10 Things to Know About Commercial Real Estate Appraisals

A commercial real estate appraisal can be complicated process. Commercial property transactions, guidelines, and rules are often different from those of residential property appraisals. Make sure you use an experienced commercial appraiser licensed to work in your area. The primary purpose of a real estate appraiser is to provide an educated unbiased opinion as to the true dollar value of a property or real estate.

Commercial property appraisals are very different from residential real estate appraisals in that property values are calculated differently. Much of the value from commercial property is based on rental rates and income received relative to expenses paid out. As a commercial property, the appraiser provides valuations based on the value of the business, as well as the intrinsic value of the real estate holdings. Below is a top 10 list you need to know about commercial real estate appraisals:

1. Property Inspection Is Only a Small Part of the Appraisal Process

Depending on the size and complexity of the commercial property to be appraised, it might take less than an hour to several hours to inspect the property. Appraisers also research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings. The inspection is just the beginning of an appraisal process that may take several days or even weeks.

2. Do Not Misrepresent the Facts

Appraisers are professional skeptics. They will seek to verify anything you tell them from many sources. Appraisers are always thinking about how they will defend their opinions if they are ever brought to court, even in assignments in which litigation appears unlikely. If you misrepresent anything, the appraiser will discount the credibility of anything else you say.

3. Do Not Withhold Information

You will probably be asked to provide a property tax bill, a set of drawings of the property, income statements, and other things. You might not know why an appraiser is asking you for something, but it is your best interest to provide any information requested. Appraisers need certain information to help them with their duties, and the more you provide, the more quickly they can complete the assignment.

4. Appraisers Must Adhere to a Strict Code of Ethics

Appraisers must follow the Uniform Standards of Professional Appraisal Practice (USPAP), which, among other things, requires them to provide an unbiased opinion. Failure to follow this might result in disciplinary action from the state, including revocation of an appraiser’s certification. If an appraiser refuses to do something that you ask for, it is probably because of the obligation to adhere to this code of ethics.

5. The Client Orders the Appraisal

If the property appraisal is for financing, the lender is the client. Appraisers are obligated to maintain client confidentiality. The appraiser cannot release the appraisal report or any other confidential information to anyone but the client without authorization.

6. Identify the Intended Users of the Appraiser Report

Make sure the appraiser knows who you want to use the report. If you are looking to buy a property, you may intend to share the appraisal with the seller, your lender, and possibly your local property tax appeal board. These people or parties will be identified in the appraisal report and are the only ones who are authorized to use the report.

7. There Are Three Types of Appraisal Reports

A “restricted use report” is the shortest and least expensive type, but it can only be used by the client. A “summary report” summarizes the data and analysis and can be used by any intended user. A “self-contained report” contains all of the details of the data and analysis, but it is rarely requested. If you tell the appraiser how you intend to use the report, he or she can guide you as to what type of report you will need.

8. Type of Report Is Separate From Scope of Work

The amount of work involved in reaching conclusions does not depend on the type of appraisal. With a restricted use or summary appraisal, the real estate appraiser compiles large amounts of information that are retained in a work file but are not included in the report. For this reason, the differences in fees between the various types of reports are more significant than the amount of information contained in the reports.

9. Consider the Date of Valuation

Let’s say you appraised commercial property in New Orleans in July 2005. It’s value would most likely be significantly different a couple months later due to the damage caused by Hurricane Katrina. This indicates the importance of establishing the date of valuation. Appraisers can appraise property as of the date of inspection, as of a past date (a “retrospective appraisal”) or as of a future date (a “prospective appraisal”). It is important that you establish the correct date of valuation for your needs.

10. Consider the “Property Interest” Appraised

It is important to tell the real estate appraiser what your interest in the property is. For example, if you want to know what a property is worth free and clear – such as a warehouse you want to move your business into – you are interested in what’s called the “fee simple interest.” In other words, you simply want to know the value of the building and its property. On the other hand, if you want to know what a property is worth to a landlord when occupied by a particular tenant or tenants, you want a “leased fee interest.” Finally, if you want to know what a lease is worth to a tenant, you want a “leasehold interest.” This is a common request when people look to buy businesses, as they need to know what the value of the lease is to that business. Be sure to identify what you ant appraised.