How Is Commercial Property Valued?

The asking price is what a seller hopes to receive. The contract price is what you agree to pay. Market value is a third thing: an estimate of what the property should bring in an open sale.

Federal appraisal rules for national banks define market value as the most probable price a property should bring in a competitive and open market, with buyer and seller each acting prudently and knowledgeably and the price not affected by undue stimulus. The definition also assumes reasonable market exposure and normal payment terms, unaffected by special financing or sale concessions.

That definition describes an arm's-length sale to a typical buyer. It does not measure what the building is worth to your company in particular. A location next to your largest customer may be worth more to you than to anyone else, but a lender's appraisal is not designed to pay for that.

The Comptroller's Handbook on commercial real estate lending, written for bank examiners, describes three ways to reach a value.

• Income approach. Expected net operating income (NOI) is converted into a present value. The common shortcut, direct capitalization, divides stabilized NOI by a capitalization rate. The longer version, discounted cash flow, discounts projected NOI and an expected sale price back to today.
• Sales comparison approach. The value comes from sales data on similar properties. The handbook says an appraiser typically compares the property to at least three recently sold properties in the area with similar characteristics.
• Cost approach. The value equals the cost of the land, plus the cost of construction, less depreciation.

An appraiser may develop more than one approach and then explain which deserves the most weight for this building. When you read a report, look for that reasoning and not only the final figure.

The figures below are hypothetical, for illustration. They are not market data, and the capitalization rates are not market rates.

• Income approach: NOI of $150,000 divided by a 7.5 percent capitalization rate equals $2,000,000.
• Same NOI at an 8 percent capitalization rate: $150,000 divided by 0.08 equals $1,875,000. A half-point change in the rate moved the value by $125,000 with no change at the building.
• Cost approach: $400,000 of land plus $2,100,000 of construction cost, less $500,000 of depreciation, equals $2,000,000.
• Sales comparison: three similar buildings sold, and the appraiser adjusts each sale for differences such as size, age, condition and location before reconciling them into one figure.

The second line is why interest rates matter to value. The handbook notes that rising interest rates may lead to higher capitalization rates and lower property values without any change in the property's fundamentals.

An investor buys a stream of rent. An owner-user buys a place to operate. That difference changes how much each approach tells you.

• The income approach may rest on an estimate. A building you will occupy may have little or no rent roll, so the income figure has to come from what the space could rent for. Ask what rent the appraiser assumed and where it came from.
• Sales of owner-occupied buildings may be the closest evidence, if enough similar ones sold recently. Ask how comparable they really are, and what adjustments were made.
• Specialized buildings are harder. The handbook says unique or specialized properties are normally less marketable and more difficult to liquidate, and that they raise difficult valuation issues, including the cost of converting them to other uses.
• Your planned improvements may not add dollar-for-dollar value. A lab, clean room or custom layout may serve you well and mean little to the next buyer.

That last point is worth settling early: decide which costs you are willing to treat as operating necessities and which you expect to recover on resale. Lenders also read the two separately. The handbook says that for owner-occupied property the primary repayment source is usually the occupying business's cash flow, while appraisals and loan-to-value limits remain relevant.

The appraisal is ordered for the lender, and its timing can matter as much as its conclusion. For example, the SBA's operating procedure, SOP 50 10 8.1 (effective October 1, 2026, and subject to change), says a 7(a) lender may not use an appraisal prepared for the seller or the applicant, and that the appraiser must be independent.

Federal rules for national banks also require a state certified appraiser for federally related commercial real estate transactions above $500,000 (eCFR text read November 2026). Your lender will know which requirement applies to your loan.

A low appraisal can reopen the financing. Under the same SOP, if a 504 appraisal comes in below 90 percent of the estimated value, the debenture must be reduced or the gap addressed with more collateral or investment, unless SBA approves the appraisal based on strong, consistent cash flow. Conventional lenders set their own policies, so ask yours what happens if value comes in below price.

1. Before you offer, review recent comparable sales so your price has a basis.
2. Ask your lender early what appraisal it will order and how long it takes.
3. Align your contract's financing or appraisal contingency with that timing, with help from your attorney.
4. When the report arrives, read the assumptions, the comparable sales and the reconciliation.
5. If the value falls short, compare your options: renegotiate, add cash or change lenders.

An appraisal below your contract price does not automatically lower the price. Whether you can renegotiate or walk away depends on what your contract says.

An assessed value is not an appraisal. In Cook County, for example, the Assessor reassesses each property once every three years on a schedule set by township, and the reassessment notice states an updated estimated fair market value that the owner may appeal within a stated window. That figure drives property tax, not your loan, and it can differ from your purchase price.

Tenant Advisory Group is a broker, not an appraiser or a lender. Our role for a buyer is to bring comparable sales and competing options into the price discussion, while the buyer's lender orders its own appraisal independently.