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:
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 kdickey@starfieldsmith.com or 407.618.0698.
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