Posted on September 12, 2019 They’re long. Their language is characterized by highly specialized (and sometimes unfamiliar) terminology and legalese. They’re bursting with tables, charts, maps, and photos. But they demand to be pored over, and from cover to cover. The question remains, however: What’s the best way to read a commercial real estate
(CRE) appraisal report? Let’s begin by pinpointing the exact object of our inquiry. A commercial real estate appraisal (or a commercial real estate valuation) is a professionally calculated assessment of the value of a commercial property. A broad category, “commercial property” encompasses everything from office buildings to condominiums to industrial sites and vacant land. If commercial property is being bought, sold, taxed, insured, or developed, that activity can trigger an
appraisal. Appraisal (or valuation) is a process and therefore to be distinguished from appraisal reports, which are the outcome of this process and can take one of several forms.
Furthermore, it should be noted that the market is now demanding many Evaluation Reports. According to federal banking regulations, an evaluation may be issued instead of a formal appraisal if:
Many appraisers are now producing Restricted Appraisal Reports and submitting them as Evaluations. This is permissible as long as appraisers are careful to label the appraisal a “Restricted Appraisal” and comply with the specific USPAP requirements and quality assurances (see below) related to the composition of formal appraisal reports. Quality Assurance for Appraisal ReportsWhatever its type, and regardless of the audience for which it is intended, any worthwhile appraisal report must adhere to a set of professional guidelines known as the Uniform Standards of Professional Appraisal Practice (USPAP). By order of Congress, USPAP compliance is required for state-licensed and state-certified appraisers involved in federally-related commercial real estate transactions. USPAP Rule 2-1 stipulates that each written appraisal report must:
Evaluation reports must comply with the Interagency Appraisal and Evaluation Guidelines as defined by the Federal Deposit Insurance Corporation (FDIC). The Most Critical Features of Any CRE Appraisal ReportYou’ve confirmed the report type. You feel confident that the document you are consulting adheres to USPAP’s best practices. What next? Look first to these sections or elements of your appraisal report to begin extracting the most value from its valuations. 1) Definitions. Does the appraiser define such key terms as “cap rate”and “damages?” Do they also provide sources and context for their definitions? An illustrative example serves to highlight the weight these definitions carry.
2) Explanation of methodology. The previously described formats are the bones of a CRE appraisal report. The methodology the appraiser uses to determine the fair market value (FMV) of the property being evaluated can be likened to the report’s soul. The three most frequently applied valuation methods are:
It should be emphasized that, for the professional appraiser, appraisal method selection is not necessarily an either/or proposition. Appraisers can and often do mix and match methods to provide the most accurate appraisal possible for the property in question. Either way, the report should speak to the rationale behind the appraiser’s choices. 3) Ownership history. Real estate properties, while material assets, are not immutable. They change over time, being put to different uses by different landlords. When assessing an appraisal report, look for the following items.
4) Market conditions.What a meteorologist is to the weather, the appraiser is to the economic forces affecting real property transactions. After reading through this section of an appraisal report, you should be able to answer the following questions.
5) Property interest appraised. Ultimately, the appraisal report should directly address the client’s — that is, your — stated interest in the property. If, for example, you want to move your business into a shopping center, the appraisal you receive should report on the fee simple interest, or the total value of the building and the land on which it is situated. If, on the other hand, your goal is to lease the property to a tenant or tenants, you want to know what it is worth to a landlord. The appraisal should therefore report on leased fee interest. It is crucial for clients to specify this interest before property inspection commences. If the property interest is not identified (or has been misidentified), the valuations issued may not be absolutely accurate — or relevant. Which of the following must every appraisal address or include?essenTiAl elemenTs of credible ApprAisAl
The appraisal report must include the definition of value (e.g., market value), the effective date of value, the subject property's relevant characteristics, and any other special instructions from the lender, Fannie Mae, Freddie Mac, VA, FHA, etc.
Which is a required part of an appraisal review report?Beyond typical assignment elements required in appraisals (i.e. state the client, intended users, report date, etc), the appraisal review report must include these components: Summary of the work under review's assignment elements and scope of work. Reviewer's Scope of Work summary. Reviewer's analysis and conclusions.
Who may be identified as an intended user in a real property appraisal assignment?INTENDED USER: the client and any other party as identified, by name or type, as users of the appraisal or appraisal review report by the appraiser, based on communication with the client at the time of the assignment. The client is always an intended user for an appraisal or appraisal review assignment.
What are the two report types permitted by the USPAP?The USPAP guidelines have recognized two types of reports for appraisals: the appraisal report and the restricted appraisal report.
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