Property owners will find that commercial appraisals differ greatly from residential appraisals.
Here is a look at the top things property owners need to be aware of when seeking an appraisal.
The role of a commercial real estate appraiser, in general, is to remain impartial and unbiased. For example, J.H. Berry’s Appraisal and Valuation Services division is a separate department from the firm’s traditional brokerage and property management services. However, in order to obtain the most up-to-date and relevant market information, Paulk works closely with the brokerage team to maintain current information about sales, rentals, trends and more.
Commercial real estate appraisers must at all times comply with the Uniform Standards of Professional Appraisal Practice code of ethics, which is the universally recognized ethical and performance standard for the appraisal profession. USPAP establishes rules on ethics and confidentiality, and requires appraisers to provide an unbiased opinion of value. Adopted by Congress in 1989, the USPAP provides standards for all types of appraisal services.
Commercial vs. residential
The difference between commercial and residential appraisal is primarily based on the income-producing potential of commercial properties. Commercial appraisals require much more research and analysis than residential appraisals, with three approaches to value typically considered including: the cost, sales comparison and income approaches.
Most commercial appraisals require the appraiser to analyze the income-producing potential of the property, whereas any leases, rent rolls, and income and expense information of the subject and comparable properties is considered. Therefore, commercial real estate appraisal fees are higher than residential appraisals, which typically only consider the sale comparison approach.
Define scope of work
The scope of work has to be defined for each appraisal report. This includes the level of detail and research required for a particular job in order to produce credible results that are appropriate for the appraisal problem.
The parts that must be identified to determine the scope of an assignment include: the client and intended users; the intended use of the appraisal; the type and definition of value (i.e. market, foreclosure, investment, etc.); hypothetical conditions and extraordinary assumptions; the effective date of the appraisal; typical client expectations; and, typical appraisal work by peers for similar assignments. A more complex property will most likely have a more expansive scope of work than a smaller property.
Highest and best use
The most important factor to consider in a commercial appraisal is the highest and best use of the property, and is the foundation on which value is based. This determines which physically possible and legally permissible use will provide the highest possible return on investment for a property. The potential uses are then narrowed to those which are financially feasible and economically supported for the property. The appraiser then identifies which of these remaining uses would be the most maximally productive for the property.
The highest and best use of the property as though vacant is considered, as if the property were unimproved with any existing buildings; as well as the highest and best use of the property as it is improved, which considers the existing buildings. An existing improvement should be renovated or retained as long as it continues to contribute to the total value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a higher intensity building use on the property. Therefore, the existing building(s) is not always the highest and best use.
Not all appraisers or appraisals are equal
It is important to note that not all appraisers or appraisals are equal. Most appraisers are not qualified to appraise commercial properties as most commercial appraisers have a certified general license issued by the state, which requires more education, training, and experience than other licenses. Many appraisers also have other certifications and designations in addition to the state licenses. Notable and respected certifications and designations, such as the MAI, cost time and money.
The MAI from the Appraisal Institute is held by professionals who can provide a wide range of services relating to commercial, industrial, residential, and other types of properties, and is recognized as a mark of excellence in the field of real estate valuation and analysis. This level expertise can be reflected in appraisal fees and therefore, lower fees may not provide the most reliable report. Further, the complexity of a particular property and the estimated time to complete the assignment is reflected in the appraisal fees.
Paulk Turner is a guest contributor to REAL and currently serves as J.H. Berry & Gilbert’s director of Appraisal and Valuation Services division.