Getting to grips with commercial valuations

When it comes to valuing a commercial property, there is more to be considered than you might think. Not only is the construction and location taken into account, but also any current leaseholders and how long it may take to resell the property. Whether you are looking at purchasing a commercial property for an investment or buying premises for your own business to trade from, understanding the valuation process is key.

Market value: This is the surveyor’s assessment of what the property is worth as it presently stands either with a tenant or without. This will take into account the quality of any tenant currently in situ, as a strong tenant can actually improve the market value of the property. The market value is usually the highest figure on a valuation report but may not always be the value that is used by lenders.

So, what are the other types of valuation that a lender may choose to use instead and how might this affect the value and how much you are able to borrow?

180-day and 90-day market values: These two valuations still take into account the present leases, however they look at the likely values that may be attained in the event that the property needs to be resold within either a 180-day or 90-day period. The 180-day market value is likely to be 5–10% less than the original market value and the 90-day market value even lower.

Vacant possession: As the name suggests, this is purely a bricks and mortar valuation. It assumes the property is empty with no restriction on marketing/re-sell time.

180-day and 90-day vacant possession: There are also valuations based upon vacant possession when the property needs to be resold within either a 180-day or 90-day period. As with market value, these valuations will be lower than vacant possession with no time restrictions on the re-sell. 90-day vacant possession is likely to be the lowest valuation of all. 

With these different methodologies all in use, understanding which figure a given lender will use along with their maximum loan to value is important. It could be that a lender offering 70% of the market value actually lends significantly more than a lender offering 75% of the vacant possession value of a property, even though it doesn’t appear that way at first glance.

When looking at commercial properties, the valuation process is certainly something to familiarise yourself with and to follow up on in discussions with your broker.