What’s In A Commercial Real Estate Appraisal?

This explainer is a supplement to Bisnow's four-part investigation into the appraisal field, including its demographics, talent pipeline and relevance in today's market. This project also included an in-depth investigation into The Appraisal Foundation, a quasi-governmental nonprofit that writes the rules for the industry. 

Find the entire series here.

Before a commercial property can be bought, leased or financed, the professionals working on a deal need to have a baseline understanding of how much the building is worth. Determining that value usually includes the input of an appraiser.

Appraisals are a blend of art and science, compiling a wide variety of factors to determine a building's value. But while nearly every deal requires an appraisal, the basics of this common CRE function are often misunderstood.

Here, Bisnow answers the five most important questions you need to know to understand the field: 

What is a CRE appraisal?

A commercial real estate appraisal is an assessment of the valuation of any particular commercial property. Properties across all asset classes may require an appraisal, depending on the transaction. 

Why are appraisals needed?

Lenders, investors and property owners will often request appraisals to determine the value of a property for loan collateral, investment or property tax purposes. Appraisals can also provide insight into the value of a property that hasn’t traded hands in many years and align its present worth with current market conditions. 

Who conducts appraisals?

Typically, independent third parties conduct appraisals on behalf of clients, though some larger companies have in-house appraisers. To appraise commercial properties, professionals first need to undergo thousands of hours of training under the supervision of a mentor until they receive the proper licensing. Appraisers are required to follow standards outlined by The Appraisal Foundation.  

What factors go into a CRE appraisal?

Appraisers evaluate many data points when surveying a property, including the sales of comparable buildings, market data, net operating income and cap rates. They also exercise their professional judgment to come to a final valuation. 

How much does an appraisal cost?

A typical commercial appraisal costs between $3K to $5K, according to a post from the Robert Weiler Co. The cost of an appraisal on larger commercial properties involved in litigation or tax cases can cost between $10K to $25K.