The pitfalls of property valuation for commercial real estate lenders: using a comparative income approach to improve accuracy

Abstract

This paper assesses valuation methods of income producing real estate used by real estate appraisers from the perspective of commercial property lenders. Imbedded in any valuation are assumptions made about income growth and property price appreciation. These assumptions are evaluated highlighting models most frequently used by appraisers. When using appraisals, commercial lenders should be particularly aware of growth-related assumptions as they significantly impact the estimated value of any property. This paper provides a method of evaluating the sensitivity of a property's value to differing income growth scenarios using a perpetuity model. The comparative income growth (CIG) technique can improve lenders' risk analysis and loan decision making by building on information provided in property appraisal reports. Copyright © 2003 Henry Stewart Publications