An appraisal is an independent, professional estimate of a property's market value, typically prepared by a licensed appraiser using approaches such as comparable sales, income capitalization, or replacement cost. Lenders generally require an appraisal before financing a commercial property, since the appraised value helps determine the maximum loan amount they are willing to extend relative to that value.
For income-producing real estate, appraisers place particular weight on the income approach, which estimates value based on a property's net operating income and prevailing capitalization rates for similar assets. This makes the appraisal not just a formality but a meaningful checkpoint on a sponsor's underwriting assumptions. If an appraisal comes in below a purchase price, it can reduce available financing and force a sponsor to raise additional equity or renegotiate terms. Investors reviewing a deal often look for how a property's appraised value compares to its purchase price as one indicator of underwriting discipline.
Further reading: Lightstone's Track Record
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