How a commercial appraisal actually works
The lender lends against the appraised value, so it is worth understanding how that number gets built.
The short answer
A commercial appraisal is the lender's independent view of what the property is worth, and the loan is sized against that number rather than against the price you agreed. On income producing property the income approach usually drives the result, which means the appraisal is often really a view on your rents and expenses.
| Approach | How it works | When it drives the number |
|---|---|---|
| Income approach | Capitalises the net operating income the property produces | Almost always, on any property held for income |
| Direct comparison | Prices the property against recent sales of similar assets | Common on smaller assets, strata units and land |
| Cost approach | Land value plus the depreciated cost of the building | Rare, and mostly on special purpose property with few comparables |
Who orders it, who pays for it, and who it belongs to
The lender orders the appraisal from its own approved panel, which means the appraiser is working for the lender. You pay for it. The report is addressed to the lender. All three facts sit together for one reason: the lender needs a valuation that nobody with an interest in the outcome influenced.
That is why an appraisal you commissioned yourself is usually not accepted, however good it is. It was prepared for you, on your instructions, for your purpose. It is also why moving a report from one lender to another needs a reliance letter from the appraiser addressed to the new lender, and why the new lender can still decline it if the appraiser is not on its panel.
What an AACI designation is and why lenders require one
AACI stands for Accredited Appraiser Canadian Institute, the designation awarded by the Appraisal Institute of Canada for appraisers qualified on all types of real property. Most commercial lenders require the report supporting a mortgage to be signed by an AACI designated appraiser.
The practical effect is that the pool of people who can produce a report your lender will accept is smaller than the pool of people who can value a building. On complex or unusual assets that pool narrows further, which is one of the reasons those files take longer to get a report on.
What drives the cost and the timeline
Complexity first. A single tenant building with a clean lease is a simpler assignment than a multi tenant property where every lease has to be read, abstracted and tested against market. Property type matters too, and so does whether there are comparable sales to work from at all.
Then condition and status. A property under construction is valued on what it will be as well as what it is. A partly vacant building requires a view on lease up. Both add work. Development land and special purpose property cost more and take longer than stabilized income property, sometimes considerably.
We do not publish a price or a turnaround, because both move with the assignment and with how busy the panel is. What we will do is get you a quote and a date from the lender's panel before you commit to a timeline you cannot meet. The whole document list, including the reports, is on the deal submission checklist.
Why the number comes in different from yours
Four causes account for most of the gap. The appraiser applies a higher capitalisation rate than the buyer used, which lowers the value of the same income. The appraiser uses actual contracted rent where the buyer modelled market rent. The appraiser includes expenses the buyer did not model, such as management, structural reserves and vacancy allowance. And the appraiser can see deferred capital the buyer discounted.
Test your own number before the lender's arrives. The cap rate calculator shows how sharply value moves with the capitalisation rate you choose. If the report has already landed under the price, what to do when the appraisal comes in low covers reconsideration of value and the ways those deals still close.
Appraisal questions.
Want a read on value before you order a report?
Send the rent roll and the operating statement. We will tell you where we think an appraiser lands and what would move it.