When Does a Bank Require a Commercial Real Estate Appraisal?

A bank may require a commercial real estate appraisal when property is being used as collateral for a loan, including purchases, refinancing and certain loan modifications.

Whether an appraisal is required depends on the transaction, applicable regulations, lender requirements and the property's circumstances.

The appraisal helps the lender evaluate the property's value and the risk associated with the loan.

Why Do Banks Require Commercial Real Estate Appraisals?

When a bank lends money secured by commercial real estate, the property becomes an important part of the lender's risk assessment.

The lender needs reliable information about the property's value before making a lending decision.

A commercial real estate appraisal provides an independent, professionally supported opinion of value that can help the lender determine whether the property provides adequate collateral for the proposed loan.

Commercial appraisals may be used for many types of properties, including:

• Office buildings
• Retail properties
• Shopping centers
• Industrial properties
• Multifamily properties
• Hotels
• Self-storage facilities
• Convenience stores
• Land
• Mixed-use developments
• Special-purpose properties

The appraisal process and information required can vary significantly depending on the type and complexity of the property.

Is an Appraisal Required for Every Commercial Real Estate Loan?

Not necessarily.

Federal regulations establish appraisal requirements for certain federally related real estate transactions, but there are circumstances in which a full appraisal may not be required.

Banks and other lenders may also establish their own appraisal and evaluation policies based on the transaction and level of risk.

Even when regulations do not specifically require a full appraisal, a lender may determine that an appraisal is appropriate.

This is why borrowers should not assume that a commercial appraisal will—or will not—be required based solely on the size of the loan.

The lender ultimately determines what valuation documentation is necessary for the transaction.

When Might a Bank Request a Commercial Appraisal?

Commercial property appraisals are commonly associated with several types of lending situations.

Purchasing Commercial Property

When financing the purchase of commercial real estate, the lender may require an appraisal to develop an independent opinion of the property's value.

The bank can then consider the appraised value along with the purchase price, loan amount, borrower's financial qualifications and other factors when evaluating the loan.

Refinancing Commercial Property

An appraisal may also be requested when an owner refinances an existing commercial property.

Property values and market conditions can change substantially over time.

A current appraisal gives the lender updated information about the collateral securing the new loan.

Construction and Development Loans

Commercial construction and development projects may require valuation work addressing the property and proposed improvements.

Depending on the assignment, the appraiser may analyze the property's current condition as well as the proposed development and its anticipated value when completed.

Loan Modifications or Renewals

In some circumstances, a lender may need updated information about a property's value when modifying, renewing or restructuring an existing commercial real estate loan.

Whether a new appraisal is necessary depends on the specific transaction, lender requirements and applicable regulations.

What Does a Commercial Appraiser Evaluate?

A commercial appraisal involves much more than inspecting the building.

Depending on the property, an appraiser may analyze:

• Property location
• Site characteristics
• Building size and condition
• Current use
• Highest and best use
• Comparable property sales
• Rental rates
• Occupancy and vacancy
• Lease agreements
• Operating income
• Operating expenses
• Market conditions
• Local economic trends

For income-producing properties, rental income, expenses, leases and occupancy can be particularly important.

The Three Approaches to Commercial Property Value

Commercial real estate appraisers generally consider three traditional approaches to value.

Sales Comparison Approach

The sales comparison approach examines sales of comparable commercial properties.

The appraiser analyzes relevant differences between those properties and the property being appraised to develop an indication of value.

Income Approach

The income approach evaluates the property's ability to generate income.

This approach can be particularly important for properties such as apartment complexes, shopping centers, office buildings, industrial properties and other income-producing real estate.

The appraiser may analyze rental income, vacancy, operating expenses and other factors affecting the property's net operating income.

Cost Approach

The cost approach considers the value of the land and the cost of constructing the improvements, less applicable depreciation.

The relevance of each approach depends on the property, available market information and purpose of the appraisal.

Who Selects the Commercial Appraiser?

This is an important distinction for borrowers.

When an appraisal is being performed for a regulated lending transaction, the lender generally controls the appraisal engagement and must maintain appropriate independence between the appraisal process and the people responsible for loan production.

In other words, a borrower usually cannot simply hire an appraiser independently and assume the bank will accept that appraisal for the loan.

If you are obtaining commercial financing, talk with your lender about its appraisal requirements before ordering an appraisal yourself.



What Information Does a Commercial Appraiser Need?

The information required depends on the property, but the appraiser may request documents such as:

• Property surveys
• Site plans
• Building plans
• Current rent rolls
• Tenant leases
• Historical income and expenses
• Operating statements
• Property tax information
• Information about renovations
• Capital improvement records

Having accurate documentation available can help the appraiser develop a clearer understanding of the property and its financial performance.



Why Appraiser Experience Matters

Commercial properties can vary dramatically.

Valuing an apartment complex isn't the same as valuing an industrial facility, shopping center, hotel or special-purpose property.

A qualified commercial real estate appraiser must understand not only valuation methodology but also the property's particular market, income characteristics, comparable transactions and factors influencing investor behavior.

For banks and other financial institutions, credible commercial real estate valuation is an important component of informed lending decisions.

Commercial Real Estate Appraisal Services from Real Estate Matrix

Real Estate Matrix provides commercial real estate appraisal and valuation services for banks, financial institutions, investors, property owners, attorneys, accountants and other professionals.

Our experience includes a wide range of commercial property types and valuation assignments throughout Alabama, Mississippi, Georgia, Tennessee and Florida.

If your bank has requested a commercial real estate appraisal—or your organization needs professional commercial property valuation services—Real Estate Matrix can help you understand the appraisal process and your next steps.

Real Estate Matrix is one of the Southeast’s premier commercial real estate appraisal firms and has participated in the valuation of billions of dollars in real commercial property assets.

We would appreciate the opportunity to add you to our very long list of pleased clients.

You can give us a call or click here to fill out our Free Quote Appraisal Form.