What you Need to Know About Commercial Real Estate Appraisal
Thursday, August 18, 2016
Small business owners have a lot to digest when it comes obtaining an appraisal on a piece of commercial real estate, a process that can differ significantly from residential appraisals. The main difference is that much of the value derived from a commercial building is based on the rental rates received relative to the expenses paid out.
Here’s what you need to know about commercial real estate appraisals:
The Inspection Is Minor in the Appraisal Process
Don’t be fooled by the short amount of time that it can take to do an inspection. While it might take less than an hour to inspect the property, this is just the beginning of the process that may take several days or even weeks. Appraisers research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings.
It’s Impossible to Misrepresent the Facts
Appraisers will work to verify anything that you tell them from other sources. Often they will ask questions that they already know the answers to just to test the credibility of the people showing him the property. Appraisers are always considering proof of opinion and how they will defend that opinion if they are ever brought to court, even in assignments in which litigation appears unlikely.
Share All Important Information
Your appraiser will ask for a property tax bill, a set of drawings of the property, income statements, among other things. Always provide whatever you can. Appraisers need certain information and the more you provide, the faster they can complete the assignment.
The Appraiser Code of Ethics
The Uniform Standards of Professional Appraisal Practice requires appraisers to provide an unbiased opinion. Failure to do so could result in disciplinary action from the state, including revocation of an appraiser's certification.
The Client Enjoys a Confidentiality Agreement
If the appraisal is for financing, the lender is the client. Appraisers are obligated to maintain client confidentiality, so if you are the borrower or any other party, the appraiser cannot release the appraisal report or any other confidential information to you. If you request an appraisal as part of a property tax appeal and are afraid that the appraised value might be higher than the assessed value, you can rest assured that the appraiser won't release the results to the property tax board without your permission.
Inform the Appraiser of the Intended Users
If you are planning to purchase a property, you might intend to share the appraisal with the seller, your lender, and maybe your local property tax appeal board. These parties will be identified in the appraisal report and are the only ones who are authorized to use the report.
Three Types of Reports
The shortest and least expensive type is a Restricted Use report, which can only be used by the client. Fees vary based on the size of the property and the scope of the appraisal, but you can expect a restricted report to cost between $2000 and $2,500. A "summary report" summarizes the data and can be used by any intended user and can cost $3,000 or more. Rarely requested, the "self-contained report" contains all of the details of the data and analysis. If you tell the appraiser how you intend to use the report, he or she can guide you as to what type of report you will need.
Your Interest or Stake
It's important to tell the appraiser what your interest in the property is. For example, if you want to know what a property is worth free and clear – such as a warehouse you want to move your business into – you are interested in what's called the "fee simple interest," or the value of the building and its property. If you want to know what a property is worth to a landlord when occupied, you want a "leased fee interest." If you want to know what a lease is worth to a tenant, you want a "leasehold interest." This is a common request when people look to buy businesses, as they need to know what the value of the lease is to that business.