WHAT YOU NEED TO KNOW ABOUT COMMERCIAL APPRAISALS

There are many more variables to commercial property than in resdential appraisal.  In a commercial appraisal there are three different approaches used to arrive at the final determination of value.

1.) MARKET APPROACH

The market approach is the most familiar approach and is based upon substitution. A buyer will not pay more than what another similar/identical property sold for. If properties similar to the subject sell at a consistent amount, it’s likely the subject would sell at or below that amount.

Apples to Apples

2.) INCOME APPROACH

The income approach is the direct capitalization of the income stream generated by the property. It is the most common approach to income properties as investors of income properties are primarily concerned with their return from their investment. Value is determined by estimating potential rents, vacancies and expenses and by calculating the amount of risk of the investment. The risk of investment is the capitalization rate. The net income stream is then divided by the risk of investment to yield the value of the subject as an investment. The higher the risk the lower the value.

Income stream divided by risk = value

3.) COST APPROACH

The current cost of replacing a property less losses in value from deterioration and functional and economic obsolescence (accrued depreciation).

Cost of land + improvements – depreciation = value

RECONCILATION

The final step is to ascertain which approach is most appropriate for the subject and weight the accuracy of the approaches. We take into account the type of property, the purpose of the appraisal and the adequacy and relative reliability of the data processed in each of the three approaches. Typically the three approaches reflect and work off each other, but only one approach is the best approach. These considerations influence the weight to be given to each approach. But in order to appraise the property, the appraiser must first determine the highest and best use of the property.

Report Format

The typical lender will usually order a full narrative analysis.

FULL NARRATIVE REPORT

A full narrative report includes all three approaches, unless instructed by the client not to. It is typically a 30 to 300 page report. It is thick like a book and contains 15 to 50 pages of narrative and 20 to 200 pages of addenda. It is the most complete report and is designed for all readers. It fully explains itself and is the most common report option for commercial/industrial properties.   The amount of comparables used is determined by the complexity of the appraisal assignment, the subject and the market. Typically, three or more comparables are used for each approach. There are land comparables, market comparables and rental comparables.

TURN TIME

We often receive orders for a narrative report of a property that is closing in say ten days to two weeks. The typical appraisal can take any where from thirty-five to sixty man hours, and in almost all cases the commercial appraiser does not know the full scope of the analysis required until he actually sees the property. Per USPAP, there are no shortcuts – the analysis has to be completed to USPAP standards regardless of fee and turnaround time.   In conclusion, the best thing we can say to anyone in need of a commercial appraisal is to always give the appraiser as much leeway in terms of turn time requirements as possible. If you have any helpful information such as a recent appraisal of the property or reliable comparable information that could be useful let the appraiser know. Most importantly, if you can order your appraisal with a turn time of three to six weeks in advance rather than waiting until two weeks before you need the commercial appraisal in hand the better. At Irish Appraisal Service we work closely with our clients to insure the appraisal is finished on a reliable time line rather than giving unrealistic turn time quotes and keep you informed through out the appraisal process.

AVAILABLE DELIVERABLE REPORTS

EMAIL PDF OR HARD COPY

The final report can be emailed or mailed depending on the client’s desires. Nowadays most of our clients desire a computer file known as a “PDF” which is easy to open. The client prints the pdf on their own equipment or forwards the report via email to their lender, lawyer or buyer.  A hard copy can be provided if ordered by client. The first two copies of the report are free of charge and mailed to the client.

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