For the first time since the appraisal threshold for commercial real estate transactions was originally established 24 years ago, the threshold requiring an appraisal by a certified or licensed appraiser has been increased.
On April 2, 2018, the OCC, FDIC, and Federal Reserve jointly released guidance that raises the threshold for “commercial real estate transactions” requiring an appraisal. This rule really doesn’t come as a surprise as it follows the July 2017 proposal to make similar changes. One of the main differences from the proposed rule, however, is that the final rule sets the new threshold at $500,000 where the original proposed threshold was $400,000.
The final rule defines a “commercial real estate transaction” as a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property. Specifically, the final rule provides the following definition: "(e) Commercial real estate transaction means a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property." Therefore, the final rule generally excludes all transactions secured by a "single 1-to-4 family residential property." (Note: Qualified business loans - or QBLs - still qualify for the $250,000 threshold.)
The preamble to the final rule spent a great deal of time discussing how consturction loans apply. The final rule specifically includes a construction loans secured by multiple 1-to-4 family residential properties as a commercial real estate transaction. This means that a loan that is secured by a single 1-to-4 family residential property, including a loan for construction, will remain subject to the $250,000 threshold, which continues to be the threshold for residential mortgage loans.
For commercial real estate transactions that are at or below the $500,000 threshold, financial institutions are permitted to use an evaluation in lieu of an appraisal. An evaluation is often completed by the creditor and provides a market value estimate of the real estate pledged as collateral. The final rule references the longstanding standards for the utilization of an evaluation and makes it clear that any evaluation used in lieu of an appraisal should contain sufficient information and analysis to support the financial institution’s decision to engage in the transaction. The rule also makes it clear that financial institutions are permitted, but not require, to use an appraisal (instead of an evaluation) for commercial real estate transactions that are at or below the $500,000 threshold.
For transactions that are above the $500,000 threshold, financial institutions must continue to comply with the minimum standards for an appraisal. Specifically, appraisals must be:
Performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).
Written and performed by a licensed or certified appraiser.
Subject to appropriate review for compliance with USPAP.
It should be noted that certain qualifying business loans (QBLs) with a transaction value of $1 million or less are also exempt from the rules and do not require an appraisal. QBLs are business loans that are real estate-related transaction, but are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
The rule became effective with the publication in the Federal Register which was on April 9, 2018. The OCC notice can be found here:
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