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Appraisal methods for commercial real estate

Commercial real estate disputes often require one or more determinations of the value of the land at issue. While each appraiser in the Philadelphia area has his or her own unique methods, appraisal methods in general are governed by the rules and ethical standards promulgated by the American Society of Appraisers. At the heart of the appraisal discipline lie three so-called "approaches to value."

The first such approach is called the "Sales Comparison Approach to Value." In using this approach, the appraisers use public records to select recent sales of properties that are similar in size and use to the parcel to be valued, the "subject property." The appraiser then makes various adjustments to reflect differences in use, size, and other factors between the "subject property" and the various comparable properties. The appraiser then selects a value that, in his or her judgment, best reflects the fair market value of the subject property.

The "Cost Approach To Value" is a careful estimation of the cost in labor and materials required to construct a similar property. This method is rarely used for properties more than a few years old.

The final approach to value is the "Income Approach to Value." In using this approach, the appraiser estimates the amount of income likely to be generated by the property and then uses the proper formula to determine the "present value" of the income stream. This technique can be used with properties such as apartment houses and commercial rental properties, but it has limited utility for industrial properties that do not have an easily established income stream.

In any real estate litigation involving the value of the property, each side is likely to produce one or more qualified appraisers to testify concerning market value. Presenting appraisal testimony and cross-examining the opposition's appraiser require an attorney experienced in real estate litigation who understands appraisers' methods.

Source: American Society of Appraisers, "Approaches to Value," accessed on March 7, 2015

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