Aspects Considered When Valuing an Office Building
harkins / January 4, 2017
If you are looking to invest in commercial real estate, you may be interested in investing in an office building. If this is the case, you will want to know how these buildings are valued. Office buildings are valued using a multiyear discount cash flow analysis. This analysis uses several factors to give the total value of the building. These are the factors that are considered when valuing an office building.
There are three different types of areas used in valuing an office building. The gross area of the building is the overall floor space. The rentable area is usually calculated as the gross area without stair wells and mechanical shafts but including bathrooms, common corridors, and elevator lobbies. The rentable area is usually how the amount of rent is decided and is more than the useable area, the area within the tenant’s rental space.
There are also multiple financial considerations that are taken into consideration, such as gross rent, reimbursements, operating expenses, and capital expenditures. The gross rent is the amount of rent collected per square foot. Reimbursements are when a tenant must pay back a landlord for additional expenditures that are above the base year amount. Operating expenses include repairs, security, snow removal, common area maintenance, real estate taxes, insurance, and management. Capital expenditures include aspects of the building such as the roof, mechanicals, and the parking lot.
Other factors of the building that are considered when valuing an office building include vacancy and turnover. Vacancy is considered because of the amount of time that rent will not be collected and is largely dependent on the class of building. Turnover will tell the number of tenants that will renew their lease.
An important part of investing in commercial real estate is knowing the value of the property. For office buildings, there are several factors considered when valuing a building. These are a few of those aspects. If you are looking to invest in commercial real estate, consult the experts at Harkins Commercial Real Estate.
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