Some clients are interested in obtaining “Evaluations” rather than full appraisals but are unsure of where and when commercial property “evaluations” can be used in lieu of a full appraisal and still be in compliance with the Interagency Appraisal and Evaluations Guidelines issued December 2, 2010. Here’s the answer
The Interagency Guidelines include the following three requirements to have compliant “Evaluations.”
- An institution’s board of directors or its designated committee is responsible for adopting and reviewing policies and procedures that establish an effective real estate appraisal and evaluation program.
- The Agencies’ appraisal regulations permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions.
- An evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision.
So, what do clients need to do to make sure “Evaluations” are part of their asset review program?
First, policies and procedures related to Appraisals and Evaluations should be reviewed to make sure those policies clearly define when and how “Evaluations” can be used. The Interagency Guidelines include the following “exemptions,” when an appraisal is not required: These exemptions include a transaction that:
• Has a transaction value equal to or less than the appraisal threshold of $250,000.
• Is a business loan with a transaction value equal to or less than the business loan threshold of $1 million, and is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
• Involves an existing extension of credit at the lending institution, provided that:
o There has been no obvious and material change in market conditions or physical aspects of the property that threaten the adequacy of the institution’s real estate collateral protection after the transaction, even with the advancement of new monies; or
o There is no advancement of new monies other than funds necessary to cover reasonable closing costs.
Secondly, institutions must understand that “Evaluations” are NOT limited to properties with a loan of $250,000 or less as is sometimes erroneously assumed. In our experience, the highest volume of “Evaluation” orders received are related to the third bullet point above; A review of a commercial asset that has received an extension of credit in the past, and for which there has been no material change in physical aspects of the property. We have completed reports for $46M shopping centers, 300 room hotels, hundred+ acre land parcels and many, many other large commercial properties.
Thirdly, clients must work with their Evaluation vendors to ensure the Evaluation, at a minimum:
• Identify the location of the property.
• Provide a description of the property and its current and projected use.
• Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions.
• Describe the method(s) the institution used to confirm the property’s actual physical condition and the extent to which an inspection was performed.
• Describe the analysis that was performed and the supporting information that was used in valuing the property.
• Describe the supplemental information that was considered when using an analytical method or technological tool.
• Indicate all source(s) of information used in the analysis, as applicable, to value the property, including:
o External data sources (such as market sales databases and public tax and land
o Property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information);
o Evidence of a property inspection;
o Photos of the property;
o Description of the neighborhood; or
o Local market conditions.
- Include information on the preparer when an evaluation is performed by a person, such as the name and contact information, and signature (electronic or other legally permissible signature) of the preparer.
Following these guidelines ensures that any “Evaluation” acquired is compliant with the Interagency Guidelines. Professional vendors of “Evaluations” such as Omnia are available to assist clients with a review of Policies and Procedures as well as the transaction thresholds and content requirements for each report.