Whats It Worth?

Valuing Commercial Real

Estate Properties

What is Value?
The worth of a good
or service as
determined by the
market

What is the Commercial Real Estate

Market?

Value

Price
Sellers

Buyers

Lender
s

Appraise
rs

Psychol
ogy

Brokers
Butterflies

Price is what
you pay,
value is what
you get

Different Commercial Assets

Require Different Valuation
Approaches
Three Primary Asset Classes:
Owner/User Properties
Income Producing Properties
Development Properties (Land)

Valuing Owner/User Assets

Definition of Owner/User Asset:
Owner/User Looking for Return + Use

Lower

Price

Owner/User Looking for Use + Return

Owner/User looking for Use

Higher

Valuing Owner/User Assets

Comparable Sales Approach: Know what you have. Know what you have.
What is a comparable sale?
Recent Comp
Market Comp
Off-Market Comp
Neighbor Comp
Assemblage Comp
Tenant Comp
Vacant Comp
Improved Building Comp
Fixer-Upper Comp
Replacement Cost Approach:
Opportunity Cost Approach:
Cost of the best available alternative Lease Costs and Business Costs?
Munger: Intelligent people make decisions based on opportunity costs.

Valuing Income Producing

Assets
Its All About the Numbers But Which Numbers Matter and

Which Buyers Are Looking at Which Numbers?

Individual Investors (local or out of town?)
REITs
Private Equity Investors
Pension Funds
1031 Exchange Money
Leveraged or Cash
Which of these are buyers for your property?
Every investor has different opportunity costs, which means
every investor will value real estate a bit differently
Know what you have. Know what you have.

Valuing Income Producing

Assets
PlanEase Forces us to look at the numbers and know who is responsible

for what
Assumptions Be Very Careful Here Know Your Market
Returns:
IRR
Cap Rates IRV - What the cap rate represents is merely the projected
return for one year as if the property were bought with all cash
Leveraged and Unleveraged Returns
Debt Coverage Ratio Does income sufficiently cover debt? What is
sufficient? Talk with lender
Cash-on-Cash AKA Cash-in-Fist
Opportunity Cost
GIGO Do I know the market and whats it going to do
Margin of Safety Investing
Fragility?
Exit Strategy?

Valuing Development
Properties (Land)
SWAG
Factors affecting the value:
Location
Utilities
Market Conditions
Zoning Can it be rezoned or upzoned?
Politics of the area and of working with council reps, neighbors, etc.
Return expectations

To Dont Do List
Ways Not to Value Property
By What You Owe On It
By What You Put In (A improvements in a B or C building)
By What It Was Worth When
By What Someone Offered You X Years Ago
By What a Broker Tells You Its Worth (Unless They are Named

Tee or Stephen)
By What An Appraisal Said It Was Worth X Years Ago
By What the Tax Appraisal Says Its Worth
By What Cousin Johnny Told You It Was Worth
By What Your Gut Says Its Worth (Hard to be Like Jethro Gibbs)
By What a Building in Atlanta or Charlotte Sold For (even
Brentwood, Downtown, East Nashville, etc.)

Conclusion
Independent thinking, emotional stability, and a keen

understanding of both human and institutional behavior

are vital to long-term investment success. WB
We use a lot of experience and do it [investment returns]
in our heads. We dont like complexity and we distrust
other systems and think it many times leads to false
confidence. The harder you work, the more confidence
you get.. CM
"Valuation is an art, not a science. Because the value of a
business (building) depends on numerous variables, it can
typically be assessed only within a range. SK