How to Value Commercial Real Estate

Valuing commercial real estate might seem a bit intimidating at first, but it’s a crucial step for anyone looking to buy, sell, or lease property. Whether you’re an investor, a business owner, or a developer, knowing what a property is really worth is key to making smart decisions. In Kansas and Missouri, valuing commercial real estate has its own set of rules and methods, all aimed at giving you a clear picture of a property’s value. Let’s break down the main ways to figure out what commercial real estate is worth, so you can feel confident in the Kansas and Missouri markets.

The Income Approach: Looking at What the Property Earns

The income approach is one of the go-to methods for figuring out the value of commercial real estate, especially if the property is bringing in money, like an office building, shopping center, or apartment complex. This method is all about the cash flow—how much money the property is making.

How the Income Approach Works

You start by calculating the Net Operating Income (NOI), which is a way of saying the income the property generates after you’ve paid all the bills. Once you’ve got that number, you divide it by the capitalization rate, or cap rate, which is the expected rate of return on the property. The formula looks like this: Property Value = Net Operating Income / Capitalization Rate.

So, let’s say a property in Kansas is bringing in $100,000 a year, and the cap rate is 8%. That would put the property’s value at around $1.25 million.

What Influences the Income Approach

A few things can affect how this method works, like where the property is, what shape it’s in, and how steady the tenants are. In Kansas, the market can vary a lot depending on whether you’re in a big city like Wichita or a smaller town. Properties in hot spots might have higher cap rates, while those in quieter areas might see lower ones.

The Sales Comparison Approach: Seeing What Others Have Sold For

The sales comparison approach is another popular way to value commercial real estate. This method is pretty straightforward—you look at what similar properties in the area have sold for recently and use that info to gauge your property’s value.

How the Sales Comparison Approach Works

This approach involves finding properties similar to yours that have sold in the same area. Then, you adjust for any differences, like size, location, or condition, to figure out what your property might be worth. Think of it as seeing what the “going rate” is in the neighborhood.

For example, if a similar office building in Kansas City sold for $2 million, and your property has a few extra perks like more parking or a better location, those factors would bump up the value a bit.

Why Local Market Know-How Is Important

Knowing the local Kansas market is key when using the sales comparison approach. Things like zoning laws, the local economy, and demand for commercial real estate can all impact property values. It helps to work with someone who knows the area well, like a local real estate pro or attorney, to make sure you’re making accurate comparisons.

The Cost Approach: Figuring Out What It Would Cost to Build New

The cost approach is often used for new or unique commercial properties where there aren’t many similar properties to compare. This method estimates what it would cost to build the property from scratch, then subtracts any depreciation.

How the Cost Approach Works

Here’s the idea: You start by calculating how much it would cost to build a similar property today, then subtract any depreciation due to age, wear and tear, or other factors. Finally, you add in the land value to get the total property value.

For instance, if it would cost $5 million to build a new shopping center like the one you’re valuing, and the current one has depreciated by $1 million because it’s a bit older, the property’s value would be around $4 million, plus the land.

When to Use the Cost Approach

This method is super handy for valuing unique properties like schools, hospitals, or other commercial buildings where there just aren’t many comparable sales. In rural Kansas, where commercial properties can be spread out, the cost approach can be especially useful.

Legal Factors to Keep in Mind in Kansas

Valuing commercial real estate in Kansas isn’t just about the numbers—you’ve also got to keep an eye on the legal side of things. Kansas has specific laws and rules that affect commercial real estate, from zoning to environmental regulations to property taxes.

Zoning and Land Use Laws

Zoning laws in Kansas can have a big impact on commercial real estate value. These laws dictate how a property can be used—whether it’s for retail, office, industrial, or other commercial purposes. If your property is in a zone with restrictions, its value might take a hit compared to a similar property in a more flexible zone.

For example, an industrial property might not be worth as much if there’s a lot of demand for retail space in the area. Understanding these zoning rules is crucial for getting the right value.

Environmental Regulations

Environmental laws can also play a role in property value, especially if there are issues like contamination. Kansas has specific environmental rules that property owners have to follow, and any violations can bring down a property’s value.

Say a commercial property has soil contamination from previous industrial use. The cost to clean that up could seriously lower the property’s value, making it less appealing to buyers.

Property Tax Assessments

Property taxes are based on the assessed value of your property, and in Kansas, it’s important that this value accurately reflects the market value. If a property is over-assessed, you could end up paying more in taxes than you should, which could lower the property’s overall value.

If you think your property has been over-assessed, there’s an appeal process you can go through. This is where having a good real estate attorney on your side can really help, as they can guide you through the process and help you get a fair assessment.

Why You Might Want a Commercial Real Estate Attorney

Valuing commercial real estate can get pretty complicated, so having a commercial real estate attorney in your corner can be a game-changer. In Kansas, these attorneys can help you with everything from understanding local laws to challenging property tax assessments.

A commercial real estate attorney can assist with zoning issues, environmental concerns, and property tax disputes, making sure all the legal aspects of your real estate deal are handled smoothly. Whether you’re buying, selling, or leasing commercial property in Kansas, having someone who knows the ropes can protect your investment and save you a lot of headaches.

Keeping Your Interests Protected

When it comes to commercial real estate, mistakes can be costly. Working with a Kansas commercial real estate attorney can help you avoid pitfalls and make informed decisions that align with your goals.

Valuing commercial real estate in Kansas doesn’t have to be overly complicated, but it does require a good mix of market savvy, legal know-how, and strategic thinking. Whether you’re using the income approach, the sales comparison approach, or the cost approach, it’s important to consider all the factors that can affect property value. 

Understanding the local laws and regulations will also help you avoid potential issues and get the most accurate valuation. If you’re involved in a commercial real estate transaction, consider teaming up with a commercial real estate attorney to make sure everything goes smoothly and you’re making the best decisions for your investment.

Contact a Commercial Real Estate Attorney

Are you a prospective commercial real estate investor or are you an experienced property owner who needs a refresher? Contact Coppaken Law Firm to schedule an appointment. We serve Overland Park, Kansas; Kansas City, MO; Johnson County; and Jackson County. Jeff, our founder and attorney at law, offers a decade of business experience that came prior to law school. In his words, “You catch more flies with honey with vinegar.”