Anyone who has ever bought or sold a property is aware that a valuation is a prerequisite to the completion of the transaction. Louis van Rooyen, commercial and industrial broker with Rawson Commercial Somerset West says, “Some may view an annual valuation over a commercial property as an unnecessary exercise and expense. However, if done correctly, valuations can prove to be a fantastic asset in a business’ arsenal of information.”
Further to the above, Van Rooyen gives five immediate benefits to obtaining an up to date commercial property valuation on a regular basis:
When one’s property portfolio requires additional bank funding, either to purchase a new property or to raise capital for deposits, maintenance, development etcetera, the bank loan will need to be secured against a specific asset either registered in one’s personal or business name. Banks will appoint their own professional valuer to confirm the value of a commercial property, with the cost of the valuation being carried by the customer seeking funding from the bank. This only happens when the loan is approved and, it should be noted that, many clients fail to keep abreast of what the growth in their property’s value has been.
“As the value of the property grows, the risk to the bank decreases and clients are able to renegotiate their lending terms or possibly apply for additional funding,” says van Rooyen. “Using a reputable commercial property group for an estimated market value will greatly assist in this regard.”
End of Lease Repairs
“When one’s lease comes to an end, the landlord may try to claim for damages,” says van Rooyen, “depending on the repairing liabilities of the Lease Agreement. Considering a valuation done at the time the property was initially tenanted and comparing it to a valuation done when the lease expires, it could present useful information for determining the damages suffered by the relevant parties.”
Often in determining the value of the property, the person carrying out the valuation will make a note of the current condition of the property, the required maintenance obligations and an indication of the costs to rectify these. In addition, comments are usually made regarding the age of the building and when future maintenance obligations may be required. Valuations done regularly, in conjunction with an annual inspection, are not only proactive but will go a long way to ensuring that a healthy relationship, built on respect, trust and professionalism, is maintained between the landlord and tenant.
Ascertain the Best Use of a Property
In some circumstances, ascertaining the best use of the property garners the best selling price. For example, a residential property may easily be rezoned for commercial activity, which could potentially bring in a higher sales price than marketing the property to potential residential buyers. By considering the market-related rentals which can be obtained across the different commercial asset classes (for example, retail, offices or industrial) and then assessing which asset class is most suitable to the relevant property, one could potentially unlock better rental yields or attract a better quality tenant.
Market Related Rentals and Expenses
“A valuation allows one to assess the rentals currently being charged on similar properties in the market, and whether there isn’t perhaps scope for increasing these rentals, thereby raising the value of the property at the same time,” says van Rooyen.
Similarly, the regular expenses incurred on the property require regular investigation. When summarised and considering how this impacts the value of the property, a commercial property investor is able to re-assess these costs and examine how these could effectively be reduced to further increase the value of the property.
“In determining the value of a building, one needs to take into account the value of the land and the cost of the buildings. From an accounting point of view,” van Rooyen continues, “the cost of the buildings, excluding the land, can be depreciated in the legal entity’s financials, thereby generating a tax deduction for that legal entity. In order to ensure that one is not depreciating the asset incorrectly and to ensure the asset is correctly reflected in the financials for liquidity purposes, the property should be valued at its current market value and reflected accordingly in the annual financials.”
An up-to-date valuation saves time and money in this regard, and allows the directors to express an opinion on the value of the asset.