If you’re planning to sell a commercial property, you’ll likely need to go through a commercial real estate appraisal. This guide explains what you need to know about the appraisal process for commercial properties. You’ll discover what a commercial real estate appraisal is, how it works, and how you can increase the value of your property.

What is a Commercial Real Estate Appraisal?

A commercial real estate appraisal is an unbiased assessment of a property’s value, similar to residential appraisals. However, instead of focusing on single-family homes or condos, commercial appraisals evaluate properties like office buildings, retail spaces, and multifamily housing units.

Appraisals are crucial for determining a property’s market value and are vital for underwriting. Lenders use appraisals to decide how much financing to offer, ensuring they don’t lend more than the property’s worth. From an investment standpoint, appraisals provide insights into how much to pay for a property and inform decisions about future investments or renovations.

How is a CRE Appraisal Different from a Residential Appraisal?

Though both commercial and residential appraisals aim to determine property value, their processes differ significantly. Residential appraisers often use comparable sales (comps) to determine value, adjusting for unique property features. In contrast, commercial appraisals focus more on the income the property generates.

Commercial appraisals are typically more complex and time-consuming than residential ones, leading to higher costs. While residential appraisals might cost a few hundred dollars, commercial appraisals can run into thousands due to the unique nature of many commercial properties.

Methods for CRE Valuation

There are four primary methods commercial appraisers use to value properties:

• Cost Approach: This method, less common today, calculates value based on the cost to reconstruct the property from scratch. It’s useful for new or unique buildings. The formula is:
  
  • Land cost + Cost to build new – Accumulated depreciation = Property value

• Income Approach: The most popular method, it uses calculations like net operating income (NOI) and capitalization rate (cap rate) to estimate the property’s income potential. The formula is:
  
  • Net operating income (NOI) / Capitalization rate = Property value

• Sales Comparison Approach: Common in residential real estate, this method uses sale prices of comparable properties. Commercial appraisers often have fewer comparables, making this approach less reliable for them.

• Gross Rent Multiplier Approach: More of a quick estimate than a formal method, it uses gross rent multipliers from comparable properties and the property’s rental income to estimate value. The formula is:
  
  • Gross rent multiplier x Annual income = Property valuation

How to Increase the Value of a Commercial Real Estate Appraisal

To maximize your property’s appraisal value, consider these strategies:

1. Prepare Your Documents: Have essential documents like building plans, site plans, rent rolls, and leases ready. This helps speed up the appraisal process and may positively influence the valuation.

2. Maintain and Improve the Property: Regular maintenance and updates can enhance the property’s condition and value. Keeping the property in good shape can lead to a higher appraisal.

3. Generate More Income: Since income is a significant factor in commercial appraisals, find ways to boost income. For instance, adding amenities like coin-operated laundry, parking garages, or vending machines in an apartment building can increase revenue and, consequently, the property’s value.

Conclusion

Navigating the commercial real estate appraisal process is crucial when selling a commercial building. Understanding what a commercial appraisal entails, the different valuation methods, and strategies to enhance your property’s value will prepare you for a successful appraisal. Whether you’re an investor or a property owner, this knowledge ensures you’re equipped to handle the appraisal process effectively.

FAQs

What is a commercial real estate appraisal?

A commercial real estate appraisal is an unbiased assessment of a commercial property’s value, essential for financing and investment decisions.

How does a commercial appraisal differ from a residential appraisal?

Commercial appraisals focus on a property’s income potential and are more complex, whereas residential appraisals use comparable sales and are simpler.

What methods are used in commercial real estate valuation?

The four primary methods are the cost approach, income approach, sales comparison approach, and gross rent multiplier approach.

How can I increase the value of my commercial property?

Prepare necessary documents, maintain and improve the property, and find ways to generate additional income.

Why are commercial appraisals more expensive than residential ones?

Commercial appraisals are more complex and time-consuming, often dealing with unique properties, which increases the cost compared to residential appraisals.