Help clients understand the
value of commercial appraisals
An appraisal is often a required — and misunderstood — step in buying or selling commercial real estate. But
an appraisal is useful from many perspectives. It allows an investor to obtain an independent market value to
help establish a fair purchase price, while providing mortgage underwriters and insurers with a tool to ensure
accurate loan amounts and to estimate replacement costs.
Heather Olson is an assistant vice president at Walker & Dunlop — the nation’s top originator in 2017 of multi-
family loans through Fannie Mae’s Delegated Underwriting and Servicing platform. She spoke with Scotsman
Guide about commercial real estate appraisals and their importance in multifamily-property transactions.
Why should a commercial mortgage broker or borrower complete an appraisal, and what is the value
for a lender?
For every transaction that we lend on, we require an appraisal. We do not recommend that the borrower or the
broker engages [an appraisal company]. … That is a requirement from Fannie [Mae], Freddie [Mac] and all lenders
that we engage for the appraisal.
It is standard practice for the lender to require an appraisal as part of the underwriting of the property. An
appraisal establishes the value of the property, as well as the income and expenses the property is expected
to generate, based on the [borrower’s] operating history, developer’s budget and market comparisons. The appraisal should always be ordered by the lender to avoid any influence on value by the borrower.
Do mortgage brokers or borrowers have any common misconceptions about appraisals?
How brokers value property and how appraisers value property can be significantly different. When brokers
issue their BOV (broker’s opinion of value), they will look to potential future income that could be generated
at the property, from increased rents, renovations, etc. However, that is only a piece of the full picture that an
appraiser evaluates. An appraiser considers the operating history, current operations market data and the borrower’s year-one budget to establish the income, expenses and NOI (net operating income) of the property, as
well as the market cap rate and appraised value.
How real estate taxes are evaluated is a common oversight when a borrower is establishing their operating pro
forma and estimating the value of the property. Every state and county or city assess their properties differently.
Some counties reassess property value every four years; some only reassess at the time of a sale. This can greatly
affect the amount of property taxes that will be due on a property, which affects not only the value of the prop-
erty, but also the expected cash flow that the property will generate.
The appraisal will outline how the property’s value and taxes are assessed, and provide a guideline to what the
real estate taxes are expected to be going forward. It is also good practice to know the real estate tax abate-
ments, if any, [that] are available for the property, which we commonly see in affordable housing.
Capitalization rates can affect appraised values, so which U. S. markets are growing areas for multifamily
Cap rates [calculated by dividing a property’s net operating income by its current market value] have continued
to compress in the last few years. The bigger markets of New York City, Miami and Los Angeles typically have
cap rates that range [from] 4 percent to low 5 percent, with Atlanta trading in the mid-5s. Bigger submarkets are
in the high 5s to mid- 6 percent range.
Urban markets continue to grow for the multifamily industry, with millennials as well as baby boomers looking
for cities where they have easy, walkable access to restaurants, retail and green space. Additionally, B and C
class multifamily [properties] will continue to grow in secondary markets like Pittsburgh, Salt Lake City and Fort
Lauderdale [Florida]. I see a decline in the Class A-plus market in urban areas. I think rents have been maxed out
in this market, and the Class B product is offering competitive amenities at lower rents that millennials and baby
boomers can more readily afford.
Is there anything else brokers should know about appraisals when dealing with certain lenders?
Our [company’s] appraisals are all required to be completed by an appraiser with an MAI (Member of Appraisal
Institute) membership designation. Appraisers with an MAI designation have the necessary commercial-proper-
ty valuation experience and knowledge to conclude a valuation that gives lenders confidence. n
Neil Pierson is editor of Scotsman Guide Commercial Edition.
Reach him at (800) 297-6061 or firstname.lastname@example.org.
Heather Olson is an assistant vice
president at Walker & Dunlop in Atlanta.
She is responsible for multifamily-loan
originations throughout the Southeast
and specializes in affordable housing.
She has assisted with the origination,
underwriting and funding of more
than $800 million in affordable- and
market-rate housing transactions
involving Fannie Mae, Freddie Mac and
the U.S. Department of Housing and
Urban Development (HUD). She earned
the designation of Certified Commercial Investment Member (CCIM) in
2014. Reach Olson at (678) 256-1428 or
Assistant vice president, Walker & Dunlop
By Neil Pierson