Well, I said things aren’t simple! Last week’s eBulletin addressing changes to SBA’s appraisal requirements for 7(a) and 504 loans triggered a question from a savvy reader. I appreciate the feedback. SBA’s Policy Notice 5000-19007 distinguishes appraisal requirements for 7(a) and 504 loans. I confess that at first, I didn’t notice the distinction. As an ancient 504 lender, I reverted to the 504 language. Time to clear things up. So here’s how it is:

For 7(a) loans an appraisal is triggered by the loan amount. For all loans over $500,000 secured by commercial property an appraisal is required. Say the commercial real estate component is $300,000 and equipment is $250,000. The loan will be secured by the CRE and requires an appraisal. This requirement is similar to Interagency Guidelines for Appraisals and Evaluations governing conventional federally regulated lenders. Most 7(a) lenders are familiar with the Interagency requirements so this should be easily understood. The only difference is that the appraisal threshold for SBA loans is now the same as for conventional loans.

There are exceptions under Interagency Guidelines, but they don’t apply to 7(a loans). For example, the Interagency Guidelines contain an exception that if a financial institution makes a loan under $1 million secured by CRE, an appraisal is not required if repayment is dependent on the sale of the real estate or rent from the real estate. This exception doesn’t apply to 7(a) loans so an appraisal is required. And regardless of the loan amount, if the loan finances a transaction involving parties with a close relationship, an appraisal is required.

 For 504 loans, an appraisal is triggered by the estimated value of the real estate. If the estimated value of the commercial real estate in a transaction is more than $500,000, an appraisal is required. It the estimated value is less than $500,000, an appraisal is not required. So, let’s say estimated value is $300,000 for the CRE and $250,000 for equipment. In this situation, the CDC must get an evaluation but not an appraisal.  Of course, the third-party lender might have to get an appraisal, so the easiest thing for the CDC is to get that appraisal and not require a separate evaluation. Naturally, an appraisal is required if SBA says it is required.

We just discovered what underscores the title of my recent eBulletin “Not as simple as you think!”

Again, thank you for your important feedback. I hope I’ve cleared things up!

Richard Jeffrey
JRB Associate