How Does Commercial Property Appraisals Work?

How does commercial property appraisals work? Continue reading to find out more about the process of appraising a commercial property. 

Commercial property appraisals are very misunderstood. Most people when they think of appraisals think of residential appraisals. This is because most people’s only experience with an appraiser is when they buy a home. However, commercial property appraisals are quite different from residential appraisals.

Commercial property appraisals are opinions of value conducted by a certified general appraisers (highest level of state licensing).  Commercial property appraisals are for properties such as office, medical office, retail, restaurants, shopping centers, industrial, apartments, hotels/motels, special use properties and more. Most commercial property appraisals consist of narrative reports ranging anywhere between 70-+100 pages versus residential appraisals which consists of form reports and check boxes.

The preparation of the commercial property appraisals involves thorough research into appropriate market areas; the assembly and analysis of information pertinent to a property; property rights (fee simple, leased fee & leasehold), zoning analysis, site & building descriptions, market analysis (law of supply and demand), highest and best analysis (as-vacant and as-improved) and the knowledge, experience, and professional judgment of the appraiser.  Commercial property appraisals are usually required whenever real property is sold, mortgaged, taxed, insured, or developed. For example, commercial property appraisals are prepared for mortgage lending purposes, when you buy or sell commercial property, tax assessment and appeals of assessment, determination fair market value of an asset,  negotiation between buyers and sellers, government acquisition of private property for public use, business mergers or dissolutions, lease negotiations and more.

Approaches to Commercial Property Appraisal 

In general, there are three main approaches used to value the commercial properties.

The Sales Approach 

The Sale Approach (also known as Market Approach) is based on the principle of substitution. This principle states that no one would pay more for the subject property than the value of similar property in the market. This approach analyzes sales of comparable properties with regard to the nature and condition of each sale. Comparisons are made for varying physical characteristics.

The Cost Approach 

This approach is based upon the principle that the value of the property is significantly related to its physical characteristics, and that no one would pay more for a facility than it would cost to build a similar facility in today’s market on a comparable site. The cost approach does take into account other factors, such as depreciation. 

Income Capitalization Approach 

The Income Approach is based on the premise that properties similar to the subject are income producing, and that investors purchase these properties based upon their income-producing ability. In the Income Approach, market rents for the subject property are estimated, contract rents are analyzed, the applicable operating expenses are deducted, and the resulting net income is capitalized into a value estimate.

Call an Appraiser You Can Rely On 

Commercial real estate can be profitable business opportunities for investors/owners; however, it is critical that the commercial property appraisal is accurate. An unbiased, true and well-supported opinion of value can mean the difference between reaching a critical goal – securing a loan, closing a sale, reporting to investors, choosing the best asset – or failing to achieve it altogther.  

This is why you must hire a commercial appraiser you can trust and who sticks to the strictest code of ethics. 

The team at Vanguard Realty Advisors may be the commercial appraisal services you’re looking for. To find out how we can help you, contact us today