Would you pay more for a well maintained and documented building?

A vehicle with full maintenance records almost certainly will command a premium over the same vehicle without similar proof of maintenance. Does this hold true for buildings?

There is evidence that “green buildings“, those with LEED or other building performance ratings, do see a premium in the market, presumably as they are seen to be more energy efficient, with lower operating costs.

Many buildings are well maintained. Fewer are both well maintained and well documented. Logically, well maintained buildings should see a premium value in the marketplace, but without documentation, that premium value may be difficult to realize on sale.

What’s the potential value of a well documented building? In Vancouver, commercial buildings might sell at a capitalization rate of about 5.5 percent. That means that the expected net income is 5.5 percent of the selling price. In other words, a $1 increase in net income adds $18 to building value.

It is relatively easy to temporarily improve net income by simply deferring maintenance. Consider this example building, with net income of $5.5 million and operating/tax expenses of approximately $3.4 million. If the building is adequately maintained, the building will be valued at $100 million. Let’s assume the building owner chooses to defer $100,000 (2.9 percent of budget) in maintenance each year for 3 years in order to improve net income, prior to a sale. This simple act would add $1.8 million in value, by the numbers, in those years.

Notice the building valuation in Year 4, for the $300,000 deferred maintenance example. In Year 4, a new purchaser could be catching up on $300,000 per year of deferred maintenance, $900,000 poorer, and a calculated building valuation down by almost $20 million!

Will poor building documentation reduce the value of your building? You bet!

Note: If you would like details on the calculations, please leave a comment.