Whenever a new commercial appraisal assignment lands on my desk, the first thing I do is start formulating questions. I also make a quick call to the property contact where I introduce myself and ask for their email address to send over a list of questions/requests. Sometimes I'll ask for a rundown on the property, but when juggling multiple assignments, it is a lot easier to keep track of email correspondence about the property than jotting down handwritten notes during the call.
For an income-producing property, the information request is pretty straight forward:
Rent Roll, Lease Abstracts and/or Lease Agreements
Historical Operating Statements and a Budget or Proforma
Site Plan or Survey
Floor Plans, Stacking Plans or Construction Drawings
Summary of Capital Expenditures and Costs
Planned Capital Expenditures
Sale and/or Offering History the Past Three Years
Recent Property Condition Report
For owner-occupied properties, the request list is relatively similar, although there is likely no rent roll, historical operating statements, budget or proforma. But hopefully the property owner knows what they're paying in property insurance and have a record of any renovations or repairs made over time. Some of these requests are pretty straight forward, obviously, but how about we dive in a little deeper.
Rent Roll, Lease Abstracts and Lease Agreements
I'm specifically looking for a list of tenants/suite numbers, lease start/end dates, size of suite (or apartment w/# of beds/baths), and lease terms. When it comes to lease terms for apartment properties, I need to know what utilities the tenants pay. For office, retail, industrial or other commercial properties, I need to know if the leases are on triple net terms, modified gross or gross terms. Modified gross terms can really vary, not just by property type, but on a tenant-to-tenant basis. I've seen office buildings with some tenants on triple net terms, some of gross terms, and some on modified gross terms with the tenant paying utilities and increases to the base years on taxes and insurance, but not CAM. All of these factors impact potential cash flows of a property which is why clarity on these items is so critical.
Historical Operating Statements and a Budget
As long as I'm not valuing the going-concern of the business, I simply need income and expenses associated with the real estate. It usually is laid out in a table with multiple rows for each income and expense item. I will then restructure those items into specific categories. Here's a simplified version of what goes into a restructured operating statement.
Income
Potential Gross Rent (PGI) + Expense Reimbursements - Vacancy Rate/Collection Loss = Effective Gross Income (EGI)
Expenses*
Real Estate Taxes + Property Insurance + Utilities + CAM (Repairs/Maintenance) + Admin Costs + Management Fees + Reserves = Total Expenses
Net Operating Income (NOI)
EGI - Total Expenses = NOI
For some bank/mortgage related assignments, I've had borrowers refuse to provide this information. In situations like this, I will inform the client and let them give me direction on how to handle. Sometimes they will say apply market expenses, other times they may actually have the historical operating statements to share.
*Again, this is a simplified example of expense categories and there are usually multiple expenses that fall under one category. Expenses can also vary by property type. Apartment properties usually have an expense line item for costs associated with turning/cleaning a unit while self-storage properties have two line items for management - both on-site and off-site, for example.
Summary of Capital Expenditures
On an inspection, it is pretty clear where an owner or landlord has invested in a property. Perhaps there is fresh paint, updated common areas/bathrooms, new parking lot, etc. But sometimes there are things the appraiser cannot see, like the roof or mechanicals unit above a drop ceiling. That is why it is good to know how much has been spent improving the property over the last three-to-five years. Capital expenditures (capex) extend the economic life of a building and in turn, reduce a building's effective age.
Knowing how much has been spent on capex also plays an important part when adjusting the comparables in the sales comparison and income capitalization approaches. For example, a building originally constructed in 1980 with extensive renovations in 2022 may be more similar to a building constructed in 2000 or 2010 than an unrenovated building constructed in 1980.
Take a look at the office building below. The building was constructed in 1953, but completely renovated in 2015. This property had finishes commensurate with Class A office space and therefore, high-end, newer office buildings were determined to be appropriate comparables.
See additional photographs of this property here.
Sale History
Appraisers are required to follow the Uniform Standards of Professional Appraisal Practice (USPAP). Per Standards Rule 1-5, we need to confirm the following:
Was the property bought or sold in the past three years?
Is the property currently listed for sale or under-contract?
If it is not currently listed for sale, was it listed for sale at some point in the past three years?
If the answer to number one is yes, then I will request the purchase agreement, determine if it was an arm's-length transaction by talking to the buyer/seller and find out if any brokers worked on the deal. A quick call to the broker may yield some potential comparables. If the answer to number one is a no, then no action is required.
If the answer to number two is yes, then I will request a copy of the offering memorandum and/or offer to purchase. I will also call the listing broker and find out more about the property, i.e. how many offers were received, was there a lot of activity, etc. If the answer to number two is no, then no action is required.
If the answer to number three is yes, then I will request the historical offering memorandum and try to find out why the property was taken off the market. A call with the listing broker will be helpful here. I will try to get background on the property and possibly some comparables the broker used in determining an asking price.
Overall, getting this information tends to be pretty easy. I ask and they tell. But I've had situations where some brokers have gotten combative, "WHY DO YOU NEED THIS INFORMATION? NO APPRAISER HAS ASKED ME THIS BEFORE!" Well firstly, the appraiser should have asked these questions. But also, I get it, sometimes brokers have signed an NDA or confidentially agreement and cannot share information. Nonetheless, efforts should be made to confirm as much about the sale history or pending transactions, as possible. If the broker or other parties to the sale cannot share details, simply note that in your report.
Final Thoughts
There is almost always some nuance to the information required as part of an appraisal assignment, especially depending on the property being appraised. However, the basic information request listed earlier in this post is a good start when beginning to solve the appraisal problem. Just be ready to adapt, keep asking questions and make additional requests, if necessary.