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A Checklist for Industrial and Commercial Appraisals
By John L. Gadd
Originally published in the American Bar Association Journal, Vol. 69
Lawyers encounter numerous situations when they need to have commercial or industry property appraised for their clients. Appraisals become necessary in transfers of property, bankruptcies, a divorces and tax matters, to name a few.
It is important for lawyers to understand the differing valuation procedures that are employed, because not all appraisals are the same. An approach that would be correct for valuing vacant land zoned for a shopping center will not work for a high-volume cement plant. Valuations skills go beyond just an understanding of real estate. A broad knowledge of modern plant operations, modern manufacturing process flow and modern plant design is required. An understanding of industrial engineering is a must.
In the case of commercial properties, knowledge of modern store layout as well as parking and shipping requirements is needed. The availability of good marketing studies, such as neighborhood resident profiles, census reports, a review of local competition and resident income characteristics, provides data necessary to the formulation of a proper appraisal value.
The availability of important amenities also is a contributing factor in the valuation process and must be considered in valuing any industrial or commercial property. These amenities include: (1) Land available for development; (2) close proximity to markets; (3) good highways and other transportation services; (4) availability of labor, both skilled and semi-skilled, and good labor relations: (5) adequate water and utility services; (6) proximity to suppliers and law materials, or both; (7) police and fire protection; and (8) community amenities and personal considerations.
When, what and why
Certain basic questions arise in considering industrial and commercial appraising, such as when are appraisals necessary, what constitutes a professional appraisal and why is an appraisal so important? To understand the valuation process, one must be familiar with basic valuation techniques, definitions or values used by appraisers and special purpose properties.
Appraisals are required for a purchase, a sale, financing, insurance, a condemnation, merger and acquisitions, ad valorem tax, a sale of entire businesses or equity interests in those businesses, certain federal tax benefits, estate planning, inflation cost accounting, asset control record systems and for a variety of special needs when the appraiser is asked to determine economic feasibility.
The basic requirements for a professional appraisal vary little with the discipline or field of specialty. All appraisals, however, are based on four basic valuation principles; supply and demand; highest and best use; substitution; and contribution. Factors that create value include: desire, utility, scarcity and effective purchasing power.
The basic segments of a professional real estate appraisal include: letter of transmittal; a complete legal description of the land; purpose of the appraisal, date of value and rights to be appraised; highest and best use of the land and building; zoning and tax history; definition of value used; site and neighborhood data; building description; valuation of land with supporting comparable land sales; cost, income and market data approaches to value; supporting comparable sales data and correlation of values; and a report addendum consisting of photographs, plat plan, area map, limiting conditions, qualifications of appraiser and other exhibits as necessary.
Included above are many “mini-studies” that the appraiser must research, including local labor relations, the supply of labor, proximity to raw materials and markets, zoning and tax climate, constructions costs, proximity to population centers, availability of utilities and knowledge of market demand. Industrial properties also are regulated by the Occupational Safety and Health Administration and local building codes.
Machinery and equipment
The appraisal of industrial and commercial properties often requires the assistance of other appraisal specialties such as machinery and equipments business enterprise, necessitating a team effort of real estate, machinery and business appraisers. These special disciplines all have a great influence on the total value; their appraisal reports generally include additional data and an examination of new factors.
In the valuation of machinery and equipment, the professional appraisal should include: letter of transmittal; purpose of the appraisal, date of value and rights to be appraised; highest and best use; description of the asset; cost and market data approaches to value; correlation of values; and report addenda, including plat plans, limiting conditions and qualifications of appraiser.
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417 W Roosevelt Rd Ste 200
Wheaton, IL 60187
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