Commercial Real Estate Appraisal Review: Essential Handbook to a Necessary and Influential 2nd Opinion
In the age of social media, we’re frequently asking friends and family for their thoughts on a subject. Unlike a commercial real estate appraisal review, most of the answers from “Facebook experts” are not fact-based; the responses on your social media post will range from beliefs to convictions to opinions.
Fortunately, we do not conduct commercial real estate appraisals on social media! And, the commercial real estate appraisal review process is not just a second opinion or a survey to friends or even colleagues; it is a required, in-depth analysis by industry experts. In most instances, such as public development projects or litigation cases, the commercial appraisal review is a mandatory examination of an appraisal report to spot mistakes, address errors in a CRE appraiser’s judgment or update information based on changing conditions due to the passage of time.
Would you have a medical procedure without getting a verified second opinion? How about entering into a business venture without the same careful consideration?
A commercial real estate appraisal review is a necessary professional check on the accuracy and quality of a commercial appraisal report… full stop.
Why Is a Commercial Real Estate Appraisal Review Required?
When you consider the details and information that goes into a commercial appraisal report, why is a second look essential? As shocking as it may be, commercial real estate appraisal reviews are required for the following reasons:
- The conclusion of the original CRE appraisal is in contention.
- The obligation to the client isn’t met.
- It isn’t clear who owns the appraised property.
- Too much time has elapsed between the CRE appraisal and the loan.
- City or federally owned property is being evaluated.
- A public project is being conducted.
- The physical, legal, or economic descriptions of the property are in question.
- Uniform Standards of Professional Appraisal Practice regulations aren’t followed.
Use Cases for a Commercial Appraisal Review
As per the above list, there are several motives for a commercial real estate appraisal review; however, what does a real-world scenario look like? Two of the best examples occur when there is lending involved or litigation pursued.
For grants secured for commercial real estate acquisition or development, appraisal reviews are a must-have. Consider the grantor’s position when considering a disbursement for a mixed-use development, conservation easement, or specialty use property.
An appraisal review is a second opinion or added insurance for the transaction to ensure the purchase price history, comps, adjustments, and disclaimers are accurate. Essentially, the commercial appraisal reviewer must confirm the report is acceptable, meets standards, and the appraiser had no interest in the property appraised.
A commercial appraisal review is also critical during litigation. As such, an attorney will often solicit a commercial real estate appraiser to conduct an independent review of the appraisal report. Why is a review significant? The commercial appraisal review has the potential to:
- aid the attorney by identifying strengths and weaknesses within the report;
- provide information that assists in countering the opposing party’s claims;
- assist in framing questions for depositions and during the trial;
- advise on professional code of ethics and standards of practice; and
- clarify references and data to ensure that all parties (including the jury) understand the information.
It is critical to reiterate that, while solicited by one or both attorneys on a case, the commercial real estate appraiser often remains completely autonomous.
Opportunities in the CRE Appraisal Review Process
There is much at stake in commercial real estate deals. As such, all parties should take the prerequisite time to get the CRE appraisal right. If you are not satisfied with the original commercial property appraisal, the review process offers the opportunity to fix parts of the report that did not meet your standards or the standards of the financial lending institution you represent.
Under USPAP’s Scope of Work Rule, “reviewers have broad flexibility and significant responsibility in determining the appropriate scope of work in an appraisal review assignment.” In other words, when commencing with the commercial appraisal review process, property information that should have been included by the original commercial property appraiser can be used by the appraisal reviewer. This new information helps the appraisal reviewer develop an opinion about the quality of work or the value of the property under review.
The commercial property appraisal review must meet rigorous professional standards established by USPAP, the Uniform Standards of Professional Appraisal Practice, standards 3 and 4. According to USPAP, “In developing an appraisal review, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses to produce a credible appraisal review.” The commercial real estate appraisal reviewer is giving his or her opinion of another appraiser’s work, not an opinion about the appraiser. The review is not personal.
How Does COVID-19 Affect Commercial Real Estate Appraisal Reviews?
During these uncertain times, the impact on commercial real estate has been monumental. Based on a COVID-19 commercial real estate impact survey, more than half (57.4%) of industry participants expect a decrease in the immediate short-term rents, while 41.8% of the respondents expect rents to stay the same. Concerning capitalization rates, 44.5% of the respondents expect a quick, short-term increase on capitalization rates.
One result of this may be commercial property owners choosing to file tax appeals. Additionally, lenders, investors, developers, and attorneys may request a commercial appraisal review if they have worries about rental delinquencies or vacancy rates. A real estate appraisal review is an excellent tool for a recently conducted commercial appraisal, to check if market comps and other property valuations remain the same.
Who Conducts Commercial Real Estate Appraisal Reviews?
As the name implies, the commercial real estate appraisal review is to critique another’s work; it’s not personal and could save you thousands of dollars or even litigation by catching an appraisal error.
Commercial appraisal reviewers have the same professional responsibilities and must follow all of the professional standards of a certified appraiser. Appraisal reviewers will also work on the same complex properties and, therefore, must understand legal descriptions, building plans, valuations, appraisal methods, and more. Further, a property appraisal reviewer should have experience with the type of property that the professional is reviewing.
Licensed and qualified real estate appraisers typically perform appraisal reviews. Commercial real estate appraisal is a profession with specific training, regulations, and professional designations. State laws differ, and the reviewer may need more than one license. For instance, the reviewer may need a license in the state where the report’s subject is located.
In some cases, a non-appraiser may look over an appraisal for facts and accuracy or ensure compliance with USPAP and regulations. When outside professionals evaluate another appraiser’s work, their opinions are called administrative reviews. For example, when an attorney checks an appraisal for completeness and factual accuracy for litigation purposes. This is an administrative review, not an official commercial real estate appraisal review.
To summarize, the commercial appraisal reviewer must be as competent and knowledgeable or even more seasoned than the original appraiser. The Robert Weiler Company, with over 80 years of experience, excels at the core competencies of commercial real estate appraisal. As economics, finance, law, and technology change, The Robert Weiler Company stays on top of the CRE trends. And we always take those trends into consideration with regards to our commercial appraisal review services.
What’s in a Commercial Real Estate Appraisal Review Report?
The content and type of information required in reporting the results of an appraisal review can be found in USPAP Standard 4. Fannie Mae’s appraisal review requirements ensure that their own policies are followed, as well as the USPAP standards.
A commercial appraisal review report must:
- identify the client and intended users;
- explain why the property appraisal is being reviewed;
- plainly describe any assumptions about the assignment;
- state the use of the property appraisal review;
- communicate the research and analysis performed; and
- describe the reviewer’s conclusions about the work being reviewed, including the reasons for any disagreement.
Did the grant application demand a commercial real estate appraisal review for submission purposes? Is the Internal Revenue Service performing an audit of assets? Whatever the intended use for the analysis, the information must be indicated in the report. More specifically, appraisal reports must include the five qualities that USPAP specify as critical for appraisal credibility:
Some elements will be unique if the commercial appraisal reviewer is establishing their own opinion regarding the value. For example, the scope of work, effective date, and development process.
What Happens When the Commercial Appraiser and Appraisal Reviewer Disagree?
As in medicine, or even at the local auto body shop, you expect the professionals involved in giving you the second opinion to act… well, professionally. The commercial real estate review process is no different. The original appraiser and reviewer know that they will not always agree on a property valuation, and both parties will be respectful of each other. Both the original appraiser and reviewer will maintain their independence.
When a commercial appraisal reviewer does conclude that their appraisal opinion is different than the original report, the reviewer’s report must conform to SR 3-4, 3-5, and 3-6. The appraisal reviewer, in the report provided to the client, will have clear and detailed explanations relating to how the difference in property valuation was determined.
The steps for accomplishing the outcomes to meet the standards are known in the professional development classes as CAARR (Completeness, Accuracy, Adequacy, Relevance, and Reasonableness). These five qualities are part of the development process or are the elements of a commercial real estate appraisal review. However, they aren’t the only considerations. A competent commercial appraisal review will also include:
- methods used to analyze property;
- the type of property reviewed;
- property location;
- a comparison of similar properties; and
- how the property is or will be used.
Standard 4 addresses the commercial appraisal reporting process. Each written or oral appraisal review report must be an original report, truthful, and clear; this is so that the intended users of the appraisal review can understand the report.
Another source to provide guidance if there is a dispute between the appraisal reviewer and appraiser is the book, ‘Review Theory and Procedures: A Systematic Approach to Review in Real Property Valuation.’
Published by the Appraisal Institute, this book defines a real property valuation review process model as an organizing tool.
The book describes the model as:
- identifying the problem that the client needs to be solved by the review;
- communication of the reviewer’s work;
- special considerations in review assignments;
- and other challenging assignment conditions, including misunderstandings, communications problems, and more.
Why Is It Important That the Commercial Real Estate Appraisal Reviewer Be Independent?
The appraisal of commercial property and appraisal review of these properties are often outsourced for many reasons including, insulation from influence, cost, and experience.
The appraisal reviewer must be independent; any party benefitting from the transaction cannot influence the reviewer. As such, the parties at the center of the commercial real estate deal agree to hire a third-party appraisal company like The Robert Weiler Company. Experience is earned. Commercial appraisers and reviewers develop, over time, experiences with a wide range of properties and markets. Independent commercial real estate appraisal firms gain this experience by servicing multiple clients; and lending institutions gain the benefits from this earned depth of knowledge.
A commercial appraisal review can be as significant as the appraisal itself. Essentially, the review process ensures unbiased confirmation of the commercial appraisal report’s validity. A qualified appraisal reviewer is truly independent of the valuation purpose. The appraisal review process is important as a tool to scrutinize appraisal reports and makes commercial real estate transactions safe for the involved parties.
What Should You Do If You Need a Commercial Real Estate Appraisal Review?
Contact The Robert Weiler Company for your next commercial appraisal review! Whether your deal includes land, commercial offices, industrial warehouses, or any other type of property, our commercial real estate appraisal reviews are in compliance with professional standards and guidelines. With our commercial appraisal review services, The Robert Weiler Company adheres to best practices of the following guiding organizations:
- Uniform Standards and Appraisal Practice (USPAP)
- International Valuation Standards (IVS)
- Federal Housing Authority (FHA)
- Fannie Mae
The next time you consider a second opinion (on anything of value), don’t go to social media. Trust the experts! For decades, The Robert Weiler Company has assisted sellers, buyers, and investors in various real estate transactions. We know the industry, and we deeply understand the Central Ohio commercial real estate market. If you have an appraisal that requires both expertise and transparency, contact The Robert Weiler Company for a commercial real estate appraisal review at 614-221-4286.