Co-authored with Andrew T. Robinson, MAI of Kidder Mathews
A commercial property that suffers from below-market occupancy typically will not sell for as much as an identical commercial property with stabilized occupancy. Where property tax laws require a fee simple valuation of commercial property based on market rents, the assessed property value should reflect a valuation adjustment for any below-market occupancy. Estimating the effect of below-market occupancy on the value of commercial property requires an additional procedure in the real estate appraisal analysis: after first valuing the subject property at stabilized market occupancy, the real estate appraiser should then analyze the subject property at its below-market occupancy. The difference between market occupancy and below-market occupancy is referred to as “vacancy shortfall.”
This discussion explains the vacancy shortfall analysis, including consideration of a valuation adjustment for the entrepreneurial incentive that a typical investor would require to bring a destabilized occupancy property up to stabilized occupancy.
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