There exist many reasons for seeking professional valuation of your commercial property, from preparing to sell to seeking funds or investment to upgrade. Commercial property appraisals should be approached with the expert assistance of a licensed appraisal professional – who can most effectively and properly execute a property valuation in the Atlanta GA or surrounding area.
Following are some important considerations to note, and answers to frequently asked questions, provided by Fletcher and Company. Fletcher & Company is a full service land, residential, industrial and commercial Georgia Real Estate Appraisal Firm providing property appraisal reviews, appraisal reports and industrial property valuation throughout the southeast U.S. appraisal coverage area, including Tennessee, North Carolina, South Carolina, Alabama, Florida and Georgia, and metropolitan areas in and around Atlanta including Roswell, Macon, Columbus, Griffin, Lawrenceville, Douglasville, and Fort Valley.
1. What is the range of services a commercial appraiser should provide?
A truly comprehensive professional appraisal services firm should provide the following services:
Appraisals for federal and non-federal related transaction lending situations
Tax assessment review, advice and appraisals
Advice in eminent domain and condemnation property transactions
Dispute resolution – divorce, estate settlements, property partition suits, foreclosures and zoning issues
Feasibility studies
Capitalization rate studies
Market rent and trend studies
Expert witness testimony
Land utilization studies
2. What property types are typically covered by a commercial property valuation agency?
Commercial appraisal service providers in the Atlanta, GA area typically provide coverage for:
Apartment Buildings & Complexes
Office & Retail Condominiums
Industrial Condominiums
Hotels and Motels
Industrial Buildings
Mixed-Use
Self-Storage Facilities
Shopping Centers
Office Buildings
Retail Buildings
Subdivisions (Commercial, Residential, Industrial)
Mobile Home Parks
Vacant Land
Farms
Restaurants
Nursing Homes
Gasoline/Convenience Stores
Resort Property
Religious Facilities
School Facilities
Single-Family Residential
2-4 Unit Multi-Family Residential
Rock Quarries
Golf Courses
Hangars
Marinas
Car Washes
3. When hiring an appraiser, what questions should I ask?
To be confident and sure that the commercial appraisal firm you’re considering is qualified and experienced in their work, the following questions are appropriate:
What type of professional designations do you have and from whom?
Are you licensed or certified in the states you practice?
Like any job you are contracting out, it pays to compare the resumes of appraisers whom you are interested in having prepare a bid. This is the first place to start.
4. What appraisal approaches will be used in appraising my property?
The three most commonly accepted valuation approaches to value are the “cost approach”, the “sales comparison approach” and the “income approach”.
The cost approach combines the value of the land and depreciated site improvements with the depreciated value of the building. The sales comparison approach compares the property to others and adjusts for differences. The income approach takes market rents, subtracts a vacancy allowance and expenses, and takes the resulting net income and turns that into value using a capitalization rate.
It is rare that all three commercial property valuation approaches are done, and isn’t typically required. Appraisal theory has largely discredited the cost approach as reflective of market value and commercial appraisers seldom provide it except in newer construction and special purpose properties.
The sales comparison and income approaches are the primary valuation methods used for commercial properties. Even then, there are times when one of these approaches does not reflect the market and although it might be performed, it is given little or no weight in deciding on the final value conclusion.
5. How are approaches to value selected for use in preparing a bid?
Fees for professional commercial appraisers will typically reflect the cost to perform two approaches to value, usually the sales comparison and income approaches. Even if a particular approach is not performed, time is still invested in searching and analyzing data. This occurs most frequently in areas where too few comparable sales occur. There are times when a third party, such as a lender, will require the cost approach to be performed. Let your appraiser know beforehand if this is the case.
6. If I don’t like the appraised value, what can I do about it?
That depends upon many things. The best place to start is to speak with the appraiser(s) who signed the report. It’s possible that he/she may have overlooked one or more important factors which affect the value of your property; if you mention it in your conversation, you may find the appraiser willing to reconsider the value conclusion. Of course, if you are not their client (such as when your bank orders the appraisal), they are not required to speak about the appraisal and may be in violation of the licensing law or professional standards if they do so.
It’s important to remember that the appraiser is an unbiased third party. Their job is to find out the good and the bad about a property and report it, not to favor a direction. The better appraisals are round-tabled by professional review staff and carefully scrutinized before they are released, so you get the benefit and knowledge of more people than just those involved with the report.
If you are still dissatisfied, you can get a second opinion by hiring another appraiser or insist that a review appraisal be performed on the original report. If there is a large discrepancy in value, you or a third party may be able to negotiate an intermediate position.
7. How much do commercial property appraisals cost?
Every appraisal is different, so fees are quoted individually on a per job basis. Generally, prices depend on the number of properties and the complexity of the assignment, though appraisals used as evidence in court cases command a higher price. Fees are normally calculated based on the number of hours it takes to do a report and the fee structure of the personnel involved, with modification for overtime if a rush assignment is required.
8. Why do special purpose properties cost more?
Special purpose properties require research of a wider trade radius, sometimes the entire United States! Fees are based on time estimates, so the more time that is invested in finding comparable properties, the higher the fee. Also, the market analysis section of the report many times requires a greater amount of research time and it is not uncommon to have to purchase studies performed by industry experts to properly show the dynamics affecting the property type.
9. What is a typical turnaround time?
Commercial appraisal delivery times typically range from two to four weeks, depending upon the complexity of the property and your needs. It requires one to two weeks to do the research, verify the factual nature of the information, perform a market study of the area and write the report. Typically, delivery times less than two weeks are rush orders and they command a price premium.
10. How can I help shorten the turnaround time?
The number one way to help shorten the turnaround time is to provide your commercial or residential property appraiser with the written information they need as soon as possible. Copies of leases, deeds, rent rolls, income and expense statements and other items listed on our engagement letter are the needed as soon as possible. Delay in providing one or more of the necessary items will almost always result in a delay in the appraisal process.
11. If you don’t come up with the value I want, do I have to pay for the appraisal?
Appraisers must maintain a third party position to your transaction. No appraiser can accept an assignment where bias could be interpreted. USPAP has a phrase used verbatim by many appraisal firms on their letters of transmittals:
“Our assignment was not based on the reporting of a predetermined value, a direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result or the occurrence of a subsequent event directly related to the value opinion.”
USPAP is very clear on this issue. Appraisers cannot be advocates for any client. Although it may seem unusual to some users to have to pay for a report that did not provide them a favorable outcome, appraisers governed by appraisal licensing laws must remain objective.
If there is any uncertainty in the value, clients should have the appraiser perform a restricted appraisal first and then upgrade the report to a summary or self-contained if the value is satisfactory. This is acceptable appraisal practice and one not often suggested by an appraiser.
12. Why are the fees for commercial appraisals so much higher than residential appraisals?
There are many reasons why there is such a great discrepancy. The most important difference is the amount of time it takes to prepare each type of report. Most skilled residential appraisers can do a residential report in a half-day whereas a skilled commercial appraiser needs at least a week.
Residential reports are on a common form with a standardized property type whereas commercial appraisals are mainly free-form documents with information that varies with the property type, market and client needs. Special use commercial properties take longer and can have a multi-state data search radius, thus making it more time intensive and costly to perform than more common property types such as office and apartments.
13. I paid my lender for the appraisal, therefore I should own it.
The appraisal is legally owned by the client, unless the lender “releases its interest” in the document, typically in writing to us. If the lender ordered it, they own it. If you just want a copy of the appraisal, under the Equal Credit Opportunity Act you can be given a copy of it upon written request of the lender.
14. If I didn’t order the appraisal, can I find out the appraised value?
Only if you ask the person who originated the order and they provide permission in writing. However, most appraisal companies cannot give you this information because it would violate the ethical standards governing their appraisal practice.
It doesn’t make sense to me to hire you (the appraiser) if I don’t know you’ll come up with the value I need. Can you give me a guarantee?
It is a violation of state laws and the appraisal licensing laws to provide a value opinion without doing an appraisal. Although a guarantee can’t typically be given, in some cases a restricted appraisal can be performed that will tell you what the property is worth. If the value opinion is acceptable, the report can be upgraded to a summary or self-contained format for a higher fee.
15. I paid for the appraisal. Why am I not entitled to get a copy?
The client is the person who engages the services of the appraiser, usually in the form of an engagement letter. Many times the lender is the one who issues and/or signs an engagement letter, making them the client. It does not matter who pays the bill. Only the client and those whom he has specifically authorized are allowed to receive a copy of the report from the appraiser. If the person who pays the bill is not the client, verbal or written permission is required for the appraiser to release the appraisal to anyone else.
16. My lender said I need to get an “MAI appraisal”. What is it?
The term MAI, which stands for “Member Appraisal Institute”, is a registered trademark of the Appraisal Institute. The Appraisal Institute is a trade organization. There is no such thing as an “MAI appraisal.” Persons requesting an “MAI appraisal” mean that the report should be prepared by an MAI designated member of the Appraisal Institute. Each appraiser needs to be judged by his/her merits rather than the association to which they belong. *Note – it is considered discriminatory by FIRREA to consider or not consider an appraiser for an assignment based on a trade designation. Fletcher & Company houses three appraisers that are associate members of the appraisal institute and one appraiser that is a CCIM candidate.
17. Will the market value equal assessed value?
While most states support the concept that assessed value approximate estimated market value; in practice, this often is not the case. Examples include when interior remodeling has occurred and the assessor is unaware of improvements, or when properties in the vicinity have not been reassessed for an extended period.
18. Shouldn’t market value approximate replacement cost?
Market value is based on what a willing buyer likely would pay a willing seller for a particular property, with neither being under pressure to buy or sell. Replacement cost is the dollar amount required to reconstruct a property in-kind. Rarely are they the same number.
19. My broker performed a market valuation. Why do I need an appraiser to perform one?
There are many reasons why valuations are required to be done by appraisers. First and foremost, the appraiser is an independent, third party. Many times, the appraiser is the only one in the transaction that does not have a vested interest in the outcome. This is the reason for the creation of the appraisal industry in the 1930’s. Another important difference between a broker’s valuation and that performed by an appraiser is that a licensed appraiser is bound by USPAP, whereas a broker is not.
20. What are the differences between an informal appraisal and a formal one?
Those outside the appraisal profession have different interpretations of formal and informal reports. When a client simply wants “a number” and not a long document, he/she will often call it an informal appraisal. Those outside the appraisal field often refer to the old “letter of opinion” report as an informal report, although terms such as “update appraisal”, “recertification of value” and “evaluation of real property collateral” have also been used. When USPAP became effective in the late 1980’s, appraisers no longer used this terminology because a letter of opinion and the derivatives above became a violation of multiple USPAP regulations. Now known as the restricted report format, appraisers are required to do substantially more work to issue this type of report.
21. I’m told there are three types of “formal” reports I can usually order. What’s the difference?
The final appraisal product delivered to you depends on the type of report specified by your agreement. The parameters of the three types of appraisal reports are defined by USPAP. The primary difference is in the terms describe, summarize and state. Describe means to provide a comprehensive level of detail, summarize is providing a more concise presentation of the information and state means to provide a minimal presentation of the information.
For “formal” reports, USPAP dictates that appraisers can issue three types of reports.
Self-Contained:
In this report option, the appraiser provides all of his/her data and rationale that was used in the development of the appraisal. All conclusions and data sources are fully disclosed and discussed. Two practical tests can be used to determine if a report is a self-contained document:
1. The content of the report fully describes the data, reasoning and each conclusion to such a degree that there is no need to consult other data sources or to inquire how the appraiser reached a conclusion.
2. Information sources cited within the report are included in the document, within reason. Citing a book does not require the inclusion of the book in the addenda, but market studies or other material articles cited in a report should be included, especially if the appraiser relied upon them for supporting important conclusions. This is the type of report most often needed for commercial property lending.
Summary:
In the summary report, the appraiser summarizes his/her findings rather than fully describing them. This is a much shorter report than a self contained and many lenders accept this reporting type. Most residential appraisals are done on forms that are summary reports along with non-complex commercial assignments. The appraiser may summarize the data and his/her conclusions without explaining the full reasoning behind them.
Restricted Report:
This is the shortest type of report. A restricted report only states the conclusions of the appraiser with no explanation on how they were derived. Restricted reports are generally used internally or when a value must be reported quickly. Many clients order restricted reports when time is of the essence and then have them upgraded to a summary or self contained in the future.
An important caveat is that USPAP does not allow a restricted report to be used by anyone other than the client or someone intimately familiar with the property, so if the appraisal will be viewed by other third parties, a summary or self-contained report must be prepared. Appraisers cannot “recertify” this type of report to any other lender.
22. What type of report do I need?
The appraiser is in the best position to tell you what type of report you need. He/she is required by USPAP to determine the scope of the assignment, the function of the appraisal and use of the report. To do that, he/she will need to understand your needs, so the appraiser is in the best position to recommend one or more of the above choices and to counsel you on what choice(s) would be inappropriate.
23. What is the difference between a valuation and an appraisal?
The words valuation and appraisal are used interchangeably. There is no difference between them. The confusion began when lenders started using the term “evaluations” in the early 1990’s, implying that they were not appraisals. Soon, the “e” in evaluations was omitted. This issue has been addressed at length by the appraisal community and the Appraisal Foundation (the creators of USPAP) and an evaluation was found to be an appraisal. As discussed earlier, there are six possible combinations of appraisal and report; evaluations are not among them.