Why can a lender’s appraisal differ from the price of a commercial property?

A lender’s appraisal and the price in your offer answer different questions. The price is what two parties agreed to pay. The appraisal is a professional’s opinion of market value, prepared for the lender to rely on. Neither is wrong when they differ, but only one of them sets how much the lender will advance, and that is the appraisal. This matters most when a business purchase includes the building or land.

What the appraisal measures

The Appraisal Institute of Canada says professional appraisers provide independent valuations that support lenders, governments, businesses and property owners, and that its members follow the Canadian Uniform Standards of Professional Appraisal Practice. The CSBF program’s guidelines add that an appraisal must be for fair market value, with the assets inspected, and that book value or a municipality’s assessed value for tax does not count as one.

Why a price can sit above it

BDC notes that a business’s fair market value is not necessarily the price it will sell for, and lists market conditions, the buyer’s strategic interests, due diligence, availability of financing and the seller’s eagerness among the factors that move the final price. The same reasoning applies to property included in a deal. An appraisal also has a shelf life: the program requires it to be recent relative to the first advance.

What the lender does with the gap

Under the program, the eligible cost is the lesser of the purchase cost and the appraised value. If the appraisal gives a range, a price inside or below it is accepted and a price above it is capped at the top of the range. Other lenders set their own policies, so ask yours whether it advances against price or value. Either way, any shortfall has to come from your cash, another source or a renegotiated price. Appraisal costs are typically the borrower’s, and the guidelines expect the purchase agreement to allocate the price across the assets, since an appraised value is not accepted as that allocation.