, or improvements to the property (including who will bear the cost) and any special provisions (e.g., subleasing, expansion, contractions, or early termination).
  7. Cost Savings: While it might seem counterintuitive, collaborating with a broker can lead to cost savings. Brokers can leverage their market knowledge, process efficiency and negotiation skills to secure favorable terms and save parties money in the long run. They clarify all additional lease costs related to base rent, maintenance, utilities, property taxes and common area fees. Additionally, they ensure you fully understand how these costs are calculated and negotiate to limit any unexpected expenses.
  8. Risk Mitigation: Brokers can help tenants navigate potential risks associated with leasing commercial space. They can advise on issues such as zoning regulations, environmental concerns, and other factors that may impact the suitability of a property.
  9. Experience and Expertise: Commercial real estate transactions can be complicated, and having a professional with experience in the field can be invaluable. Brokers bring a level of expertise that can guide tenants through the entire leasing process.
  10. Communication: Successful negotiation is about finding a balance that meets both the tenant’s and landlord’s needs. Clear communication and a well-researched approach can significantly improve your chances of securing a favorable lease agreement.

While a broker’s role and the payment of commissions should be disclosed upfront, it is common for brokers to negotiate leases in a competitive marketplace and generally the commission is paid by the landlord. Rather than embark on searching for properties and negotiating a lease yourself it is wise to reach out to a broker first. They can explain the negotiating process, their value and how they are paid.

In summary, hiring a CRE broker to represent a tenant or landlord can provide numerous benefits, including market knowledge, negotiation expertise, time savings, access to a network and personalized solutions tailored to meet their needs. Feel free to reach out to Reliant Partners if you have questions or interest.

Understanding NNN Operating Expenses: Can I Negotiate a Cap or Limit my Exposure?

In a commercial lease, NNN operating expenses, also known as Triple Net expenses, refer to the additional costs that tenants are responsible for on top of their base rent. The term “NNN” stands for “Net, Net, Net,” indicating that the tenant is responsible for the following three types of expenses:

  1. Property Taxes (Net): This includes the tenant’s share of property taxes assessed on the commercial property. In Indiana, property taxes are paid in arrears. This means the assessed value is the prior year for taxes paid the following year (e.g., 2023 Property Taxes Payable in 2024). The landlord calculates the total property taxes for the entire property, and each tenant contributes a portion based on the proportionate size or value of their leased space.
  2. Property Insurance (Net): Tenants are required to contribute to the cost of insurance coverage for the commercial property. This typically includes insurance for the building’s structure, common areas, and sometimes liability insurance. As with property taxes, the tenant’s share is determined by the size or value of their leased space.
  3. Common Area Maintenance (Net): Common Area Maintenance (CAM) expenses cover the costs associated with maintaining and repairing common areas shared by multiple tenants, such as parking lots, hallways, landscaping, and other communal spaces. Tenants pay a proportionate share of these expenses based on the size or percentage of the total leased space they occupy.

When a lease includes NNN expenses, it means that the tenant is responsible for these extra costs in addition to their base rent. This type of lease structure is common in commercial real estate and is often seen in retail, office, and industrial leases. It allows landlords to pass on the operational costs of the property to tenants, providing them with a predictable income stream, while requiring tenants to cover the ongoing expenses associated with property ownership. It is important for tenants to carefully review and understand the NNN provisions in their lease agreements, as these expenses can significantly impact the overall cost of occupancy.

Negotiating caps on NNN (Triple Net) operating expenses is possible, but it depends on the terms of the lease agreement and the willingness of both parties to negotiate. Negotiating caps can be a way to limit the tenant’s exposure to unpredictable increases in operating expenses.

Here are some steps you can consider:

  1. Research Market Standards: Research market standards for NNN leases in your location and industry. Knowing what is typical in your market can help you make informed proposals during negotiations.
  2. Identify Specific Expenses: Identify specific operating expenses that you want to cap. This could include property taxes, insurance premiums, or maintenance costs. Being specific about the expenses you want to cap can make negotiations more focused.
  3. Prepare a Proposal: Draft a proposal that outlines the caps you are seeking and the reasons behind them. For example, you might argue that capping property tax increases can provide stability for the tenant and make it easier to budget.
  4. Negotiate with the Landlord: Initiate discussions with the landlord or their representative. Present your proposal, explaining the benefits of having caps on certain operating expenses. Be open to compromise and negotiation to find a mutually agreeable solution.
  5. Consider Lease Renewal or Amendment: If you are renewing the lease or negotiating an amendment, this may be an opportune time to discuss changes to the terms, including caps on operating expenses.
  6. Consult Legal and Real Estate Professionals: Before finalizing any negotiations, consider consulting legal and real estate professionals to ensure that the proposed changes align with local laws and regulations and protect your interests.

Remember that successful negotiation often involves compromise, so be prepared to find common ground with the landlord. Additionally, the negotiation process may vary depending on local real estate market conditions and the specific dynamics between the parties involved. Lastly always seek the guidance of an experienced CRE broker like Reliant Partners.

CRE Investing: Owner-Occupant Commercial Investors vs. Third-Party Commercial Investors

Commercial real estate investment is a multifaceted domain that attracts a diverse range of investors. Owner-occupant commercial investors and third-party commercial investors represent two distinct approaches to navigating the complex landscape of commercial properties. Reliant Partners has learned firsthand that understanding the differences between these two types of investors is crucial for anyone seeking to delve into the world of commercial real estate.

Owner-Occupant Commercial Investors:

  1. Primary Purpose:
  • Owner-occupant commercial investors, like Reliant Partners, are typically businesses or entrepreneurs who purchase commercial properties with the intention of using them for their own operations. This may include office spaces (like 59th & College or the current 146th Street office), retail outlets, or manufacturing facilities.
  • The primary purpose of such investments is to provide a physical space for the investor’s business operations (e.g., 5594 E. 146th Street), to ensure greater control over the property and to have the ability to tailor it to specific needs.
  1. Financial Motivations:
  • While financial returns are a consideration for owner-occupant investors, their primary focus is often on the operational benefits of owning the property, such as cost stability, control over the space, and long-term strategic advantages (including wealth accumulation).
  1. Decision-Making Factors:
  • Decision-making for owner-occupant investors is heavily influenced by operational requirements. Factors such as location, space configuration, and suitability for business activities take precedence over traditional investment metrics like capitalization rates, which was the case for the Reliant Partners office building on 146th.
  1. Tax Implications:
  • Owner-occupant investors may benefit from tax advantages, including potential deductions for mortgage interest and property depreciation. Tax considerations are often intertwined with the overall financial strategy of the business along with long-term wealth creation.

Third-Party Commercial Investors:

  1. Primary Purpose:
  • Third-party commercial investors (like 59th & College LLC), on the other hand, are individuals or entities whose primary goal is generating profit through property appreciation, rental income, or a combination of both. Their investments are not tied to personal use but focused on the financial performance of the property, which is the case for Reliant Partners’ first development project at 5915 N. College Avenue.
  1. Financial Motivations:
  • The key driver for third-party commercial investors is financial gain. They analyze potential returns based on factors like rental yield, property appreciation, and market trends. Profitability is the central consideration in their decision-making process and can be measured from cash flow and/or upon a sale of the property.
  1. Decision-Making Factors:
  • Traditional investment metrics, such as return on investment (ROI), capitalization rates, and market demand, heavily influence the decision-making process for third-party commercial investors. They prioritize properties with high potential for appreciation and steady rental income.
  1. Tax Implications:
  • Tax strategies for third-party investors are centered around maximizing returns and minimizing liabilities. Deductions for property management expenses, mortgage interest, and depreciation are crucial elements of their tax planning, which is Reliant Partners’ role as the property and asset manager of 5594 E. 146th Street.

In summary, the divide between owner-occupant commercial investors and third-party commercial investors lies in their primary objectives and decision-making criteria. While owner-occupants focus on operational needs and long-term strategic advantages, third-party investors prioritize financial returns and adhere to traditional investment metrics. Reliant deals with both perspectives as we are an owner-occupant in our 146th Street building with investment partners and participate as a third-party investor in other commercial properties.

Both approaches have their merits and drawbacks, and understanding these differences is essential for anyone navigating the intricate landscape of commercial real estate investment. Feel free to reach out to arrange a meeting and/or tour of any of our CRE investments to further discuss how Reliant Partners may be a resource to achieve your investment goals.