Nearly one year after the FDIC, the OCC, and the Fed published a joint Final Rule increasing the Threshold from $250,000 to $500,000 for appraisals on financed commercial real estate transactions, the SBA provided notice changing this requirement in the SBA 504 and 7a loan programs as well. What that means for our borrowers and partners is that for SBA 504 projects where the purchase, construction, and/or renovations to commercial real estate total is less than $500,000, an appraisal is no longer required. This, like all SBA regulations, is subject to a few caveats. An appraisal is required in the following situations:
- If equity in the land is being used as borrower injection and the land has been held for 2 years or more;
- The real estate is a Third Party Lenders’ OREO;
- If the loan finances a transaction between parties with a close relationship such as between existing owners or family members;
- The seller of the property is providing carry back financing that is part of the borrower’s injection;
- If the SBA or CDC concludes that an appraisal is necessary to evaluate creditworthiness.
So, what happens on real estate projects that are less than $500,000? Well, that is actually the newest development in the appraisal guidelines and is something that was not previously required. Going forward, these projects will require an evaluation of the project property that is consistent with safe and sound banking practices. These evaluations should be consistent with Interagency guidelines issued by the Federal Banking Regulators.
In a nutshell, if the Third Party Lender has a qualified employee capable of completing this type of evaluation, it can be done in-house and can be used as the valuation for the SBA 504 application. While the guidelines don’t have specific requirements for the evaluation, it must be sufficient for a credit decision. Items needed would include a detailed analysis of the property including its physical condition, assumptions that support the valuation, comparable sales or costs, etc.
We are happy to share this information about the increased threshold as it will save on costs and time for many of our applicants. For additional information or if you have any questions, contact one of our business development officers today:
- Emily Schroeder – Serving Northern ND
- Roxi Pfliiger – Serving SW & SC ND
- Preston Braathen – Serving Eastern ND & Western MN
- Steve Dusek – Serving Moorhead/Fargo/West Fargo
- Christie Williams – Serving Rural MT