• Tue. Jun 21st, 2022

10 things to know about valuing commercial real estate


Small business owners have a lot to digest when it comes to the subject of commercial real estate, especially these days. This will double for the notion of getting an appraisal on commercial real estate, a process that may differ a bit from appraisals done for residential properties. “Commercial is very different from residential in that valuations are much more subjective in nature,” says Scott Everett, founder and president of Supreme Lending, a mortgage lender in Dallas. “Much of the value derived from a commercial property is based on the rental rates received versus expenses paid. The underlying asset is important, but not in the same way that a residential property values ​​assets. . “

In other words, if you are looking to get a commercial property appraised — perhaps because you want to buy or sell it, or even because you want to establish the value of a lease or file a property claim. property tax — there might be a bit of a learning curve as to what you’re about to get into. Inc. Contributor Darren Dahl asked Douglas McKnight, a 22-year-old commercial real estate expert and managing director of CapStruc Valuation in Malvern, Pa., For an overview of his profession. The following is a list of the top 10 things McKnight says you need to know about commercial real estate appraisals:

1. Inspection is only a small part of the assessment process

Depending on the size and complexity of the property to be appraised, the property inspection can take from less than an hour to several hours. Some customers see this as the whole process, but the truth is, it’s just the start. Appraisers research public property and zoning records, study demographic and lifestyle information, and compile comparable sales, replacement costs and rentals. They then analyze this information with respect to the value of the property. Finally, they write a report on their findings. The inspection is just the start of an assessment process that can take days or even weeks.

2. Don’t try to distort the facts

Reviewers are professional skeptics. They will seek to verify anything you tell them from other sources. McKnight says he often asks questions he already knows the answers to, just to test the credibility of people showing him ownership. Evaluators are always thinking about how they will defend their opinions if they are taken to court, even in missions where litigation seems unlikely. If you misrepresent anything, the reviewer will cast aside the credibility of anything you say.

Dig deeper: How to choose a site for your business

3. Don’t hide information

You will likely be asked if you can provide a property tax bill, a set of property drawings, tax returns, and other items. You might not be sure why an appraiser is asking you for something, but it’s best to provide whatever you can. Evaluators have no interest in expanding their working files unduly, but they do need certain information and the more you provide, the faster they can complete the assignment. If you later dispute the opinions of the reviewers and produce additional information that was not provided up front, you have wasted valuable time.

4. Evaluators must adhere to a strict code of ethics.

Appraisers must follow the Uniform Standards of Professional Appraisal Practice, which, among other things, requires them to provide an impartial opinion. Failure to comply with this rule may result in disciplinary action by the state, including revocation of an assessor’s certification. If an assessor refuses to do something you ask them to do, it is probably because of the obligation to uphold those ethics.

Dig deeper: Think twice before buying commercial real estate

5. The client is the party who orders the expertise

If the appraisal is for financing, the lender is the customer. Appraisers are required to maintain client confidentiality, so whether you are the borrower or any other party, the appraiser cannot share the appraisal report or any other confidential information with you. If you order an appraisal as part of a property tax appeal and you are concerned that the appraised value may be greater than the appraised value, you can be assured that the appraiser will not release the results to the tax commission. land without your permission.

6. Identify the targeted users

Make sure the rater knows who you want to use the report for. If you are looking to buy a property, this may mean that you intend to share the appraisal with the seller, your lender (although they will likely get their own appraisal) and possibly your local tax appeal board. land. These people or parties will be identified in the expert report and are the only ones authorized to use the report.

Dig deeper: The truth about real estate

7. There are three types of reports

A “Restricted Use Report” is the shortest and cheapest type, but can only be used by the customer. The fees can vary depending on the size of the property as well as the scope of the appraisal, but a good starting point for a small report might be $ 2,000 to $ 2,500. A “Summary Report” summarizes the data and analysis and can be used by any intended user and can cost up to $ 3,000. A “stand-alone report” contains all the details of the data and analysis, but is rarely requested. If you tell the reviewer how you plan to use the report, they can tell you what type of report you need.

8. The type of report is distinct from the scope of work.

The amount of work required to reach conclusions does not depend on the type of assessment. With restricted use or rough assessment, the assessor will compile large amounts of information that is kept in a working file but is not included in the report. For this reason, the differences in fees between the various types of reports are less than the amount of information contained in the reports might indicate.

Dig deeper: How to get a good deal on a lease

9. Take into account the valuation date

Several years ago, McKnight rated a nightclub. The weekend after inspecting the property, someone was shot dead in the club. This introduced a stigma that reduced the value of the property. This shows the importance of establishing the valuation date. Appraisers may appraise a property on the date of the inspection, at an earlier date (a “retrospective appraisal”) or at a future date (a “prospective appraisal”). It is important that you set the appropriate valuation date for your needs.

10. Consider the assessed “interest in land”

Last but not least, it is important to tell the appraiser what your interest in the property is. For example, if you want to know what is the value of a free and clear property – like a warehouse that you want to move your business into – you are interested in something called “fee simple interest.” In other words, you just want to know the value of the building and its property. On the other hand, if you want to know what a property is worth to a landlord when it is occupied by one or more specific tenants, you want “interest on rental charges.” Finally, if you want to know what a lease is worth to a tenant, you want a “lease interest”. This is a common request when people are looking to buy businesses because they need to know what the lease value is for that business. “Make sure you identify the real estate interest you want to appraise,” says McKnight.

Dig deeper: How to buy commercial real estate

The opinions expressed here by the columnists of Inc.com are theirs and not those of Inc.com.