Frequently Asked Questions About Commercial Real Estate Appraisals
At Martens Appraisal we complete over 600 commercial appraisals a year and have a team of experts with over 100 years of combined experience.
But if you have never been through the process of getting a commercial real estate appraisal, it can be a little daunting. It is a detailed process that is going to vary depending on your property type and the scope of work. Here at Martens Appraisal, we strive to make the process as painless as possible. To that end, we put together a list of some very common questions that you may have about the commercial real estate process.
Question 1: What is a commercial real estate appraisal?
The short answer is: an opinion of value for any type of commercial property. This includes multifamily properties such as apartment buildings and condominiums, office buildings, shopping centers, industrial sites, raw land for development, hotels, mobile home parks, self-storage facilities and more. The opinion of value that is established in an appraisal is used for a variety of purposes, the most common one being commercial lending, but Martens Appraisal appraisers also establish values for estate purposes, tax appeals, internal business decisions, partnership buy-outs, etc.
Question 2: How do I order a commercial real estate appraisal?
It depends on the purpose. Our client is the person who orders the appraisal. The most important thing to remember here is that if you are going to want to use the report for a commercial mortgage, you need to talk to your lender because they cannot rely on a report where they are not the client. We have had instances where an individual will order an appraisal and after it is delivered (and paid for) they try to get a loan with it, you cannot do it. Your lender will have to order the appraisal again and there will be an additional fee. It’s also important to remember that appraisers are obligated to maintain client confidentiality, so if you are not the client, the appraiser cannot release the appraisal report or any other confidential information to you. This includes a copy of the final report, we cannot release a copy of the report to anyone other than the client without the client’s express permission.
Question 3: Who conducts a commercial real estate appraisal?
Martens Appraisal has a staff of 11 appraisers who all hold the Kansas general appraisal license. They are assisted by a staff of three individuals who are in the process of becoming state certified appraisers. The appraisers and their assistants inspect the property research market conditions and use our database of sales and leases to come up with a value.
While all our appraisers are certified to appraise any type of property they feel competent to appraise under the USPAP Competency Rule, many of our appraisers specialize in property types such as hospitality, multifamily, industrial and residential subdivisions.
In addition to being state certified, four of our appraisers have gone the extra step to become MAI designated appraisers. They have completed additional education and experience, have passed several exams and have written a complex analysis of a commercial property.
Question 4: Why do you need a commercial real estate appraisal?
We discussed this in Question #1, the main reason we do appraisals is for commercial lending, but there are many reasons a commercial real estate appraisal might be conducted, such as:
- Helping prospective sellers determine acceptable selling prices, or prospective buyers decide on offering prices (negotiations between sellers and buyers);
- Supporting lease negotiations by establishing market rent;
- For tax assessments;
- For appeals of tax assessments;
- Helping with business dissolutions;
- Aiding in corporate mergers, issuance of stock, or revision of book value;
- For government acquisition of private property for public use;
- Assessing damages created by weather conditions or environmental contamination;
- Determining gift or inheritance taxes;
- Ascertaining the feasibility of a construction or renovation program;
- Estimating the liquidation value for forced-sale or auction proceedings;
- Counseling a client on commercial real estate investment matters, such as goals, alternatives, resources, constraints, and timing;
- Advising zoning boards, courts, and planners regarding the probable effects of proposed actions.
Question 5: What is the commercial real estate appraisal process?
The details of the commercial real estate process can vary depending on the nature of the project, but the basics are roughly the same.
First, the “problem” is identified. This includes determining the intended use, relevant characteristics of the property, and assignment conditions. Second, the scope of work necessary to solve the problem is agreed upon. The scope includes the amount and type of information to be researched and the analyses to be applied in an assignment. Third, relevant data is collected, verified, and analyzed. This may include market area data (general characteristics of the area/neighborhood) and comparable property data (sales, listings, offerings, vacancies, etc.). The analysis also takes into account four factors: scarcity, desire, utility, and effective purchasing power. Finally, after following these steps and principles, the appraiser forms an opinion of value and creates an appraisal report.
For a “typical” property in Wichita, Martens Appraisal strives to deliver reports within 15 business days of receiving all necessary information and being able to inspect the property. More complex or out of town appraisals may take longer due to the additional research that will need to be done. Our fees vary based on the property type, as well as the scope of the appraisal.
Question 6: What are the specific types of commercial appraisals?
A property’s value can be determined in a variety of ways; however, it all comes down to data. That data may include details on the specific property or general information on the neighborhood, community, city, and/or region. At Martens Appraisal we take great pride in having the most comprehensive data on the Wichita MSA. We have two full-time researchers who analyze market conditions as well as research sales and leases to develop comparables. Additionally, the relationship between Martens Appraisal appraisers and NAI Martens salespersons means you can trust that we have the most up to date information on the market.
There are three main types of approaches used when appraising commercial real estate: the cost approach, sales comparison/market approach, and income capitalization approach.
- Cost approach: Essentially, this technique equates the property value to the cost of constructing a replica. The cost approach also considers depreciation, thus, assuming a fair market value for the commercial property. The cost approach is often used to appraise new properties and unique properties with few comparable sales.
- Sales comparison/market approach: This method speculates that an investor will pay only what similar properties have sold for. As such, the sales comparison/market approach is rooted in which property features are alike and the costs associated with those features. Important characteristics may include location, size, condition, floor plan, and the surrounding area. Many in the commercial real estate appraisal industry believe this is a more accurate approach because the current market value is taken into account.
- Income capitalization approach: This tactic involves a rationalization of the income that a property may generate over time. Appraisers commonly use this method for properties such as shopping centers, office buildings, and large apartment buildings, which have a strong earning ability. When this approach is used for a rental property, an investor considers the net income generated, and other factors, to calculate its value on the current market, if sold. In addition, a lender will closely examine the findings and determine whether they feel confident that their investment will be repaid.
To determine a final estimate, the property appraiser will consider the value that results from one of these three types of commercial appraisals. They will take into consideration the applicability/reliability of their preferred approach, relative to the kind of property being appraised, the adequacy of the data processed, and the overall purpose of the commercial real estate appraisal. The approach or approaches that are found to be the most reliable and applicable will bear more weight in determining the final estimate.
Question 7: What are the different types of commercial appraisal reports?
Your commercial appraisal report may cover a variety of important factors. These factors may include a comparative analysis of other properties in the area, a description of the property, an estimate of the value of the property, and a listing of any potential risks you may encounter. It may also include negative aspects that can impact the market value of the property.
We covered the different appraisal types in a previous post, but to put it simply, your report is going to be one of three formats, depending on the client’s needs and the project type.
Our Evaluation Reports contain the least amount of detail, however, they do meet the standards of a summary.
Our Summary Reports contain a moderate amount of detail
Our Self-Contained Reports contain an extensive amount of detail
Question 8: Who can see the results of the commercial appraisal report?
Appraisers must adhere to a strict confidentiality policy. The only person who can see the appraisal report or the results of the report is the client named in the appraisal engagement letter. If our client is a lender, we cannot even provide a copy of the report to you, even if you are the borrower, without the permission of the client.
Question 9: What sort of information will I need to provide the appraiser?
It’s really going to depend on the property type. The information needed for an appraisal on a hotel is going to be very different than the information needed on a warehouse. We have lists of the data we typically need for each property type and we will provide it to the client at the time of engagement. Here is a general list, obviously not all of these items are going to apply in every situation.
• Purchasing contract or any marketing material
• Financing terms
• Legal description
• Title policy
• Site survey
• Building plans & specs
• Environmental site assessment (if applicable)
• Detailed Income and Expenses (3 years)
• Copies of Leases, proposed leases or letter of intent to lease
• Current Rent Roll
• Recent capital expenditures
• Known items of deferred maintenance
Please remember that all of this information will be kept confidential, but retained in the appraiser’s work file. It’s very important to make sure you are giving accurate and complete information to the appraiser as a lack of information could impact our final value.
Question 10: Where can I find highly qualified appraisers?
You came to the right place! Martens Appraisal has been providing commercial real estate services since 1948. Under the leadership of four MAI certified appraisers, our appraisal team comprises over 100 years of combined experience.
Rest assured that when your property is being appraised by one of our appraisers, you are getting the best. No other company in Kansas can boast the experience and access to data that we have.
If you have any questions please do not hesitate to call us at 316-262-6161 and we would be happy to answer them.