The fair market value of commercial real estate is traditionally established using one or more of the following methodologies: The Sales Comparable approach, the Income Capitalization approach, and the Cost approach. The Sales Comparable approach equates the value of a particular property to the prices that buyers have recently paid for similar properties, usually adjusting the prices to account for obvious differences between the comparable properties and the subject. The Income Capitalization approach is used with income-generating properties, and applies a capitalization rate (a percentage used to assess risk-reward tolerance in the market at large) to the net operating income generated by the property over a one-year period to establish value. The Cost approach considers the current cost of reproducing a property, including the land, buildings and related site improvements, and then deducts from that sum an amount equal to the “cost” of physical deterioration to the existing property and any obsolescence of the existing structures. If you have questions about how these valuation methodologies might apply to a particular piece of commercial real estate, please call our office or send an inquiry using the link provided below.