Ways to Increase the Value of A Commercial Building And Why It’s Important

When you buy a piece of commercial real estate, one of the first things on your mind should be the most effective way to increase its value. The value of a piece of property is used by banks and lenders to decide how much to lend and what terms to offer. Value is also an important factor in refinancing. When buying or selling, it's vital that a building be at its optimal value, for as little cost to the owner as possible.

The value of a commercial building to its owner isn't calculated only as its resale price. The difference between the money laid out to purchase or maintain the building and the rent received is also a consideration. When you examine your finances, pay attention to this difference, referred to as the capitalization or CAP rate. Ordinarily, this number ranges between three and ten percent.

The value of your property can be figured via the “Income Valuation” formula: Value = NOI (Net Operating Income)/CAP rate. The NOI = Annual Gross Income – Annual Operating Expenses. If one can increase the annual income of your property, or decrease the annual expenditures it requires, value improves. An astute owner of a commercial property will take advantage of ways to increase income or reduce expenses whenever possible.

One way to increase the income taken in on a property is to raise rents. However, a building must be in a condition to justify that rent increase. Interior and exterior physical improvements, such as painting, drainage repair, and grounds care can greatly improve a building's value. Conversion of the building to a higher and better use can also help to justify a rent increase. For instance, a warehouse, once converted to loft apartments, commands higher rents than it did when used for storage.

Often overlooked is the value of eliminating items on which maintenance has long been deferred. Renovating HVAC systems, plumbing, and roofing are methods that can be used not only to increase value for the purpose of obtaining higher rents, but also to decrease expenses for the owner. Greater energy efficiency and fewer repair bills can quickly pay for the cost of improvements.

Submetering of utilities is another way that commercial building owners can recoup some of their expenditures, thus decreasing their operating expenses. Simply put, submetering is a system that allows the building owner to bill tenants individually for utility usage. One place that this can help owners recover cost is on the water bill. If the building's owner pays that bill, and a faucet is leaking, it could cost over a hundred dollars per year. By submetering, owners are able to return that cost to the tenant. This makes tenants responsible for their own utility usage, making them more conscious of conservation. Label: Gergen4

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