The Role of Commercial Real Estate Appraisal

Commercial Real-estate appraisal refers to determining the value of any kind of commercial property. The properties may include apartment buildings, offices, industrial sites, shopping centers, etc. If you are looking to buy, sell, manage or invest in a commercial property, you need to understand the appraisal process. A professional and licensed commercial real estate appraiser conducts the appraisal process. Generally, the appraiser gathers all available information about the property and analyzes it to develop an opinion of the property’s value. Not just anyone can appraise commercial properties. Commercial real estate appraisers are often certified and licensed by the state.

Need for Commercial Real Estate Appraisal

There are several reasons why one might need a commercial real estate appraisal. They include:

  1. An appraisal helps the buyer determine the sale price while assisting the seller in determining the fair, current market value of their property. Having a commercial real estate appraisal makes the negotiation process between buyer and seller more streamlined. 
  2. A commercial real estate appraisal helps an underwriter gauge the property's value for mortgage lending purposes.
  3. It supports lease negotiations and tax assessments
  4. Appraisals can also assess the damages to the property due to environmental or weather conditions
  5. They play a significant role in the acquisition of the property by government entities and other institutional parties
  6. During corporate mergers, revision of book value, and issuing stock, appraisals help determine the actual value of the commercial property. 

Types of Commercial Appraisals 

There are several ways of determining the value of a property. In real estate, three main approaches are used during appraisals: a cost approach, a sales comparison/market approach, and an income capitalization approach.

1. Cost Approach

In this technique, the valuation of the property depends on the cost of constructing a replica of that property. The cost approach also takes into consideration any depreciation of the property. The simple question asked is: “How much would it cost to construct the exact same property?” Additionally, this approach also includes any improvement costs determined during valuation. Improvement costs refer to new construction costs for features that would have to be improved based on current standards. First, the cost of constructing a replica is calculated, after which any improvement costs are subtracted to get the value of the property. This approach is mainly used for newer structures. 

2. Sales Comparison/Market Approach

As the name suggests, this approach determines the property's value by comparing it with similar properties in the surrounding area. It also considers any property features or potential features that will add to the value. This approach is commonly used to determine the value of residential properties, yet it is also common in commercial appraisals. The appraiser looks at the property's characteristics and compares them to other properties in the neighborhood. It is important to note that other external factors like proximity to the train station, shopping center, amenities, and extent of noise pollution also affect the valuation of the property. 

3. Income Capitalization Approach

This approach is commonly used for commercial properties that generate income. Such properties may include apartment condos, shopping centers, office buildings, etc. It determines the value of the property depending on the amount of income it generates within a given time. It is calculated by taking the net operating income and dividing it by the capitalization rate. The capitalization rate is a percentage (calculated as the net operating income divided by the current market value of an asset) that indicates the rate of return on the property. 

If you need a commercial real estate appraisal of your property, Valcre is the perfect solution for you. Valcre makes the appraisal process more organized, efficient, and quicker with its end-to-end appraisal software solutions. All of Valcre’s custom-made Word and Excel templates are compliant with USPAP and CUSPAP. With the best presentation and reporting tools, it takes the administrative burden off you.