November 2, 2016

Best Practices: Commercial Real Estate Appraisals for SBA 7A Loans and Non Arm’s Length Transactions

by Kristen G. Dickey

This article will summarize commercial real estate appraisal requirements for SBA 7a loans, and specifically discuss the requirement applicable to a business real estate appraisal when there is a change of ownership within the 36 months prior to the date of the loan application for the related real estate purchase.

One of the primary underwriting responsibilities for many SBA lenders is to review the commercial real estate appraisal and verify that it complies with SBA requirements, which are found in the SOP 50 10 5(H), Pages 168-171 and are summarized below:

  • SBA requires an appraisal of real estate if the loan is greater than $250,000 and collateralized by commercial real property.
  • SBA or the lender may require an appraisal of real estate for a loan of $250,000 or less, if the appraisal is necessary for appropriate evaluation of creditworthiness.
  • The appraisal must:
    • be an “Appraisal Report” prepared in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP);
    • be less than 12 months old from the date of the application for guaranty; and
    • identify the lender as the client and/or an intended user of the appraisal.
  • The appraiser must:
    • be independent and have no appearance of a conflict of interest; and
    • be either State-licensed or State-certified (except the appraiser must be State-certified if the estimated value of the commercial real estate is in excess of $1,000,000) .
  • If the loan proceeds will be used to finance new construction, “substantially renovate” an existing building, or cover the construction period, the appraisal must estimate what the market value will be at completion of construction.  Various other requirements apply, so please see SOP 50 10 5(H), Page 169.
  • If the loan proceeds are to fund the purchase of an existing building not requiring construction, the appraiser should estimate market value based on an as-is basis or otherwise explain why this basis was not used.
  • When valuing the collateral, the lender must not include the contributory value of any rental income or intangible assets contained in the appraisal.
  • If the valuation of fixed assets is greater than their depreciated value (net book value), an independent appraisal by a qualified individual must be obtained by the lender to support the higher valuation (the use of a business valuation, unless part of a going-concern appraisal, will not meet this requirement).
  • For businesses that have been transferred within 36 months prior to the date of the loan application and the loan amount is more than $250,000, SBA requires: (i) an appraisal of the business real estate; and (ii) either a “review” of the appraisal by another appraiser selected directly by the lender or a site visit by a senior member of the lender’s staff.

This last SBA requirement stems from the uncertainty behind a “non arm’s length transaction.”  By way of background, an “arm’s length transaction” is a transaction between two independent, unrelated, and well-informed parties.  In an “arm’s length transaction,” the parties will be on equal footing and able to negotiate a purchase price that is close to fair market value, which should be confirmed by the appraisal.

In a “non arm’s length transaction,” the parties have a pre-existing relationship whether it be by blood, marriage, or business.  In such a situation, the purchase price may not reflect the actual fair market value of the property due to unsupported values or misrepresentations, either of which create potential risk for the lender.  A separate review of the appraisal by another appraiser is the best-practice to confirm the appraised value, but a site visit is another option permitted by the SBA.

For more information on commercial real estate appraisals for 7a loans and “non arm’s length
transactions,” please contact Kristen at or 407.618.0698.