In one sentence
An independent opinion of the property's value prepared to USPAP standards, required for regulated lenders under FIRREA above threshold amounts.
The longer version
Commercial appraisals typically weigh three approaches: income capitalization, sales comparison, and cost. For lenders the income approach usually leads, and the appraisal's NOI and cap rate feed directly into LTV and debt yield sizing.
Regulated lenders must order through an appraisal management process independent of production, and review the report before relying on it. Appraisal timing is a standard critical-path item.
Common questions
- Why do commercial lenders require an appraisal?
- To support the collateral's value for sizing the loan, and because regulated lenders must obtain one under FIRREA above the federal thresholds. The appraiser is engaged by the lender, not the borrower.
- How long does a commercial appraisal take?
- Commonly several weeks, depending on property type and complexity. It is usually one of the longest lead items in diligence, which is why it is ordered as soon as terms are agreed.
- What appraisal approaches are used for commercial property?
- The income approach, the sales comparison approach and the cost approach. For income-producing property the income approach usually carries the most weight.
Keep reading
- The CRE due diligence checklistEvery phase of diligence, organized the way deals close.
- The commercial loan closing timelineThe stages and what sets the pace.
- Setting up a data room for a loan closingThe folder skeleton and the first hour.
- Due diligence softwareThe request list, the owners and the dates in one place.