IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Seth Rudin. Mr. Rudin is a senior business broker at IBA (www.ibainc.com):
Valuing Commercial Real Estate: A Different Ballgame
Even if you’ve sold a home before or successfully challenged your property tax assessment (and won), you might think you know the ins and outs of real estate valuation. However, valuing commercial real estate (CRE) is a much more intricate process. Unlike residential properties, commercial real estate requires a deeper understanding of the land’s role in the business’s success, the local market, and future development plans for the area. With multiple valuation methods to use, ensuring you’re getting the best possible price for your business and the property it’s tied to is more difficult than it might first appear.
Important Factors When Selling Property with a Business
When selling a business along with its associated real estate, careful consideration must be given to the property’s valuation. In commercial real estate (CRE), the property and business are often linked. Understanding how interconnected the land is with the business’s success is important to setting and receiving the best price possible. Several key factors come into play when determining value, any of which can make or break a deal.
The first key is discretion. If you’re selling the business and property together, posting the property on a multiple listing service available for the public and the real estate community to view at their discretion can inadvertently signal to competitors and the public that the business is for sale. This can negatively impact customers, employee retention, and vendors, plus lead to a potential devaluation of the company.
Interconnected Value of the Land and Business
The relationship between the land and the business is fundamental in commercial real estate sales. For example, the demand for space or land, the quality of the property, its proximity to highways, trains, airports, workforce access, and environmental factors all weigh heavily in the valuation. It’s not just about the property itself but how integral the location is to the business’s success.
Awareness of Local Permitting and Developments
Before putting the property on the market, the broker and seller must understand any upcoming developments or zoning changes in the area. New projects such as rail stations, industrial parks, or sports stadiums can significantly impact property values positively or negatively. For example, if a new transportation hub is slated to be built nearby, it could enhance the property’s appeal, making it a more valuable asset to potential buyers.
Traffic Flow for Retail and Office Spaces
Traffic flow is a vital component of value for retail, office spaces, gas stations, or other customer-facing businesses. Brokers need to assess the average daily traffic (ADT) and other key metrics to understand the potential customer base passing through the area. Higher traffic volume often correlates with higher value, particularly for businesses that depend on walk-ins or drive-throughs.
Access to Transportation for Industrial, Office, and Manufacturing
For industrial, manufacturing, or office properties, transportation access is essential. Buyers will want to know how easily they can move goods and personnel to and from the property. Proximity to major highways, railroads, airports, and seaports can drastically increase a property’s appeal, reducing logistics costs and boosting efficiency. Similarly, access to a skilled workforce is key in determining whether the location is desirable.
Development Potential of Extra Land
If the property includes extra land next to the occupied building, its potential for development can add significant value. Buyers will consider whether they can expand, develop, or repurpose the unused land. This is particularly relevant in areas where space is premium or development regulations are favorable.
Attachments, Encumbrances, Environmental Concerns and Easements
It’s essential to fully understand and disclose any encumbrances, easements, environmental concerns, or attachments on the property. These legal stipulations can restrict what the buyer can do with the land and should be factored into the overall valuation. For example, gas stations and dry cleaners often face environmental scrutiny during the Phase I and II sign-offs when selling their real estate. This liability can be very substantial and may impact both current and new landowners.
The Most Common Valuation Approaches In CRE Sales
A broker will likely use one or a combination of these common valuation methods:
- Sales Comparison Approach: This method looks at recent sales of similar properties in the area. It’s especially useful when ample market data is available, allowing for comparisons of similar properties to determine a fair market value.
- Income Approach: This approach evaluates the property based on its income-generating potential. This method looks at regional cap rates, rental income, operating expenses, and projected future income for properties with tenants or businesses.
- Replacement Cost Approach: This method estimates the cost of replacing the existing building and land improvements with a similar new structure, considering depreciation and land value. It’s particularly useful for properties where there is little comparable market data, or the property has unique characteristics.
- Price Per Square Foot Approach: This is a simple yet effective method of determining a property’s value, especially for retail or office spaces. The property’s total square footage is multiplied by the going rate per square foot for similar properties in the area. While straightforward, it must be used with other methods to ensure accuracy, as factors like location, condition, and amenities can influence the price.
Final Thoughts
Selling commercial real estate and a business is a complex transaction requiring careful valuation and strategic planning. A thorough understanding of the land’s interconnectedness with the business, local developments, traffic, transportation access, and potential for future development all play a role in determining value. It is prudent when selling a business with real estate to engage a business sales intermediary who can comprehensively represent both the business and real estate assets at the same time. It is not uncommon in transactions involving both a business and real estate for value to slide between the two assets to achieve favorable tax and financing outcomes.
If you have questions relating to the content of this article or the process associated with selling a business with real estate in Washington or Oregon, Seth Rudin would welcome the opportunity to talk with you. Mr. Rudin is licensed to sell businesses & real estate in both Washington and Oregon. Mr. Rudin can be reached at (425) 454-3052 or seth@ibainc.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.