Is there a formula to value a business operating from a leased building? Turnover or profit, times whatever??
Answer:
There are a number of ways. One of the most utilized ratios is the capitalization rate (or cap rate). It is next year's net operating income / cap rate = value. But be careful, the NOI used by RE professionals is NOT the same as the accounting definition. To estimate the cap rate, you can infer the cap rates from recent comp sales. some data providers also provide estimates for major markets, but usually only for investment grade properties. You can also contact a local commercial RE agent & ask for the typical cap rate range for that type of property in your area.
The more thorough way is to forecast the cash flows over your expected holding period & discount them back. Once you have the forecast, standard rules for NPV & IRR hold.
If you really want to be thorough, you can build binomial trees to value the embedded options & incorporate these into the equation. Other Questions and Answers: