Commercial real estate appraisals play a major role in determining the value of a property. The process of evaluating a commercial property's value is essential for several reasons, including buying, selling, or financing a property. In this article, we will explore the different aspects of commercial real estate appraisals and discuss how they impact everything from investing to finance.

What Are Appraisals in Commercial Real Estate? 

A commercial real estate appraisal is a professional assessment of the value of a commercial property. The process of evaluating the value of a commercial property is done by a licensed commercial property appraiser, and the report includes an estimate of the property's market value.

Why Are Appraisals Necessary?

Appraisals are typically requested by lenders, investors, and property owners. They are important because they can establish the value of a property for loan collateral, investment, or tax assessment purposes. They also can be helpful in settling disputes, risk management, and estate planning.

Beyond these uses, appraisals can also provide valuable information about a property's condition, location, and potential for future development.

How Commercial Property Appraisals Affect Loans

Accurate appraisals play a significant role in the lending process. Commercial property lenders need to determine the value of the real estate to provide a loan based on a loan-to-value ratio, after all, not to mention it's used to calculate several other key metrics.

Inaccurate appraisals can lead to problems for the lender, as an inaccurate market value can hide the risk involved in a loan. This could present itself with higher rates of loan default, foreclosure, and other financial difficulties. Beyond this, appraisals can also impact the interest rate and terms of a loan. Thus, lenders pay very close attention to the results of any commercial real estate appraisal.

Loan-to-Value Ratio Calculator

If you know your property's value — and what loan-to-value or loan-to-cost ratio a lender is willing to allow — you can determine how much financing you'll receive. Try our calculator below.

How Appraisals Impact Commercial Real Estate Investing

Appraisals are also essential for commercial real estate investors. Investors use appraisals to determine the potential return on investment and the risk involved. Additionally, investors also use appraisals to evaluate potential properties and compare them with similar properties in the area. After all, you can't calculate an investment's cap rate if you don't know its market value.

In short: If you don't know what your property (or potential investment) is worth, you can't accurately decide whether to invest in a building or determine how much you should sell an asset for.

Cap Rate Calculator

If you know your property's market value, you can use our cap rate calculator below.

3 Methods of Appraising Commercial Real Estate

A commercial property appraiser will use one or a combination of three methods including the cost approach, the income approach, and the sales comparison approach. We'll explore each below.

The Sales Comparison Approach

One of the most common methods of commercial real estate appraisal is the sales comparison approach. This method is based on the principle that the value of a property is equal to the sale price of similar properties in the area.

Appraisers use data on recent sales of comparable properties to determine the value of a property. They generally utilize public records to find sales comps, though some national databases, like CompStak or Yardi Matrix, can also be useful if evaluating a property in a larger, regional context.

The Income Capitalization Approach

Another method used in commercial real estate appraisals is the income capitalization approach. This method is based on the principle that the value of a property is equal to the income it generates, discounted to present value. Appraisers use information such as rental income and expenses to determine the value of a property using this method.

The Cost Approach

The cost approach is another method used in commercial real estate appraisals. This method is based on the principle that the value of a property is equal to the cost of reproducing the improvements on the land, less depreciation. Appraisers use information such as construction costs, land value, and depreciation to determine the value of a property using this method.

Uses for Commercial Property Appraisals

Commercial property appraisals are used for various purposes, including buying and selling properties, property tax assessments, and determining loan amounts. Additionally, appraisals can also be used to determine insurance values and for settling estates and disputes or for estate planning.

How to Find a Commercial Property Appraiser

When looking for a commercial property appraiser, it is important to find a professional with experience and credentials. A good place to start is by checking the credentials of appraisers with the Appraisal Institute or National Association of Realtors. Additionally, you can ask for references from other professionals in the field, or even check online reviews.

Appraisals vs. Broker Price Opinions

It's important to note that an appraisal is different from a broker price opinion, or BPO. A BPO — also known as a broker opinion of value, or BOV — is a written analysis of the estimated market value of a property, created by a real estate broker, rather than a licensed and certified appraiser.

A BPO is typically used for less formal purposes, such as pricing a property for listing or determining a reasonable offer price. Appraisals, on the other hand, are more formal evaluations that are typically required for lending and other financial purposes. They are typically more detailed and involve a more thorough analysis of the property, the market, and other factors.

Conclusion

In conclusion, commercial real estate appraisals play a crucial role in determining the value of a property. The process of evaluating a property's value is essential for buying, selling, or financing a property. By understanding the different methods used in appraisals, such as the sales comparison approach, income capitalization approach and cost approach, investors and other professionals in the field can make more informed decisions. It's important to work with a certified and experienced appraiser to ensure that the appraisal is as accurate and informative as possible.