Commercial real estate appraisals are a combination of art and science. Knowledgeable appraisers gather and analyze data prior to making informed decisions about real estate value. The appraisal profession has developed a series of well-established analytical techniques; the Cost Approach, Income Approach and Sales Comparison approach. The most appropriate approaches depend upon the characteristics of the subject property.
- The Cost Approach is considered most applicable for commercial real estate appraisals for relatively new properties and special-use properties. Commercial real estate appraisers are less likely to use the cost approach for older properties due to the difficulty of precisely calculating the amount of depreciation.
- The Income Approach is considered most applicable for investment or income properties. Appraisers gather data regarding the actual income and expenses for the subject property, rental comparables, expense comparables, industry expense data, market occupancy, and rental market trends. The commercial real estate appraiser then estimates gross potential income, other income, effective gross income, operating expenses, and net operating income. Net operating income is converted into an indication of market value using a conversion factor termed the capitalization rate, using the following formula:
Market value = net operating income/capitalization rate.
This process is termed direct capitalization.
The Income Approach can also be calculated using a discounted cash flow analysis. Revenue and expenses are estimated for a period of years and the resulting annual cash flows and gross proceeds from a projected sale of the property are discounted to a present value using a discount rate.
- The Sales Comparison approach Commercial real estate appraisers also utilize the Sales Comparison approach to estimate market value. The Sales Comparison Approach is often considered most comparable for owner-occupied properties. After obtaining data regarding similar properties that recently sold, the appraiser makes adjustments to generate an indication of market value for the subject property.
After considering each of the three approaches to appraisal and preparing an analysis for the approaches which are considered relevant, the appraiser reconciles the indications of value to a final value conclusion. The quality and quantity of data for each of the approaches is considered when reconciling to a final value conclusion.
The expertise of RPD Analytics includes valuing commercial real estate, single-family, business personal property, business enterprise value, purchase price allocation for businesses, valuation for property tax assignments, partial interest valuation, estate tax valuation, expert witness testimony and valuation for condemnation.