Best Practices: Real Estate Appraisals

By Jessica L. Conn, Esq. 

Jessica L. Conn, Esq.

When does the SBA require an appraisal of commercial real estate? 

 In a 7(a) loan greater than $250,000.00, an appraisal is required for ALL commercial real estate. If the 7(a) loan is less than $250,000.00 the lender should follow its regulators' guidelines.

 For a 504 loan, an appraisal is needed if the estimated value of the property is greater than $250,000.00, or if the estimated value of property is less than $250,000.00 and the appraisal is needed to establish creditworthiness.

 The SBA does not specifically require a real estate appraisal on non-commercial real estate or real estate pledged to secure a personal guaranty.

What kind of appraisal is required?

For both 7(a) and 504 loans when there is no construction or renovation, the lender should obtain an "as-is" appraisal.

 For both 7(a) and 504 loans when there is construction or renovation, the general rule is that the lender should obtain an "as-built" appraisal. Such an appraisal is obtained prior to construction being completed and is based, in large part, on the plans and specifications provided to the appraiser. Lenders should be aware that when a project involves construction, the SBA may have additional requirements beyond the "as-built" appraisal.

When a 7(a) construction loan closes prior to construction being completed, the lender must monitor the construction to ensure that there are no deviations from the plans used by the appraiser as the basis for the "as-built" appraisal. Under SOP 50 10 5(C), if there are deviations from the plans after a loan has closed, the lender MUST notify the SBA. The SBA will determine the appropriate action, which may include obtaining additional collateral.

For 504 construction loans and 7(a) construction loans that close after construction is completed, the lender or CDC should start by assessing the extent of the work being performed. If the loan is being used to finance new construction or "substantial renovation," which is defined as renovation that is more than 1/3 of the purchase price or fair market value at the time of application, the lender or CDC must verify the appraised value. In order to do this, the lender or CDC must obtain a statement from the appraiser 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." Without such a statement, the lender or CDC cannot close the loan without the SBA's prior written permission.

Who can perform the appraisal?

For both 7(a) and 504 loans, the appraisal must be requested by and prepared for the lender/CDC. The appraiser MUST be independent and must not have any financial or other type of interest in the property or transaction. For properties with a value less than $1,000,000.00 the appraiser should be either State-licensed or State-certified. For properties valued over $1,000,000.00, the appraiser MUST be State-certified.  If the property is a special-use property, the appraiser must have experience with that particular industry and type of property.

Lenders must be sure to follow the guidelines set forth by the SBA in obtaining real estate appraisals in order to protect the SBA guaranty and properly document the loan. For more information on this and other SBA related topics, contact Jessica Conn at jconn@starfieldsmith.com or 215-542-7070.