HOW COMMERCIAL PROPERTY IS APPRAISED

APPRAISAL COMMERCIAL REAL ESTATE | JACKSONVILLE, FL

Sales Comparison or “Market” Approach

The Sales Comparison Approach for commercial property appraisals, also known as the “Market” approach, compares the subject property to recent sales of similar properties in the area surrounding the subject. This approach is based on the principle of substitution, meaning that a buyer would be willing to pay a similar price for the subject property as they would for a similar property in the same area. This approach is the most widely accepted and understood, and it reflects current market conditions. However, it is critically important that the data on the sales of comparable properties be accurate and that the commercial real estate appraiser has the knowledge and experience to be able to properly adjust for the differences in properties such as physical characteristics and conditions of sale.

Income Approach

The Income Approach is based on the establishing a properties market value by estimating the income that the commercial property generates or is projected to generate and applying a multiplier. This approach considers the gross income and expenses of a commercial property and applies a market derived capitalization rate or multiplier to determine the market value of the property. This CRE appraisal approach is particularly useful for income-producing commercial properties and provides insight to the investor into the potential return on investment. The Income Approach is more complex and time-intensive than the other approaches and also requires accurate financial data.

Cost Approach

The Cost Approach estimates the market value of the commercial real estate based on the cost of replacing it with a similar property. This approach calculates the value of the land and the cost of reconstructing a new building on the land, then subtracts any physical deterioration or functional obsolescence. This commercial appraisal approach is most useful for unique (special-purpose) properties and providing insight into the potential cost of property replacement. The Cost approach can also estimate when the property is nearing the end of its economic life, either through physical depreciation or changes in market conditions.