@Brianne Leichliter @Patrick Britton I'll answer you both simultaneously, as the answers are sort of linked together. First off, an appraisal can change in any realistic timeframe. Fix-and-flips happen in the commercial sector all the time and that dramatically changes the appraised value. So don't worry about that. The two ways to change a property's value is to alter market behavior or to alter the subject's qualities. It's tremendously easier to change the subject property's qualities over changing how the market behaves, and altering the NOI is one way of doing that.
Let me walk through, very, very generally, the process most appraisers take to arrive at a value conclusion for the income approach.
First, an effective gross income is derived for the subject property. This is usually similar to the owner's pro forma. This effective gross income is then compared to similar properties in similarly competitive markets. In other words, this is the part where rental income is compared to similar properties. The contracted rents from the owner is most important when deciding potential income for the subject property, but it's measured against the market to determine if that is below, at, or above market rents in the area.
Second, net operating income is derived for the subject property which is, basically, EGI minus expenses. Again, this is usually taken directly from the owner's pro forma (and weighted against the comps, if there are any). Some appraisers will simply take the owner's word at their own expenses for the most part, if the figures are somewhat reasonable. Appraisers measure the market and know industry standards, but the owner is considered to be more knowledgeable about his/her property than the appraiser and those figures are generally trusted. In any case, those figures are sometimes measured against expense comparables in the area to check if they are reasonable. If there is a discrepancy, such as with fixed operating expenses being much higher in the market than the owner depicts, then the benefit of the doubt is usually given to the market's typical expenses. In all cases, there will usually be a blended estimation of expenses based on the owner's pro forma and the comps. However, this is where documentation comes into play. If the owner is diligent about their expenses and can prove any discrepancies, then they can make a strong case to increase the report's NOI for the property. Perhaps you purchased a top-of-the-line boiler and your energy costs are 25% lower because of that... Those documents should be sent to the appraiser (including subsequent energy bills). The appraiser will then, most likely, use that information and give the most weight to your own historical data instead of relying on market data, despite a strong discrepancy. Remember that the appraiser's license is on the line and it gets riskier and riskier the more people are "trusted" in the report instead of using actual, quantifiable, and measurable data. If you provide the appraiser with that data, then they protect themselves and everybody is generally happy. For this reason, they won't usually add in a bunch of expenses that aren't usually present in the rest of the market. The data in the report usually isn't shocking or surprising and the numbers are usually very "average" if an expense profile needs to created for the subject (like new construction properties).
Third, cap rates are derived for the property. Appraisers use different methods depending on the market, industry, asset class, etc. But it usually heavily leans on expense/income documentation and is weighed against national/regional cap rates. The methodology can get cumbersome, so I'll spare you the details.
Fourth, the cap rate is mathematically factored into the subject's calculated NOI and an opinion of value is developed based on that formula.
So all in all, you can absolutely alter your NOI and effectively alter your property's value, even if you just got an appraisal done. The biggest key is to keep strong documentation of all money going in and out of that building and why. After that, if you disagree with an appraisal, then give the appraiser a reason to change the opinion of value. Always be respectful (which is a good tip in all aspects of life), but ask that they consider other data, different comparables, etc. An appraiser is usually ethically bound to consider all new information and is restricted from ignoring it in the report. Even if they disagree with your comparables, for example, they'll usually update the report and explain why those comparables weren't utilized in the analysis.
Remember that when it comes to commercial leases, triple net leases are pretty common and they're a relatively simple way to deal with CAM/tax/maintenance/improvement expenses so that it doesn't come out of your pocket. So that's a useful tool to explore if you haven't, already. On a related note... Here's an interesting story. A client of ours in the past told us that he was sued by a tenant for having that tenant pay for his share of the roof and the tenant ended up winning. Not because a roof can't be included as a CAM expense, and not because a tenant isn't responsible for capital expenditures... That can all be worked out in the lease. The issue was that he referred to the new roof as a liability (as an expense) when it was, in fact, an asset that was an "expense". What this tenant should have been paying for was the depreciative expenses associated with a new roof, not the liability of purchasing a new roof (this isn't allowed on your taxes, either, for the most part). In any case, I'm not an accountant or a lawyer, but it's something to consider and discuss with your attorney when setting up your leases. Just a tip!
