All Forum Posts by: Konstantin Komkov

@Konstantin Komkov

Take some courses with the appraisal institute and you will learn and meet valuation professionals that have a wealth of knowledge.   

Quantity of income (amount of NOI)

Quality of income (likelihood of NOI)

The former is harder to collect, but the latter can be public data.

OP.  Commercial appraisals are based on three approaches:

a.  Cost to build.

b.  Comparables

c.  Value of Net Operating Income, Cap rates.

Cost to build approach has not kept up with inflation.  They use 20 year old averages.  Thus this approach will undervalue the building.

Comparables- As noted by the other responders, this is very hard to do.  Exact same business and building.  Both on a 35 MPH road.  One has 3,000 and the other has 17,000 vehicle traffic.  

Value of Net Operating Income- you have to be able to do the due diligence and vet the properties.  Lots of good input above.  You can't do a broad brush stroke, even if all of them are the exact same building.

This is where you as the investor can bring more to the table to identify or create value.

A few reasons why similar office / retail spaces are priced differently from my experience.
-Tenant mix - buildings with a good mix of stable, creditworthy tenants will be seen as less risky and could sell for a higher price per sqft.
-Recent renovations - the more modern the interior is and more functional increase its value
-Floor plans - you could have two identical office buildings but one with a better floor plan will sell for higher per sqft.
-Submarket - the specific area in the city will have a big influence. Even if a property is 3 miles away, you will notice price difference if it falls on the other side of the highway for example.
-Visibility - corner locations or offices with prominent signage might attract more buyers.

I would suggest walking the buildings to get a better feel of the properties. Hope this helps.

Quote from @Konstantin Komkov:

Quote from @Chris Mason:

Quote from @Konstantin Komkov:

Thank you very much for detailed explanation! So basically what appears to be going on in commercial real estate is if two identical offices are leased for different amount of money they have different market value. Does resent comparable sales impact office values in same building at all or we only need to look at CAP rates and determine the value based on CAP rates alone?

You can/should look at comparable sales if you can, but you're using that mostly to determine appropriate cap rate.

Suppose the unit in the building you are looking at is, in fact, in the middle of a 15 year lease with a strong tenant. What if there are no other units of similar size similarly situated have recently sold? Great, find one that's 5x as big that has recently sold. Cap rate lets you normalize that. 

Thank you very much! Your information put a lot of clarity! How could I learn more about commercial real estate and valuations and CAP rates? Maybe there is a book you could recommend?

 No book, I just do the mortgages and talk to folks.

Quote from @Konstantin Komkov:

Thank you very much for detailed explanation! So basically what appears to be going on in commercial real estate is if two identical offices are leased for different amount of money they have different market value. Does resent comparable sales impact office values in same building at all or we only need to look at CAP rates and determine the value based on CAP rates alone?

You can/should look at comparable sales if you can, but you're using that mostly to determine appropriate cap rate.

Suppose the unit in the building you are looking at is, in fact, in the middle of a 15 year lease with a strong tenant. What if there are no other units of similar size similarly situated have recently sold? Great, find one that's 5x as big that has recently sold. Cap rate lets you normalize that. 

@Konstantin Komkov glad to hear you're getting your questions answered. That said, if the property is of serious interest to you, to the point of potentially writing a LOI, it's worth your time and work with a local commercial broker to walk you through the process. Doing so will help mitigate the risk of getting into a property without knowing all of the issues, good and bad, about the property. Also, part of the due diligence process if debt is being used will be a formal commercial appraisal, so value from a lenders perspective will be identified.

@Konstantin Komkov when you say you have a "commercial property in mind" that you want a valuation on, what exactly do you mean? Are you considering buying it, marketing it for sale, placing debt on it, etc.? You reference Costar directly, but as another member already shared, Costar is simply a data collection tool that commercial re brokers use to evaluate properties for themselves and their clients. They pay hundreds per month for this data (myself included) and they don't typically give out that information for free to a non-client (myself included). If you're evaluating property to invest in, I would recommend finding a quality broker to assist you in evaluating that property, and others, to make sure you have as much assistance as possible related to a large investment. If you're the landlord, same advice. 

Good luck and send me a connection request if you want to discuss this more!