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Knowing appraisal requirements for an SBA loan paves the way for a smooth transaction
By: Jean Wojtowicz, President
Cambridge Capital Management Corp.

Every loan officer wants to help navigate his or her borrower through an SBA transaction with as few bumps in the road as possible. Knowing the basic appraisal requirements will ensure that you and your borrower are well-informed and well-equipped for the ride.

It is crucial that proper procedures are followed up front because failure to do can result in extra cost and more time. You certainly don't want to have to order a whole new appraisal or re-engage the appraiser because something was not done correctly the first time around. (Quotations marks identify copy from the SBA Standard Operating Procedures 50-10-5 (D).)

Appraisals are not required for all SBA transactions. The cut off is $250,000. For a 7(a) loan, "SBA requires a real estate appraisal if the SBA-guaranteed loan is greater than $250,000 AND is collateralized by commercial real property." For a 504 transaction, a real estate appraisal is required "if the estimated value of the Project Property is: (a) Greater than $250,000; or (b) $250,000 or less, if such appraisal is necessary for appropriate evaluation of creditworthiness."

The appraiser must be independent. There must be no appearance of a conflict of interest. The appraiser cannot have a direct or an indirect financial or other interest in the property or transaction.

The SBA requires a specific type of appraisal. "The appraisal report must be prepared in compliance with Uniform Standards of Professional Appraisal Practice (USPAP)" and be a self-contained appraisal report or a summary appraisal report.

One approach to value is typically not sufficient. In almost every case the SBA requires at least two approaches to value in a commercial real estate appraisal. Even though the appraiser may thoroughly explain his or her reasoning for only using one approach, the SBA will typically require that they develop two approaches for the appraisal to be accepted and approved.

An appraisal must be properly addressed. For a 7a loan the lender would be named as the client and the intended user of the appraisal report. In a 504 transaction the Certified Development Company (CDC) AND the SBA must be identified as "the client and/or the intended user of the appraisal." If the proper parties are not named up front, the appraiser will need to readdress the appraisal. This may result in extra cost and time.

The loan can still fund even if the appraisal is low. If the appraisal comes in at 90% or more of the estimated value, the loan can fund, but the lender or the CDC must document its file as to the reasons the appraised value was less than estimated. Obviously, the individual financial institution may have a different threshold.

If the loan contains construction or substantial renovation, the appraiser will need to be re-engaged before the loan can fund. "After construction is completed, lender/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." The SBA wants to know that the construction or renovation that the "as completed" appraised value was based on was actually completed as planned.

As you can see, the SBA appraisal requirements are not complicated you just need to know them. When you know the rules, you are providing your borrowers with a value-added service and acquiring a competitive edge for your organization. Now that you have tanked up on the requirements, get ready to rev your engine and put yourself in hot pursuit of those SBA loans. See you at the finish line!

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