Current Appraisal Issues

The following is the next installment in RMA’s Credit Risk Council 2017 Industry Insights: Perspectives from the Front Line.

Appraisals continue to be a very important and required valuation tool for both owner occupied and investor real estate transactions. Independent ordering and review separate from relationship managers and approval officers remains critical. There are, however, ongoing discussions about issues with appraisals and a few are outlined below.

In the Federal Financial Institution Examination Council's Joint Report to Congress, the banking agencies are developing a proposal to increase the required appraisal threshold for commercial real estate transactions from $250,000 to $400,000. The proposed increase would allow banks to use evaluations for new commercial real estate (CRE) loans up to $400,000 and below, rather than the current $250,000 threshold. The report currently proposes to leave the residential real estate threshold at $250,000. The $1,000,000 threshold for owner occupied real estate business loans is still under review.

Another issue is the legality of doing technical appraisal reviews in states other than the one(s) where the reviewer is state certified. All states have their own requirements for appraisal reviews. Some states however allow a review of a property that is located in that state as long as 1) the reviewer is certified in some state, and 2) as long as the reviewer does not modify the value. If the reviewer opines to a value different than the appraisal, he/she must be certified in the state where the property is located. Other states' laws dictate that in order to complete a technical review of a real estate appraisal in their state, the reviewer must be certified in the state where the property is located in all situations. This requirement would theoretically require a reviewer that does review work nationwide to be certified in all 50 states even if he/she does not opine to a value. However, this is an issue that needs to be resolved on the federal level and the federal government has remained silent thus far.

Inconsistency in methods to determine the allocated values of a going concern is another controversial subject. Properties such as hotels, convenience stores, and senior housing typically sell as a going concern. However, for real estate loans, the going concern must be allocated to separate "real estate value only," as well as business enterprise value and furniture, fixtures, and equipment (FF&E) components for loan-to-value (LTV) purposes. There are several acceptable methods for doing the allocation, but they result in varied conclusions. The challenge is how to get consistency in the allocation. One thought is to require multiple methods in each appraisal that would make it easier for the reviewer to reconcile multiple appraisals of the same property.

Please look for the next Industry Insight on Tuesday, September 5, Commercial Real Estate Issues in 2017.

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