an infographic with wheel spokes to show the components of property value

As a Lender, Knowing the Ins & Outs of a Commercial Real Estate Appraisal is Incredibly Important

As a commercial real estate lender, Extensia Financial has decades of experience assisting credit unions and their borrowers in the commercial real estate loan process. One of the most essential steps in this process is obtaining a commercial appraisal, which estimates the current value of the collateral and provides valuable insight regarding the market area.

In comparison to residential appraisals, commercial real estate appraisals are more complex and require additional valuation criteria and unique reports.  As a result, they have higher costs and longer turnaround times. Due to the sophistication of the process, understanding a commercial appraisal can be difficult, so it’s important to understand what to look for when reviewing a real estate appraisal.

The Essentials of an Appraisal Report

There are three major types of appraisal reports:

  1. Self-contained: A comprehensive review of the obtained property information and comparable properties.  This report includes everything regarding the appraiser’s assessment.
  2. Summary: This report summarizes the comprehensive appraisal.
  3. Restricted-use: This appraisal report focuses solely on the conclusions of the valuation and may only include one of the value approaches.

Typically, the appraisal report will cover a variety of factors, including the property’s historical operating history, market vacancy rates, market lease rates, details on the property and market area, and cap rate, which calculates the rate of return on an investment property.

The Steps of the Appraisal Process

The appraisal process begins with identifying the use of the property. Will it be owner-occupied or used for investment?

The appraiser begins by collecting market area data and comparable property data, such as recent sales, listings, offerings and vacancies to compare against.

After that’s done, a site inspection is conducted, which means the appraiser will walk through and survey the interior and exterior of the property. He or she will take photos for documentation for the report itself. It is important to note, however, during the walk-through, the appraiser does not assess mechanical or structural aspects of the building.

Finally, the appraiser utilizes this information to form an opinion of value and draw up an appraisal report.

Commercial Property Value Methods

There are three main commercial property value methods utilized to determine a property’s valuation and most reports will include all three.

  1. Cost Approach

This valuation method is employed when comparable properties are lacking. It considers the cost of rebuilding the building from scratch.

  1. Income Approach

The income capitalization approach takes into account the amount of income one can expect  the property to generate based on its historical performance as well as comparable properties in the area and then applies an the current expected rate of return for that property type in the market to determine the value.  This approach is the primary driver of value for properties leased to 3rd party tenants.

  1. Sales Comparison Approach

Also known as the market approach, the sales comparison method considers comparable properties that recently sold in the market.  This tends to be the primary determining factor of value for owner-occupied properties.

The Importance of Reviewing a Commercial Property Appraisal

Reviewing a commercial property appraisal will help the lender determine if there are any discrepancies between what was originally expected in the initial underwriting and what the appraiser has determined through their research regarding the property.

Several aspects of the commercial property valuation, including the market area comparisons, are based on limited, secondhand information. For example, an appraiser does not conduct an in-person inspection of the comparable properties, but rather relies on public files related to their closing. This could potentially mean there is unrecorded data your appraiser isn’t able to access, which could include features that may have impacted the sales prices of those properties. But overall, a commercial appraisal is designed to provide a good estimate of the current value of the appraised property given the market conditions at the time.

 

About Extensia Financial

Established in 1998 and headquartered in Simi Valley, CA, Extensia Financial offers competitive and collaborative commercial real estate loans. We partner with credit unions and connect them to investors across the United States. Additionally, we uniquely support and guide our partners through the entire full lifecycle of the loans, including commercial appraisals. Extensia Financial is a proud member of the AVANA Family of Companies.