Most important aspect of a commerical property

[hastalavista]

Denis DeSaix

How about government buidlings (i.e. - city hall, fire nd police stations), religious facilities, schools? Would these owner occupied properties that produce no income be charcterized as commercial?

Howard-

I believe some could be.
A government building built to house government offices could also house private/commercial offices and thus be rented out.
Some types of properties may be too specialized to be marketable as income-producing properties.

How would one value the Pentagon, for example?
Not many office complexes to compare it to, is there?
Cost = Value? I don't know. Once we figure out how much it cost to build, perhaps no-one would buy it for that price?
Income Approach? Can we estimate market rents, lease-up rate, estimate a vacancy rate and estimate the operating expenses? Next, we determine a NOI and forecast a reasonable cap rate. With those components, can we conclude a reasonable and credible value? I think so.

(If I bid the job, can I count on you to co-op it with me? :laugh:
I'm going to ask Greg Boyd to come-in too; someone has to do the measuring! )

 

[PropertyEconomics]

I personally think the definition is not right ... a commercial property does not have to produce income in the conventional sense. Most owner occupied properties dont and yet they are still commercial in my mind.
Id not try to appraise the Pentegon just because the definition doesnt classify it as a commercial property per se.
Its a very poorly worded definition.

 

[hastalavista]

I personally think the definition is not right ... a commercial property does not have to produce income in the conventional sense. Most owner occupied properties dont and yet they are still commercial in my mind.

PE-
Maybe there is a nuance in this discussion that escapes me, but the definition doesn't state a property must produce income. It only requires that it could (has the ability to do so) produce income and would therefore be marketable as an income-producing property; ergo, owner-occupied properties are considered commercial- as per the definition and in your mind! :new_smile-l:

Id not try to appraise the Pentegon just because the definition doesnt classify it as a commercial property per se.

What approach would one use to value the largest office complex in the world?

 

[PropertyEconomics]

Denis .. let me give you an example real world ... Wal-Mart ... all are now real estate owned of the company. They are not leased, and yet while they could be, it is practical they never will be. Yet they remain commercial properties.
I dont see the distinction of the need for being able to produce income. A commercial property can house the owners business which produces income.
I do suppose the fact they can be sold, which would produce lump sum income to the owner, could be intrepreted to meet the definition but Im still not convinced.


My difficulty is with the definition only because there are so many vast commercial enterprises and properties in existence.

 

[PL1957]

Denis .. let me give you an example real world ... Wal-Mart ... all are now real estate owned of the company. They are not leased, and yet while they could be, it is practical they never will be. Yet they remain commercial properties

First, Wal-Mart, while owning much of its real estate, still has a substantial number of stores that it leases.

Second, the prototypical Wal-Mart store is of a design that could easily be used for an alternate use, either by an owner or a tenant, falling easily within a traditional "commercial" analysis.

 

[hastalavista]

PE-

I appreciate the real life example of Wal-Mart (somewhat like the Pentagon of retailers!).

But those buildings were built with the intent to house a Wal-Mart-like entity. And, if Wal-Mart chooses to do so, they could rent them to Target. The point being is that Wal-Mart's properties fit the definition of commercial property if owner-occupied or non-owner occupied; income generation is not a requirement of being a commercial property... but the ability to generate income such that the income is attractive to investors is a requirement of being a commercial property.

I say "such that the income is attractive to investors" being a requirement for one simple reason- the property has to compete against other income-producing properties. If not, then income analysis may not be the correct tool to use in valuation.
I can rent-out my house. However, an investor can probably get a better return by buying a different type of income-producing property. So while my house can generate income, it isn't attractive to investors and would not be considered a commercial property. The income approach is probably not the most reliable indicator of how the market reacts to my house. That makes sense since my house's value is in its utility as a residence, not in its ability to generate income competitively as compared to other income-properties.

For those types of properties that typically do produce income, even in those cases where a specific property doesn't, income analysis is the significant valuation tool.

 

[PropertyEconomics]

PE-

I appreciate the real life example of Wal-Mart (somewhat like the Pentagon of retailers!).

But those buildings were built with the intent to house a Wal-Mart-like entity. And, if Wal-Mart chooses to do so, they could rent them to Target. The point being is that Wal-Mart's properties fit the definition of commercial property if owner-occupied or non-owner occupied; income generation is not a requirement of being a commercial property... but the ability to generate income such that the income is attractive to investors is a requirement of being a commercial property.

I say "such that the income is attractive to investors" being a requirement for one simple reason- the property has to compete against other income-producing properties. If not, then income analysis may not be the correct tool to use in valuation.
I can rent-out my house. However, an investor can probably get a better return by buying a different type of income-producing property. So while my house can generate income, it isn't attractive to investors and would not be considered a commercial property. The income approach is probably not the most reliable indicator of how the market reacts to my house. That makes sense since my house's value is in its utility as a residence, not in its ability to generate income competitively as compared to other income-properties.

For those types of properties that typically do produce income, even in those cases where a specific property doesn't, income analysis is the significant valuation tool.

And in an owner occupied office/warehouse market where there are a number of sales ... these properties remain commercial (perhaps industrial but you get my drift) and the market appraoch would be the best measure of value even though they could be rented. Just one example of a commercial property not having a strong income appeal among market participants.

 

[hastalavista]

Just one example of a commercial property not having a strong income appeal among market participants.

This I can understand; if the market participants do not use income analysis as their deciding factor, neither should we.

But here's a side-question that may have a different answer in different markets- I'll take your answer as only specific to your market:
In such an environment where the majority of properties are "traded" as owner-user/occupant, are the income-approach results always lower than the SCA?

 

[Wayne Tomlinson]

In Illinois, or knot headed governor wants to sell the largest state office building in Chicago. He wants to pay off some of the bills that he has created. Then the state would rent it back.

If you were to appraise it, is it commercial? Was it commercial before the governor sold it?

When the courts said that he couldn't sell it, he then wanted to mortgage it.

I think that it would be a sub-prime loan.

Back to the income. I believe if an existing leased commercial property is valued, the income is likely to be the largest consideration. All the other factors which have been mentioned in this thread, are already included and accounted for in the income stream. The potential buyer/appraiser or whoever will have the problem discussing or factoring in the future quality and also quantity.

It all follows the $$$a.

Wayne Tomlinson

 

[CCAAMO]

Everyone is in agreement here....QUALITY and QUANTITY of the in the INCOME stream. You must also consider the DURABILITY of the income stream. Will the income last for a reasonable amount of time?

The one thing about income property is the rents will show the market reaction, if any, to different locations. Many times you don't have good data to argue the market effect of different locations for single family homes.