Commercial Real Estate Appraisal — Overview, Process, and Types
A commercial real estate appraisal or valuation refers to the calculated assessment of the value of any commercial property, including apartment buildings, offices, shopping centers, industrial sites, and land. A commercial real estate appraisal is needed for properties that are being developed, mortgaged, sold, taxed, or insured. A professional real estate appraiser creates this appraisal by gathering information and statistics about the property. Then, they analyze the data and use it to develop opinions of value.
Appraisers must possess sharp analytical skills, strong communication skills, and sound judgment to arrive at an accurate commercial real estate appraisal. Often, appraisers need to pass a test to become certified or licensed in the state where they work. Some even go through more rigorous training to become designated members of the Appraisal Institute, an international association of professional real estate appraisers.
Commercial real estate appraisals determine optimal selling prices for prospective sellers and buyers. They also help underwriters in establishing a security value for mortgage lending purposes, and serve as supporting documentation during lease negotiations. Commercial real estate appraisals are also used for assessing and appealing taxes. Appraisals play a role during business dissolutions and aid during corporate mergers, revisions of book value, and the issuance of stocks.
Property owners can use a commercial real estate appraisal to assess damages due to weather conditions, determine gift or inheritance taxes, and estimate liquidation value during auction proceedings. Similarly, government agencies can use a commercial real estate appraisal as a reference when acquiring private properties for public use, assessing the feasibility of major construction or renovation projects, and advising courts, planners, and zoning boards.
The commercial real estate appraisal process can vary significantly depending on the nature of the project, but the basic structure of the approach is roughly the same across the board. First, appraisers define the purpose and relevant characteristics of the property, such as the area or neighborhood. Next, they determine the scope of the work and the type of information that needs to be researched and analyzed regarding the property.
Third, they collect, verify, and analyze the relevant data, including comparable property data, sales, offerings, vacancies, and listings. There are three main approaches to commercial real estate appraisal: cost, market, and income capitalization. Using a cost approach, the appraiser equates the property’s value to how much it would cost to build a new one. It also considers depreciation to arrive at a fair market value of a commercial property.
A market or sales comparison approach ascertains that investors of a commercial property will pay an equivalent amount to similar properties that have recently been sold. In addition, this approach looks into the similar features that properties share and their costs. Last, appraisers use income capitalization by considering the income that a commercial property can generate over time. This method is commonly used when appraising shopping centers, apartment complexes, and office buildings.
Commercial real estate appraisers determine the final estimate resulting from one of these approaches. They also factor in the applicability or reliability of the approach and the adequacy of data gathered. Generally, the commercial real estate appraisal process takes several days to weeks after conducting inspection and subsequent investigative work. After finalizing the value, they create an appraisal report, which may include a detailed description of the data and analysis, a summary, and conclusions.
