You own a small hotel. Next year you retire and are worried about the future. Your only son has decided against a life in the hotel business. What should happen to your life's work now? You will probably have to sell it...
What is your commercial property worth and how is the value calculated? How does this actually work? Do you need professional help? Questions upon questions - but you can't answer any of them.
From my many years of experience as an estate agent, I know that when selling commercial property, the term "commercial property valuation" leads to confusion. Most of my clients do not know how to value a commercial property and what needs to be considered. Doing their own research then often leads to dangerous half-knowledge, which can result in you selling your property below value.
With this blog post, I would like to introduce you to commercial property valuation. After reading this post, you will know which valuation procedures there are, who is allowed to carry out this valuation and how it actually works.
Valuing commercial real estate: The most important procedures
Capitalised earnings method
The characteristic of a commercial property is that it is intended for commercial use. Income is to be generated, therefore the income value is calculated in the valuation.
In the capitalised earnings value method(§ 5 LBG), the main focus is not on the material value of the property, but rather on how much profit the property generates . Therefore, this method is only used for properties that generate income, i.e. for commercial properties that are let on a long-term basis (e.g. management properties such as medical centres, supermarkets, etc.).
The following valuesare needed tocalculate the capitalised earnings value:
- Gross profit (=total of all income, mostly the sum of net rents)
- Management costs (= maintenance costs, administration costs, etc.)
- Property interest rate (= interest rate customary in the market for a property)
- Land value (= market value of the undeveloped land)
Let's take a look at the formula of the simplified capitalised earnings method:
EW = (RoE - BWK) * V + BW / qn
I think at this point it quickly becomes clear that this is not a simple calculation example, but requires specialist knowledge. The explanation of the individual variables and their calculation would go beyond the scope of this blog post and I think it would cause more confusion than clarification.
Therefore, my tip: If you want to value your commercial property accurately, I recommend that you consult an expert. He is familiar with the individual values and knows how to calculate them.
Material and comparative value method
Attention in the case of vacant commercial properties or undeveloped, unrented land:
The capitalised earnings method is not used here. In these cases there are 2 other valuation methods:
Real value method (§ 6 LBG)
This procedure can be used to determine the value of developed land. Here, the valuation focuses on the following question: How much would it cost to construct a new building on an existing property at the present time? The real value of the property results from the land value and the real value of the building (construction value including ancillary construction costs).
Comparative value method(§ 4 LBG)
In the comparative value procedure, a comparative value is calculated. The comparative value is based on the purchase price realised by the sale of a similar property. This procedure is mainly used for undeveloped land. If land alone is to be valued, neither the asset value method nor the capitalised earnings value method is suitable, as the land and building values are always valued separately.
Are there factors that reduce or increase the value of a commercial property in the respective processes?
Yes, the following circumstances are included in the assessment:
- Location of the commercial property
- Internal development (e.g.: connection to road network)
- Economic environment (e.g. accessibility for employees, labour market, etc.)
- Third-party usability (Can your commercial property be used directly by someone else without major modification?)
- Value-reducing factors, such as construction defects and structural damage, rent ties, etc., are also taken into account.
Valuing commercial real estate: Valuation procedure
Before we get into the process of valuation, we must first clarify who is allowed to value a commercial property. The simple answer: Generally sworn and court-certified experts in the field of valuation of commercially and industrially used real estate (so-called. Court experts for real estate). How to check this qualification? Court experts must be registered in the list of court experts in the field of valuation of commercially and industrially used real estate at the Ministry of Justice. For the province of Tyrol you can find them here: http://www.rgb.at/sv/fg.cfm
Once you have commissioned an expert, the valuationtakes place in 6 steps
Step #1 : Obtain the necessary documents
- Land register extract
- Query in the Tyrolean Spatial Planning Act (property form, aerial photograph, environmental hazards,...)
- Collection of the building permit and, if applicable, the operating facility permit.
Step #2: Structural survey (determination of usable space, cubature, building defects and structural damage,...)
Step #3: Preparation of the findings on the basis of the documents
Step #4: Viewing the property
Step #5: The choice of the appropriate method (income, asset or comparative value method)
Step #6: Preparation of the expert opinion
How long does it take to prepare such an expert opinion? As a rule, you can expect 4 weeks. The prerequisite for this is that all necessary documents are available and that there are no delays.
Tip: To be on the safe side, leave the valuation of your commercial property to the experts!
As a real estate agent in Innsbruck, I know that you can do many things around real estate without a professional. When valuing commercial real estate, I strongly advise you not to go it alone! There are so many factors involved that you, as a layman, will hardly take into account. Can you make a forecast of how your income will develop in the future? Do you know the property interest rate and land value? Can you solve the above formula of the income procedure without further ado?
If you are honest, you will not be able to answer many of these questions. Therefore, the simple solution: Hire an experienced real estate appraiser to determine your property value.
With his expertise, he can determine a realistic capitalised value. A positive side effect: He will take care of all the necessary official and official channels for the preparation of your appraisal.
Would you like to place the valuation of your commercial property in experienced hands? You are welcome to contact us and we will arrange an appointment for a free and non-binding initial consultation.
Bernhard Großruck, M.D.