How does a lender's appraisal process differ for commercial property compared to residential in Ontario?

A residential appraisal leans heavily on comparable sales, meaning what similar homes nearby have recently sold for, because most homes are bought for occupancy rather than as an income-generating investment. Commercial appraisals work differently because commercial properties are typically valued, at least in part, on the income they produce: an appraiser will often apply an income approach, capitalizing the property's net operating income, rent collected minus operating expenses, into a value, informed heavily by the rent roll, actual leases, and expense history.

Comparable sales and replacement cost approaches still play a role in commercial appraisals, but the income approach tends to carry significant weight for income-producing properties like retail plazas, office buildings, and industrial properties. Because of this, commercial lenders also look closely at tenant covenant strength, meaning how creditworthy and stable the actual tenants are, lease terms and remaining length, and vacancy, rather than focusing mainly on the physical property the way a residential appraisal might.

This means a commercial buyer's financing can be affected as much by the quality and stability of the existing tenants and leases as by the physical building itself. A property with strong tenants on long leases can appraise and finance quite differently than a similar building with weak or short-term tenancies.