Valuation Management Group Discusses Commercial Condominium Ownership

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Valuation Management Group Discusses Commercial Condominium Ownership

Valuation Management Group is a national appraisal management services company, managing appraisals involving assets with many forms of ownership. As our quality assurance reviewers notice areas of interest, we like to share the industry information with our clients and panel appraisers in order to keep both informed.

Today, many types of real estate are being subdivided and sold under condominium ownership. Owners of individual suites in office, retail, and industrial properties lease or occupy space and share the responsibilities of maintenance and upkeep with the other unit owners.  Those expenses can include painting the building or replacing the roof, insuring the structure, paving the parking lot and maintaining the landscape, cleaning the public hallways and bath rooms in the building, etc.  Most often, the common area expenses are shared based on each unit’s percentage of the total building area. Commonly, two sizes are established; the gross building area and the total area that can be occupied (excluding common areas such as interior hallways, stairwells, lobbies, elevator and mechanical space, etc.). The difference between the two sizes is sometimes referred to as the Common (or Core) Area Factor. The Common Area Factor is the multiplier that inflates the net area of each suite to account for the shared areas of the building.  By “grossing up” each suite, the property owners’ association can pass along 100% of the building’s operating expenses to the individual unit owners for reimbursement, usually through payment of monthly, quarterly, or annual dues.

It is important when valuing properties under condominium ownership to confirm the areas of both the subject property and the sales and rentals that are being compared. It is not uncommon for Common Area Factors to be 15% of the gross building area, so comparing the unit price paid for one property’s net area to another’s gross area can produce misleading results. It is sometimes difficult to confirm the net and gross areas, when the broker, owner, and property appraiser are all reporting different numbers generated from different sources.

When detailed plans are unavailable, or physical measurement is not possible or practical, condominium documents recorded in the Public Records are often a good source of both figures. Floor plans with dimensions that show both the net sizes of each individual suite and also the gross area of the entire building are often reproduced in the condominium documents. Charts that show all of the individual suites and their respective percentage shares of the total property owners’ association are also often reproduced in those documents. When available for both the subject property and the properties presented for comparison, the condominium documents can be helpful to the appraiser’s analysis.

It may not matter if the subject and the comparable properties are evaluated based on their net areas or their gross sizes, but it is most important to compare them “apples to apples.” Drawing comparisons between Apples and Oranges will almost certainly lead to misleading results.

Valuation Management Group is a national, full service appraisal management service company that manages the appraisal process, including the required review, for financial institutions, banks, mortgage bankers, and credit unions. We offer the full array of commercial and residential appraisal products and services. We take the appraisal process from ordinary to extraordinary.

 

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