FAQ

Commercial Appraisals

• What is an appraisal?

  As defined by the Appraisal Institute of Canada:

  An appraisal is an estimate of value. It can be provided orally but it is usually a written statement of market value, or value for loan purposes, or value as described by the appraiser of an adequately described property on a specific date and supported by the presentation and analysis of relevant data.

• How is commercial property appraised?

  The three approaches recognized in the current Canadian Standards of Professional Appraisal Practice are Cost, Income and Direct Comparison. 

  Cost Approach

  The Principle of Substitution is the basis for this method of valuation. Use of the Cost Approach is typically confined to proposed improvements as a test of feasibility, or for special purpose properties. 

  Value is determined in the Cost Approach using the following steps:

  • Estimate the value of the land as if vacant.
  • Estimate the Reproduction Cost New (RCN) of the structure(s) and the ancillary improvements.
  • Estimate the depreciation affecting the structure(s) and other improvements.
  • Deduct this total depreciation from the RCN.
  • Add the land value obtained in step “1” to the depreciated value of all improvements obtained in step “4.”

  “Cost” and “Value,” although related, are not synonymous: “Cost” is the amount of money necessary to erect the structure. “Value” is the market worth of the building once erected. In a situation where labour and material become scarce for a period of time, the cost of the building may be higher than its value a year later when labour and materials are more plentiful.

  A cost approach requires the estimation of accrued depreciation from all sources which is critical in the analysis. With existing improvements, determining what the accrued depreciation is can be subjective and difficult to accurately measure; as a result, the cost approach does not tend to produce a reliable market value indicator. 

  Income Approach

  This approach involves analysing the income produced by a property to determine its relative worth in a given market. It is typically utilized when valuing an improved income producing property or the underlying land value of a proposed development.

  For an improved, income-producing property, value is determined in the Income Capitalization Approach using the following steps:

  • Estimate the annual potential gross income (PGI), which represents the maximum revenue that the property can generate in one year given 100% occupancy and any other ancillary income from other sources such as coin-operated machines, parking, etc.
  • Determine a vacancy and collection loss and deduct that amount from the PGI to arrive at the effective gross income (EGI).
  • Estimate and deduct the annual operating and maintenance expenses from the EGI to determine the net operating income (NOI).
  • The NOI is converted to value through either the Income Rate method or the Discount Rate method. The methodology applied is dependent upon existing or anticipated earnings. Choosing the appropriate rate or rates will convert the income into a capital value of the property.

  There are three (3) income-based methods when valuing land, as detailed below:

  In the Ground Rent Capitalization Method, ground rent is the amount paid for the right to use and occupy the land according to the terms of the ground lease.  Ground rents can be capitalized at an appropriate rate to form an indicator of value. An alternative method involves discounting the anticipated rental income received over the holding period and the reversion (lump sum benefit) received on the termination of the investment.

  The Land Residual Method is based on the concept that the value of a property with development potential is derived from the value of the property after development minus the cost of undertaking that development, including a profit for the developer. The Land Residual Method is complicated by the fact that development takes time, while the valuation is at a single time point. Because of this, the remaining cash flows after the deduction for development costs and profit must be discounted for time.

  The Subdivision Development Method allows the appraiser to take into account the costs and revenues associated with undertaking a complex subdivision. Furthermore, this analysis takes into account the time period over which development will take place, as well as how long it will take for the marketplace to absorb the finished product. Finally, factors such as construction financing and developer’s profit are also taken into account.

  Direct Comparison Approach

  This approach involves the comparison of properties similar to the subject to arrive at a value. The process requires a study of similar properties that have recently been sold or offered for sale, analysing the differences and making quantitative or qualitative adjustments to the comparable properties for differences found to exist in each in order to provide a correlation of values between the comparable properties and the subject. 

  This approach is appropriate when a number of similar properties have sold or are currently offered for sale. However, when applying this approach, knowing the nuances within each comparable relative to those within the subject is critical to the adjustment process. If they are not known, then this approach is deemed simplistic in the valuation of complex investment-grade real estate. The Direct Comparison Approach requires a significant amount of subjectivity by the appraiser, so accurate information is important. 

  Value is determined in the Direct Comparison Approach using the following steps:

  • Locate comparable properties that have sold or are currently being marketed.
  • Compile all relevant data about each comparable and check for accuracy.
  • Analyse and verify all differences regarding the property and conditions of sale as compared to the subject.
  • Make direct comparisons between the subject and the comparable and adjust for differences affecting the value.
  • Reconcile all of the data to arrive at a value for the subject property.

  The Direct Comparison Approach is most appropriate when valuing improved, owner-occupied properties and vacant land.

• What is market value and how is it determined?

  As defined by the Canadian Uniform Standard of Professional Appraisal Practice (CUSPAP):

  The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: the buyer and seller are typically motivated; both parties are well informed or well advised and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

  Appraisers estimate market value by measuring the impact of market forces. Appraisers do not determine value in a commercial appraisal; the market determines the value. In estimating market value, the appraiser must consider many principles including supply and demand forces, competition, law of substitution, opportunity cost, conformity, highest and best use and marginal productivity among others. The appraiser will use the Direct Comparison Approach to value which looks at the differences in the legal, physical, locational and economic characteristics of comparable sales and listings, and more closely on differences in the property rights, the sale dates, the motivation of the parties and the financing involved.

• Why would I require an appraisal?

  Buying or selling real property can be one of the largest financial decisions you will make in your life. Commercial appraisals offer an unbiased, informed opinion of the market value of the property you are interested in purchasing or selling. Appraisal services may be needed:

  • To ensure that the purchaser does not pay more for a property than it is worth.
  • To obtain a qualified opinion of value for mortgage or lending purposes.
  • To provide investors with adequate information upon which to base investment decisions.
  • To determine the correct selling price when selling a home.

• How long is a commercial real estate appraisal good for?

  Commercial property appraisals may not have expiration dates; however, lenders tend to reject appraisals that are more than 120 to 365 days old. For residential properties, the expiration date may be within 60 to 90 days. It’s also possible to extend an appraisal with the proper documents. Lenders call the time in which they accept appraisals the “term of validity.”

• How long do commercial appraisals take?

  Timelines for commercial appraisals depend on the physical characteristics of the subject property as well as the current market for appraisals within your community. Some properties are complex with multiple components or unique physical characteristics, which sometimes requires extended timelines to collect the appropriate data needed to estimate market value. These more complex appraisals can sometime take three to four weeks to complete and sometimes even longer. On the other hand, some properties are more simplistic, requiring only a short turnaround time of one to two weeks. Depending on how active the market for appraisals is at the time of a commercial appraisal request, these estimated timeframes can be even longer due to high volume of work within each office.

• How accurate are commercial real estate appraisals?

  In a recent study, the accuracy of commercial real estate appraisals was analysed using data from commercial properties sold out of the NCREIF National Property Index during the last 25 years in the USA. On average, appraisals are more than 10% above, or below, subsequent sales prices, and this result holds true for both external and internal appraisals. It was also found that appraisals appear to lag the true sales prices, falling below in hot markets and remaining above in cold markets. The largest deviations were observed during the two peaks and two valleys of the past two cycles in the commercial real estate market. Not surprisingly, the worst performance occurred during the recent financial crisis.

• What is the BC Assessment appeal process?

  Property assessments in British Columbia are the basis for property taxation. Ensuring your commercial property is accurately and fairly assessed is a professional service we offer. Our staff have the expertise and relationships with BC Assessment staff to review and negotiate changes to assessments, where over-assessment is indicated, in a cost effective and timely fashion.

  Contact our office before the January 31st appeal deadline to preserve your right of appeal.

  We take a multi-stage approach for property assessment consulting to limit costs to property owners, as follows:

  Step 1 – Initial review of the assessment to determine if the property inventory, Actual Value, and Classification are correct, and if the property is assessed fairly (equitably) with similar properties in the neighbourhood. This usually involves one to three hours of consulting time and a modest fee. If the assessment appears reasonable or the degree of over assessment is minor, we will likely recommend no further action. Keep in mind that the property’s Actual Value may be overstated if the inventory is inaccurate; e.g., BCA is using a higher than actual building rentable area. If the property’s Actual Value is improperly allocated among the Property Classes for a mixed-use property, you may have an excessive property tax burden.

  Step 2 – Assuming your property is significantly over-assessed or improperly classified, we will recommend a best approach to achieving a positive outcome, including potential costs versus tax savings and our forecast of the probability of success. If you agree with our approach, we’ll begin negotiations with the local Assessor (as your agent) and file an appeal, if necessary. Some assessment issues can be resolved quickly during the initial review period, which is January 1 to January 31st of each year.

  Step 3 – If we unable to resolve the assessment issues with the Assessor during the review period, we will provide you with the option to continue the appeal to the Property Assessment Appeal Board, or PAAB. Appeals to PAAB for more complex commercial properties are common since the initial level of appeal, the Property Assessment Review Panel, typically has insufficient time and expertise to deal with commercial property valuation and classification issues. The PAAB is a judicial tribunal with broad powers, somewhat similar to the Courts. The PAAB hears appeals based on rules of evidence and strongly encourages the parties to resolve the issues through informal mediation processes to avoid the costs of in-person hearings. During this stage the property owner may be subject to orders for financial and other property information. Our goal is to manage these requests on your behalf and minimize the disclosure of confidential business information. 

  During each stage in the process, our goal is to keep you informed and manage the risk of achieving a successful outcome. In our experience the best approach is to maintain a respectful relationship with BC Assessment staff but ensure the Assessor continues to give your file the highest priority for issue resolution in the shortest time frame possible.

  Should you wish to engage us in the initial Step 1, please call our office at 250.388.6242 we will put you in contact with an expert in your specific property type.

• Why do BC Assessment values differ so much from the actual Appraised Values?

  Assessed Value refers to the value for tax roll purposes. Both the Assessed Value and the Appraised Value are based on Market Value in BC. The BCA value is the market value estimated as of July 1st of the previous year, and a current market appraisal is based on the current date. An Assessment is often appraised on a bulk basis, lumping many similar homes in the same neighbourhood together. The Assessor may also not be aware of any updates or renovations that a home may have, whereas an appraisal would take both those into account.

• Who owns the appraisal? Who is the appraisal client?

  The appraiser performs a commercial appraisal for his/her client, and the client is any party for whom the appraiser performs a service. This is usually the person who engages the appraiser to complete the assignment and may or may not be the person who actually pays for the appraisal. Often the lender/broker will order the appraisal from the appraiser, but the fee is paid by the property owner; in this case the lender/broker is the client. Appraisers work on a confidential basis with their clients (known as client-appraiser relationship), in the same fashion as other professionals such as lawyers and accountants.

• What is Economic Life and how is Remaining Economic Life calculated?

  Economic Life is the total period of time in which the improvements (house/buildings) contribute to the overall property value. The total Economic Life of a typical BC home is generally 65 years. Economic Life and physical life can differ widely; physical life usually exceeds Economic Life. Renovations and updates can increase a property’s physical and Economic Life while poor maintenance can shorten it. Increases in land value can also have a negative impact on remaining Economic Life as older homes are torn down to make way for new ones, it makes less “economic” sense to keep the older one standing.

  Remaining Economic Life (REL) is the estimated time period in which the improvements continue to contribute to property value. An appraiser estimates REL in part by interpreting the economic conditions, attitudes and reactions of buyers in the market.

  The Remaining Economic Life is calculated by subtracting the Effective Age from the Total Economic Life.

  Economic Life – Effective Age = Remaining Economic Life

  For example:

  A 40-year-old home that has had substantial renovations may have an effective age of 30 years.

  65 years – 30 years = 35 years Remaining Economic Life (REL)

Residential Appraisals

• What is an appraisal?

  As defined by the Appraisal Institute of Canada:

  An appraisal is an estimate of value. It can be provided orally but it is usually a written statement of market value, or value for loan purposes, or value as described by the appraiser of an adequately described property on a specific date and supported by the presentation and analysis of relevant data.

• Why would I require a house appraisal?

  Buying or selling real property can be one of the largest financial decisions you will make in your life. Appraisals offer an unbiased, informed opinion of the market value of the property you are interested in purchasing or selling. Appraisal services may be needed:

  • To ensure that the purchaser does not pay more for a property than it is worth.
  • To obtain a qualified opinion of value for mortgage or lending purposes.
  • To provide investors with adequate information upon which to base investment decisions.
  • To determine the correct selling price when selling a home.

• What hurts a home appraisal?

  A residential home appraisal conducted by D.R. Coell and Associates is an objective opinion of the market value of your property. A higher or lower value is neither inherently good or bad. There are many different circumstances in which an appraisal would be required, and various situations in which a higher or lower valuable is more desirable to the end user. Residential properties are valued by comparable property sales, adjusted based on influential factors. Factors that may increase or decrease a property’s value include views, location (busy street, corner lot, etc.), and/or proximity to amenities, schools, parks or the ocean.

• How much does a house appraisal cost in BC?

  Our professional fee is based on the scope of the appraisal as well as the nuances of each specific property. In order to meet your requirements, our team will prepare a personalized, no-obligation quote.

• Who owns the appraisal? Who is the appraisal client?

  The appraiser performs anappraisal for his/her client, and the client is any party for whom the appraiser performs a service. This is usually the person who engages the appraiser to complete the assignment and may or may not be the person who actually pays for the appraisal. Often the lender/broker will order the appraisal from the appraiser, but the fee is paid by the homeowner; in this case the lender/broker is the client. Appraisers work on a confidential basis with their clients (known as client-appraiser relationship), in the same fashion as other professionals such as lawyers and accountants.

Depreciation Reports

• Who is qualified to prepare a Depreciation Report?

  The Strata Property Act requires depreciation reports to be conducted by a “qualified person.” This leaves the required qualifications up for interpretation. What is most important is that the writer has a strong understanding of the corporation’s bylaws, agreements with owners pertaining to the repair and maintenance of common property, limited common property and strata lots.

  Depreciation reports prepared by D.R. Coell & Associates will exceed requirements under the Strata Property Act, as well as be prepared in accordance with guidelines set out under the Real Estate Institute of Canada, which is known for having the most advanced Reserve Fund Planning (Depreciation Report) system in Canada. Engaging D.R. Coell & Associates to prepare your report will guarantee your report has been prepared by a qualified professional.

• Who is exempt from needing a Depreciation Report?

  British Columbia’s Strata Property Act requires that all Stratas with more than five strata lots obtain a Depreciation Report every three years. Stratas may waive the requirement or defer the report by passing an annual ¾ vote. 

  While stratas and other organizations may be exempt from needing a Depreciation Report, or waive the requirement, it is worthwhile to have them done. Depreciation Reports are a comprehensive financial document that adds tangible value to strata corporations as well as to various other organizations.

• How much does a Depreciation Report cost?

  The fee for service is based on the size of your complex, the type of construction, the number of common elements, along with other nuances of different developments and/or stratas. Our team is happy to prepare a no-obligation, customized quote to meet your specific requirements. As mandated under the Strata Property Act, a new report is required every three years. This report would be considered an “update” and is typically available at a reduced fee.

• How often should a Depreciation Report be conducted?

  Depreciation Reports are required for stratas with more than five lots, every three years. While stratas may choose to waive the requirement, it is worthwhile to have Depreciation Reports completed regularly. Since a Depreciation Report is a detailed financial tool, obtaining regular, timely reports adds overall value to your complex.

Insurance Appraisal

• How much does an Insurance Appraisal cost?

  Our fees are based on the specific scope of each assignment. As such, discussions with one of our experts will provide the most accurate quote. Obtaining regular, timely insurance updates is important to ensure that your property is adequately, but not over-insured. As such, we offer annual update letters at a reduced fee for four years after the original report has been conducted.

• How often should a strata have an insurance appraisal done?

  Insurance appraisals should be conducted regularly to ensure that your property is neither over nor underinsured. Obtaining an up-to-date replacement cost estimate is sound property management. To facilitate this, D.R. Coell offers annual update letters at a discounted rate for four years after the original report has been produced. After the four-year lifespan of the report, a new report is recommended.

• Why is it important to have an up-to-date insurance appraisal?

  Maintaining an up-to-date replacement cost of your property ensures you are neither over nor underinsured. Our appraisers are experts in building costs. Cost data changes rapidly, and obtaining regular insurance appraisals provides peace of mind that your property is accurately insured.

• What is the purpose of an insurance appraisal?

  Insurance appraisals are comprehensive reports that provide a detailed narrative of your property’s components and an accurate estimate of the replacement cost of your property in the event of a disaster or loss. Insurance appraisals offer protection to clients in two important ways: by ensuring adequate coverage is provided in case of a loss and by ensuring premiums are not overpaid.