A Commercial Real Estate Appraisal is a valuation that is performed on real estate that generates income or has the capacity to generate income. The real estate appraisal process is the transformation of real estate market information into a credible estimate of market value.
A Commercial Real Estate Appraisal Report in Canada is completed under CUSPAP (Canadian Uniform Standards of Professional Appraisal Practice). The report must meet the high standards of CUSPAP and have the soundness, clarity, and effectiveness expected to produce a credible result.
A good appraisal report must have the following characteristics:
- The Appraisal Report must consider all pertinent data. An appraiser who has developed a systematic method of writing appraisals seldom overlooks pertinent data. The skimpy report that leaves out important information is as bad as the verbose report containing detailed statistics and a confusing mass of unrefined data. Excess brevity is often the result of reluctance of the appraiser to write a narrative report. Excess verbiage may be due to a misunderstanding of the function of a report.
- The Appraisal Report must relate the information set forth in it to the estimate of value. An appraisal that does not clearly tie in the value stated with the data on which it is presumably based is useless. A client who, in reading an appraisal report, has to ask “How did he arrive at this figure?” will not be satisfied with the estimate of value. Time-consuming explanations over the telephone or through correspondence will be necessary, and adjustments in valuation may have to be made.
- The report must be intelligible to the client, whether he is a layman or a professional. This can be accomplished by following a few simple rules with respect to the order of presentation and the mechanics of writing the report. An appraisal report that meets these requisites will be acceptable and will carry weight not only with the client, but in the case of a dispute, with assessors, right-of-way agents, and even opposing counsel in pre-trial hearings.
In order to arrive at a reasonable estimate of value, the appraiser must consider the particular appraisal problem, set forth the pertinent facts, state the assumptions and conditions underlying the estimate of value, analyze the supporting data, and arrive at a reasonable conclusion of value. The written appraisal report is a step-by-step presentation of these elements of valuation. Even if a written report is not required, the appraiser must follow these steps in order to make a proper appraisal.
Details of presentation may vary with the appraiser’s personal style and taste and with the client’s requirements, but the fundamental contents of the report are always the same.
Every appraisal must communicate the following information if it is to be effective:
- Purpose of the appraisal.
- Kind of value estimated, with a definition of such value.
- Date as of which the valuation is made.
- Description of the physical property and of the bundle of rights being appraised.
- Socio-economic factors that now have or may be expected to have an effect on the value of the property.
- Underlying assumptions and conditions.
- Approaches to value applied, with arithmetical computations for each value estimate.
- Correlation and reconciliation of these estimates interpretation of the data.
- Final estimate of value.
- Supporting descriptive and statistical data.