Maximizing the value of your commercial property to coincide with the time you plan to sell may just take a little planning. Over a holding period of three or more years, when you do something can be even more important than what you do. Focusing on these seven easy steps as part of your exit strategy will allow you to maximize the value of your property.
Improve Property Condition
Improving the condition of your property can have a significant impact on value in several ways:
• A property in better condition is more appealing to potential buyers which improves the marketability of your property.
• It is desirable to use comparables in similar condition, so by improving the condition of your property can result in a comparison with better properties which sold at a higher price.
• An improvement in property condition can justify a corresponding increase in rent, resulting in a higher Net Operating Income (NOI).
• Properties which are in better condition represent a lower investment risk resulting in a lower capitalization rate and a higher property value.
Increase Other Income
Provide improved or additional features to tenants to increase other income. Vending machines, advertising and parking are just a few ways to increase other income.
This “Other Income” may appear to be small and insignificant when compared to the rental income a property may generate. However, it becomes much more significant when that income is capitalized to an indicated value. The $1.25 profit from selling a snack could translate into a $20.00 increase in property value. ($1.25 NOI / 6% Cap Rate = $20.83 Value). If the total snack income is $3,000 in a year that could translate into a $50,000 increase in property value.
All leases being at market rent with escalation clauses is an essential element to increasing the value of a commercial property. Escalation clauses protect you and your potential buyer from contract rent becoming significantly below market rent. Increasing lease rates to the market rate can lead to a higher turnover, a period of vacancy and additional leasing costs. While that is all undesirable in the short term, the increase in property value can be substantial when the income achieved at market rent is capitalized.
Reduce Operating Expenses
Reducing operating expenses and increasing efficiency is the fastest way to increase Net Operating Income (NOI). Improving property condition now will result in lower maintenance expense in the year preceding the sale of your property. Improvement made to comply with new energy efficiency regulations will result in lower utility costs and improving efficiencies can reduce administrative costs.
Have Your Property Appraised
When you have reduced expenses, increased revenue and improved condition have your property appraised prior to selling. The appraisal will translate these items into property value which is supported by market data. The number one mistake sellers make is not knowing the real value of their property prior to listing the property for sale. Don’t make that mistake, know the real value, and have a credible well support value conclusion you can present to potential buyers as support for your asking price.
Apply a Strategy
When you implement this step-by-step exit strategy over a period of 3 to 5 years, you can maximize the value of your property at the time you sell. It is typical to review the most recent years’ operating history when purchasing a property. Spend money improving property condition, absorb rent loss due to vacancy resulting from increased rents, provide front end rent concessions prior to the last two years of your holding period. During the last two years of your holding period, cut expenses, increase other income, and escalate rents. Maximize NOI during this period to achieve the highest increase in value.
Time the Market
As your approach the end of your planned holding period begin paying close attention to the market indicators for your property type and the overall market fundamentals. Watch the trends and adjust your timing accordingly.
Realty Advisors Appraisal is a full-service Colorado commercial real estate appraisal company experience in the appraisal of all commercial property types. Phil McDonald, MScRE is a Colorado Certified General Appraiser who holds a master’s degree in real estate from the University of Denver. His extensive experience in commercial real estate appraisal spans a period of 25 years in Colorado.