Best Practices: Appraisal Requirements Under SOP 50 10 7

SOP 50 10 7 will apply to all SBA loan applications received by the SBA on or after August 1, 2023.  SOP 50 10 7 sets forth real estate appraisal requirements that Lenders are to follow, some of which mirror 50 10 6, and some of which are new.

Under SOP 50 10 7, Lenders must obtain an appraisal by a state licensed or certified appraiser for all 7(a) loans, regardless of size, if the loan proceeds will be used to acquire, refinance or improve commercial real estate securing the loan.  This is a change from 50 10 6 which specified that 7(a) loans greater than $500,000.00 required an appraisal for all commercial real estate securing the loan, but 7(a) loans of $500,000.00 or less (“small 7(a) loans”) only required an appraisal in certain situations.  SOP 50 10 7 states that if the loan proceeds will be used to acquire, refinance or improve commercial real estate, regardless of the size, the Lender must obtain an appraisal that complies with Uniform Standards of Professional Appraisal Practice (USPAP) and be dated within 12 months of the application for guaranty.  In addition, an appraisal is required on the business real estate for businesses that have been transferred within 36 months prior to the loan application date, as well as an appraisal review by another appraiser selected by the Lender or a site visit by a senior member of the Lender’s staff.  Based upon the new language set forth above, it appears that appraisals are no longer required for commercial real estate securing the 7(a) loan that is not acquired, refinanced or improved with loan proceeds or if the business was not transferred within 36 months prior to the loan application.

The appraisal must identity the Lender as the client, and the Lender may not use an appraisal prepared for the seller or the applicant.  The appraiser must be independent with no appearance of a conflict of interest, including no direct or indirect financial interest in the property or transaction.  New language was also added to prohibit appraisers from having an interest in the loan production function and from being involved in the approval of the transaction.  Consistent with the prior SOP 50 10 6, the appraiser must be either State-licensed or State-certified, with the exception that the appraiser must be State-certified if the commercial property’s estimated value is over $1,000,000.

There has been no change to the procedures to follow for a low appraisal.  If the appraisal comes in at 90% or more of the estimated value, the Lender may close the loan with a written explanation in the file as to why the appraisal came in low.  If the appraisal comes in less than 90% of the estimated value, a PLP lender may close the loan with a written justification in its file which includes a thorough analysis of the reasons for the low appraisal and a description of the steps that the Lender took to offset the risk to SBA such as requiring additional equity or collateral.  If the appraisal comes in less than 90% of the estimated value, a Lender who submitted through general processing may not close the loan without SBA’s prior written approval. The Lender must justify to the SBA the reasons that the appraisal came in low and provide a recommendation to offset the risk to SBA such as offering additional equity or collateral.  The Lender must set forth both the fair market value and liquidation value of any additional collateral proposed.

For non-commercial real estate and real estate securing a personal guaranty, the SBA continues to have no specific appraisal requirements.

For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or visit us at www.starfieldsmith.com.