This column is intended as a basic introduction to commercial real estate appraisal and valuation. The valuation of commercial property typically involves three valuation approaches, which should converge on a final value estimate. The cost approach entails estimating a property’s underlying land value and adding the depreciated cost of improvements, soft costs, and entrepreneurial profit. The sales comparison approach involves a side-by-side analysis of similar properties that have sold within a reasonable geographic region and appropriate time frame. The income capitalization approach involves deriving an anticipated net operating income figure, which is divided by an appropriate capitalization rate to produce the value estimate. There are two types of valuations and three types of appraisal report formats available for clients. The client may request either a limited or complete appraisal. The complete appraisal will often involve all three approaches to value while a limited appraisal may rely on only the one or two most appropriate approaches. The appraisal may be presented in a self-contained, summary, or restricted-use report. The self-contained report is fully documented and should lead the reader logically through the valuation process. The summary report is an abbreviated reporting alternative while the restricted-use report has minimal narration and is intended for use by only one client. When requesting an appraisal, the appraiser should assist the client in selecting the most appropriate type of valuation and reporting format. A complete appraisal will provide the most thorough study of the subject property by generating values from three separate points of view. For complex properties, particularly newer ones, a complete appraisal is usually warranted. However, if a property is 30 years old and income generating, the cost approach may provide minimal reliable information in establishing value and could possibly be discarded. Similarly, newer owner-occupied properties are often valued most reliably using the sales comparison and cost approaches and the income approach may contribute little insight, provided similar properties are not ordinarily leased to arm’s length tenants. In conclusion, the selection of appraisal types and reporting formats can be confusing. However, a service-oriented appraiser will be able to guide the client through the decision process if sufficient property information is available. In order to assist the client and reliably bid on an appraisal, an appraiser will need to know property characteristics such as: property type, the age of any buildings, the size of improvements (square feet, number of units, etc.), site area, address, and parcel identification number. Further, to perform an appraisal, the appraiser may typically require a variety of information including: surveys/site plans, building plans, pending purchase contracts or listing agreements, historical and budgeted income statements, details regarding any proposed construction work, rent rolls, environmental studies, feasibility studies, and leases among other items.
