As a result of the increased amount of research involved, a commercial appraisal

generally takes two to four weeks to complete. Because most commercial lenders have

specific guidelines that they require in their appraisal reports, it is strongly recommended

that you allow the lender to control the appraisal process. It is important to remember

that commercial appraisals cost substantially more than residential appraisals and

that a low quality report may jeopardize the entire loan request altogether. There are

three primary approaches used by appraisers to determine commercial real estate value.

Cost approach

For this approach, appraisers add the estimated value of the land to the replacement value

of improvements and then subtract depreciation (including deterioration and obsolescence).

This approach is most often used with new construction. The cost approach is rarely utilized

in most urban markets because there is generally a limited amount of land to purchase

and develop.

Sales comparison or market value approach

Appraisers compare the subject property with comparable sales—similar properties in

the market which have recently sold—to determine estimated value. Properties that are

somewhat special purpose in nature that are located in markets that lack recent sales

activity present valuation challenges as it becomes difficult to identify similar properties

to compare.

Income approach

In the income capitalization approach, the property value is determined by analyzing

a property’s net operating income (NOI) and capitalizing it into a present lump sum

value. The appraiser examines recent property sale prices and their respective NOIs to

determine a “capitalization” rate, or return on investment, applicable for the property’s

market. A stabilized income statement is estimated for the subject property based on

the area’s rental rates and operating expenses experienced by similar properties in the

market. The NOI derived from this process is then capitalized at a market overall rate

to arrive at the value (NOI/Cap Rate = Value).