773 388 0003

Tag: commercial appraisal

  1. Homepage
  2. commercial appraisal
Request a quote

Our blog

Latest news
& events

Partially leased retail strip center being appraised for a commercial refinance
11 Views
Commercial AppraisalsEstate Planning
What to Expect From a Commercial Refinance Appraisal

Thinking about refinancing a building you own? Before a lender sets the new loan amount, it needs a supported opinion of what the property is worth today. That is the job of the commercial refinance appraisal, and it shapes how much you can borrow, how much cash you can take out, and sometimes whether the deal works at all.

By the end of this article, you’ll know:

  • How the appraised value sets the size of a refinance loan
  • Who orders the appraisal, and when a new one may not be needed
  • What owners and lenders can do to keep the process moving

How a Commercial Refinance Appraisal Sets Your Loan Amount

Lenders look at two things in a refinance. First, can the property’s income cover the payment? Second, is the building worth enough to secure the loan? According to the Interagency Appraisal and Evaluation Guidelines, the ability to repay comes first. Still, a bank must also consider the value of the real estate behind the loan.

That value usually caps the loan through a loan-to-value limit in the lender’s policy. Consider a hypothetical. A lender caps the loan at 70 percent of value, and your building appraises at $3,000,000. The most it would lend is $2,100,000. If you still owe $2,300,000, you would need to bring $200,000 to closing or find another lender.

So a few percent in value can move real money. That’s why it helps to understand what goes into the number before the appraiser shows up.

Your Lender Orders the Appraisal, Not You

This part surprises a lot of owners. The bank picks and engages the appraiser, and federal guidance says it can’t use a report the borrower ordered. Our article on commercial appraisals for lending covers those independence rules in detail.

For a refinance, the practical point is simple. An appraisal you order yourself can help you decide whether refinancing makes sense before you talk to lenders. It just won’t stand in for the appraisal the bank orders for the loan.

When a Refinance May Not Need a New Appraisal

Some refinances skip the full appraisal. Under the OCC’s appraisal rule at 12 CFR 34.43, an existing loan at the same bank can be refinanced without one in either of two cases. In the first, no new money goes out beyond reasonable closing costs. In the second, nothing obvious and material has changed in the market or the property that threatens the bank’s collateral.

The same rule exempts commercial real estate deals of $500,000 or less. In both cases, though, the bank still needs an evaluation, which is a simpler written estimate of market value. A bank can also order a full appraisal anyway, and the guidelines point that way for higher risk loans.

Two more points matter here. Moving the loan to a new lender takes it outside the existing loan exemption, since that exemption only covers credit already at the lending bank. And a cash-out refinance adds new money, so it qualifies only if the market and the property haven’t materially changed. The FDIC and the Federal Reserve have parallel rules for the banks they supervise, and credit unions follow the NCUA’s version.

What Moves the Value of a Leased Building

For most income property, the appraiser leans hard on the income. Our guide to the income approach shows how rent turns into value. Our explainers on net operating income and cap rates cover the two numbers that drive it.

Leases count too. The federal guidelines require lending appraisals to analyze deductions and discounts for partially leased buildings and non-market lease terms. So a half-empty building, or a big tenant paying well under market rent, will show up in the number.

Time plays a part as well. The guidelines list factors that can make an older appraisal stale, including the passage of time, changes in financing terms, lack of maintenance, and shifts in cap rates and lease terms. In other words, what your building was worth at purchase may not be what a refinance lender sees today.

Who occupies the building matters too. If your own company fills the space, our piece on owner-occupied and investment property appraisals explains why the two get valued differently.

How Owners Can Prepare for the Appraisal

You can’t pick the appraiser, but you can make the work go smoother. Have a current rent roll, every lease with its amendments, recent operating statements, and a list of capital improvements ready before the inspection. Our lending article above has a fuller checklist.

A refinance adds one more step. Find your last appraisal and write down what has changed since. A new roof, a lease renewal at a higher rent, or a tenant who moved out are exactly the facts that decide whether the old value still holds. So hand them to your lender early, before anyone has to ask.

One thing to leave out is a target value. The guidelines tell lenders not to give an appraiser a predetermined value, a loan amount, or a target loan-to-value ratio. For what happens next, see what goes into a commercial appraisal report and how long a commercial appraisal takes.

For Lenders, Set Up the Refinance Assignment Right

Bankers already know the ordering rules, and our lending article covers them. A refinance adds two decisions of its own.

First, decide whether the existing appraisal still holds. The guidelines let a bank use an existing appraisal for a later transaction. However, the credit file should show the facts and analysis behind that call, weighed against the staleness factors listed above. So document the check, even on a renewal with no new money that is exempt from a new appraisal.

Second, match the value premise to the new loan. If cash-out proceeds fund a renovation or a lease-up, the guidelines say a bank would generally ask for the as-is value. As applicable, it would also ask for a prospective value upon completion or stabilization.

If the building sits outside Cook County, our Dallas, Philadelphia, Phoenix, and Naples teams take commercial assignments in those markets. In Cook County, our Chicago appraisal team handles the work.

Planning a Refinance on a Building You Own?

Your lender orders the appraisal behind the loan. If you want a supported value first, to plan or before you talk to lenders, PahRoo can prepare one. Bankers can engage us for refinance assignments too.

Request a Commercial Appraisal Quote

Frequently Asked Questions

What is a commercial refinance appraisal?

It is an appraisal a lender uses to decide how much it will lend on a new loan secured by income-producing or business property. The appraised value usually caps the loan through the lender’s loan-to-value limit.

Can my bank reuse the appraisal from when I bought the building?

Sometimes. A bank can rely on an existing appraisal for a later loan if it documents why the value still holds. The passage of time, lease changes, or a shift in cap rates can make an older value stale.

Does every commercial refinance need a new appraisal?

No. For an existing loan at the same bank, federal rules may allow an evaluation instead when no new money goes out or when the market and property haven’t materially changed. The bank decides which it needs.

What should I have ready for a commercial refinance appraisal?

A current rent roll, every lease and amendment, recent operating statements, and a list of capital improvements. Plan for access to the whole building, including vacant space.

Does a cash-out refinance need a new appraisal?

Not always. At the same bank, a cash-out refinance can skip a new appraisal only if nothing obvious and material has changed in the market or the property. Otherwise it generally needs one, or an evaluation for smaller loans.

Refinance Appraisals That Hold Up in Credit Review

When a lender needs a value it can underwrite, PahRoo Appraisal & Consultancy prepares commercial appraisals for banks, investors, and owners in Chicago and Cook County, Dallas, Philadelphia, Phoenix, and Naples. Michael Hobbs, MAI, SRA, signs our Illinois reports. See our commercial appraisal services for the property types we cover.

Read Now
Chicago six-flat apartment building valued in a commercial real estate divorce appraisal
14 Views
Divorce Appraisal
How Commercial Property Gets Appraised in a Divorce

A divorce with a six-flat, a strip center, or an office condo on the balance sheet needs more than a house appraisal. A commercial real estate divorce appraisal values the building the way investors do, by what it earns and what buyers pay for that income. For divorce attorneys, that changes what you ask for at engagement and what you can defend later.

By the end of this article, you’ll know:

  • Why commercial property needs a different appraisal than the marital home
  • How the valuation date, the leases, and the business affect the number
  • What CPAs should line up for the tax side of the split

Why a Commercial Real Estate Divorce Appraisal Works Differently

Most marital homes get valued mainly from recent sales of similar houses. A rented building is different, because the rent is a big part of what a buyer is paying for.

So the appraiser looks at more than sales. Federal banking guidelines sum up the USPAP rule well. According to the Interagency Appraisal and Evaluation Guidelines, an appraisal must include each approach to value that applies, whether sales comparison, income, or cost. It also has to explain any approach it leaves out. Our guide to the three approaches to value covers how each one works.

In a leased building, that usually puts real weight on the income. Our article on the income approach for commercial property shows how rent becomes a value.

Illinois also sets the standard the report has to meet. Under 750 ILCS 5/503, the court uses a fair market value standard. It also has to make specific factual findings on values. So the report should support a number a judge can actually write into those findings.

Settle the Valuation Date Before the Appraiser Starts

Illinois gives the court room on timing. Under Section 503, the valuation date is the date of trial or another date the parties agree to or the court orders. That flexibility matters more for a building than for a house.

Commercial values move with leases and capitalization rates. The federal guidelines list changes in cap rates and lease terms among the things that can make an older appraisal stale. A tenant leaving, or a lease renewing at a new rent, can shift the number between filing and trial.

So agree on the date, or ask the court to set it, before the work begins. If that date has already passed, the assignment becomes a retrospective appraisal as of the earlier date. Our piece on the date of value problem in divorce explains why timing moves value, and our explainer on cap rates shows how small rate changes add up.

Other states handle valuation dates their own way. If the building sits in another market we serve, our Dallas, Philadelphia, Phoenix, and Naples teams appraise under that state’s rules. In Cook County, our Chicago appraisal team handles the work.

Leases Can Raise or Lower What the Building Is Worth

A building with tenants comes with its leases. A long lease at below-market rent can hold value down for years. An above-market lease with a strong tenant can do the opposite, at least until it ends.

Lenders already watch for this. The federal guidelines require lending appraisals to account for partially leased buildings and non-market lease terms. A divorce file raises the same facts, so the report should compare each lease with market rent and show the effect.

Also watch for leases between family entities. If the couple’s own company rents the space, the rent may not match the market. The appraiser can report what market rent would be, and counsel can decide what that means for the case. We cover that setup in more detail in our article on the family business’s real estate.

Keep the Building Separate From the Business

A building and the business inside it are two different assets. The federal guidelines draw the same line for lenders. They say going concern value and value in use may not stand in for market value, and any such opinion has to be identified separately.

That matters when one spouse runs a restaurant, clinic, or shop in a building the couple owns. The real estate appraisal should value the land and building only. Any business value belongs with a business valuator, and the two reports should not count the same dollars twice. Our conversation on going concern appraisal with Bruce Jones, MAI covers how appraisers think about that split.

Ownership through an LLC raises a related point. PahRoo values the real estate itself. What a spouse’s share of that LLC is worth can be a separate question, so confirm early who is answering it.

For CPAs, the Same Value Can Carry Different Tax Results

Federal tax rules usually let a building pass between divorcing spouses without immediate gain or loss. Under Treasury Regulation 1.1041-1T, that applies to transfers incident to divorce. The spouse who receives the building also takes the other spouse’s adjusted basis.

So two buildings with the same appraised value may not be equal after tax. Consider a hypothetical. Building A and Building B each appraise at $2,000,000. Building A has an adjusted basis of $600,000, and Building B has $1,800,000. On a later sale at that price, Building A would show $1,400,000 of gain, while Building B would show $200,000.

Illinois courts can weigh this too, since Section 503 lists the tax consequences of the division as a factor. A few steps help. First, ask the transferring spouse for basis and holding period records, which the regulation says the transferor must supply. Second, match the appraisal’s effective date to the business valuation date when both assets are in play. Third, get the appraiser the rent roll, the leases, and three years of operating statements early.

What to Put in the Engagement Letter

Start with the intended use and the intended users. The federal guidelines note that an engagement letter identifies both, as USPAP defines them, and that sets who can rely on the report. Then state the valuation date, the property interest, and whether you expect testimony. Illinois courts can also bring in their own financial experts under Section 503, and counsel may examine a professional the court designates as its witness. A tight engagement letter gives you a report that is easier to defend if the other side attacks its scope.

Dividing a Commercial Building in the Divorce?

PahRoo appraises the real estate on its own, with the valuation date, the leases, and the property interest spelled out. Tell us about the building and the date the case needs.

Order a Commercial Appraisal

Frequently Asked Questions

How is commercial property appraised in a divorce?

The appraiser considers the sales comparison, income, and cost approaches and uses each one that applies. For a leased building, the rent and the leases usually drive much of the analysis.

What valuation date does an Illinois divorce use?

Under 750 ILCS 5/503, it is the date of trial or another date the parties agree to or the court orders. Settle the date before the appraisal starts.

Do tenant leases change a building’s value in a divorce?

Yes. A lease above or below market rent can raise or lower value, so the report should compare each lease with market rent.

Does a commercial real estate appraisal include the business?

No. It values the land and building. A business operating there, or a spouse’s share of an LLC that owns the building, is a separate valuation question.

Is transferring a building between divorcing spouses taxable?

Generally not at the time of transfer. Under Treasury Regulation 1.1041-1T, the receiving spouse takes the other spouse’s adjusted basis, so the gain can show up on a later sale. A tax advisor should confirm the details.

Commercial Appraisals for Family Law Cases

PahRoo Appraisal & Consultancy appraises commercial and investment property for family law attorneys and CPAs in Chicago and Cook County, Dallas, Philadelphia, Phoenix, and Naples. Michael Hobbs, MAI, SRA, signs our Illinois reports. See our commercial appraisal services to learn how we work.

Read Now
Business owner in the loading bay of the light industrial building her company occupies, the subject of an owner-occupied appraisal
25 Views
Commercial Appraisals
Why Owner-Occupied and Investment Property Appraisals Differ

Two buildings sit side by side, same size, same age, same street. One is full of your own company. The other houses a tenant you have never met. An owner-occupied appraisal and an investment property appraisal can land on different numbers for these two buildings. The reason has less to do with the bricks than with the question the appraiser answers.

By the end of this article, you’ll know:

  • Why the appraiser uses market rent on a building you occupy and the actual leases on a building you rent out
  • How a below-market or above-market lease moves value, with a worked example
  • Why the value of your business stays out of the real estate number, and what lenders should tell the appraiser up front

What an Owner-Occupied Appraisal Actually Values

When you own the building and run your business in it, nobody is paying rent. So there is no lease for the appraiser to read. Instead, the appraiser asks a simpler question. What would this space rent for if it hit the open market tomorrow?

That figure is market rent. It comes from comparable leases on similar buildings nearby, adjusted for size, condition, and location. The appraiser then builds an income approach on that rent. Sales of similar buildings come in too, and sometimes a cost approach.

Here the appraiser usually values the fee simple interest. In plain terms, that means full ownership with no lease attached. Since no tenant holds any rights, the value rests on what the market would pay for the building itself. Our guide to the income approach for commercial property walks through how that rent becomes a value.

Investment Property Starts With the Leases

Once you rent a building to someone else, the leases become part of what you own. Now the appraiser reads them closely. The rent a tenant actually pays is contract rent. It may or may not match market rent.

If the leases run at market, the two numbers line up and the gap is small. But leases signed years ago often drift. A tenant paying well under market holds a bargain that the owner cannot take back until the lease ends. A tenant paying above market adds income, though only as long as that tenant can keep paying.

Federal appraisal rules for bank loans address this directly. Under 12 CFR 34.44(d), appraisals for federally related transactions must analyze deductions and discounts for non-market lease terms. Partially leased buildings get the same treatment. So the appraiser cannot just assume every lease is at market. Each one gets tested.

A Hypothetical Building, Valued Two Ways

Consider a hypothetical 20,000-square-foot light industrial building in a Chicago suburb. We invented every figure below for illustration.

First, assume the owner’s company occupies all of it. Comparable leases suggest market rent of $10 per square foot, net. That gives $200,000 a year in potential rent. Take out 5 percent for vacancy and collection loss, and you have $190,000. Then subtract $10,000 for costs a landlord would typically absorb, such as management and reserves. Net operating income comes to $180,000. At a 7.5 percent capitalization rate, the indicated value is $2,400,000.

Now change one fact. An unrelated tenant leases the same building at $8 per square foot. Six years remain on the lease. Contract rent is $160,000 a year. That is $40,000 a year below market, every year, until the lease ends.

The appraiser has to account for that shortfall. In this case, the leased fee value would likely come in under $2,400,000. How far under depends on the discount rate and the tenant’s credit. It also depends on the market when those six years run out. Flip the facts, with a strong tenant paying $12, and the leased version could come in higher.

The Owner’s Business Is Not the Building

Owner-users sometimes expect their company’s success to show up in the appraisal. After all, the building is where the money gets made. But a real estate appraisal values the real estate, and the business is a separate asset.

This matters most for restaurants, hotels, and car washes. In those, the operation and the building can feel like one thing. The Interagency Appraisal and Evaluation Guidelines address this. For federally related transactions, they bar using going concern value or value in use as market value. An appraisal can still report those values separately, as long as they are clearly identified.

In practice, the appraisal on your building will often come in below what the whole operation feels worth. That is by design. The SBA has its own rules on separating business value. Our article on SBA appraisal requirements covers them.

What Lenders Should Put in the Engagement

For bankers, occupancy changes more than the appraisal. It also shapes how you classify the loan. The 2006 interagency guidance on CRE concentrations excludes certain loans on owner-occupied buildings. The test is whether repayment comes mainly from the operations of the owner or its affiliate. It covers nonfarm nonresidential loans when 50 percent or more of repayment comes from third-party, nonaffiliated rental income. SBA uses a different test. For an existing building, 13 CFR 120.131 requires the borrower to occupy at least 51 percent. It may lease out the other 49 percent.

So a few lines in the engagement letter save a revision later. Tell the appraiser the current occupancy split, in square feet, between the borrower and outside tenants. State the interest you need valued, fee simple or leased fee. Does the borrower’s real estate LLC lease to its own operating company? Then send that lease too, and ask for a comparison to market rent. Related-party leases are often set for tax or convenience reasons, not market terms.

Finally, ask the appraiser to state a market rent figure even on a fully owner-occupied building. If the borrower’s business struggles, that number tells you what the space could earn from a tenant. Our overview of commercial appraisals for lending covers the rest of what credit reviewers check.

Plan for the Building You Might Own Next Year

If you occupy your building today, the value turns on market rent. Lease part of it out or plan a sale-leaseback, and the lease terms you sign will shape the appraisal for years. A lease set well below market to help your own company can drag down value later.

So before you sign, refinance, or sell, decide which interest you actually need valued. Then give the appraiser the leases, the occupancy split, and the intended use of the report. That keeps the number tied to the question you are asking.

Own the Building Your Business Runs From?

Whether you occupy it, lease part of it, or are weighing a sale-leaseback, we’ll value the right interest. We work from market rent and real lease data in your submarket.

Get a Commercial Quote

Frequently Asked Questions

What is the difference between an owner-occupied and an investment property appraisal?

An owner-occupied appraisal usually values the fee simple interest. So the appraiser estimates what the space would rent for at market. An investment property appraisal values the building subject to its existing leases. Contract rents, lease terms, and tenant strength all feed into that value.

Do appraisers use market rent for owner-occupied property?

Yes, in most cases. The owner pays no rent, so the appraiser studies comparable leases on similar buildings to estimate market rent. That rent then drives the income approach, alongside comparable sales.

How is contract rent different from market rent?

Contract rent is what a tenant actually pays under its lease. Market rent is what the space would likely rent for today on typical terms. When a lease runs below or above market, the appraiser accounts for that gap over the remaining term.

What is going-concern value?

Going-concern value is the value of an established business as a whole. That includes its real estate, equipment, and intangible assets. For federally related transactions, interagency guidelines bar using it as market value. An appraisal can still report it separately if clearly identified.

If my company leases the building from my own LLC, is it an investment property?

For valuation, the appraiser reads that lease and tests it against market rent. Related-party leases often stray from market terms. How to classify the loan is a separate question for the lender. Still, the 2006 federal CRE guidance treats space occupied by the owner or its affiliate as owner-occupied.

About PahRoo Appraisal & Consultancy

Owners, investors, and lenders come to PahRoo when they need a commercial value they can defend. Our commercial appraisal team works from our Lincolnwood office. We serve Chicago, Dallas, Philadelphia, Phoenix, and Naples, with deep coverage across Cook County through our Chicago appraisal services. Michael Hobbs, MAI, leads the firm.

Read Now
Owner-occupied family business real estate being valued in a divorce
18 Views
Divorce Appraisal
The Family Business’s Real Estate and What Gets Appraised in a Divorce

When a divorcing client owns a business, the building often gets lost in the business valuation. Maybe the company owns it outright. Maybe a spouse holds it in a separate LLC and charges rent. Either way, family business real estate usually needs its own appraisal, and how that appraisal fits with your valuation decides whether the numbers hold together.

By the end of this article, you’ll know:

  • Which real estate questions the appraiser answers, and which stay with you
  • How related-party rent can count the building twice
  • What to settle with counsel before anyone sets a value

Family Business Real Estate Is Its Own Asset

A business and the building it occupies are different things to value. The business earns its money from customers, staff, and know-how. The building earns its value from location, size, condition, and the rent it could command.

So an appraiser values the real estate, and a business valuator values the company. In practice, the two reports have to speak to each other. If they don’t, one asset can show up twice, or the building can vanish into a goodwill number nobody can test.

The appraiser’s job here is narrow on purpose. It covers the market value of the land and building. The enterprise, its equipment, and its customer list belong in the business valuation. When a property runs as a going concern, like a restaurant or a car wash, the appraiser separates the real estate from the business. Our conversation on going concern appraisal with Bruce Jones, MAI walks through how that split works, and our piece on special use property covers buildings with few comparable sales.

Who Holds Title Changes the Work

Start with the deed. Ownership usually falls into one of three patterns, and each one asks something different of your model.

First, the operating company may own the building. Then the real estate sits on the company’s balance sheet, often at depreciated cost. That book figure can be far from market value, so an asset-based method needs an appraised number in its place.

Second, one or both spouses may own the building personally or through a separate LLC. The company then pays rent, or sometimes pays none. Now there are two assets to account for, the business and the real estate holding.

Third, the company may rent from an unrelated landlord. In that case there is usually no family real estate to appraise at all. Still, the lease terms affect the business’s costs.

Whether any of these interests is marital, separate, or mixed is a legal question for counsel and the court. Under 750 ILCS 5/503, property acquired during the marriage is presumed marital. But the appraisal stays the same either way. It reports what the property is worth, and the attorneys argue what that value means.

Related-Party Rent Is Where Values Get Counted Twice

This is the part that matters most for your normalization work. When spouses own the building and the business pays them rent, that rent is a related-party number. It may not match the market.

Consider a hypothetical. A family distribution company uses a warehouse owned by the spouses’ LLC and pays no rent. The appraiser concludes the market rent is $60,000 a year. If the business valuation never deducts that rent, the company’s earnings look $60,000 richer than they would under a market lease. That extra income then gets capitalized into business value.

Meanwhile, the appraisal values the warehouse using that same $60,000 of income. At a hypothetical 8% capitalization rate, the building comes in near $750,000. Now the same stream of rent props up two values. The fix is to adjust the business’s rent expense to the market rent from the appraisal, so each asset carries only its own income.

The reverse happens too. Rent can rise before a divorce, which drains reported business income into the real estate entity. Either way, the market rent figure from the appraisal gives you a tested benchmark. For how appraisers build that income figure, see our guide to the income approach for commercial property.

Fee Simple or Leased Fee Should Be Decided Up Front

If a lease exists between the business and the property owner, the appraiser has to know which interest to value. A fee simple value assumes the building is free of that lease and could rent at market terms. A leased fee value reflects the owner’s position subject to the actual lease, including its rent and remaining term.

When the contract rent matches market rent, the two values tend to land close together. When a related-party lease sits well above or below market, they can split apart. A reading on leased fee valuation from Illinois State University lays out how contract rent and market rent drive that difference.

Because the lease was written inside the family, it may not survive the divorce. So the right interest to appraise is a scoping call to settle with counsel and the appraiser before any work begins. Write it into the engagement letter.

For Divorce Attorneys, Settle the Scope Before Anyone Values Anything

Attorneys can head off most of these problems early. A few steps make the experts’ work fit together.

Pull the deed and the entity records first. Who holds title, and through what entity, tells everyone which pattern you have. Then request every lease and the rent actually paid for several years, including any recent changes.

Next, align the valuation date. Section 503(k) sets the date of trial unless the parties agree on another date or the court orders one. The appraiser and the business valuator should work to the same date. Our article on the date of value in a divorce appraisal explains why mismatched dates cause trouble.

Finally, have both experts share their real estate figures before either report is final. That includes the market value, the market rent, and the interest appraised. Section 503(l) also lets the court seek advice from financial experts or other professionals, so a clean, consistent record helps if the court brings in its own.

Get the Building Valued Before the Business Number Is Set

If your engagement involves a business that owns or occupies real estate, ask for the appraisal early. You need the market rent to normalize earnings and the market value to complete the balance sheet. Waiting until the business valuation is done invites rework, or worse, competing appraisals in divorce court that disagree on facts nobody checked.

Is the Building Hiding Inside the Business Value?

PahRoo appraises the real estate on its own, with a market rent figure your business valuation can use. Tell us about the property and who holds title.

Value the Building Separately

Frequently Asked Questions

Is the family business’s building marital property?

That is a legal question for counsel and the court. Illinois presumes property acquired during the marriage is marital, but title, timing, and contributions all matter. The appraisal reports the property’s value either way.

How is company real estate valued in a divorce?

An appraiser sets the market value of the land and building, usually relying on comparable sales and an income analysis based on market rent. Illinois courts value divided assets at fair market value.

Does the business or the building get appraised?

Usually both, by different experts. A real estate appraiser values the property, and a business valuator values the company. Their reports should share the same date and the same market rent figure.

Who owns the property a business uses?

Check the deed. The company may own it, the spouses may hold it personally or through a separate LLC, or an unrelated landlord may own it. Each pattern changes what needs appraising.

Can the building be counted twice in a divorce?

Yes. If the business pays no rent or below-market rent to the spouses, its earnings look higher and the building’s income can inflate the business value too. Adjusting rent to market avoids that.

Real Estate Valuation That Fits the Financial Picture

PahRoo Appraisal & Consultancy appraises commercial and owner-occupied property for CPAs and family law attorneys across Cook County and the Chicago area. Michael Hobbs, MAI, signs our Illinois reports and is available to testify on them. See our commercial appraisal services, our overview of appraisals in divorce proceedings, and our Chicago appraisal coverage.

Read Now
Lender reviewing an SBA appraisal report for a 7(a) loan on an owner-occupied commercial building
28 Views
For Bankers
What the SBA Needs To See In The Appraisal File

An SBA appraisal is the one document in a 7(a) or 504 file that the borrower cannot supply. The lender orders it. The lender is the client. And the SBA guaranty rides on whether the report meets the SOP, not on the number alone. So the appraisal deserves a closer read than the value on its cover.

By the end of this article, you’ll know:

  • Which rulebook governs the appraisal on a file that gets its loan number after October 1, 2026.
  • When the real estate has to be valued apart from the business that runs inside it.
  • What a borrower can do before the order goes in, so the report does not stall the closing.

SBA Appraisal Requirements Start With SOP 50 10

SBA does not publish a standalone appraisal rule. Instead, the requirements sit inside SOP 50 10. That is the Lender and Development Company Loan Programs procedure, and it governs 7(a) and 504 origination. The current version is SOP 50 10 8.1. It took effect October 1, 2026 and applies to applications issued an SBA loan number on or after that date. Files that received a loan number through September 30 stay under SOP 50 10 8. So the first question on any SBA appraisal is simple. Which version governs this file?

The dollar trigger comes from federal law. The 7(a) Real Estate Appraisal Harmonization Act tied SBA’s threshold to the bank regulators’ figure. Specifically, it uses the lowest commercial real estate threshold set by the Federal Reserve, the OCC, and the FDIC. Under the OCC’s appraisal rule, that figure is $500,000. So a 7(a) loan secured by commercial real estate above that amount needs an appraisal. A State licensed or certified appraiser has to prepare it. Below it, the statute leaves the call to the lender, though SBA and the lender can still require one.

One more wrinkle matters for bankers. The same OCC rule exempts transactions guaranteed by a federal agency from the bank appraisal requirement. That exemption is exactly why SBA writes its own appraisal standards into the SOP. A lender cannot lean on the bank rule’s exemption and skip the report on an SBA file.

What the SOP Expects From the Report and the Appraiser

For a standard 7(a) loan, the appraisal standards have stayed stable across recent SOP versions. SBA lending counsel Starfield & Smith summarized them well. The report must be a USPAP Appraisal Report, not a restricted report. It must be dated within 12 months of the application for guaranty. It must name the lender as the client or an intended user. So a report prepared for the seller or the borrower cannot be used. The appraiser must be independent of loan production and the approval decision. Above an estimated value of $1,000,000, the appraiser must be State certified. Because SOP language shifts between versions, confirm each point against the version on your file.

Two more points catch lenders after the order goes in. First, construction gets its own rules. If loan proceeds fund new construction or a substantial renovation, the appraisal must estimate value at completion. Then, once the work is done, the lender needs a statement that the building was built to the plans. Second, the appraisal gets measured against the value estimate in the credit memo. Any shortfall needs a written explanation. A report below 90 percent of the estimate triggers more than that. Non-delegated lenders need SBA’s written permission to close. PLP lenders must instead document why the number came in low and how they offset the risk. So the estimate in the credit memo is not a throwaway line. It sets the bar the appraisal has to clear.

504 Loans: One Report, Three Intended Users

A 504 project runs through a Certified Development Company alongside a senior lender. The SBA’s 504 program finances major fixed assets, including buying, building, or renovating land and buildings. The CDC portion is capped at $5.5 million. It cannot fund working capital or inventory. That structure makes the appraisal the anchor of the project budget. In practice the same report has to serve the third party lender, the CDC, and SBA. So the engagement letter should name every intended user before the appraiser starts. A report written for one party alone can end up reordered for the others, and that costs weeks.

The 504 structure also sharpens the going-concern question. Because 504 proceeds finance fixed assets, the value a CDC can rely on is the real estate and the long-term equipment. The business that operates there is a separate question. When the building only works with a business inside it, the report has to say how much of the value is which. That is where allocation comes in.

When the Real Estate Has to Be Separated From the Business

Some properties only make sense with a business running in them. A car wash. A hotel. A gas station with a convenience store. A golf course or a bowling alley. SBA calls these Special Purpose Properties, and it treats a change of ownership involving one differently.

The standard SBA set for these deals is specific. When a business operating from a Special Purpose Property changes hands, a Certified General Real Property Appraiser must complete the going-concern appraisal. That appraiser also needs experience in the property type. The report must allocate separate values to land, building, equipment, and intangible assets. And the appraiser must have completed at least four going-concern appraisals of equivalent special-use property in the prior 36 months. The report’s qualifications section has to show it. SBA Information Notice 5000-1340 introduced that language. It remains the framework lenders apply to change of ownership deals, which SOP 50 10 8.1 now gathers in Appendix 15.

Why does the split matter so much? A lender can secure a loan with land and a building. Goodwill is a different animal. If a report bundles everything into one going-concern number, the lender is stuck. It cannot tell how much of the collateral is real estate and how much walks out the door with the owner. The allocation answers that question line by line. It also has to reconcile. The parts should add up to the whole, and the real estate component should stand on its own against comparable sales. For a walk-through of how appraisers weigh sales, cost, and income evidence, see our guide to the three approaches to value.

For Borrowers: What Slows an SBA Appraisal Down

If you own the business, or you are buying the building your company occupies, the SBA appraisal is out of your hands. But you can keep it from stalling the deal.

  • Do not order your own appraisal. The lender has to be the client. A report you commission cannot go in the SBA file, so the money gets spent twice.
  • Ask the lender for its value estimate up front. That figure goes in the credit memo, and a report that lands well below it triggers extra review. If you think the estimate is high, say so before the order goes in.
  • Assemble the file the appraiser will ask for. That means the purchase agreement with any price allocation, plus current leases and a rent roll if part of the building is leased. For a special-use property, add three years of business financials and an equipment list with age and cost. For any build-out, add the plans and the budget.
  • Flag the property type early. If the building is a car wash, a hotel, or another Special Purpose Property, the lender needs a specific kind of appraiser. That means one with the going-concern experience the SOP requires. Finding one late adds weeks.

A clean file does not raise the value. Still, it keeps the appraiser from discounting for uncertainty, and it keeps the closing calendar intact. For owner-users, our commercial appraisal services page lists the property types we handle.

Match the Appraisal to the SOP Before the Order Goes In

Most SBA appraisal problems trace back to the engagement, not the analysis. The wrong client name. A restricted report. A licensed-only appraiser on a seven-figure building. A going-concern report with no allocation. Each one is avoidable at the order stage. So confirm the SOP version, name the intended users, match the license to the value, and ask for the allocation up front. Then the report can do what the guaranty needs it to do.

Structuring an SBA Deal With Real Estate Collateral?

PahRoo delivers USPAP Appraisal Reports for 7(a) and 504 files. The lender is named as client, the allocation is broken out, and a reviewer can trace the support.

Request an SBA Appraisal Quote

Frequently Asked Questions

Do SBA loans require an appraisal?

Yes, when a 7(a) loan secured by commercial real estate exceeds the federal banking regulator appraisal threshold, which the OCC rule sets at $500,000. The appraisal must come from a State licensed or certified appraiser, and the SOP adds its own requirements for the report, the appraiser, and timing. Below the threshold, the lender or SBA may still require one.

What is an SBA 504 appraisal?

It is the real estate appraisal ordered for a 504 project, where a Certified Development Company and a senior lender finance fixed assets such as land, buildings, and long-term equipment. The report sets the value behind the project budget, and in practice it has to serve the third party lender, the CDC, and SBA as intended users.

When is a going-concern appraisal needed for SBA?

When a change of ownership involves a business operating from a Special Purpose Property, such as a hotel, car wash, gas station, golf course, or bowling alley. SBA requires a Certified General Real Property Appraiser with experience in that property type, and the report must allocate value among land, building, equipment, and intangible assets.

What is the SBA appraisal threshold?

By statute, the 7(a) threshold equals the lowest commercial real estate appraisal threshold set by the Federal Reserve, the OCC, and the FDIC. Under the OCC rule that figure is $500,000. The SOP layers program rules on top of the statute, so lenders confirm the trigger against the SOP version governing the file.

Who pays for the SBA appraisal?

The lender engages the appraiser, since the lender must be the client, and the cost is generally passed through to the borrower as part of the loan’s out-of-pocket costs. Confirm the treatment with your lender, because the SOP governs which fees a lender may charge on an SBA loan.

Appraisals Written to Sit in an SBA File

PahRoo Appraisal & Consultancy prepares commercial appraisals for 7(a) and 504 lenders in five markets. Those are Chicago and Cook County, Dallas-Fort Worth, Philadelphia, Phoenix, and Naples. If your credit team reads the income section first, our guide to the income approach explains how those numbers get built. For scope and timing in Cook County, start with our Chicago appraisal services page.

Read Now
Empty office suite photographed as evidence for a vacancy adjustment tax appeal.
30 Views
Property Tax
Documenting Vacancy, Deferred Maintenance, and Obsolescence in a Tax Appeal

A vacancy adjustment tax appeal rarely loses because the building was full. It loses because nobody can prove how empty it was, or for how long. The same goes for a failing roof or a floor plan tenants walk away from. If the condition isn’t documented and tied to a number, the Assessor and the Board of Review have little reason to move.

By the end of this article, you’ll know:

  • What the Cook County Assessor’s vacancy policy accepts, and where it stops
  • How an appraiser turns deferred maintenance and obsolescence into a dollar figure
  • Which records a property manager should keep before the next filing window

What a Vacancy Adjustment Tax Appeal Has to Show

Start with the Assessor’s rules, because they are narrower than many owners expect. The Cook County Assessor’s vacancy policy treats homes and commercial buildings differently. A house, condo, or two-to-six-unit building gets vacancy relief only after a casualty such as a fire or flood. Commercial property, which includes apartment buildings over six units, has more room.

For commercial buildings, the policy looks for space that isn’t serving its intended use because of conditions outside the owner’s control. It recognizes three situations. One is market vacancy, where a ready-to-occupy building sits empty despite real leasing effort. Another is a renovation that leaves the whole building unusable and earning nothing. The last is a casualty. Any single event supports no more than 24 months of reduction, and land value is never adjusted for vacancy.

Then comes the paperwork. A market vacancy claim needs a 12-month vacancy affidavit, a rent roll, proof of marketing, utility bills, and dated photos. A renovation claim also needs the contractor’s scope of work, a timeline, permits, and the general contractor’s contact information. A casualty claim needs the fire, flood, or disaster report.

The policy also says some commercial vacancy is normal and expected. So a building running at a typical vacancy rate has little to claim. The Assessor already builds a market vacancy factor into its income valuation, which we covered in our piece on NOI and cap rates in commercial appeals. The appeal starts where actual vacancy runs past what the model assumed.

The math is specific, too. For market and renovation vacancy, the policy takes half of the year’s weighted vacancy and subtracts the vacancy already in the original value. Consider a hypothetical building with 40 percent weighted vacancy and an 8 percent factor already in the model. Half of 40 is 20, and 20 minus 8 leaves a 12 percent reduction. If the building is assessed at $250,000, that comes to $30,000 off. The land stays where it was.

The Board of Review has its own list. Under its official rules, Rule 21 asks for a vacancy affidavit and dated photos of the vacant interior space. It also wants an affidavit on how long the space sat empty, why, and what was done to lease it. Rule 20 adds lease and income records. If your client files at both levels, plan on two overlapping packages.

Deferred Maintenance Needs a Cost Attached

Deferred maintenance is physical deterioration the owner put off fixing. Think of a worn roof membrane, rooftop units past their service life, or a parking lot breaking apart. Mentioning these in a brief doesn’t change a value. The value moves when an appraiser shows what a buyer would deduct for them.

Appraisers sort physical deterioration by whether a repair is practical. If the repair restores the lost value at a sensible cost, the item is curable, and the cost to cure usually measures it. If the repair isn’t practical, the loss tends to show up in effective age instead. For example, a well-kept 40-year-old building might carry an effective age of 25. A neglected one of the same vintage might carry 45, with a shorter remaining life to match.

Contractor bids help, but only when they are dated near the lien date and scoped to the real problem. A full roof replacement bid proves little if the roof only needed patching. Buyers also rarely pay dollar for dollar on every repair. So a careful appraiser tests the bid against market behavior rather than taking it whole.

Timing trips up a lot of condition claims. The Board’s Rule 19 requires appraisals to value the property as of the January 1 lien date. Rule 14 asks that the front photo in a brief show the condition as of that date as well. Photos taken after a spring repair don’t prove what January looked like. Neither do photos of damage that happened in March. Depreciation sits at the center of the cost approach, which is why condition arguments often lean on it.

Functional and External Obsolescence Need Market Proof

Obsolescence is harder to see and harder to prove. Functional obsolescence is a loss that comes from the building’s own design. A warehouse with low clear heights when tenants want taller space is one example. An office floor plate too deep to divide for small tenants is another. Some of it can be fixed at a reasonable cost, and some of it can’t.

External obsolescence comes from outside the property line. A road change that pulls traffic away from a retail strip can cause it. So can a large employer closing nearby. Nothing the owner does on site will cure it, so appraisers usually treat it as incurable.

Neither kind shows up clearly in a photo. An appraiser measures it with market evidence instead. That often means comparing rents or sales of buildings with and without the problem. It can also mean capitalizing the income the problem costs each year. The appraiser’s job is to measure the loss. The attorney decides how to argue it, and the Board decides what weight it gets.

Long vacancy is sometimes a symptom of obsolescence rather than a passing market problem. When a building stays empty past the 24-month window, vacancy relief runs out. At that point the stronger argument may be what the building is actually worth in its current form, with its design or location problems priced in.

What Property Managers Can Start Collecting Now

Most of this evidence sits with the property manager, not the attorney. It is also far easier to keep it monthly than to rebuild it a year later. If you manage commercial space in Cook County, a short routine covers most of what the Assessor and the Board ask for.

  • Take dated interior photos of every vacant suite each month, and as close to January 1 as you can.
  • Keep a month-by-month occupancy log by suite and square footage. That log becomes the vacancy affidavit.
  • Save every listing, broker agreement, and marketing flyer, with the dates they ran.
  • File utility bills for vacant space, and note any months that are missing.
  • Keep work orders, deferred repair lists, and contractor bids with their dates.
  • Pull permits and the contractor’s scope of work before any renovation starts.

None of this takes a judgment call. It’s record keeping. But it often decides whether the attorney can file a vacancy or condition claim at all.

Tie Every Claimed Impairment to a Record and a Number

Before filing, sort the client’s story into its parts. Vacancy needs the affidavit trail and has to fit one of the Assessor’s categories. Deferred maintenance needs dated photos and a supportable cost to cure. Obsolescence needs market evidence an appraiser can quantify. If a claim has no record behind it, consider cutting it, because weak items can pull down the credible ones. Then bring the appraiser in early, while there is still time to inspect the building and review the records before the filing window closes.

Can You Prove What’s Dragging the Value Down?

We document the condition and measure what vacancy, deferred repairs, and obsolescence cost in market value as of the lien date.

Document the Impairment

Frequently Asked Questions

Does vacancy affect a property tax assessment in Cook County?

It can. The Cook County Assessor considers commercial vacancy when space isn’t serving its intended use because of conditions outside the owner’s control, such as a market lease-up, a full-building renovation, or a casualty. Residential vacancy counts only after a casualty like a fire or flood. Land value is never reduced for vacancy.

How long can a vacancy reduction last?

Under the Assessor’s vacancy policy, a single event supports no more than 24 months of full or partial vacancy reduction. A building that stays empty longer may have a different problem, such as obsolescence, which calls for a valuation argument rather than vacancy relief.

How do I prove deferred maintenance in an appeal?

Start with dated photos that show the condition as of the January 1 lien date, repair records, and contractor bids scoped to the actual problem. An appraiser then measures what a buyer would deduct for that condition, often through cost to cure or effective age.

What is functional obsolescence?

Functional obsolescence is a loss in value caused by the building’s own design, such as a layout or ceiling height the market no longer wants. Some of it can be fixed at a reasonable cost and some can’t. An appraiser measures it with market evidence, not photos alone.

Can poor condition lower my assessment?

It can, if the evidence shows the condition reduced market value as of the lien date. The Board of Review weighs evidence case by case, and its rules treat appraisals that violate USPAP or Illinois law as not credible. A documented, quantified condition claim gives the Board something concrete to weigh.

Appraisals Built for Cook County Condition Claims

Condition and vacancy evidence is strongest when an appraiser has walked the building and photographed it. PahRoo Appraisal & Consultancy works from its Lincolnwood office on Cook County tax appeals, Board of Review appraisal evidence, and commercial appraisals. Michael Hobbs, MAI, leads the firm and is available for expert testimony when a case goes further.

Read Now
Loan officer reviewing a commercial appraisal for lending at a bank office desk.
38 Views
Commercial AppraisalsFor Bankers
Commercial Appraisals for Lending and What Banks Require

When a credit officer orders a commercial appraisal for lending, the report has two jobs. It has to support the loan decision, and it has to hold up when an examiner pulls the file. Most of what banks require comes from one set of federal rules and the guidance built on them. So it pays to know where loan files usually come up short.

By the end of this article, you’ll know:

  • When a federally regulated lender needs a full appraisal, and when an evaluation will do.
  • What appraisal independence means for who orders the report and who talks to the appraiser.
  • What credit review should check before the appraisal goes to committee.

What a Commercial Appraisal for Lending Has to Meet

The rules trace back to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, better known as FIRREA. Title XI requires each federal banking agency to set appraisal standards for the institutions it oversees. So when a banker asks for a FIRREA appraisal, they mean a report that meets those agency rules.

Each agency publishes its own version. The OCC’s sits in 12 CFR Part 34, Subpart C, and it sets a clear minimum. The appraisal must follow USPAP, unless safe and sound banking calls for a stricter standard. It must be in writing, with enough analysis to support the decision to make the loan. It must also use the regulation’s definition of market value.

The same rule asks for deductions and discounts where they apply. That covers proposed construction or renovation, partially leased buildings, and leases written below market. Finally, a state licensed or certified appraiser has to do the work. But a credential alone does not prove competency, according to the rule. Experience with the property type counts too.

When an Evaluation Will Do and When It Won’t

Not every loan needs a full appraisal. The rule exempts several kinds of transactions, and three thresholds come up most often.

  • Commercial real estate transactions with a transaction value of $500,000 or less.
  • Business loans of $1 million or less, if repayment does not depend mainly on real estate sales or rental income.
  • Residential transactions with a transaction value of $400,000 or less.

For a loan, transaction value means the loan amount, not the property’s value. And an exempt loan still needs an evaluation of the collateral. The agencies raised the commercial threshold from $250,000 to $500,000 in 2018. Keep that in mind, because the interagency guidance still quotes the older figure.

There is a line on the other end, too. Once the transaction value reaches $1 million, the rule calls for a state certified appraiser.

Consider two hypothetical loans. A $450,000 loan on a small retail building falls under the commercial threshold, so an evaluation would satisfy the rule. A $1.2 million loan on the same kind of building needs a full appraisal by a certified appraiser. Still, an exemption only sets the minimum. The guidance says lenders should consider an appraisal for higher-risk deals even when an exemption applies.

An evaluation still needs substance. The guidance expects it to describe the property and its use, estimate market value as of an effective date, and explain how condition was confirmed. It should also name its sources and, when a person prepares it, identify that person.

Appraisal Independence Starts With Who Orders the Report

The lender or its agent has to engage a fee appraiser directly. The appraiser can have no interest in the property or the deal. Staff appraisers, in turn, have to stay independent of lending, investment, and collection.

The Interagency Appraisal and Evaluation Guidelines go further. If a bank uses an appraisal the borrower ordered or provided, it violates the agencies’ rules. Independence also suffers when the borrower recommends the appraiser, or when loan production staff pick one for a deal.

That does not mean the appraiser works in silence. A lender may share the sales contract on a purchase. It may also ask the appraiser to consider more information about the property or the comps, and to fix factual errors. What it can’t do is push the appraiser, directly or indirectly, toward a number.

Engagement letters belong in the same conversation. The guidance says lenders should use written engagement letters, and work should not start until the appraiser is engaged. A good letter states the intended use and the property interest. It also says whether you need an as is value alone, or prospective values upon completion or stabilization as well.

Using an Appraisal Another Bank Ordered

Participations and loan transfers raise a common question. Can you rely on an appraisal another lender ordered? Under the rule, yes, if another financial services institution engaged the appraiser directly. The appraiser also must have had no interest in the property or the transaction.

Even then, the receiving bank has to review the report as closely as it would its own and document that review. It should also confirm the original lender, not the borrower, ordered it. And it must not accept a report altered to hide the original client.

What Credit Review Should Check Before Committee

Every appraisal used for lending needs a review for USPAP compliance. Reviewers should be independent of the transaction and shielded from loan production staff. A reviewer cannot change the value the original appraiser reached. But a qualified reviewer can develop a second opinion of market value through a USPAP review. In practice, these are the points worth checking first.

  • The approaches. The appraisal has to include each approach that applies and explain any it leaves out. Our guide to the three approaches to value shows how each one works.
  • The income support. On income property, trace the net operating income back to the rent roll and the cap rate back to market evidence.
  • The value premise. For construction loans, banks generally ask for the as is value, plus prospective values if the deal calls for them. Those should rest on current and reasonably expected market conditions.
  • The leases. Vacancy in a partially leased building and leases below market should show up as deductions where they apply.

Those details feed straight into loan sizing. Take a hypothetical building appraised at $2.8 million from $196,000 of net operating income at a 7 percent cap rate. A $1.96 million loan sits at 70 percent loan-to-value. If the market supports 8 percent instead, the same income points to $2.45 million. Then that loan runs at 80 percent of value.

What Borrowers Can Do to Keep the Appraisal Moving

If you own the property or are buying it, you can’t hire the bank’s appraiser. But you can make the assignment faster and cleaner.

  • Tell your lender early if a recent appraisal exists. The guidance lets a borrower point the bank to it, so the bank can request it directly from the lender that ordered it.
  • Have current leases, a rent roll, and two or three years of operating statements ready before the inspection.
  • Pull together the survey, any environmental reports, and a list of recent capital work with costs.
  • Plan for access to tenant spaces, the roof, and mechanical rooms.

Questions about value should go through your loan officer, not to the appraiser. Also ask the lender early about timing and whether you will get a copy of the report. Practices vary from bank to bank, and knowing up front keeps the closing date realistic.

Most Lending Appraisal Problems Start at the Order

A borrower-supplied report or a vague engagement letter causes more trouble than any single comp. Get the order right, and the review tends to go faster. This article summarizes the federal rules in plain terms. How your institution applies them is a question for your compliance team and counsel.

Have a CRE Loan Heading to Credit Committee?

PahRoo prepares USPAP-compliant commercial appraisals with the support a reviewer looks for, from the rent roll to the cap rate.

Request a Commercial Quote

Frequently Asked Questions

What appraisal do banks require for a commercial loan?

A federally regulated bank generally needs a written, USPAP-compliant appraisal from a state licensed or certified appraiser the bank engages directly. Commercial real estate loans of $500,000 or less, and certain business loans up to $1 million, can use an evaluation instead. At $1 million and above, the appraiser must be state certified.

What is a FIRREA appraisal?

It is an appraisal that meets the rules the federal banking agencies adopted under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Those rules require USPAP compliance, a written report with enough analysis to support the loan decision, the regulation’s definition of market value, and an independent appraiser.

Can a borrower order the bank’s appraisal?

No. Interagency guidance says a lender’s use of a borrower-ordered or borrower-provided appraisal violates the agencies’ appraisal regulations. A borrower can tell the lender that an appraisal already exists, and the lender can then request it directly from the institution that ordered it.

What is the difference between an evaluation and an appraisal?

An evaluation is an estimate of market value allowed for transactions exempt from the appraisal requirement, such as commercial real estate loans of $500,000 or less. It does not have to meet professional appraisal standards or be prepared by a licensed or certified appraiser. An appraisal must meet both.

What is appraisal independence?

It means the appraiser’s judgment stays separate from the lending side of the deal. The lender or its agent engages the appraiser directly, the appraiser has no interest in the property, loan production staff do not pick the appraiser, and no one pressures the appraiser toward a value.

Commercial Appraisals Built for Credit Review

Lenders, owners, and their advisors bring commercial assignments to PahRoo Appraisal & Consultancy across Chicago and Cook County, Dallas-Fort Worth, Philadelphia, Phoenix, and Naples. Our commercial appraisal services page lists the property types we cover. For Chicago-area loans, our Chicago appraisal services page explains how to place an order.


Read Now
income-approach-tax-appeal-cook-county.
41 Views
Property Tax
NOI and Cap Rates Under Scrutiny in Commercial Tax Appeals

When the Assessor and your client’s appraiser both use the income approach, why do the values sit so far apart? In an income approach tax appeal, the answer usually sits in two inputs, net operating income and the cap rate. Both are getting a harder look in 2026, because Cook County changed how real estate taxes enter the cap rate.

What you will take from this article

  • How the Assessor builds a commercial value, and what changed for 2026
  • Which income records the Assessor and the Board of Review expect in a file
  • How a lender can test a reassessed value against a borrower’s real income

How the Assessor Builds Value in an Income Approach Tax Appeal

The Assessor’s Office values most commercial property with the income approach, applied through mass appraisal. Its published method starts with potential gross income at estimated market rents. Then it takes out vacancy and collection loss and subtracts typical operating expenses. The resulting net operating income is divided by a market cap rate. If you want the logic behind each step, our guide to how appraisers use the income approach walks through it.

The inputs reflect market data and past appeals on similar properties, so they describe a typical building, not your client’s. That is why the model can miss a below-market lease or a tenant who stopped paying. The Assessor’s own commercial brochure addresses this. It says a below-market lease may support a reduction if detailed income and expense records back it up.

After the value is set, the county ordinance level applies. Office, industrial, and retail buildings typically assess at 25% of market value, while apartment buildings assess at 10%.

Cook County reassesses in thirds, and the south and west suburbs are in the 2026 cycle. Township windows open on a rolling schedule, so the Assessor’s calendar is the place to confirm a date. Our earlier piece on the 2026 south suburbs reassessment covers when a second opinion makes sense.

The 2026 Loaded Cap Rate Changes the Arithmetic

Starting in 2026, the Assessor applies a loaded cap rate to all commercial properties under its cap rate policy. Real estate taxes no longer come out as a line item in operating expenses. Instead, a tax load gets added to the market cap rate.

The load is the level of assessment times the equalization factor times the tax rate. The policy’s own example multiplies 25% by a 3.0355 equalization factor and an 8.970% tax rate. That gives 6.81%.

The south townships carry a wrinkle. The Assessor estimated their 2026 tax rates by mirroring the 2023 actual rates, and it uses the 2023 equalization factor. Your client’s current bill may tell a different story, so the load is worth comparing with it.

Consider a hypothetical building with $500,000 of net operating income before real estate taxes. Assume a 7.00% market cap rate and a 6.81% tax load. The loaded rate is 13.81%, so the indicated value is about $3,620,565. At the 25% level, the assessed value would be about $905,141.

Now check it from the other direction. Taxes at that value run about $246,560, which leaves about $253,440 of income. Capitalized at 7.00%, that returns roughly $3.62 million, the same answer. The two methods agree because the taxes sit in one place only.

Mixing them breaks the math. Suppose a report deducts $200,000 of actual taxes and also applies the loaded rate. Value falls to about $2,172,339, roughly 40% lower, because the taxes were counted twice. Rate moves matter too. A 50 basis point rise in the market cap rate lowers value to about $3,494,060 in the same example. That is a drop of about 3.5%. These figures are illustrative and are not Assessor data.

So ask one question of every income analysis in your file. Do the taxes sit in the NOI or in the rate? The answer has to match on both sides of the formula, and the report should say which basis it used.

Where Net Operating Income Gets Tested

Appeals on income-producing property now include Real Property Income and Expense filing. The online filing page warns that missing or incomplete information may produce a no change result. The Assessor’s brochure lists three years of income and expense records. It also asks for rent rolls, leases, an appraisal if available, and recent sales documents.

At the Board of Review, one commissioner’s published guidance for leased property covers the rent roll and leases. It also lists three years of IRS Schedule E, photographs, and a vacancy affidavit. Each township is open at the Board for a 30-day window. For the appraisal side, see what a tax appeal appraisal must contain.

Clean records come first. Strip out depreciation, debt costs, capital expenses, and payments to owners. The Assessor leaves those out of operating expenses too. Our overview of net operating income in commercial real estate shows what belongs above the line.

The harder part is reconciling the owner’s actual income with market income. Contract rents above or below market change the picture. A Board of Review summary of the 2022 appeal cycle says the Board checks whether leases sit at market rates. Your appraiser supports that comparison with leases and market rent evidence. How it fits a legal theory stays with counsel.

Vacancy Claims Follow a Published Formula

The Assessor’s valuation already carries a market vacancy factor, so a vacancy claim has to go beyond it. Under the vacancy policy, a reduction applies when conditions outside the owner’s control keep a building from its intended use. The policy recognizes market, renovation, and casualty vacancy, and it limits any reduction to 24 months per event.

For market-related vacancy, the formula takes half of the weighted annual vacancy and subtracts the vacancy already in the valuation. Take 60% weighted vacancy with 10% already in the valuation. That is 30% less 10%, an additional 20% reduction to the building’s assessed value.

The documents matter as much as the math. The policy asks for a month-by-month vacancy affidavit, a twelve-month rent roll, proof the space was marketed, and utility bills. If the file can’t show those, the number won’t carry.

What Lenders Should Do With a Reassessed Value

Bankers see this from the other side. A reassessment can move the tax line in a borrower’s NOI long before any appeal is decided. The Assessor’s value is not a collateral value. It is a mass appraisal built for tax purposes.

So when a notice arrives, ask the borrower for the Assessor’s methodology report for the township. It shows how each PIN was reassessed. Set the income, vacancy, expense, and cap rate inputs next to the borrower’s rent roll and your own appraisal. If the borrower has filed an appeal, ask to see the filing and the income evidence behind it. Treat any hoped-for reduction as unrealized until a decision issues.

Put the Income Evidence and the Cap Rate on the Same Basis

Start early. Gather three years of income and expense statements, the current rent roll, and the leases. Ask your appraiser to state whether taxes sit in the NOI or in the cap rate. Have the market rate and the vacancy supported with evidence you can hand to the Board. Then confirm the township window, because they open on different dates and close on schedule.

PahRoo establishes value from the evidence. Whether a given fact pattern meets a legal standard stays with you and the Board.

Is Your Cap Rate Loaded or Unloaded?

Send us the rent roll and the Assessor’s notice. We will build the income case on one consistent basis. Your NOI and cap rate then hold together at the Board.

Build the Income Case

Frequently Asked Questions

How is commercial property valued for a Cook County tax appeal?

The Assessor values most commercial property with the income approach, applied through mass appraisal. It uses market rents, vacancy, expenses, and a market cap rate. In an appeal, an owner can present actual income records and an appraisal to support a different value. The Assessor defines fair market value as what a property could sell for between willing parties.

What income evidence does the Board of Review want?

Board of Review guidance for leased commercial property covers the rent roll and leases. It also lists three years of IRS Schedule E, photographs, and a vacancy affidavit where it applies. Owner-occupied property needs an appraisal completed in the past three years. Check the current filing rules before you submit, because requirements can change.

Do commercial tax appeals need an appraisal?

It depends on the property and the filing. Board of Review guidance asks for an appraisal on owner-occupied property, while leased property leans on income records. Illinois Property Tax Appeal Board rules list an appraisal as one form of proof of market value. A recent sale, comparable sales, and construction costs are others. Your attorney decides which evidence fits the case.

What cap rate does the Assessor use?

There is no single rate. The Assessor derives a market cap rate from market data, third-party sources, past appeals, and comparable sales. Starting in 2026 it adds a tax load to that rate. The loaded rate therefore runs higher than the market rate alone. The methodology report for your township shows what was applied to each property.

How does vacancy affect a commercial assessment?

The Assessor’s valuation already includes a market vacancy factor. A commercial vacancy reduction applies when conditions outside the owner’s control keep a building from its intended use. Any reduction is limited to 24 months per event. The owner documents the claim with a vacancy affidavit, a rent roll, proof of marketing, and utility bills.

Income Approach Appraisals for Cook County Appeal Files

PahRoo Appraisal and Consultancy prepares income approach appraisals from our Lincolnwood office. We work with attorneys, lenders, and property owners across Cook County. If you are still deciding whether to appeal, start with our overview of Cook County tax appeals. You can also read when a commercial real estate appraisal makes sense.

Read Now
Former church building on a residential block, a common subject of a special use property appraisal
49 Views
Commercial Appraisals
When There Are No Comps for a Mixed-Use or Special Use Building

What do you tell a client who asks what a former church is worth? Or a bowling alley, or a storefront with four apartments upstairs? A special use property appraisal starts where the usual shortcuts stop. There may be no recent sales of anything like it, and no rental market to borrow from. So the report has to show more of its reasoning, and counsel should know where to look.

By the end of this article, you’ll know:

  • What makes a property special use or mixed-use, and why comparable sales fall short.
  • How highest and best use and the cost approach carry the analysis.
  • Which value, interest, and use questions to settle before the engagement letter goes out.

Why a Special Use Property Appraisal Takes More Work

A special use property is a building designed around one purpose. Its layout, structure, or equipment fits that use and little else. Think of a house of worship, a school, a theater, a car wash, a gas station, or a bowling alley. Appraisal texts usually call it special purpose property, but the idea is the same.

The trouble starts with the market. Few buyers want a building they would have to gut, so these properties sell rarely. When one does sell, the price often reflects a conversion or a teardown. Because of that, the sale may say little about what the building is worth in its current use.

So the appraiser widens the search. Sales from other counties or other states may come in, along with older ones. Each needs more adjustment and more explanation. The income approach has limits too, because many of these buildings have no rental market to speak of. Our guide to the three approaches to value explains how each one works on ordinary commercial property.

Highest and Best Use Comes Before Any Number

Every appraisal rests on a use. Highest and best use is the use that passes four tests. It has to be legally permissible, physically possible, financially feasible, and maximally productive. On a special use building, that analysis can decide the whole assignment.

Take a closed church on a residential block. It may be worth the most to another congregation. Or a developer may pay more to convert it to housing, if zoning allows. Sometimes the land is worth more with the building gone. Those are three different values for the same parcel.

The first test is where your work and ours meet. Zoning, a special use permit, legal nonconforming status, deed restrictions, and easements all shape what a buyer can do. The appraiser reports what the analysis relied on. But if the legal status is in doubt, that call belongs to counsel, not to us. In that case the report should state the assumption plainly, so any reader knows what the value depends on.

Federal bank guidance takes the same view. Under the Interagency Appraisal and Evaluation Guidelines, market value should reflect the property’s actual physical condition, use, and zoning as of the effective date. If the highest and best use is redevelopment, demolition and site preparation costs also belong in the analysis.

Where the Cost Approach Earns Its Place

When sales and rents are thin, the cost approach often carries the most weight. It adds land value to the cost of building the improvements new, then subtracts depreciation. On a special use building, depreciation is the hard part.

Physical wear is easy enough to see, but functional obsolescence takes more judgment. A 600-seat sanctuary or a 40-lane bowling center may cost far more to build than the market would pay for it today. That gap has to come off the cost, and the report should say how the appraiser measured it.

Consider a hypothetical single-purpose building. Say the land is worth $600,000 and the improvements would cost $3,200,000 to replace. Physical depreciation of 35 percent takes off $1,120,000. Functional obsolescence then takes off another $480,000. So the improvements contribute $1,600,000, and the cost approach indicates $2,200,000.

In a dispute, that $480,000 line is the one the other side will test. The same goes for the land value, which still comes from sales. The interagency guidelines also expect the appraiser to explain any approach left out. If the report skips sales comparison, it should say why.

Mixed-Use Property Is Several Buildings in One

Mixed-use property has the opposite problem. There is plenty of market evidence, but it belongs to different markets. A building with retail at grade and apartments above answers to retail rents and apartment rents at once. Each part has its own vacancy pattern, expense load, and lease structure.

So the income approach gets built one component at a time. The appraiser estimates net operating income for the retail and for the apartments, then asks who buys the building as a whole. The cap rate should come from sales of buildings with a similar mix. If it can’t, the report should explain how the appraiser blended the rate.

Leases need a close read as well. The interagency guidelines note that a long lease below market rent can make the leased fee worth less than the fee simple. For that reason, the report must state which interest it values.

In Cook County, the mix also drives the tax line. Under the Assessor’s class definitions, revised in December 2024, a mixed-use building with six or fewer units and under 20,000 square feet is Class 2-12. That class sits at a 10 percent level of assessment, while commercial classes sit at 25 percent. Larger buildings can end up split between the two. The Assessor makes that call, but the appraisal still has to model the taxes a buyer would expect.

The Real Estate Is Not the Business

Some special use properties sell as operating businesses. A car wash or a hotel changes hands with its equipment and its customer base. That total is going concern value, and it is not the value of the real estate.

The distinction matters for lending. The same federal guidelines say going concern value, value in use, and value to a specific user may not stand in for market value in a federally related transaction. An appraisal can report them, but only as separate opinions with clear labels.

SBA lending went a step further. In a 2015 notice, SBA said going concern appraisals of special purpose property must allocate separate values to land, building, equipment, and intangible assets. SBA has revised its procedures since then, so confirm the current rule with the lender.

Still, the allocation question comes up in purchase agreements, collateral descriptions, and ownership disputes too. How those pieces get characterized legally is your call. Our job is to support each number.

What Owners and Investors Should Hand the Appraiser

If you own or are buying one of these buildings, the file you hand over shapes the report. So pull these together first.

  • Every commercial lease, plus a rent roll that separates commercial space from apartments.
  • Three years of income and expenses, with shared costs such as taxes and insurance split by component where you can.
  • The certificate of occupancy and any special use permit, variance, or zoning letter.
  • For a single-purpose building, the construction costs or recent contractor bids.
  • A list showing which equipment stays with the building and which belongs to the business.

If your own company occupies the building, put a written lease in place at a rent you can support. Then the appraiser has something to analyze besides your word. Also, before you buy a special use building, price the exit. Ask a contractor what conversion would cost, because the next buyer will ask the same thing.

Settle Four Questions Before the Engagement Letter Goes Out

Most trouble with these appraisals starts before anyone hires the appraiser. So settle four points up front and put them in the engagement letter.

  • Start with the value, whether market value of the real estate, value in use, or going concern.
  • Then name the interest, fee simple or leased fee.
  • Next comes the use, as the property stands today or under a stated zoning or conversion assumption.
  • Finally, fix the date, either today or a past date the matter turns on.

A special use property appraisal that answers those four on page one is far easier to defend. It is also easier to compare when the other side produces its own report.

Drafting Around a Hard-to-Value Building?

PahRoo lays out the highest and best use, the approaches, and any allocation step by step, so counsel can follow how the value was reached.

Discuss Your Commercial Assignment

Frequently Asked Questions

What counts as special use property?

A property built for one purpose, with a design or layout that suits that use and little else. Common examples are houses of worship, schools, theaters, car washes, gas stations, and bowling alleys. Appraisers often call it special purpose property. Because few buyers want such a building as it stands, sales are scarce.

How do you appraise a church or school?

Usually with the cost approach in the lead. The appraiser values the land from sales, estimates the cost to build the improvements new, then subtracts physical wear and functional obsolescence. Sales of similar buildings, often from a wider area, serve as a check. Highest and best use analysis comes first, since conversion or redevelopment may be worth more than continued use.

How is mixed-use property valued?

Mostly through the income approach, built one component at a time. Retail, office, and apartment space each get their own market rent, vacancy, and expense analysis. The appraiser then applies a cap rate supported by sales of buildings with a similar mix, and checks the result against those sales directly.

What is a going concern in appraisal?

It is the value of an operating business together with its real estate, equipment, and intangible assets. Federal bank guidance says going concern value may not be used as market value for a federally related transaction, though an appraisal may report it as a separate, clearly identified opinion.

Why are special use properties hard to value?

They rarely sell, and many have no rental market, so two of the three approaches have little data. The cost approach fills the gap, but it depends on a judgment about how much value the specialized design has lost. That judgment needs clear support in the report.

Appraisals for Buildings That Don’t Fit a Template

Odd buildings are regular work at PahRoo Appraisal & Consultancy. Our MAI and SRA designated team serves Chicago and Cook County, Dallas-Fort Worth, Philadelphia, Phoenix, and Naples. See our commercial appraisal services for the property types we cover, mixed-use and special purpose assignments included. Or start with our Chicago appraisal services page for local scope questions.


Read Now

NEWSLETTER

Knowing a property's true value is key
to making informed real estate decisions

Contact us TEST

appraisal@pahroo.com

+1 (773) 388-0003

Visit us

7383 Lincoln Ave Suite,
#100 Lincolnwood, IL, 60712

© 2026 PahRoo, All Rights Reserved