Secrets of Appraising Office Condominiums - Part 2 of 5

Secret # 3 – The Subtle Demographic

I’ll admit I don’t include demographics in office condominium appraisals, but some appraisers do.  Demographics really mean nothing to this property type, although there is a subtle type of “demographic” that is hard to argue with.  In reports I’ve looked at from other appraisal firms, I’ve found that it if you blow it here, it completely undermines the valuation.

What is this mystery of mine?  It’s the occupancy/tenancy of an office condo project.  If you have a project that is mostly lawyers, what does that tell you about the local demographics?  Now contrast this with general office space users.  Take it a step further and look at the companies that are in the general office space and you’ll also see patterns.

The difference here is that if you select comparables from projects that have very different tenancies, you need to make the correct adjustment.  For instance, if your subject is mostly legal firms and your comps are general office users, expect to adjust your comparables upward for an inferior location.  True, in all likelihood the attorney-occupied office condo project is situated within walking distance of the District Court or Hall of Records in an urban location, so it shouldn’t be hard to pick that adjustment out.  Yet I rarely see it done or explained properly.

I may be the only appraiser to have a database of inspected office condo projects in Maryland and that puts me in a unique position to talk about this adjustment.  I know these projects.  Still, it’s all about knowing your data and your market, isn’t it?

Secret # 4 – Medical Office Condos are not Exactly Regular Condos

Theoretically, they are, but that doesn’t mean they should be treated the same.  What happens is that the medical office condo is upgraded. One of the biggest differences is plumbing.  Each operatory or examination room likely has its own sink.  Another big difference is in layout.  You have many more small offices, a front waiting area and a central reception station, although the latter two aren’t so different between medical and general office condos.  Having a medical layout for the next medical practitioner is an obvious cost saver, so in this respect the extra partitioning and other upgrades directly translate into a higher price per square foot compared to general offices.  It’s pretty common to find the medical offices too small for the demands of general offices.

Sometimes the upgrades are subtle too.  There may be more electrical outlets or the unit could have a higher electrical capacity due to medical equipment that draws more power when in use (this is not common, but I’ve seen it).

Secret # 5 – Property Tax Differentials Greatly Affect Market Values Between Counties

I talk about this at length in my effect of property tax rates on commercial property blog.  For instance, in Laurel, Maryland, you have three distinct markets and distinct prices per square foot depending on which of the three counties a Laurel office condo is situated within.  Tax rate differences between towns and cities within a county are too insignificant to matter, so there is no need to adjust those.

In Part 3, more of the same.

John Simpson, MAI