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Commercial Leasing: Fair Market Value for Beginners

Andrea Townsley

Learn the ins and outs of fair market value for commercial property

When looking for a rental unit, you don't want to pay more than fair market value.

Commercial space is different from residential space and there are a few things you should know before you go "shopping." First and foremost, you need to know how the costs are expressed, and what is involved in arriving at a fair market value for commercial property.

The square footage is generally expressed as dollars per square foot per year. So, if you're looking at a unit that has 500 square feet of space and it costs $6000 per year (or $500 per month), that equates to $12 per square foot per year ($1 per month). Now that you're familiar with that, you can now consider commercial leasing: fair market value for beginners.

1. Determine the fair market value for leasing commercial property for the unit alone. Location and several other factors go into this determination.

2. Factor in the costs of maintenance. When you find commercial lease at fair market value, you'll have to consider two types of maintenance.

3. Add in the cost of any extras that come with the space. Fair market value office space sometimes comes with little (or big) perks.

Consider the major cost of commercial leasing: fair market value of the unit itself

Location is one of the biggest considerations to determining fair market value for commercial space. Units on busy roads, shopping complexes and high-rise office buildings demand the highest rents; units in plazas fetch higher prices because the foot traffic can help attract business; units with a brand new office complex next door may be advantageous as well, it just depends on how visible your plaza is when people are heading toward the new building.

Think about maintenance costs in relation to fair market value for commercial real estate

Maintenance costs can refer to one of two things. First, it could refer to common area maintenance (CAM), which is a flat fee you pay each month with your rent in exchange for the upkeep of the breezeways and other common areas in a plaza. Second, it could literally mean maintenance. Units that are in disrepair and spaces that are older have the potential for more problems that may cost the lessee some money, and are therefore priced a bit lower. Many contracts state that the lessee makes repairs under a certain cost and the lessor takes care of major repairs.

Get fair market value commercial leasing information for add-ons

There are quite a few extras you have to factor in when looking for space for your business. Parking lots are convenient so they increase the price per square foot. Having a secretary in the lobby or a doorman can make the unit more attractive as well. The best way to find out the fair market value is to compare the prices of spaces without these extras.

  • Taking a look at the fair market value for commercial space around the unit you're looking at will help you make up your mind. For example, if the space you're looking at runs you $12 per square foot per year and the brand new building next door goes for the same price per square foot, you may be getting a bad deal. Just don't forget to compare apples to apples and consider the location, maintenance costs and extras.
  • Property taxes, insurance and special zoning can also impact the fair market value. Commercial lease unit owners may require any of these, which may adjust the cost of your lease.
Image Credit: Shutterstock/Undrey
Andrea Townsley