ATLANTA—When it comes to commercial real estate appraisals, the scope of work has to be defined for each appraisal report, and is more extensive for a commercial property than a residential property. So says Paulk Turner, director of J.H. Berry & Gilbert's appraisal and valuation services division.
In part one of this exclusive educational series, we discussed the benefits of the cost approach valuation. In part two, we explored the right model for income-producing properties. In part three we dived into the Income Approach. Now, we'll look at the concepts of scope and highest and best use.
“The scope includes the level of detail and research required for a particular job in order to produce credible results that are appropriate for the appraisal problem,” Turner tells Globest.com. He explains the parts that must be identified to determine the scope of an assignment include: the client and intended users; the intended use of the appraisal; the type and definition of value—such as market, foreclosure, investment—hypothetical conditions and extraordinary assumptions; the effective date of the appraisal; typical client expectations; and, typical appraisal work by peers for similar assignments. Turner says the more complex property will most likely have a more expansive scope of work than a smaller property.
“The most important factor to consider in a commercial appraisal is the Highest and Best Use of the property, and is the foundation on which value is based,” Turner says. The basic definition from The Appraisal of Real Estate – 14th Edition is, “the reasonably probable use that produces the most benefits and highest land value at any given time” (page 333).
However, Turner notes, the term “probable use” has often been substituted with “profitable use” over the past two decades, especially as it relates to appraisals for litigation purposes. As Turner explains it, the highest and best use analysis at its most basic level determines which physically possible and legally permissible use will provide the highest possible return on investment for a property.
“The potential uses are then narrowed to those which are financially feasible and economically supported for the property,” Turner says. “The appraiser then identifies which of these remaining uses would be the most maximally productive for the property. The highest and best use of the property as though vacant is considered, as if the property were unimproved with any existing buildings; as well as the highest and best Use of the property as it is improved, which considers the existing buildings.”
An existing improvement should be renovated or retained as long as it continues to contribute to the total value of the property, he says, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a higher intensity building use on the property. Therefore, the existing building or buildings is not always the highest and best use.
“It is important for property owners to understand that all appraisers are not equal, and as such, do not provide the same quality product,” Turner says. “Most appraisers are not qualified to appraise commercial property over a certain value because they do not hold a Certified General license, which is issued by individual states.”
This license, Turner notes, requires more experience, education, and training than other state-issued licenses. Many appraisers also hold other certifications and designations in addition to the state licenses.
Notable and respected certifications and designations, such as the MAI, cost considerable time and money to complete. The MAI issued by the Appraisal Institute is held by professionals who can provide a wide range of services relating to commercial, industrial, residential, and other types of properties, and is recognized as a mark of excellence in the field of real estate valuation and analysis. Turner says, “This level of expertise can be reflected in appraisal fees and therefore, lower fees may not provide the most reliable report as this may be indicative of a less-experienced professional.”
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