Property appraisals are generally requested when commercial real estate changes hands or when a commercial property is undergoing construction or renovation. While appraisals are ordered by the lender, they are performed by licensed professionals. The primary purpose of an appraisal is to determine the property’s market value that will be used for loan collateral. An appraisal process is used by the U.S. Small Business Administration (SBA) and is likely used by your institution’s mortgage group.
What should you expect during the appraisal process? Here, we provide an overview of the SBA’s appraisal requirements, including instances where a client’s property may not be appraised at its required value.
Appraisals prepared for SBA loans are the same as other professionally prepared real estate appraisals, with a few additional requirements (noted in the section below). Professional SBA appraisers use an industry-accepted set of standards, a criteria known as The Standards of Professional Appraisal Practice (USPAP).
The SBA requires specific points to be included in an appraisal (these may be “above and beyond” those your institution requires):
• The appraiser must be independent (not affiliated with your institution or any other parties in the transaction). Lenders may not use appraisals that have been prepared for the seller or loan applicant.
• The appraisal must be dated within 12 months of the application date. This means appraisals done prior to an application may be acceptable, as long as the appraisal indicates the intended user is the lender (your institution). It’s also considered best practice to list both your institution and the U.S. Small Business Administration as the intended users.
• In alignment with SBA best practices, we recommend two methods are used to determine appraisal value. In our experience, appraisals that apply only one method of valuation very often require revision and are far more susceptible to rejection by the SBA.
The SBA requires a real estate appraisal if the SBA-guaranteed loan is greater than $500,00 and is collateralized by commercial property. Lenders should follow their internal credit policy and their institution’s requirements for real estate appraisals for loans of $5000,000 or less.
In some instances, such as when real estate and a business are acquired together, an appraisal is necessary before a loan application is submitted to the SBA. When funding is needed only for acquisition, renovation or construction of property, the SBA appraisal can be ordered at any point in the application process, although it must be completed before a loan can close.
An appraiser is required to give the current market value for acquisitions of existing buildings (with or without minor improvements needed). When the project includes new construction or substantial renovations, however, the appraiser is required to use an estimate of the after-construction or after-repair market value.
In many cases, the appraisal valuation will align with the loan request. Sometimes, however, an appraiser will determine a property is worth less than the requested loan amount:
• If the appraised value is 90% or more of the estimated value, lenders can still close the loan. However, lenders must include a written explanation to note why the appraisal differs from the estimated value of the loan.
• If the appraised value is less than 90% of the property’s estimated value, the loan may still close, but it will require the SBA’s written permission. In these cases, a lender must provide an acceptable explanation of reasons for the differences in value to the SBA; as well as recommendations for remedying said difference, such as providing additional owner equity or additional collateral from the owner to make up for said difference.
If you and your team have questions about the SBA appraisal process, Prudent Lenders is here to help. As a lender service provider (LSP), we’ve got decades of experience with SBA loan programs and commercial lending and we’re ready to assist, anytime.