Commercial Property Market Value: How it’s Determined and Why it Matters

January 24, 2023 |

Your commercial property market value is one seemingly small (or not so small) number that can have a tremendous impact on your commercial property taxes, which affect your business and bottom line. At Lane Property Tax Advocates, we believe the best way to unburden your business and prime yourself for success is to go into every situation as informed as possible. That includes knowing how valuations regarding your commercial property work.

Here, we’ve laid out need-to-know information regarding your commercial property market value. Read on to learn more about the important role it plays for your business, how it differs from your assessed value and more.

What is Your Commercial Property Market Value?
“Market value” refers to the actual value of your commercial property, or what a buyer would be willing to pay if you placed that property on the market at a specific point in time. It isn’t a number calculated through a specific formula, but rather a careful assessment where a number of factors come into play. Here are a few considerations that can impact your overall commercial property market value.

  • Location: Easy access to public transportation, close proximity to popular shops and restaurants, and the number and type of nearby services/amenities can all impact your commercial property market value.
  • Property Features: Does your property have ample parking or boast interesting architecture? Does it have vast green spaces or status as a Class A office building? Both interior and exterior factors can affect your overall value.
  • Market Standings: The basic principle of supply and demand still very much pulls its weight in the commercial real estate world. Sought-after areas where commercial real estate is hard to come by will feature higher market values than areas struggling to fill spaces.  
  • Nearby Similar Properties: Comparables (or “comps”, as they’re often referred to in the industry) are properties featuring amenities and square footage that are similar to yours. County appraisal districts (CADs), who often take a mass-appraisal approach to the valuation process, will use comps as a way to speed the overall process along.
  • Reputation: This might seem silly, but certain buildings maintain heightened status. Leasing space in famous structures such as New York’s Empire State Building will cost you more than it would to lease a space of similar size inside a run-of-the-mill office building. And it works both ways. Structures in areas regularly impacted by crime and vandalism are likely to see lower property values.

The valuation portion of your property tax bill will break out the value of your land, as well as that of your buildings and extras. When you add the two up, you find your assessed value.
Lane Lesson: Want to dig deeper into the various aspects of your bill? We have a blog post that breaks your commercial property tax bill down in a way that’s quick and easy to understand.

How is Your Commercial Property Market Value Determined?
We’ve already touched on a few of the factors that can impact your commercial property’s overall value, but that’s just the tip of the iceberg. In the commercial real estate world, there are three general approaches an appraising entity can take when determining that number. Remember, the specific route your appraising entity takes will depend on considerations such as the type of commercial property you own and operate.

  • The Cost Approach to Commercial Real Estate Valuation: The cost approach is all about determining how much money it would take to rebuild your commercial property to its current state, or to construct an equivalent building in the event that it was demolished. That’s calculated with the following formula: Property Value = Land Value + (Cost New – Depreciation).
  • The Income Approach to Commercial Real Estate Valuation: This method of property appraisals focuses on the estimated amount a commercial property will bring in, or what an investor might expect in generated revenue. There are two paths the appraiser might follow — direct capitalization, which typically takes into account year one stabilized income, or a discounted cash flow, which factors in projections spanning multiple years. Direct capitalization tends to be the go-to method appraisal districts use to determine values for income-generating properties.
  • The Sales Comparison Approach to Commercial Real Estate Valuation: This is an appraisal method that takes an apples-to-apples approach to property valuation. Sales comparison is all about uncovering similar properties that have recently sold (comparables, as we mentioned previously) to determine value that is essentially market derived. Ideally, comparable properties will feature similar building/land sizes, be in the same general geographic region and boast other similarities in areas such as improvements, age, condition and building class.

Lane Lesson: Curious to learn more about the three approaches to commercial real estate valuation? Investopedia offers in-depth explanations into the cost approach, income approach and sales comparison approach, too.

We hope the above information sheds a little light on how your appraiser settles on the market values that guide what you’ll pay in commercial property taxes. It’s important to remember that the mass appraisal systems most county appraisal districts (CADs) use are an imperfect science. More often than not, they result in overinflated assessed values that cost property owners thousands upon thousands of dollars out of pocket.

The best way to ensure you’re only paying what’s fair, and to keep those assessed values in check, is to protest your commercial property taxes each year. (Don’t worry, you don’t have to go it alone. Lane’s experts are here to help.) For more information about any of the above, or to learn more about how to begin your commercial property tax protest, feel free to contact the professionals at Lane. We look forward to helping you!

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