Commercial Appraisal Definitions

Appraisal 

The act or process of developing an opinion of value; an opinion of value. It must be expressed as a specific amount, as a range of numbers, or as a relationship. 

Arm’s-length transaction 

A transaction between unrelated parties who are each acting in his or her own best interest. 

As is market value 

The estimate of the market value of real property in its current physical condition, use, and zoning as of the appraisal date. 

Assessed value 

The value of a property according to the tax rolls. 

Asset 

Any item, the rights to which may have economic value, including financial assets (cash or bonds), business interests, intangible assets (copyrights and trademarks), and physical assets (real estate and personal property). 

Assignment 

1. An agreement between an appraiser and a client to provide a valuation service.
2. The valuation service that is provided as a consequence of such an agreement. 

Capitalization 

The conversion of income into value. 

Certificate of occupancy 

A formal written acknowledgment by an appropriate unit of local government that a new construction or renovation project is at the stage where it meets applicable health and safety codes and is ready for commercial or residential occupancy. 

Commercial property 

Income-producing property such as office buildings, retail buildings, retail buildings, hotels, banks, restaurants, service outlets, and owner-occupied properties that are capable of becoming income-producing should the owner so decide; usually zoned for business purposes. 

Consideration 

The recorded price for which title to a property is transferred. 

Construction cost 

The cost to build, particularly an improvement; includes the direct costs of labor and materials plus the contractor’s indirect costs. 

Contract rent 

The actual rent specified in a lease. 

Contributory value 

Reflects the amount a property or component of a property contributes to the value of another asset or to the property as a whole. 

Cost approach 

A value indication is derived for the fee simple estate by estimating the current cost to construct a replacement for the existing structure, including an entrepreneurial profit; deducting depreciation from the total cost; and adding the estimated land value. 

Direct capitalization 

A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. 

Discounted cash flow (DCF) analysis 

The procedure in which a discount rate is applied to a set of projected income streams and a reversion. 

Discount rate 

Rate of return on capital used to convert future payments into present value. 

Easement 

The right to use another’s land for a stated purpose. 

Economic life 

The period over which improvements such as buildings and site improvements contribute to property value. 

Economic unit 

A portion of a larger (parent) parcel, vacant or improved, that can be described and valued as a separate and independent parcel. 

Effective age 

The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age. 

Effective date 

1. The date on which the appraisal applies. 
2. In a lease document, the date upon which the lease goes into effect. 

Effective rent 

The total base rent stipulated in a lease minus rent concessions.

Encumbrance 

Any claim of liability that affects or limits the title to property. An encumbrance cannot prevent the transfer but it does remain after the transfer. 

Entrepreneurial profit 

The amount an entrepreneur receives for his or her contribution to a project and risk. The entrepreneur’s compensation for the risk and expertise associated with development. 

Estate 

A right or interest in property. 

Excess land 

Land that is not needed to serve or support the existing use. The highest and best use of the excess land may or may not be the same as the parcel. Excess land has the potential to be sold separately and is valued separately. 

Exposure time 

The time a property remains on the market. 

External obsolescence 

A type of depreciation or a diminution in value caused by negative external influences and generally incurable on the part of the owner, landlord, or tenant. 

Feasibility analysis 

A study of the cost-benefit relationship of an economic endeavor. 

Fee simple estate 

Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. 

Furniture, fixtures, and equipment (FF&E) 

Business trade fixtures and personal property, exclusive of inventory. 

Grantee 

A person to whom property is transferred by deed or to whom property rights are granted. 

Grantor 

A person who transfers property by deed or grants property rights. 

Gross building area (GBA) 

1. Total floor area of a building. This includes mezzanines and basements. 
2. Gross leasable area plus all common areas. 

Ground lease 

A lease that grants the right to use and occupy land. Improvements made by the ground lessee typically revert to the ground lessor at the end of the lease term. 

Highest and best use 

The reasonably probable use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. 

Inspection 

Personal observation of the exterior or interior of the real estate that is the subject of an appraisal. 

Inspection date

The date on which an inspection is performed; distinct from, but often the same as, the date of the value opinion. 

Intangible asset 

A nonphysical asset such as a franchise, trademark, patent, copyright, goodwill, equity, mineral right, security, and contract that grant rights and privileges, and have value for the owner. 

Intended use 

The use or uses of an appraiser’s reported appraisal identified by the appraiser based on communication with the client at the time of the assignment. 

Intended user 

The client and any other party as identified, by the name or type, as users of the appraisal report by the appraiser on the basis of communication with the client at the time of the assignment. 

Land-to-building ratio 

The proportion of land area to gross building area. 

Lease 

A contract in which the rights to use and occupy land, space, or structures are transferred by the owner to another for a specified period of time in return for a specified rent. 

Leaseback 

An arrangement in which the seller of a property is obligated to lease the property from the buyer under terms and conditions that are negotiated by the parties. 

Leased fee interest 

The ownership interest held by the lessor or landlord, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires.  

Leasehold interest 

The right held by the lessee or tenant to use and occupy real estate for a stated term and under the conditions specified in the lease. 

Legally nonconforming use 

A use that was lawfully established and maintained, but no longer conforms to the use regulations of its current zoning. 

Lessor 

One who conveys the rights of occupancy and use to others under lease agreement. 

Marketability 

The relative desirability of a property (for sale or lease) in comparison with similar or competing properties in the area. 

Market approach 

A valuation technique that provides an indication of value by comparing the subject with identical or similar assets for which price information is available. 

Market participants 

Individuals actively engaged in transactions. Those who invest equity in real property or use real estate, buyers, sellers, owners, lenders, tenants. 

Market rent 

The most probable rent that a property should bring in a competitive and open market reflecting the conditions and restrictions of a specified lease agreement. 

Market value 

The most probable price, as of a specified date, in cash, or in terms equivalent to cash, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress. 

Mixed-use development

A real estate project with planned integration of some combination of retail, office, residential, hotel, recreation, or other functions. 

Narrative report 

A written communication of results of a valuation assignment presented to the client in narrative style rather than on a form or orally. 

Net lease 

A lease in which the landlord passes on all expenses to the tenant. Also called triple net lease. 

Net operating income (NOI) 

The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. 

Obsolescence 

One cause of depreciation; an impairment of desirability and usefulness caused by new inventions, changes in design, improved processes for production, or external factors that make a property less desirable and valuable for a continued use; may be either functional or external. 

Offer 

A set of terms presented by a bidder or prospective buyer or tenant that are subject to negotiation. 

Off-site improvements 

Improvements located off the property itself but necessary to facilitate its development, e.g., streets, sidewalks, curbing, traffic signals, water, and sewer mains, parking, water retention ponds. 

On-site improvements 

Any improvements on a site exclusive of buildings. 

Rate of return 

The ratio of income or yield to the original investment. 

Raw land 

Land that is undeveloped. 

Real estate 

Land and all things that are a natural part of the land (e.g., trees, minerals) and things that have been attached to the land (e.g., buildings and site improvements) and all permanent building attachments (e.g., mechanical and electrical plant providing services to a building) that are both below and above the ground. 

Real property 

An interest or interests in real estate. 

Physical deterioration 

The wear and tear that begins when a building is completed and placed into service. 

Property rights 

An enforceable, legal claim to title of or interest in property. 

Remaining economic life 

The estimated period over which existing improvements are expected to contribute economically to a property. 

Rentable area 

Tenant’s rented portion out of a building or space.

Replacement cost 

The estimated cost to construct, at current prices as of a specific date, a substitute for a building or other improvements, using modern materials and current standards, design, and layout. 

Replacement cost for insurance purposes 

The estimated cost, at current prices as of the effective date of valuation; using modern materials and current standards, design, and layout for insurance coverage purposes guaranteeing that damaged property is replaced with new property (i.e., depreciation is not deducted). 

Report 

The final communication, written or oral, of an appraisal transmitted to the client. 

Sales comparison approach 

The process of deriving a value indication for the subject property by comparing sales of similar properties to the property. 

Special-purpose property 

A property with a unique physical design, special construction materials, or a layout that particularly adapts its utility to the use for which it was built. 

Surplus land 

Land that is not currently needed to support the existing use but cannot be separated from the property and sold off for another use. 

Tenant improvements (TIs) 

Fixed improvements to the land or structures installed for use by a lessee. 

Undevelopable land 

Land area that cannot be used practicably for the development of structures and other improvements because of limitations. 

Useful life 

The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed. 

Utility easement

The rights granted to use a portion of a property for utility lines, pipes, poles, guy wires, or other improvements. 

Vacancy 

Unrented space. 

Valuation date 

The date on which the opinion of value applies. 

Valuation process 

A systematic set of procedures an appraiser follows to provide answers to a client’s questions about real property value.