Valuing Commercial Real Estate PropertiesWhats It Worth?

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

What is the Commercial Real Estate Market?PriceSellersBuyersLendersAppraisersBrokersButterfliesValuePrice is what you pay, value is what you getPsychology

Different Commercial Assets Require Different Valuation ApproachesThree Primary Asset Classes:Owner/User PropertiesIncome Producing PropertiesDevelopment Properties (Land)

Valuing Owner/User AssetsDefinition of Owner/User Asset:

Owner/User Looking for Return + Use

Owner/User Looking for Use + Return

Owner/User looking for Use

HigherLowerPrice

Comparable Sales Approach: Know what you have. Know what you have.What is a comparable sale?Recent CompMarket CompOff-Market CompNeighbor CompAssemblage CompTenant CompVacant CompImproved Building CompFixer-Upper CompReplacement 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 Owner/User Assets

Valuing Income Producing AssetsIts 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 InvestorsPension Funds1031 Exchange MoneyLeveraged or CashWhich of these are buyers for your property?Every investor has different opportunity costs, which means every investor will value real estate a bit differentlyKnow what you have. Know what you have.

PlanEase Forces us to look at the numbers and know who is responsible for whatAssumptions Be Very Careful Here Know Your MarketReturns:IRRCap Rates IRV - What the cap rate represents is merely the projected return for one year as if the property were bought with all cashLeveraged and Unleveraged ReturnsDebt Coverage Ratio Does income sufficiently cover debt? What is sufficient? Talk with lenderCash-on-Cash AKA Cash-in-FistOpportunity CostGIGO Do I know the market and whats it going to doMargin of Safety InvestingFragility?Exit Strategy?

Valuing Income Producing Assets

SWAGFactors affecting the value:LocationUtilitiesMarket ConditionsZoning Can it be rezoned or upzoned?Politics of the area and of working with council reps, neighbors, etc.Return expectations

Valuing Development Properties (Land)

Ways Not to Value PropertyBy What You Owe On ItBy What You Put In (A improvements in a B or C building)By What It Was Worth WhenBy What Someone Offered You X Years AgoBy What a Broker Tells You Its Worth (Unless They are Named Tee or Stephen)By What An Appraisal Said It Was Worth X Years AgoBy What the Tax Appraisal Says Its WorthBy What Cousin Johnny Told You It Was WorthBy 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.)

To Dont Do List

ConclusionIndependent thinking, emotional stability, and a keen understanding of both human and institutional behavior are vital to long-terminvestment success. WBWe usea 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

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