Are Your Improvements Contributory?

You are going to use that new industrial building that you just purchased for indoor tennis courts, and you want to know if those improvements will make the building worth more money? Or you already purchased and remodeled an industrial build to grow marijuana, and now it’s your opinion that those grow improvements are going to make it much more valuable.

The problem that appraisers confront every day is that many parties who purchase industrial buildings and then modify them for a specialty purpose believe that there is an entire market full of people out there who are interested in purchasing the modified building, with its improvements, and they believe that there are many people willing to pay a premium for the improvements.

If you have a 50,000 square foot industrial building with an ice skating rink constructed inside it that is located at the outskirts of Las Vegas, NV, you may have hundreds of people interested in the building if vacant but you are likely to have few or likely no people interested in the building with the ice rink.  It’s hard to find an industrial buyer who thinks that a building is exactly what he is looking for without there having to be major renovation.  There are just so many different industrial building users and uses, from those who are involved in fabrication, vehicle repair, warehousing and distribution, that you can’t hope to design a building that will meet the needs of everyone.

Just because you as an owner invested hundreds of thousands of dollars into the interior improvements of an industrial building doesn’t mean that there is a market for them.  I’m not saying that you won’t find a buyer who will pay for both the building and the improvements, I’m just saying that as an appraiser it may be difficult for me to conclude that your million dollars in high end office improvements will be deemed contributory.  There are improvements appraiser consider “super-adequate” or basically beyond what most buyers in the market want and are willing to pay for.
Some building owners assume that the specialty building improvements that are often trade fixtures, add to the market value of the real property when often they do not. It puts an appraiser in an awkward position when he hears that the owner thinks his real estate improvements, which may be deemed worthless by many potential building buyers, increase market value when in fact they do not.  Non-contributory improvements in industrial buildings are not common, most owners and users don’t finish their buildings like palaces or do things in them that are unique.

Contributory improvements are improvements that are by definition improvements that add to real property market value.  The problem with the definition is that it doesn’t explain that some improvements don’t add value in the industrial market.  Appraisers have to ask themselves “do the thousands of grow lights, quality weed testing rooms, the HVAC in the warehouse area and the super-security added to the building all contribute in the mind of the typical industrial building buyer?  The answer is probably not.  Often buildings can languish on the market because the build area is too large because many industrial users just don’t need more that 5% to 10% dedicated to an office. 

If the interior improvements consist of office or showroom build-out beyond the normal range there are buyers in the market who are seeking those types of improvements and will buy the building and they may even modify it by demolishing some of the build-out.  When you stray too far from the typical 5% to 25% build-out range you can negatively impact the value of an industrial building.  Buyers in that market are often not looking for a lot of office space, and having it finished and trying to get compensation for it may make a sale take much longer.

If an industrial building has a finished office area that is at or near 100% the building area it has effectively become an office building.  Some industrial buildings located in R & D areas actually have very high-quality finishes and they are at times worth more than a standard office building.

Industrial building, which are real property, can often become just one element included in a business entity as a business asset.  Business appraisals consider the value of the real property, and the specialty improvements and trade fixtures, but the income production of the entire business entity is at the crux of business valuation.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or http://www.horizonvillageappraisal.com, or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

Article source: http://www.appraisalarticles.com/General-Appraisal-Articles/4696-Are-Your-improvements-Contributory.html