Commercial value / State buying property

[Matt Todd]

I have commercial property that generates $144,000 per year on NNN leases. My mortgage totals $36,000 per year.

I am nearing a condemnation offer from the state due to a new bridge going through the property.

I have never had an appraisal done, but did have a broker value the property a year ago @ $1.2MM as an investment property.

Is there a standard formula or process that reflects the value of the income this property would produce for my family over the next 20-30 years? Will it be difficult to convince the state of this value vs. appraised value?

Any help or advice is appreciated, thanks.

[Jon Holdman]

The appraisal will reflect the future income. That's the only things the determines the value of a commercial property. If the value accurately incorporates the future income, take the payment you get and buy another similar property for a similar price and it should produce similar income.

This is all driven from cap rates. If local cap rates for this type of property are, say, 12%, then the value should be one years NOI divided by 12%. With your $144K in net income, that gives a value of $1.2 million. That sounds like the calculation that was done. If the 12% cap rate accurately reflects local conditions, you should be able to take the $1.2 million and buy another similar property that aslo produces $144K in income. If you can't, then you have a reasonable basis for arguing the $1.2 million value is wrong.

An argument that the building will produce $144K a year for the next 20 years so its worth $2.88 million just doesn't hold water. No buyer would pay that. A government agency is only going to pay you the value. Further, that's not a realistic estimate because $144K 20 years from not is not worth $144K right now. You would have to apply some discount. Even at a very nominal discount of 3% (inflation), $144K in 20 years is worth only $79K right now.