I find that many are dumfounded by the process we
commercial appraisers go through to complete an appraisal of their property.
They often don’t understand why the appraisal fee is “so high” and why we are
quoting anywhere from three to six weeks to complete their appraisal. It is my
sincere hope that this article will shed some light on the appraisal process.
To begin with, it is important to understand the laws
governing the appraiser and the appraisal process. Many will remember the real
estate bust of the early 1990s which was in large part precipitated by the mass
takeover by the Resolution Trust Corporation of Savings and Loans. The
governmental imposed reforms that followed included the passage of the Financial
Institutions Reform Recovery and Enforcement Act (FIRREA) which called for state
licensing all appraisers for assignments which include FDIC Insurance.
The passage of FIRREA brought in a much needed rigorous
set of appraisal standards, called the Uniform Standards of Professional
Practice ( USPAP
to which state appraiser licensing bodies bind licensed appraisers. These
standards to a large degree drive the appraisal process, and while dry, an
understanding of those requirements would be enlightening to those who order
commercial and residential appraisals on a regular basis.
When you order a commercial appraisal, you are essentially
paying for the appraiser’s time and expertise. A typical commercial appraisal
will take me anywhere from 30 to 60 hours. Moreover, a seven unit
apartment building, reported in a summary narrative format, will likely take
only a little less time as than a 14-unit building. Likewise, a 12,000 square
foot industrial building will likely take about the same amount of time to
complete as a 24,000 square foot industrial building. So it becomes readily
apparent that sale price and property value have little to do with the
commercial appraisal fee.
So what does affect commercial appraisal fees? There are
essentially four factors affecting the fee of the commercial appraisal: 1)
complexity of the assignment, 2) availability of data, 3) report format and 4)
required turn-around time.
1) Complexity of the assignment – I could write for hours
about this, but suffice it to say that the more complex the assignment, the
larger the scope of the investigation, the longer it will take and the higher
the fee will be.
We recently completed the appraisal of a 23,000 square
foot industrial building in Los Angeles. It was an owner-occupied building
located in an area of similar properties. The highest and best use was simple,
in that it’s continued use as-improved was not in doubt and there were
sufficient recent transactions, both sale and rental, so as to make the data
gathering process a breeze. All of these points were factored into the fee when
we issued the appraisal fee quote. The project took about 35 man hours and the
appraisal fee reflected this.
Conversely, last year we appraised a ski resort. The income
approach drove the appraisal process, and suffice it to say that it took many
more man-hours than the industrial building described above. Simply put, the
scope of the assignment was far greater, hence the time into the assignment and
the resulting appraisal fee were higher accordingly.
Further, the size of the property has little to do with
how complex the appraisal process will be, or become. Some of the most difficult
commercial properties to appraise can be small mixed-use properties, such as a
retail building with a house behind it, or office over retail. This is because
there few similar property transactions, thus cash-flows and sales data sets
need to be blended.
Take as another example the one acre redevelopment site
that we recently appraised in Highland Park, California. The property was
improved with a mix of five commercial buildings and a fourplex apartment
building. In the highest and Best Use Analysis, it was determined that the value
as-improved was outweighed by the value of the underlying site. Simply put,
similarly located and zoned parcels of that size were selling for more than the
overall value of the properties as-improved. To come to that conclusion,
however, required the appraisal of each of the properties individually, followed
by the appraisal of the land underlying the properties. To make things more
difficult, land sales of that size in that market were very hard to come by and
required significant analysis.
2) Availability of data – As the reader can see from the above examples, the
scope of the assignment and data availability are intertwined. Another recent
assignment was the appraisal of a portfolio of retail hardware stores with
attached lumber yards. All had low-cost steel buildings on large sites located
in very small market areas. Moreover, each was located many miles apart, thus
there was no data crossover between the assignments. For each of these
appraisals, we scoured the markets for transactions of similar buildings on
similarly sized parcels. We visited and revisited the markets to inspect
comparables, but found no sales that were relevant to the analyses at hand. It
was clearly apparent that the value of the properties was primarily in the land,
but what contributory value did the improvements have? In the end, the primary
approach to value was the cost approach, whereby we appraised the land and added
to that the depreciated value of the improvements based on cost, but taking into
account external forces affecting demand for such improvements. This assignment
turned out to be complex due to the lack of availability of similar comparable
3) Report Format is Purpose Driven – There are essentially
three formats available to the appraiser, the full-narrative, the summary
narrative and the restricted report (in order of cost – highest to lowest).
Samples of each can be reviewed on our Sample Appraisals
page of this site. More often than not the user of
appraisal services has little control over the required report format.
The typical lender must require a summary format, or
higher due to FDIC insurance, but will usually order a summary format. If the
appraisal assignment is complex, however, it becomes more likely that a lender
will require a full narrative analysis, which can cost thousands of dollars more
than the same commercial appraisal reported in a summary format. It is important
to note that USPAP defines the level of detail that is contained in each of
these formats, but that no matter the reporting format, the scope of the
appraisal is to be the same.
The most economical of formats, the restricted report, is
what some refer to as a letter appraisal. However, these reports can be relied
upon only by the client (again, USPAP), thus, if there is potential that a third
party will need to rely on the value conclusions, this format is not allowable.
A great example would be the appraisal of a property for estate taxes. Because
the client needs the value to determine tax owed, the IRS is passively relying
on the analysis, thus the restricted format is not allowable for that purpose.
However, we are often called upon to complete a commercial
appraisal for purposes where the restricted format is allowable. Such a purpose
would be to determine the listing price or acquisition price of a property, to
make a sell/hold decision, or simply to determine one’s net worth.
4) Required Turn-Around – This is where the user of
appraisals has the most influence on fee. We often receive calls asking for a
summary appraisal of a property that is escrow with a closing date of say two
weeks away. As stated earlier, the typical appraisal will take anywhere from 30
to 60 man hours, and in most cases the appraiser does not know the full scope of
analysis required in the commercial appraisal until he actually sees the
property. On short-order appraisals this presents a huge risk factor for the
appraiser in that the fee quote is typically issued prior to seeing the subject
and what data is available. As a result, the appraiser will usually factor such
risk into the fee quote with considerations such as potentially having to work
weekends to complete the assignment on-time. Again, per USPAP, there are no
shortcuts – the analysis has to be completed to USPAP standards regardless of
fee and turnaround time.
To sum it all up, the best advice I can give anybody in
need of a commercial appraisal, is to give the appraiser as much latitude as
possible. If you have it in your power to utilize a restricted report, your fee
will be lower than if you require a summary or a full narrative appraisal. If
you have a recent appraisal of the subject, or confirmable comparable data that
is useful, let the appraiser know. Most importantly, if you can order your
appraisal with a due date of four to eight weeks out, you will no doubt get a
better fee quote than if you wait until two weeks before you need it.
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