Warning Signs When Looking at a Commercial Building – Part II

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Part II of our blog highlights site and external influence as issues that can have a negative impact on commercial property characteristics.

1. Possible environmental issues: Industrial properties always present a concern for environmental contamination, as many industrial occupants use chemicals and oils in the operation of the business that can leak into the soil and/or groundwater supply. Drycleaners, typically classified as a retail use, also use harmful chemicals in the operation of their business that can contaminate a site. The biggest red flag is when items are not stored neatly and clearly labeled (waste, raw materials, etc.) Look for obvious signs of spilling (stains on the floor, etc.) A contaminated site can cost well-over $100,000 to remediate and “clean” the site so that it is not contaminating the environment, groundwater and neighboring sites. It is important to provide an appraiser with known issues at the time of engagement.

Unless there is overwhelming evidence or case for suspicion at the time of inspection, an appraiser will make an extraordinary assumption that there is no contamination present. If there are issues, the value conclusion based on this assumption will not be accurate as an “as is” value. If the appraiser does suspect contamination based on visual observations, they will likely request an environmental impact report and estimated site remediation costs to accurately determine the impact on value. As with structural issues, appraisers are not trained engineers and are not trained experts on such matters. A reliable estimate of the costs associated with site clean-up should come from a qualified professional.

2. Ingress/Egress: All Retail users are very concerned with exposure and visibility from the street, as well as a high traffic count and easy in/out access to the site. They want customers to see them and be able to easily get in the parking lot.

Properties located along a roadway that has a median with no break at the median at the property, will only have access available from one direction of traffic. Direct access from traffic travelling in the opposite direction will require passing the intended destination and making a u-turn at the next median break in order to get to a property. This is a negative and will almost always impact the value.

Most industrial/light industrial users have heavy equipment/trucks that make deliveries/pickups or need access. For instance, a loading dock that is accessed via a narrow alley that is nearly impossible to get a box truck (or any truck) into is basically useless. Industrial users have a strong preference for a location proximate to interstate access, so that trucks going to and from the facility do not have to navigate long distances in surface roadway traffic conditions.

Office owners are not usually as concerned with primary road frontage and exposure, but limited or restricted access can be a hassle and detract from value slightly, but not to the degree it would a retail site.

Issues having to do with ingress and egress are typically handled with adjustments to the heading “location” or “access” in a sales comparison approach. Environmental issues may be handled under the heading “site” or as specific line items referred to an “Environmental Contamination.” It is important, however, with issues such as we have discussed, that the appraiser is very clear about what the issues are, how they are being handled and to have supporting market data or reliable costs to cure in order to adjust market data toward the subject property’s scenario or condition.

It is important to utilize qualified and trained individuals for commercial appraisal reviews. It may be reviewed initially by an independent, qualified individual or outsourced to an appraisal management company, such as Valuation Management Group. Qualified appraisal reviewers understand the considerations that should be made on the real estate appraisal for these concerns.

We hope you found the above useful for your commercial property due diligence. The topics we have provided as examples are meant to quickly identify items that could be issues so that you don’t waste time/money on extensive due diligence only to discover deferred roof maintenance, for example, is a “deal killer.”

Valuation Management Group is a national appraisal management company that manages the appraisal process for community 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. VMG welcomes your call to discuss our national appraisal management services.

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