Anatomy of a Commercial Real Estate Appraisal: A Top 19 Q&A Guide
Feeling a bit overwhelmed by the thought of a commercial real estate appraisal? The process can be daunting, especially if you’ve never engaged in an appraisal for commercial real estate before. After all, it is a detailed activity that can look different depending on the scope and nature of your property.
To simplify and demystify the commercial appraisal process for you, we have addressed 19 of the most important questions asked. So, take a deep breath, read on, and be prepared to gain a deeper insight into this important topic of commercial real estate valuation. We believe that you’ll feel better informed, more confident, and maybe even a little enthusiastic when it is time to schedule a free consultation with a commercial property appraiser.
JUMP TO SECTION:
- What is a commercial real estate appraisal?
- Who conducts a commercial real estate appraisal?
- What is a commercial appraisal used for?
- What types of commercial properties can you get appraised?
- How accurate are commercial real estate appraisals?
- Why are commercial property appraisals important?
- What is the overall commercial real estate appraisal process?
- What are the specific types of commercial appraisals?
- Which appraisal method is typically used for commercial property?
- What are the different types of commercial appraisal reports?
- Who can see the results of the commercial appraisal report?
- How much does a commercial appraisal cost?
- How long is a commercial appraisal good for?
- What do commercial appraisers look for when determining a property’s value?
- How can you increase the value of your property before a commercial appraisal?
- What are some overlooked aspects of a commercial property appraisal that I should discuss with my CRE appraiser?
- Is there anything else I should keep in mind with commercial real estate valuation?
- How do I find commercial real estate appraisers near me?
- Where can I find highly qualified commercial property appraisers in Ohio I can trust?
The short answer: A commercial real estate appraisal is a calculated assessment of value for any type of commercial property. Properties may include apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and land for sale. If you’re reading this article, you will likely need a commercial real estate appraisal for property being sold, mortgaged, taxed, insured, or developed. The information that arises helps enlighten those who own, manage, sell, lend money, or invest in commercial real estate property. Note: A commercial property valuation is considered the equivalent of an appraisal, and the words are sometimes used interchangeably. For the purpose of this article, we’ll mostly stick to the word “appraisal.”
A professional real estate appraiser carries out this process. Think of this person as a property detective; the commercial appraiser assembles various facts, statistics, and other information regarding the property. The data is then analyzed and used to develop opinions of value. A good commercial real estate appraiser possesses sharp analytical skills, sound judgment, and strong communication.
Depending on the types of commercial appraisals they are working on, a commercial appraiser may need to pass a test and become state-licensed or certified. Some go one step further and fulfill strenuous education and experience requirements to become designated members of the Appraisal Institute. All commercial real estate appraisers must follow a very strict code of ethics and rules. You can check the credentials of your licensed or certified commercial real estate appraiser.
So, why do you need a commercial real estate appraisal? Generally, a commercial real estate appraisal is an unbiased valuation assessment to help you determine the value of a commercial property. You may need a commercial valuation for many reasons. The most common reasons that one would need a commercial valuation are to:
- help commercial real estate sellers determine fair selling prices;
- help commercial buyers decide on list prices and determine fair offer prices;
- bolster lease negotiations;
- transfer the ownership of commercial real estate property;
- assist lenders in establishing the amount of a loan (a lender will never provide a loan greater than the value of a property);
- aid underwriters in establishing a value of security for mortgage lending purposes;
- assist in corporate mergers, issuance of stock, or revision of book value;
- accommodate with business dissolutions;
- support legal matters, such as contract disputes, environmental damages, eminent domain proceedings, probate court, etc.;
- determine a property’s assessment for tax purposes, such as a reappraisal process (appealing a tax assessment), inheritance, charitable donation, or gift taxes;
- assess damages created by weather conditions or environmental contamination;
- reinforce government acquisition of private property for public use;
- advise zoning boards, courts, and planners regarding the probable effects of proposed actions;
- estimate the liquidation value for forced-sale or auction proceedings;
- ascertain the feasibility of a commercial construction or renovation program;
- assist commercial investors in making informed decisions; (a commercial appraisal for real estate can help investors decide on purchasing securities, setting budgets and timeframes for renovations, establishing rent prices, etc.); and
- allow a commercial broker to counsel a client on commercial real estate investment matters, such as goals, alternatives, resources, constraints, and timing;
You can get commercial property appraisal services on just about any property type. Below are some examples of CRE appraisals:
- Commercial building appraisal
- Office building appraisal
- Apartment building appraisal
- Mixed-use property appraisal
- Restaurant appraisal
- Shopping center appraisal (and other types of retail appraisal)
- Special purpose property appraisal
- Industrial real estate appraisal (including warehouse appraisal)
- Conservation easement appraisal
- Commercial land appraisal
- Raw land appraisal
- Vacant land appraisal
- Farm appraisal
Some commercial property appraisers may also provide you with an estate planning appraisal or commercial real estate appraisal review services. And full-service CRE firms may also help you with company valuation or commercial business valuation services.
Are commercial appraisals accurate? Typically, commercial appraisals may vary 2-3% up to 10% above or below comparable commercial real estate properties; this is based on properties that sell six months after the commercial appraisal services conclude. It’s important to note that commercial appraisal valuation is not an exact science: two commercial appraisers can look at the same property for the same purpose and come up with varying values. Those figures are both valid as long as proper evidence and data can be provided to support that commercial valuation.
The commercial real estate appraiser’s role is to produce an accurate, reliable, and unbiased estimate of the market value of a property. Market value is the most likely selling price a knowledgeable buyer would pay to a knowledgeable seller. An estimate is achieved through research, investigation, analysis, and reporting. The commercial real estate appraiser must consider everything that could affect a property’s value; some factors include property conditions, neighborhood, economy, market conditions, legal factors, and even the political climate. Investors can place their confidence in a licensed commercial real estate appraiser, especially one who is reputable and familiar with the local market.
A commercial property appraisal helps you determine the fair market value of your property. No matter the purpose of the appraisal, the estimated commercial valuation indicates what someone on the open market would be reasonably willing to pay for said site. Knowing the fair market value can help you determine how to price your rental fees or sale price. A commercial appraisal for real estate can help you get a better loan from a financial institution. In addition, a real estate commercial appraisal can help you better understand your financial standing. If the fair market value is greater than you anticipated, you may decide to invest in your property through upgrades, or perhaps invest elsewhere. Lastly, appraisals are important to financial institutions. A commercial property appraisal helps lenders understand the property’s value and how much they can loan.
The commercial appraisal process varies significantly depending on the nature of the project; however, the basic structure of the approach remains roughly the same across the board. First and foremost, much like a science experiment, the “problem” is identified. This may include determining the intended use, relevant characteristics of the property, and assignment conditions. Second, the scope of work necessary to solve the problem is planned out. The scope includes the amount and type of information to be researched and the analyses to be applied in an assignment. Third, relevant data is collected, verified, and analyzed. This may include market area data (general characteristics of the area/neighborhood) and comparable property data (sales, listings, offerings, vacancies, etc.).
The analysis also considers four factors: scarcity, desire, utility, and effective purchasing power. Finally, after following these steps and principles, the appraiser forms an opinion of value and creates a commercial appraisal report.
In general, the full cycle of the commercial real estate appraisal process can take several days to weeks, when you factor in the inspection and subsequent investigative work. Commercial appraisal costs can vary based on the size of your property, as well as the scope and nature of the commercial real estate appraisals. When you hire a professional to perform a commercial appraisal of a project, they will likely walk you through the appraisal process.
A property’s value can be determined in various ways; however, all commercial real estate appraisal methods are built on a data foundation. That data may include details on the specific property or general information on the neighborhood, community, city, and/or region. So, what are the three ways to value a commercial real estate property?
There are three main types of approaches used when appraising commercial real estate: the cost approach, sales comparison/market approach, and income capitalization approach. Below we’ve outlined the most common commercial property appraisal methods.
- Cost approach: Essentially, this technique equates the property value to the cost of constructing a replica. The cost approach also considers depreciation, thus, assuming a fair market value for the commercial property. Obviously, this appraisal method comes with its share of debate. For instance, how can you assume a similar site to build upon? And, can you really expect equivalent costs for rebuilding the property? Due to these questions (among others), the cost approach is often used to appraise new properties and unique properties with few comparable sales.
- Sales comparison/market approach: This method speculates that an investor will pay only what similar properties have sold for. As such, the sales comparison/market approach is rooted in which property features are alike and the costs associated with those features. Important characteristics may include location, size, condition, floor plan, and the surrounding area. Many in the commercial real estate appraisal industry believe this is a more accurate approach because the current market value is considered.
- Income capitalization approach: Also referred to as income approach, the income capitalization approach rationalizes the income that a property may generate over time. Commercial appraisers commonly use this method for appraising properties such as shopping centers, office buildings, and large apartment buildings, which have a strong earning ability. When this approach is used for a rental property, an investor considers the net income generated, and other factors, to calculate its value on the current market, if sold. In addition, a lender will closely examine the findings and determine whether they feel confident that their investment will be repaid. We dive deeper into this method, below.
To determine a final estimate, the commercial property appraiser will consider the value resulting from one of these three types of commercial appraisals. They will consider the applicability/reliability of their preferred approach, relative to the kind of property being appraised, the adequacy of the data processed, and the overall purpose of the commercial real estate appraisal. And sometimes the commercial appraiser will use multiple types of real estate appraisal methods. The types of commercial appraisal approaches that are the most reliable and applicable will bear more weight in determining the final estimate. Ask your appraiser which type of appraisal method(s) they feel best suits your property.
Out of the three main approaches, which valuation approach is most common for commercial real estate? Income approach is the most commonly used commercial appraisal method when valuing a commercial property. The method estimates fair market value based on the projected income a property will generate in the future. To determine the projected income, the commercial appraiser will analyze the income that the property currently generates. The income approach provides investors with the insight needed to determine if an asset is a worthy investment.
What’s the difference between Income Approach and Income Capitalization Approach?
The income approach to appraisal is also referred to as the capitalization approach; they are synomymous. Capitalization is the division of current income by an expected rate of return to estimate the value of an income stream. As such, the determined income stream value is a gauge of fair market value.
What principle is the income approach primarily based on?
The principle of the income approach is that the value of an investment property indicates the income it is expected to generate over its lifetime. This approach anticipates future benefits to determine present value.
How do you calculate the income approach?
The income approach is calculated by dividing the net operating income by the capitalization rate. The capitalization formula used in the income approach is called IRV: Income/Rate = Value (I/R=V).
What are the advantages and disadvantages of income approach?
The main advantage of the income approach method is that it provides investors with an estimate of anticipated cash flow. The main disadvantage of the income approach method is that a lot of data is projected; a minor discrepancy can greatly affect the market value.
Your commercial appraisal report may cover a variety of important factors. These factors may include a comparative analysis of other properties in the area, a description of the property, an estimate of the property’s value, and a listing of any potential risks you may encounter. It may also include negative aspects that can impact the market value of the property.
Depending on the client’s and project’s needs and requirements, the written commercial appraisal report will vary in type, format, length, and content. There are three possible written formats, as determined by the Uniform Standards of Professional Appraisal Practice. These three types of commercial real estate appraisal reports include self-contained reports, summary reports, and restricted-use reports.
- Self-contained reports: This type of report fully describes the data and analyses used in the appraisal. It details a broad range of appropriate information within the actual report, with minimal references to files outside the report.
- Summary report: As its name suggests, this type of report summarizes the data and analyses used in the assignment. You can find additional data and/or analyses in a separate file outside of the appraisal report. Any intended user can utilize this type of report.
- Restricted-use report: This type of report only states the appraisal’s conclusions. You can find all data and/or analyses in a separate file outside of the report. This is the shortest and least expensive type of appraisal report and can only be used by the client.
If a written report isn’t necessary, a verbal opinion of value may instead be communicated after a preliminary analysis is conducted.
Depending on your intended use of the report, your commercial real estate appraiser can help you determine which type of commercial appraisal report makes the most sense for you.
Rest assured; commercial appraisers must maintain client confidentiality and cannot release the results of a report to outside parties without your permission. When you are scheduling the commercial real estate appraisal, you should go over who you want to use the report at its completion. For instance, you may want to share the commercial appraisal with the seller, your lender, and perhaps your local property tax appeal board. The commercial appraisal report will identify these people or parties as the only ones with the authority to use the report.
Typically, a full commercial appraisal costs $3,000 to $5,000. On average, expect to pay roughly $4,000. For larger commercial properties involved in litigation or tax cases, a commercial appraisal can cost upwards of $10,000 to $25,000. However, the commercial real estate appraisal cost can greatly vary depending on the property, requirements, intended purpose, and experience of the commercial appraiser.
The intended use of the commercial valuation is the most significant factor in determining the amount of work needed, the level of research and analysis, the detail required, and the best type of commercial appraisal report to establish the property’s market value estimate.
If you have a specific project, call commercial appraisal firms to ask, “How much is a commercial property appraisal?” Provide as many details as you can to obtain a more accurate estimate. A commercial building appraisal cost differs greatly from a land appraisal or industrial real estate appraisal.
(Note: A full commercial appraisal is sometimes referred to as a “summary appraisal report.”)
Technically, commercial appraisals don’t expire. However, a commercial appraisal is typically honored for 90 days up to six months. A commercial real estate appraisal may only be accepted for up to 30 days in a volatile market.
Fair market values can shift based on the economy, supply and demand, market volatility, the condition of your property, and the local area. Due to these variables, the shelf life of a commercial real estate appraisal can vary.
As a commercial real estate buyer or seller, it’s crucial that your commercial valuation is accurate and reflects the latest data. In addition, financial institutions may not accept your commercial real estate appraisal if they feel it’s old. And lenders may set different timeframes depending on the type of loan.
If you want a loan, we recommend you check with the financial institution you’re considering; find out their timeframe policy on accepting commercial real estate appraisals. An insider tip: You can use a commercial real estate appraiser of your choice if you engage that appraiser within 3-6 months before speaking to the bank! Otherwise, you must go through a blind bidding process through the institution’s approved vendor list for a commercial real estate appraisal.
When commercial appraisers assess a property, they analyze various factors and investigate multiple data points. The specific items appraisers look for will fluctuate depending on the type of appraisal and best-suited appraisal method.
What determines the value of a commercial property? Generally, commercial appraisers look for the following when assessing a property:
- Public ownership records
- Zoning records
- Demographic information
- Property details (building and lot size, condition, functionality, accessibility, amenities, special features, etc.)
- Recent comparable sales
- Current market trends
- Replacement costs (a cost estimate to construct a building comparable to the building undergoing the appraisal, while using current prices, building standards, and materials)
- Rental information (number of renters, rent prices, length of lease agreements, etc.)
Improving your property before your commercial appraisal can increase the property’s value and attract higher-quality tenants or more buyers.
- Keep your property up-to-date. Make sure you take care of your property and keep it in good condition. Implement any necessary repairs inside and outside.
- Enhance your commercial property’s curb appeal. Improving how your property looks, at first sight, is often a surefire way to attract better tenants or buyers; it can also increase your commercial real estate valuation.
- Hire a landscaper to help make the grounds look inviting.
- Clean the exterior of the commercial building (power washing can do wonders).
- Paint the exterior (depending on the material, of course).
- Get a new or upgraded building signage (if applicable).
- Reseal the parking lot and clean the walkways.
- Update the lighting fixtures on the exterior of the building, on the walkways, and in the parking lot.
- If your commercial building has a lobby, create a warm, welcoming environment with fresh paint, new flooring or carpeting, upgraded light fixtures, and a secure entry.
- Make improvements to your property and add amenities. Having a unique property or one with value-added features will almost always improve your commercial appraisal for real estate. Update old systems, heating, air conditioning, electrical, and plumbing. Add key fob entry or a complete security system. Adding a gym room will increase your property’s appraisal value, depending on your budget.
- Rent a section to retail establishments. Based on the size of your commercial property and budget, you may consider allocating an area of your property to retail establishments. Renting commercial space to food or beverage shops or a dry cleaner provides convenience to tenants. Retail tenants can also attract more visitors (if they have outside entrances) and add a new revenue stream.
Question 16: What are some overlooked aspects of a commercial property appraisal that I should discuss with my CRE appraiser?
A lot of detail goes into a commercial appraisal of a project. One important aspect that people often overlook is the date selection; make sure the appraisal date is according to your needs. You may have a property appraisal as of the actual inspection date, as of a past date (retrospective appraisal), or as of a future date (prospective appraisal). Talk to your commercial real estate appraiser to decide which date makes the most sense in your case.
In addition to the date of the commercial appraisal, it is critical that you perform your own review of the appraisal; double-check the commercial real estate appraisal information to ensure that your commercial appraiser considered every important factor. For instance, did they properly account for all the rooms in the property and their unique features? Did they cover all upgrades you made to the property? Don’t be afraid to confirm any part of your commercial real estate appraisal. Speak up to make sure the bottom line is precise.
On the flip side, you should never misrepresent facts; commercial appraisers are expert inspectors and researchers who work tirelessly to discover the true value of your property. You also shouldn’t withhold anything if your commercial appraiser asks for information. This might include drawings or blueprints of the property, a tax bill for the property, or income statements. It is in your best interest to provide all the materials you can; doing so will enable your commercial real estate appraiser to do the best and most accurate job possible.
Always remember that commercial property appraisals are estimates of value based on limited information (e.g., a property appraiser will not verify the boundaries of a property; a surveyor needs to determine the property boundaries). Of this limited information, some are based on secondhand data. For instance, commercial property appraisers do not perform a walk-through of comparable properties; instead, they base their comparisons on recorded sale prices and the descriptions of the properties. Therefore, any unrecorded details affecting your property value will not be considered. Also, recorded prices of comparable properties in similar regions may differ based on the owners’ negotiation skills in buying and selling property.
Something to keep in mind is that when analyzing comparable properties, only the market value of the differences is considered, not their actual cost. So a proper commercial real estate appraisal will also depend on accurately assessing the market value of the differences between the appraised property and similar properties.
As you can see, there are many sources of possible inaccuracies when conducting a commercial property valuation. As a result, the commercial appraiser may offer you a range of possible values for the property; one number is not always set in stone.
If you require an accurate assessment of the market value of your commercial property, you’ll need to hire a qualified commercial property appraiser. Depending on your state’s laws, commercial appraisers may have an associate’s or bachelor’s degree in any field, completed an apprenticeship under a licensed commercial appraiser, and hold a commercial appraiser certificate or license. A local commercial appraiser also has a deep understanding of the market. As such, it’s best to find a commercial real estate appraiser near you or your property.
Don’t hesitate to ask commercial appraisers or even top commercial real estate appraisal firms for a copy of their certificate or license. You can then check with the government department that issued the qualification to confirm it is in good standing.
Below are some ways you can find a certified or licensed commercial property appraiser:
- Call the leading commercial real estate appraisers in Ohio – none other than The Robert Weiler Company! Reach us at 614-221-4286 to learn about our commercial valuation services.
- Search AppraisalInstitute.org for licensed commercial property appraisers. If you want a commercial appraisal in Ohio, visit the Ohio Chapter of the Appraisal Institute. This is a helpful way to find commercial real estate appraisers near Ohio.
- Search National Association of Realtors (NAR) for licensed commercial real estate appraisers. If you want a commercial appraisal in Columbus, Ohio, contact NAR’s local chapter, ColumbusRealtors. Call 614-475-4000 to find commercial real estate appraisers near Columbus, OH.
- Search Appraisers.org (American Society of Appraisers) for licensed commercial property appraisers.
- In Ohio, contact the Ohio Division of Real Estate and Professional Licensing (ODRE), which is part of the Ohio Department of Commerce. ODRE handles licenses for commercial real estate appraisers, brokers, salespeople, and more. Call ODRE at 614-466-4100 to request a referral.
- Ask your local commercial real estate agent for a referral.
- Request a referral from your financial lender.
If you are looking for a commercial appraisal management company in Columbus, Ohio (or throughout Ohio), you will be highly satisfied with The Robert Weiler Company. We have a long history of assisting a diverse portfolio of CRE investors and property owners throughout Ohio. Our commercial appraisal management team takes the time to provide one-on-one attention to every client. Moreover, our CRE appraisers bring an unmatched skillset to the table, ensuring a complete, fair, and accurate job you can feel confident in. Whether you need a commercial real estate appraisal or commercial appraisal review services, we can help!
In need of our commercial appraisal services now? Speak with one of our experts today by calling our office at 614-221-4286. You and your team will be glad you spoke with one of our seasoned commercial real estate appraisal professionals at The Robert Weiler Company.