how to appraise a new structure (cost vs income approach)

[Brandon McCombs]

Not sure what forum this best belongs in so I just picked one. I'm asking for opinions on the matter, especially from an appraiser's or loan officer's perspective.

I've been told that the bldg I'm having to basically fully renovate due to a fire (it's currently gutted right now) won't command an appraised ARV above $500k due to the town it's in. However, preliminary numbers from the contractor indicate that the renovation costs alone might be at least $500k. I still owe $200k on the property (only owned it 6 months when the fire struck). I doubt my loan officer will approve another $500k on top of my existing $200k loan if the 9 unit mixed-used building doesn't appraise for what the current math says it must appraise for: $700k. If anyone is wondering why I have to borrow the full $500k it is because we were underinsured due to a combination of my lack of experience with commercial property and our insurance broker not properly advising us on what the policy amount should be. The policy amount ended up being the sale price so we don't have any money left to rebuild; all the insurance money was used up during the cleanup phase after the fire.

This brings me to a question. If someone builds a new multi-unit building that costs X amount and the town in which it is built dictates the rental income for the structure is X - Y then how would someone get approved for the construction loan in the first place? And what would the appraised value of the building be afterwards? Is it going to be X (the construction cost) or Y (the expected rental income)?

I spoke to the appraiser who appraised my building 2 years ago when I was first going through the purchase transaction and he states that too many banks have been burned on using the cost approach with people paying too much or over-improving their investments which has caused most people in the industry to only use sales and income approaches to properly appraise a property. If this is indeed true then I probably won't be able to get a loan. Although my building isn't new, the only thing not being replaced is going to be the exterior walls and 2/3 of the roof so my thought was that it should maybe be appraised using the cost approach since it's close to being new construction from that perspective. But the appraiser didn't seem to agree.

Any thoughts?