Commercial Appraisals

With the vast increase in commercial submissions we've seen lately, the question invariably gets asked... "Why are commercial appraisals so expensive and why do they take so long to perform?"

It's no surprise that the $2,500 to $10,000+ price tag can generate a little sticker shock from our broker clientele, as well as the end borrowers. It's also understandable that the 2-5 week timelines that these appraisals typically take can also be a bit alarming. Let's unpack the commercial appraisal process and spend a little bit of time exploring he differences between your average residential and commercial appraisal.

95% of all brokers have spent the majority of their time on the residential side of the lending fence and are well accustomed to $350 appraisals that can be completed in a matter of 3-5 days. They know the ins and outs of the process, and most importantly, can easily 'sell' their client on the cost, necessity, and benefit they'll receive.

It's important to realize that for a residential appraisal, the vast majority of information needed about the subject property is able to be found online and through public records. Comparable sales, photos, and online estimates of value are easily accessible and can be found without leaving one's office. Commercial appraisers must spend a signficantly increased amount of time in the field performing research compared to their residential brethren. Additionally, residential appraisals typically only consider the sales approach, where as commercial appraisals require additional analysis of both the income and cost approach.

Sales Approach

This approach, on the surface, is the simplest: find a similar property and see how much it sold for and when. Commercial properties, however, due to the dissimilar, complex, and varied nature make this process increasingly difficult. True comparable properties are typically not located next door, or sometimes even in the same town. Appraisers must scour numerous sources and typically spend greater amounts of time seeking out genuinely comparable properties -- unfortunately there is no 'Zillow.com' for the commercial world.

Income Approach

This approach seeks to determine a property's Net Operating Income and then extrapoloates this figure into a reflection of the properties worth using a given 'Cap Rate'. Unfortunately, true rents are an extremely elusive number that can typically only be located by contacting owners/managers of similar properties and attempting to extract a rent-roll from them. As you can imagine, calls of this nature from random appraisers are typically not the highest of priority for most business owners. After finally garnering this information, the appraiser must then visit each separate location and take multiple pictures of the comparable property to include in their report.

Cost Approach

The cost approach is exactly what it appears to be on the surface, an estimate of the approximate replacement cost of the building should severe damage (fire, wind, storm, etc) occur or demolotion be necessary. The appraiser will typically consult a cost-data book such as Marshall & Swift's Commercial Cost Handbook for a rough approximation of replacement cost per square foot.

Summary

Appraisals performed on commercial properties are more complex and time consuming in nature and as such, the individuals who are engaged to put together these reviews must undergo additional educations and licensing requirements. We require these field reviews perform by those with the MAI designatation, or Member of the Appraisal Institute. As a result of the numerous field visits, phone calls, and overall time spent researching the above-mentioned valuation approaches, hopefully one can see why commercial appraisals both cost what and takes as long as they do.