A commercial real estate appraisal is a value assessment on an income-generating property that is performed by a third-party professional appraiser. This type of appraisal is a property valuation on any kind of commercial real estate, including retail, office, industrial and multifamily apartment buildings.
What is a commercial real estate appraisal and how is a commercial appraisal report conducted?
Commercial appraisals in Hamilton, Burlington, and Canada as a whole are conducted by designated members of the Appraisal Institute of Canada.
The appraiser assembles various facts, statistics, and other information regarding the property. The data is then analyzed and used to develop educated opinions of value
To get this educated estimation the appraiser utilizes three methods to value, being the Direct comparison approach, Cost Approach, and Income Approach.
Direct Comparison Approach
This method speculates that an investor will pay only what similar properties have sold for.
As such, the sales comparison/market approach is rooted in which property features are alike and the costs associated with those features.
Important characteristics may include location, size, condition, floor plan, and the surrounding area.
Many in the commercial real estate appraisal industry believe this is a more accurate approach because the current market value is taken into account.
Cost Approach
This technique equates the property value to the cost of constructing a replica. The cost approach also considers depreciation, thus, assuming a fair market value for the commercial property.
This appraisal method comes with its share of debate. Commercial real estate appraisers always use the same formula to determine a property’s value when they use the cost approach. It is as follows:
Land cost + cost to build new – accumulated depreciation = Property value
Income Approach
This method involves a rationalization of the income that a property may generate over time.
Commercial appraisers frequently use methods to evaluate properties such as shopping malls, commercial buildings, and large apartment buildings, which have a strong earning ability.
When this approach is used for a rental property, an investor considers the net income generated. Other factors are calculating its value in the current market if sold. The formula typically used for the income approach is as follows:
Net operating income (NOI) / capitalization rate = Property value
Types of Appraisal Reports
An appraiser is expected to evaluate the property and issue a report. Appraisal clients often don’t know about the kind of report they need and the options they have available to them.
- Independent / Self-Contained Report – For this option, the appraiser demonstrates the rationale for the derivation of value. All findings and data sources are disclosed and examined.
Two viable tests can decide whether a report is independent:
- The report narrates the data, methodology, reasoning, and conclusion. To the degree that further data search by the client is not warranted or required.
- Data sources referred to within the report are also included in the document (usually in the addenda). Market studies and other research cited in a report should be included. Also, it is imperative if the appraiser has relied on the sources to arrive at a value.
Independent reports are most frequently utilized for commercial property loaning.
Summary Report
As the name suggests, the appraiser sums up the discoveries as opposed to completely narrating the methodology. Summary reports are a lot more concise than self-contained reports but are acknowledged by numerous lenders. These types of reports most often are used for simple commercial real estate transactions.
Restricted Report
In the most concise format, restricted reports state just the appraiser’s opinions of value. Without any explanation as to how the estimate was derived. These reports for the most part are utilized internally or when a value needs to be delivered rapidly. Clients of this type of report are pressed for quick delivery and need a value right away. The reports are then upgraded to summary or self-contained reports in the future.
This article provides a brief overview of the appraisal process and how it is professionally conducted. Looking for a commercial appraisal management company in the GTA area, you will be highly satisfied with Nicro Realty Corp. We have a history of assisting a diverse portfolio of CRE investors and property owners throughout southern Ontario.
Our commercial appraisal management team takes the time to provide one-on-one attention to every client. Bringing an unmatched skillset to the table, ensuring a complete, fair, and accurate job you can feel confident in.