Commercial real estate appraisals: more than a number
Are you looking for a new office or warehouse space to expand your business? If so, First National Bank is here and ready to help.
Whether you’re a seasoned business owner or a budding entrepreneur, the need for a banker in your search for new property is the same. Our experienced business bankers will work together to help you fund the next phase of your business, wherever that may be.
When you borrow to buy or refinance a building or property, the process most often requires an appraisal to establish the estimated market value of the property you’re considering; however, the report contains other valuable information.
“There’s more to commercial real estate appraisals than just the estimated market value,” Luke Garry, FNB business banker and experienced commercial real estate lender, says. “An appraisal helps identify risks and opportunities that assist the borrower in making a sound decision for their business, other than just the property itself.”
The building blocks of commercial real estate appraisals can be complex. Here are some things in an appraisal that not only impact value, but can also help the borrower make the best decision for his or her business success.
Financial Performance – An appraisal can compare the projected performance or existing performance of the property to market norms. If the borrower is building a multi-tenant investment property, are the borrower’s projected rents in line with current market rents? If the borrower is purchasing an existing apartment complex, was the property managed properly? Are operating expenses in line with the market? What is its vacancy rate?
Neighborhood Demographics – Neighborhood demographics, like median age and income, are a very significant part of an appraisal. If a borrower wants to open a Lululemon storefront (a high-end yoga clothing retailer, popular with younger generations) in a new strip mall, but the area is populated with mostly Baby Boomers, the store likely will not attract as many customers as it would somewhere with younger people.
Functional Obsolescence – Functional obsolescence is a decrease in the property value because of deficiencies or over-improvements (super adequacies) in a building’s structure. A storage warehouse with 12-foot sidewalls (when the market norm is 16 to 20 feet) would be considered a deficiency and would have a lower appraised value. Aside from the lower appraisal value, the business would not be operating at full potential profit because it has less storage space than a market-standard building. Here’s an example of a super adequacy: an office building with expensive finishes. A coffered wood ceiling (rather than ceiling tile) is unnecessary for the function and purpose of the building, and doesn’t add additional value.
External Obsolescence – It’s also important for a business owner to consider factors of external obsolescence, which refers to a loss of value from a flaw outside of the property. For example, if an industrial building is located in an area changing to commercial development, the property no longer conforms to the neighborhood and will be out of place.
Highest and Best Use – A property is appraised in terms of its “highest and best use,” taking into consideration the property’s legal permissibility, physical possibility, financial feasibility, and maximum productivity. At times, the cost to raze and prepare a site for a new building outweighs the value of the new building. This becomes a question of the property’s highest and best use.
Legal Restrictions/Requirements – An appraisal will also identify different legal restrictions or requirements for the property owner. These can influence the property’s value, but also foreshadow some challenges for the business. Easements and setbacks are two examples. An easement is a right to use a portion of property owned by someone else; one of the most common is an access easement. If access to the property relies on the neighboring property, the borrower needs to ensure the proper access easements are in place. Setbacks are restrictions which prohibit construction on the property, such as distance from a curb, property line, or structure. For instance, properties located near airports are under height restrictions so that they don’t obstruct air navigation.
All of these factors can influence more than just the estimated market value of the property. FNB is here not only to assist you in getting the property you need but to help you build your business.
“We always have your goals and interests at the forefront of the entire process,” Garry says. “At the end of the day, we want you to be successful.”
Our business banking team will work with your business’ success at the top of mind. First National Bank is here to help you get the new property you need. Call or visit one of our business bankers today!