A Commercial Property Appraisal is an Important Step in the Loan Approval Process
A commercial real estate appraisal is a calculated assessment conducted to determine the value of a commercial property. Commercial property appraisals are an integral part of the lending process because they help the lender gauge the risk of approving the commercial real estate loan. This assessment also ensures the lender doesn’t provide more financing than necessary, lowering liability.
Subsequently, commercial appraisals also help the borrower ensure they aren’t overpaying for a property.
What Does a Commercial Property Appraisal Cost?
Typically, a commercial property appraisal cost is in the thousands. It can range anywhere from $2,000 to $25,000, depending on the size and scope of the commercial project. The most common cost is approximately $4,000. Although the lender may order the appraisal, this cost is passed to the borrower.
The Differences Between Commercial Building Appraisals & Residential Appraisals
There are three major differences between commercial building appraisals and residential real estate appraisals.
Cost
While commercial property appraisals typically cost thousands of dollars, residential appraisals cost hundreds. For instance, a single-family home appraisal report may cost $300 to $450, while an office building appraisal can cost $4,000 on average.
Valuation Method
Residential appraisals generally use a sales comparison approach when determining value. Commercial appraisers put more emphasis on the net operating income the property can potentially generate.
Turnaround Time
Because a commercial property appraisal is more complex than a residential appraisal, it takes longer to complete the process. For instance, a commercial property appraisal may take up to a month, while a residential appraisal takes only a week.
4 Types of Commercial Property Appraisals
Income Approach
The income approach is the most popular type of appraisal for commercial property. The value is derived from the amount of income the property is projected to generate in the current market.
The calculation:
Net Operating Income / Capitalization (Cap) Rate = Property Value
Sales Comparison Approach
The sales comparison approach—also known as the market approach—is most commonly used for residential real estate rather than commercial. Value is determined by analyzing comparable property or similar property sale prices. Although a residential appraiser will likely have a plethora of comparable properties to choose from, a commercial appraiser may have to look outside of the market area, making the valuation less accurate.
Gross Rent Multiplier Approach
Professional appraisal firms don’t typically use the gross rent multiplier approach. Individual investors may use this method to quickly determine value. To determine value, the individuals review similar properties and establish the average gross rent multiplier in that area.
The calculation:
Gross Rent Multiplier x Annual Income = Property Value
Cost Approach
Out of the four types of appraisals for commercial property, the cost approach is the least common. The value is determined by assessing the cost of reconstructing a property from scratch. It takes the costs of land, materials, and labor into account.
The calculation:
Land Cost + Materials Cost + Labor Cost – Accumulated Depreciation = Property Value
The Role of Property Appraisals in Lending
For Commercial real estate lenders, such as banks and credit unions, property appraisals serve as a critical risk assessment tool. When financing a commercial property, lenders need to ensure that the loan amount reflects the property’s actual market value. If a property’s value is overestimated, lenders risk loaning out more money than the property is worth. If underestimated, borrowers may receive insufficient funding, leading to stalled projects or missed opportunities.
Accurate appraisals also help protect borrowers. Picture this scenario—an entrepreneur hopes to purchase a retail space for their growing business. Without a trusted appraisal, they may unknowingly overpay for the property or face repayment challenges down the road. With a proper valuation, they can ensure they’re making a sound investment with fair financial terms.
Real-World Examples of Appraisals in Action
New Development Financing: A developer seeking to build a mixed-use property applies for financing. The lender orders an appraisal to confirm the potential property’s post-construction value. This ensures the loan aligns with the project’s true potential and mitigates risks tied to overbuilding or falling short of market demand.
Loan Default Resolution: If a loan goes into default, the appraisal helps the lender determine the current market value of the collateral property before pursuing foreclosure or sale. This ensures the lender’s recovery efforts are fair while avoiding prolonged financial losses.
Refinancing Decisions: Appraisals are pivotal in refinancing scenarios. A business owner with an existing mortgage may want to reassess their property’s worth to secure better terms or access cash equity. A recent appraisal provides an accurate snapshot of the property’s current market value, enabling more favorable financial arrangements.
Why Accurate Appraisals Matter for Both Lenders and Borrowers
For lenders, an accurate appraisal is a safeguard against financial losses. It ensures that the property being financed is worth the investment, reducing the risk of loan defaults or foreclosures. For borrowers, it establishes trust and transparency, confirming that the terms of their loan agreement are fair and realistic.
Commercial property appraisals also help foster confidence in the market. When valuations are reliable, stakeholders can proceed with clarity, knowing their transactions are backed by solid data. By serving as the bridge between a property’s market value and financial decision-making, appraisals create a win-win scenario for everyone involved.
About AVANA CUSO
Commercial real estate lender AVANA CUSO has more than 20 years of experience ordering and reviewing commercial appraisals.
Established in 1998 and headquartered in Simi Valley, CA, AVANA CUSO offers competitive and collaborative commercial real estate loans. We partner with credit unions and connect them to investors across the United States. Additionally, we uniquely support and guide our partners through the entire full lifecycle of the loans, including commercial appraisals. AVANA CUSO is a proud member of the AVANA Family of Companies.