Best Practices: Requirements for Commercial Real Estate Appraisals

SBA’s guidance on real estate appraisals depends on the type, size and use of the SBA loan proceeds.  This article focuses specifically on the basic commercial real estate appraisal requirements for Standard SBA 7(a) loans (meaning loans of more than $500,000) that are secured by commercial real estate.  These requirements are set forth in the section of the SOP 50 10 7.1 titled Real Estate Appraisal and Business Valuation Requirements at pages 114-118.

• Appraisal:
  • Must be an “Appraisal Report” prepared in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP);
  • Must be less than 12 months old from the date of the application for guaranty; and
  • Must identify the Lender as the client and/or an intended user of the appraisal. The Lender may not use an appraisal prepared for the seller or the applicant.
• Appraiser:
  • Must be independent and have no appearance of a conflict of interest (In other words, the appraiser: (i) shall not have any direct or indirect financial or other interest in the property or transaction; (ii) shall be independent of the loan production function; and (iii) shall not be involved in the approval of the transaction); and
  • Must be either State-licensed or State-certified unless the estimated value of the commercial real estate is more than $1,000,000 in which case the appraiser must be State-certified.
• Construction:
  • If loan proceeds will be used to finance new construction or the substantial renovation of an existing building, and the loan covers the construction period, then the appraisal must estimate what the market value will be at completion of construction.  “Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of the application. After construction is completed, the Lender must obtain a statement from the appraiser, general contractor, project architect, or construction management firm that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based.
  • If the Lender is unable to obtain a statement that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based, then the Lender must notify the appropriate SBA Commercial Loan Servicing Center (CLSC) and work with the SBA CLSC to determine an appropriate course of action, including the securing of additional collateral.
• No Construction:
  • If the loan proceeds will be used to purchase of an existing building and there is no construction involved, the appraiser should estimate market value based on an as-is basis or otherwise explain why an as-is basis was not used.
• Underwriting Considerations and Justification – Collateral Value:
  • 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 Lender does not have an appraisal at the time of loan application, then the Lender must include an estimate of the value of the real estate.
    • If the appraised value is 90% or more of the estimated value, the Lender must include a written explanation as to why the appraisal is less than the estimated value in the loan file; or
    • If the appraised value is less than 90% of estimated value, non-delegated Lenders or loans processed GP may not close the loan without SBA’s prior written permission.
    • PLP Lenders may close the loan when the appraisal is less than 90% of the estimated value, but the Lender must include a written justification as part of its file that may be reviewed by SBA at time of guaranty purchase or when conducting Lender oversight activities. The justification must include a thorough analysis by the Lender of the reasons for the appraisal being low and an explanation as to what steps the Lender took to offset the risk to SBA from the low appraisal such as additional equity or additional collateral.

For more information on commercial real estate appraisals for Standard SBA 7(a) loans please contact us at info@starfieldsmith.com or (215) 542-7070.