Commercial Real Estate | The Appraisal Process
REAL PROPERTY CONSULTING
Real property appraisal consulting assignments encompass a wide variety of problems to be solved. In developing a real property appraisal consulting assignment, an appraiser must identify the problem to be solved, the scope of the work necessary to solve the problem, and correctly complete the research and analysis necessary to produce credible results.
The appraiser must be aware of and correctly understand and employ those recognized methods and techniques that are necessary to produce credible results. The appraiser must also not commit a substantial error of omission or commission that significantly affects the results of the appraisal consulting assignment.
COMMERCIAL PROPERTIES
Grain Elevators: Grain elevators have various classifications. They can be country elevators, on or off rail, terminal grain elevators, and export grain elevators. Each of these has unique characteristics, but all three approaches to value are applicable.
Fertilizer Plants: Fertilizer plants may be combined with an existing grain elevator or they may be a standalone retail fertilizer facility. Wholesale fertilizer plants are also a unique property. All three approaches to value are applicable to these properties.
Soybean Processors: Soybean processing facilities include a grain elevator facility with extensive amounts of machinery and equipment to produce soybean meal and oil. The analysis of this type of property requires knowledge of the crushing process as well as experience in the valuation of machinery and equipment. All three approaches to value are applicable.
Flour Mills: Flour mills are specialty processing facilities, including a grain elevator facility with extensive amounts of machinery and equipment to produce flour. The analysis of this type of property requires knowledge of the milling process as well as experience in the valuation of machinery and equipment. All three approaches to value are applicable.
The three generally accepted valuation procedures used to value real estate are the Cost Approach, the Income Capitalization Approach, and the Sales Comparison Approach.
The Cost Approach to value involves two procedures:
- Estimating land value.
- Estimating the depreciated value of any improvements on the property.
Land is valued as though vacant and representing its highest and best use. The value of the improvements is estimated by deducting depreciation from all sources from the reproduction or replacement cost of the improvements. The sum of the vacant land value and the depreciated value of any improvements is the total value estimate from the Cost Approach.
This approach is based on the principle of substitution, which affirms that a prudent buyer would pay no more for a property than the cost to acquire the site and construct improvements of equal utility.
The Income Capitalization Approach is an appraisal technique employed to provide an estimate of value based on the relationship between income and value. The principle of anticipation is fundamental to this approach.
Value is created by the expectation of future benefits, i.e. income. The appraiser uses information from an income-producing property, or a property capable of producing income, and then capitalizes the estimated income into a value indication.
The Sales Comparison Approach is a method of estimating market value by comparing the subject property to other similar properties that have recently sold. It is based on the premise that an informed buyer would pay no more for a property than the cost of acquiring another property with the same utility.
The actual procedure involves analyzing and making comparisons between individual comparable sales to extract differences in prices paid for the different factors affecting value. The sales are then compared to the subject property for these same factors. This approach to value reflects the actual market supply and demand for properties in the area of the subject property.