Understanding Commercial Real Estate Appraisals

What is a Commercial Appraisal?

A commercial appraisal is a professional estimate of market value—what a property would most likely sell for under normal market conditions. It is an impartial evaluation based on property characteristics, comparable sales, and industry-accepted valuation methods.

Appraisals provide a realistic valuation that helps buyers, sellers, lenders, and investors make informed decisions, ensuring financial and legal transparency in real estate transactions.

How is Market Value Determined?

Appraisers use three primary approaches to establish a property's value:

1. Direct Comparison Approach (Sales Comparison)

   • Compares the subject property to recent sales of similar properties.

   • Adjustments are made for differences in size, condition, location, and features.

   • Most commonly used for owner-occupied properties, vacant land, and standard commercial buildings.

2. Income Approach

   • Used for income-generating properties such as office buildings, apartment complexes, and retail centers.

   • Determines value based on projected rental income, operating expenses, and capitalization rates.

   • Considers factors like lease structures, vacancy rates, and long-term investment potential.

3. Cost Approach

   • Estimates the cost of replacing the property with a similar one, accounting for depreciation and land value.

   • Useful for newer buildings, special-use properties, and properties with limited market comparables.

What Factors Are Considered in a Commercial Appraisal?

• Property Features & Condition – Size, layout, structure, and any renovations or upgrades.

• Land & Site Characteristics – Lot size, zoning, topography, and infrastructure access.

• Aesthetics & Environment – Landscaping, greenbelt access, curb appeal, and architectural design.

• Location & Market Trends – Demand, traffic patterns, surrounding properties, and economic conditions.

• Highest & Best Use – Determines whether the property is being used optimally for its location and zoning.

What is NOT Included in a Commercial Appraisal?

Certain items are not included in the appraised value because they are classified as movable chattels rather than part of the real estate:

• Portable storage (sea cans, shipping containers, movable sheds)

• Equipment or machinery not fixed to the building

These items may have value but are not considered part of the real property.

Appraisal Reports & Supporting Documents

Commercial appraisals follow the Appraisal Institute of Canada (AIC) standards and comply with Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP).
Depending on the purpose of the appraisal, additional documentation may be required:

• Comprehensive Appraisal Report – A full, detailed report used for financing, legal matters, or investment analysis.

• Letter of Update – A brief update to a previous appraisal when market conditions or property details have changed but a full reassessment is not required.

• Letter of Reliance – A formal document allowing a third party (e.g., a lender or investor) to rely on an existing appraisal report.

Why is a Commercial Appraisal Important?

An appraisal provides a credible, well-supported estimate of market value, ensuring that financial, legal, and investment decisions are based on objective market data rather than speculation. It is a critical tool for real estate transactions, financing, taxation, and dispute resolution.