Best Practices: What Do You Do When Your Real Estate Appraisal Comes in Low?

For SBA loans greater than $250,000 and collateralized by commercial real estate, SOP 50 10 5(J), Subpart B, Chapter 4, Section IV, Paragraph A requires that lenders obtain a real estate appraisal by an independent, state-licensed or state-certified appraiser. If the commercial real estate has an estimated value greater than $1,000,000, then lenders must use a state-certified appraiser. The appraisal must be in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and be dated within 12 months of the SBA application. The appraisal must also be in compliance with the lender’s primary regulator’s FIRREA requirements for real estate appraisals. For SBA loans less than $250,000, lenders may obtain an appraisal from a state-licensed or state-certified appraiser, but are not required to do so. The lender must be identified as the client and/or an intended user of the appraisal. The lender may not use an appraisal prepared for the seller or the SBA applicant.

The lender may submit the appraisal as part of the SBA loan application or as part of the loan closing. If the lender will be obtaining the appraisal for loan closing, the SBA loan application must include an estimate of the commercial real estate value. This estimate must be included in the SBA loan authorization along with the requirement for an appraisal that supports the estimated value. If the appraisal comes in at 90% or more of the estimated value, then the SBA permits lenders to close the loan, however, lenders must include a written explanation as to why the appraisal came in lower than the estimated value if this occurs.

If the appraisal comes in at less than 90% of estimated value, and the loan is processed through general processing (GP), then the lender needs SBA’s written approval in order to close the loan. To obtain SBA approval, the lender must justify why the appraisal came in low. Perhaps there were not sufficient comparable properties in the area; or the square footage was not as expected; or perhaps the use of the property is limited. The lender will need to suggest ways to offset the difference in value such as requiring additional equity, additional collateral, a seller note or an increase in a seller note, while taking into consideration that equity injection requirements must be satisfied. Perhaps the SBA loan applicant has a securities account that it can pledge; or a guarantor that it can add; or the applicant has a piece of vacant land to pledge as collateral. If the SBA or lender requires additional collateral to offset the difference, the lender must indicate the fair market and liquidation value of the additional collateral.

If the lender is closing the loan through the Preferred Lenders Program (PLP), and the appraisal comes in at less than 90% of the estimated value, then the PLP lender can close the SBA loan if the lender justifies in its file why the appraisal came in low and how the lender was able to offset the risk. As discussed above, the lender can request additional equity or additional collateral and/or suggest a seller note or an increase in a seller note, while taking into consideration that equity injection requirements must be satisfied. It would also be beneficial for the lender to add justification to its file detailing why this particular piece of commercial real estate would benefit the applicant. Perhaps this is the only piece of commercial real estate in the area to meet the applicant’s needs; or the parking available on site is crucial to the applicant; or the property is near the applicant’s customer base which will save on delivery costs. Whatever the case may be, the lender’s analysis should contain sufficient detail in the loan file to protect the SBA guaranty.

For more information on SBA appraisal requirements, contact Michelle Sergent Kaas at 267.470.1167 or at mkaas@starfieldsmith.com.