Ever since federal regulators changed the real estate appraisal threshold from an estimated value of $250,000 to $500,000, SBA lenders have had to explain that although the financial institution may not require an appraisal on a certain project, SBA did  SBA’s Policy Notice 5000-19007  issued March 26, 2019 is effective immediately and eliminates that issue for the most part.

Value More than $500,000 = Appraisal. Value Less than $500,000 = No Appraisal. Right? Hold on! It’s not so simple.

A word of caution. Watch for exceptions. SBA requirements are still different from those of financial institutions This is a long and complicated Notice, and I encourage you to read it thoroughly. What it basically says, is that if the estimated real estate value is $500,000 or less, no appraisal is needed – with certain exceptions:

  • For 7(a) and 504 loans, an appraisal is needed if there is a close relationship between seller and buyer.
  • Additional exceptions for 504 are the same as previously: equity in real estate owned two (2) years or more is the borrower’s contribution; the real estate is OREO; seller is carrying back a loan that is part of the equity contribution.
  • And of course, an appraisal is needed if SBA or the lender determine it is needed for creditworthiness.

SBA lenders, take note. There are times when a loan involving real estate valued at more than $500,000 doesn’t require an appraisal, according to Federal Interagency Guidelines. But SBA will still require one! Let’s say the loan request is under $1 million and repayment isn’t dependent on the sale of/or rental income from the real estate. In this case, Interagency regulators won’t require an appraisal, but SBA will. This would affect all 7(a) lenders. But CDCs may find themselves in the position of requiring an appraisal when the TPL doesn’t require one.

Then there are “evaluations.” No appraisal needed? You’re not out of the woods. According to the Policy Notice, if an appraisal isn’t needed, you still must submit an “evaluation.” And the evaluation must conform to Valuation Guidelines. Although these guidelines don’t specifically define what the evaluation must include, there must be sufficient information for the credit decision: a detailed analysis of the property including its physical condition, and assumptions and conclusions that support the value.

You can’t just print off a page from Zillow!

Generally, evaluations for commercial real estate require more documented detail than those for residential real estate. That detail should include documentation on comparable sales, or comparable costs or rental income from comparable properties. Whatever the detail, it must be of a level and kind appropriate to the transaction. For example, a cost analysis would not be appropriate for a building 30 years old.

How about using the Tax Assessment Value (TAV)?  Sound easy? The TAV itself cannot be used to establish value, but it can be a component. You still must document how the TAV is calculated, how frequently revaluations occur and test and document how TAVs correlate to market value based on contemporaneous sales at the time of assessment. Not so easy after all.

Some good news. An evaluation can be preformed in-house by a qualified employee of the lender rather than a state licensed or state-certified appraiser. In smaller communities, bankers and third-party real estate professionals have access to local market information and might be qualified to prepare evaluations for an institution. A person who prepares an evaluation may consider one or more valuation approaches or methodologies to estimate the market value of real estate. Finally, an evaluation may only consider one approach to value, which can be a benefit especially in smaller communities.

I’m a wellspring of cheery facts about appraisals and evaluations. If you need more information, give me a call. I am always happy to discuss appraisals with high degree of enthusiasm!

Richard Jeffrey
JRB Associate