By: Kyle Curtis, Senior Consultant
The OCC, Federal Reserve Board, and FDIC (collectively, the agencies) have adopted a final rule to amend the agencies’ regulations requiring appraisals of real estate for certain transactions. The final rule increases the threshold level at or below which appraisals are not required for commercial real estate
transactions from $250,000 to $500,000. The final rule defines commercial real estate transaction as a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property. It excludes all transactions secured by a single 1-to-4 family residential property, and thus construction loans secured by a single 1-to-4 family residential property are excluded. For commercial real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.
The agencies have adopted a definition of commercial real estate transaction that excludes construction loans secured by single l-to-4 family residential properties. Specifically, the final rule defines commercial real estate transaction as a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property. This definition eliminates the distinction between construction loans secured by a single l-to-4 family residential property that only finance construction and those that provide both construction and permanent financing. Under the definition in the final rule, neither of these types of loans will be commercial real estate transactions; they will both remain subject to the $250,000 threshold. However, a loan that is secured by multiple 1-to-4 family residential properties (for example, a loan to construct multiple properties in a residential neighborhood) would meet the definition of commercial real estate transaction and thus be subject to the higher threshold.
With the increase in the threshold, it is expected that many institutions will now utilize internal staff to prepare evaluations for commercial transactions that are less than $500,000, so it might be time to revisit the Interagency Appraisal and Evaluation Guidelines (Federal Register, Vol. 75, No. 237), as well as the Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions (FDIC, FIL 16-016). While the Guidelines state that an evaluation is not required to be completed by a state-licensed or state-certified appraiser or to comply with USPAP, the evaluation preparer should, however, be knowledgeable, competent, and independent of the transaction and the loan production function of the institution. Evaluations may be completed by a bank employee or by a third party. In smaller communities, bankers and third-party real estate professionals have access to local market information and may be qualified to prepare evaluations for an institution.
An evaluation should provide a reliable estimate of the market value of the property and, therefore, the approach or approaches used in an evaluation should be appropriate to the property being valued, and the intended use, so it may be appropriate to omit one or more of the three approaches to value. If the income approach is the primary approach for a tenant-occupied, income-producing property, it may be appropriate to omit the sales comparison approach and the cost approach. Similarly, if the sales comparison approach is the primary approach for a single family residence or an owner occupied commercial property, it may be appropriate to omit the cost approach and the income approach.
The Guidelines provide information regarding the minimum content that should be contained in an evaluation. Unlike an appraisal report that must be written in conformity with the requirements of USPAP, there is no standard format for documenting the information and analysis performed to reach a market value conclusion, but like an appraisal report, the evaluation should contain sufficient information to allow a reader to understand the analysis that was performed to support the value conclusion and the institution’s decision to engage in the transaction.
Young & Associates, Inc. offers a Third-party Appraisal Review service designed to provide financial institutions with a qualified, independent review of appraisals, consistent with the requirements listed in the 2010 Interagency Appraisal and Evaluation Guidelines. For more information on this article or the interpretation of the appraisal guidelines, contact Kyle Curtis at
[email protected] or 330.422.3445.