Whether on an individual basis or aggregated, buying, selling, or managing commercial property in Canada is a mammoth task. You need industry-leading researched data along with construction and management knowledge before making informed business decisions. NicroRealty, Canada’s real estate appraisal company, offer expert commercial real estate appraisal to client residing Hamilton, Oakville, Burlington market, and beyond.
Commercial Real Estate Appraisal Meaning
To put it in simple terms, commercial real estate appraisal is the unbiased market value of buildings, office real estate buildings, shopping centers, condominiums, industrial properties, land for sale, etc. Commercial asset values are used for not only selling at the current market value but for underwriting as well. As lenders do not pay more than what the asset is worth.
Commercial property appraisals are a pertinent tool to inquire about the market value before investing in a commercial property. After making the purchase, appraisals are needed to determine how much investment or renovations is worth putting into the recently purchased property.
Difference between residential and commercial real estate appraisal
The major difference is the process in which it is carried out. Other differences are:
- Valuation: Factors are varied while calculating appraisals. A real estate appraisers research neighborhood, lifestyle, square footage, location of residential property; whereas commercial real estate appraisals calculate the market conditions, rental prices, selling price, income, development in the area.
- Complexity: The process of counting appraisals of commercial properties can take about a month or more to calculate the renovation cost, maintenance, building, and operating cost of commercial properties which is a lengthy and complex process. Residences are all built in the same ways with slight differences, so the calculation of appraisals takes about a week.
- Cost: From the above point we know that the residential appraisal is less than commercial property appraisals. So to increase cost-effectiveness, you need expert appraisers.
- Report type: Commercial appraisal reports are long as it includes future effectiveness and why a certain valuation is a perfect amount for a property, so it takes longer to draw up such a lengthy report, In residential appraisal, reports are short and not more than 14 pages.
- Costly: Commercial properties are purchased for commercial use or renting out. You can get maximum returns from renting warehouses, institutional properties, offices, etc. While residential properties are bought for personal use or leashing. You can get your money’s worth buying property to lease.
Various methods of commercial property appraisals
- Cost approach: While this method is seldom used, it’s generally used to calculate the price of a brand new commercial building; and how much it would cost to build the same building using the same material, labor charges, land price in current market value. The formula for this is:
Land price + cost to build new – accumulated depreciation = Property value
- Income approach: This is the most accurate and most used method by appraisers. Commercial appraisers use Net Operating Income (NOI) and capitalization rate (cap rate) for calculations. They keep two things in mind: one, NOI listed on the pro forma for the property needs to be accurate; two, finding cap rates of comparable sales to come with cap rates for this equation. The formula is:
Net operating income/ capitalization rate = Property value
- Gross rent multiplier approach: This is rather used by individual investors rather than professionals. You need the gross average rent multiplier, pro forma to calculate the average gross rental income of the property. The formula is:
Gross rent multiplier * annual income = property valuation
- Sales comparison approach: This method is used most for residential properties. Appraisers use comparable sales rates of similar properties to calculate the value of the subject property.
Why do you need commercial property appraisals?
- To estimate liquidation value for auction or forced sale by authorities.
- To calculate tax payments.
- A real estate appraisal company uses commercial property appraisals to let their customers know about the current market, goals, alternatives, resources, constraints.
- To calculate the renovation and construction costs.
- To calculate the damage caused by natural calamities and weather conditions.
- When the government acquires private property for public usage.
- To help with business mergers, corporate dissolution, insurance of stock, and revision of book value.
- To determine gift or inheritance taxes or lease negotiations.
- Helping prospective seller or buyer with the current valuation of the subject property.
- To assist with mortgage lending purposes.
Also read: What is Portfolio Appraisal?
The overlooked aspects which you need to discuss with your commercial property appraisers:
- If one is getting different valuations for a particular property, the Highest and Best Use (HBU) is the reason.
- Most of the time, buyers get the wrong square footage of the property. Get the accurate area calculation from appraisers first.
- Get appraisers to point out the external obsolescence for the property and its impact on marketability.
- Sales prices of similar properties in the neighborhood, differences in neighborhood values, age of the comparable property, etc are often overlooked.
- Location, sales history, adverse conditions, depreciation, reconciliation, amenities, lack of business acumen, and many more things are often overlooked.
While purchasing or selling a commercial property, you can take the help of AACI Appraisers in Canada to calculate the accurate market value of the property and avoid common errors which only increases the hurdles of the tedious process. Nicro Realty a commercial appraisers in Ontario, can do the job the right way so you get your money’s worth. Visit this website to learn more about commercial real estate appraisal.