What You Should Know About Commercial Real Estate Appraisals

office building For small business owners, there’s a lot of information to digest when it comes to commercial real estate appraisals. Though the appraisal process for commercial properties is the same as it is for residential; there are stark differences that you should be aware of. Here is a list of 5 things that you should keep in mind when inquiring about commercial real estate appraisals with a contrast to residential appraising. Not all real estate appraisers can work on a commercial assignment. Make sure the appraiser is qualified as such.

The Inspection Process:

On the surface, the appraisal inspection is the most similar in commercial as it is in residential assignments. Depending on the size and complexity of the property, the time it will take to complete the appraisal inspection may vary. If the property is a multi-unit apartment building, the appraiser should see a representative sampling of the different unit types (studio, one-bedroom, two-bedroom, etc). The appraisal inspection is only a small part of the initial steps in the appraisal process. Appraisers may also research the property’s ownership, zoning, demographic studies, and comparable sales. The appraiser will then analyze the information as it relates to the property’s position within its competitive market as part of the process to develop an opinion of value. Remember, value, worth, and cost are different concepts (to be discussed in a later blog).

Appraiser’s Request for Information:

Documents and/or information that the appraiser requests are required to complete the assignment.  Typical information requested may include three years of income and expenses as it relates to the real property, floor plans, copies of leases, budgets, etc. If the commercial property is proposed, a copy of the plans, construction budget, and timeline are also required.

Standards of Professional Appraisal Practice:

Appraisers must follow the Uniform Standard of Professional Appraiser Practice (USPAP) which requires them to develop and report an unbiased opinion. USPAP is created by the Appraisal Standards Board (ASB) and is updated every two-years. USPAP is the quality control standards applicable for real property, personal property, intangible assets, and business valuation appraisal analysis and reports in the United States and its territories.

The Client is the Party that Orders the Appraisal:

If the purpose of the appraisal is for financing, the lender is the client. Appraisers are obligated to maintain client confidentiality, so if you are the borrower, the appraiser cannot release the appraisal report or any other confidential information to you. If you ordered an appraisal as part of a property tax appeal, you can trust that the appraiser will not release the results to the property tax board without your permission.

Identify the Use and User:

The user may or may not be the same as the client. Make sure that the appraiser is aware of who will utilize the report and for what purpose/use. Different users may have different reporting requirements that the appraiser needs to be made aware of on the onset of the job. This will enable the appraiser to develop a scope of work that will yield credible results.