Commercial Real Estate Appraisal: How CRE Appraisal Works

A commercial real estate appraisal is a value assessment on an income-generating property that is performed by a third-party professional appraiser. This type of appraisal is a property valuation on any kind of commercial real estate, including office buildings, multifamily apartment buildings, and retail buildings.

As is the case with a mortgage for a residential property, lenders will require applicants to get an appraisal on a commercial real estate property before they are approved for a loan to buy the property. This is to ensure that the brokerage doesn’t lend more than the fair market value of the property to a borrower. While residential real estate appraisals are typically made with comparable properties in mind, the CRE appraisal process is a more thorough assessment that takes the potential earning power of the new real estate into account.

In addition to ensuring that a brokerage isn’t lending a borrower more money than a commercial property is worth, a commercial property appraisal is an important step in the real estate buying process. Here are three reasons that a commercial real estate appraisal is important.

• Confirms current market value: A commercial property appraisal will determine the current market value of a property, giving the buyer and lender an indication of what the sale price of the property should be.
• Ensures that a lending institution is assessing value properly: Lenders use appraisals to make sure they are not lending more money than the property is worth. A third-party appraisal gives the lender an unbiased valuation of the property.
• Provides an idea of the earning potential of the property: The CRE appraisal process is performed with the earning potential of the commercial property in mind. A third-party appraisal can give potential investors an idea of whether a business is worth the investment.

A commercial real estate appraiser, or CRE appraiser, considers a number of factors to appraise a commercial property and determine its value. There are six different methods an appraiser can use to value commercial property.

1. 1. Income capitalization approach: This is the standard valuation method used in appraising commercial real estate. The appraiser considers the earning figures of comparable properties to determine how much income a business in this property could hypothetically generate.
2. 2. Cost approach: The cost approach in commercial real estate appraisal assesses how much the property would cost to build in the current market, considering land prices, materials, labor, construction, and expected depreciation.
   
3. 3. Market approach: This method is also called the sales comparison approach. An appraiser compares the property to the sales prices of similar properties in the area, as well as consider the market conditions.
4. 4. Gross rent multiplier approach: Similar to the market approach, this method compares the gross rent of similar properties in the area in order to reach an appraised value of the property. With this method, the projected value of the property is divided by the projected income of the property.
5. 5. Value-per-door approach: Apartment buildings or other commercial rental properties typically use a commercial real estate valuation method assessing the value per unit in the building.
6. 6. Value-per-rentable-square-foot approach: This approach allocates a projected value per square foot that tenants and renters can use inside a rental property to appraise a property.

There are several differences in how an appraiser values commercial and residential real estate.

• Methods: Appraisers will consider different variables when appraising residential or commercial properties. For residential real estate, an appraiser will primarily consider comparable properties (comps) and comparable sales, the condition and size of the home, and the location. For commercial properties, the appraiser will also consider the use of the property, potential income generated by the property, and rental forecasts.
• Appraisal report: Reports for commercial and residential properties are generated differently, with the commercial property report being more complicated. Commercial property appraisals contain more information about the future effectiveness of the property because the property has to maintain standards in order to remain functional and profitable.
• Cost: Because the commercial property appraisal is more complicated, it typically costs more to have a commercial building appraised. It will also typically take longer for an appraiser to perform a CRE appraisal than a commercial real estate appraisal.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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