Why Commercial is Different

[Terrel L. Shields]

After responding to @ucbruin about an RV park, perhaps it can be educating to expand my comments there and explain a few things about non-residential work.
First, specializing in certain kinds of properties is a good thing, and work a much larger area and client base. That might require some sort of state or regional advertising. But it is the most lucrative way. I knew a fellow from Florida who did only large Malls nationwide. His fee was sometimes in the 5 figure range. His personal database was extensive. His methods were oriented towards the income approach.
Unlike residential, many commercial properties are strictly purchased for their income potential, and sales may be important to develop a cap rate, there are sources of cap rates for certain businesses. This applies to most agricultural businesses, rental properties like strip malls and apartments. And items like RV parks also involve income - a more important consideration than sales. In some unique properties the sales approach may not even be developed. Cost and Income are. Churches and other not-for-profit enterprises are almost always valued by cost approach with depreciation being derived from any market sales available. This is not secondary market.
I've been in an argument over on FB with someone who is fixated upon sales. And thinks all adjustments must be based upon sales. That is not true either. In the case of a hotel, resort, RV park, etc. the individual enterprise and its income performance will dictate the depreciation, not so much the buyers' peccadillos.
Here is an incomplete list of specialties an appraiser versed in the subject could develop a regional business specializing in, and probably need no more than 20 -40 assignments a year.
RV Parks, Resorts, Marinas, golf courses
Hotels, motels, apartments
Grain handling facilities - granaries, port facilities, seed and grain processing plants, feed mills, Agri stores, hatcheries, processing plants (10s of K fees)
Confined Animal Feeding Operations (CAFOs), including...
Building intensive agriculture (poultry barns, hog farms, feedlots)
Timber (note you might need to be a certified forester or work with one)
Water rights (mainly in the West)
Mineral rights (oil country)
Cell towers, billboards, airports, hangars, etc.
Downstream oil facilities - pipelines, refineries, etc.
Marine Surveyor (boat appraiser)
Manufacturing facilities, abandoned plants included
Yes, you may need some specialized knowledge to do those but it might be a good skill to develop that will eliminate the high low residential mortgage market.

 

[ucbruin]

"His methods were oriented towards the income approach.
Unlike residential, many commercial properties are strictly purchased for their income potential, and sales may be important to develop a cap rate, there are sources of cap rates for certain businesses."

12-18 months before licensing was implemented I worked for a fee shop which mostly did commercial assignments....
I did it so I could get a CG license....
Whenever a client questioned a value he would say, "raise rents (increase income)"....

 

[TerryRohrer]

Whenever a client questioned a value he would say, "raise rents (increase income)"....

And the natural question for an appraiser to ask when someone is arguing that potential adds value...like protesting/lowering taxes, raising rents, reducing vacancies, etc, is: "Why haven't you picked all that low hanging fruit?"

 

[George Hatch]

You can't really specialize into these atypical property types without greatly expanding your geographic range.

 

[RCA]

After responding to @ucbruin about an RV park, perhaps it can be educating to expand my comments there and explain a few things about non-residential work.
First, specializing in certain kinds of properties is a good thing, and work a much larger area and client base. That might require some sort of state or regional advertising. But it is the most lucrative way. I knew a fellow from Florida who did only large Malls nationwide. His fee was sometimes in the 5 figure range. His personal database was extensive. His methods were oriented towards the income approach.
Unlike residential, many commercial properties are strictly purchased for their income potential, and sales may be important to develop a cap rate, there are sources of cap rates for certain businesses. This applies to most agricultural businesses, rental properties like strip malls and apartments. And items like RV parks also involve income - a more important consideration than sales. In some unique properties the sales approach may not even be developed. Cost and Income are. Churches and other not-for-profit enterprises are almost always valued by cost approach with depreciation being derived from any market sales available. This is not secondary market.
I've been in an argument over on FB with someone who is fixated upon sales. And thinks all adjustments must be based upon sales. That is not true either. In the case of a hotel, resort, RV park, etc. the individual enterprise and its income performance will dictate the depreciation, not so much the buyers' peccadillos.
Here is an incomplete list of specialties an appraiser versed in the subject could develop a regional business specializing in, and probably need no more than 20 -40 assignments a year.
RV Parks, Resorts, Marinas, golf courses
Hotels, motels, apartments
Grain handling facilities - granaries, port facilities, seed and grain processing plants, feed mills, Agri stores, hatcheries, processing plants (10s of K fees)
Confined Animal Feeding Operations (CAFOs), including...
Building intensive agriculture (poultry barns, hog farms, feedlots)
Timber (note you might need to be a certified forester or work with one)
Water rights (mainly in the West)
Mineral rights (oil country)
Cell towers, billboards, airports, hangars, etc.
Downstream oil facilities - pipelines, refineries, etc.
Marine Surveyor (boat appraiser)
Manufacturing facilities, abandoned plants included
Yes, you may need some specialized knowledge to do those but it might be a good skill to develop that will eliminate the high low residential mortgage market.

You are right.

Although, I would comment, that value of income predictions for DCF is questionable. The assumption of Direct Capitalization, that previous income is a good basis for predicting future income, while in some ways more realistic than DCF, is dependent on a cap rate that the often "sometimes" fallible market dictates, and most likely, the appraiser is going to use his subjective judgment to move the cap rate up or down a bit. "The great economist Mike Tyson said that everyone has a plan, - until they get punched." - And I would add that no one likes to think about that.