SBA SOP 50 10 8.1, C.Ch1.E.2 — Collateral and Appraisals

i. Commercial Real Estate: a) Appraisals and Evaluations: i) SBA requires a real estate appraisal if the estimated value of the Project Property is greater than $500,000. ii) If the estimated value of the Project Property is $500,000 or less:

(a) The CDC must obtain an appraisal under the following circumstances: (i) Equity in land owned for 2 years or more is being contributed as part of Borrower’s contribution; (ii) The real estate is Third Party Lender’s OREO property (see Section A, Ch. 3, Para. A.1.g., for more information); (iii) If the loan finances a transaction involving parties with a close relationship (for example, transactions between existing owners or family members); (iv) The seller of the property is carrying back a loan that is part of the Borrower’s contribution; (v) When the project includes a change of ownership; or (vi) If SBA or the CDC otherwise concludes that an appraisal is necessary to appropriately evaluate creditworthiness.

(b) If an appraisal is not required under the preceding paragraphs, the CDC must obtain an appropriate evaluation of the Project Property being acquired with the loan proceeds that is consistent with safe and sound banking practices. Evaluations are not required to be performed in accordance with USPAP or by a State licensed or certified appraiser but should be consistent with the Interagency Guidance Appraisal and Evaluation Guidelines and the Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions, issued by the Federal Banking Regulators. b) The appraiser must be: i) Independent and have no appearance of a conflict of interest (such as a direct or indirect financial or other interest in the property or transaction, independent of the loan production function, and not involved in the approval of the transaction); and ii) Either State-licensed or State-certified with the following exception: when the Project Property’s estimated value is over $1,000,000, the appraiser must be State-certified. c) The “Appraisal Report” must be prepared in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and dated no more than twelve months prior to the date of application. d) In order for the appraiser to identify the scope of work appropriately, the appraisal must identify SBA as the client or an intended user of the appraisal, as those terms are defined in the Uniform Standards of Professional Appraisal Practice (USPAP). The CDC may also be identified as the client or an intended user. It is acceptable to SBA if the appraisal identifies the Third Party Lender as the client and SBA as intended user. The CDC may not use an appraisal prepared for the applicant. The cost may be passed on to the Borrower. e) If the loan will be used to finance new construction or the substantial renovation of an existing building, the appraisal must estimate what the market value will be at completion of construction. (“Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of the application.) After construction is completed, CDC must obtain a statement from the appraiser, general contractor, project architect, or construction management firm 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. If the CDC cannot obtain such a statement, then the CDC cannot close the loan without the Sacramento Loan Processing Center’s (SLPC) prior written permission. f) If the loan will be used to acquire an existing building that does not require construction, the appraiser should estimate market value on an as-is basis. If the appraiser estimates the value other than on an as-is basis, the narrative must include an explanation of why the as-is basis was not used. g) If the appraisal engagement letter asks the appraiser for a business enterprise or going concern value, the appraiser must allocate separate values to the individual components of the transaction including land, building, equipment, and business (including intangible assets). h) When the collateral is a Special Purpose Property, the appraiser must be experienced in the particular industry. i) An appraisal must be submitted and approved by the SLPC (except on Delegated loans) prior to closing. If the appraisal comes in at less than 90% of the estimated value, the debenture must be reduced or, if available, the CDC must secure additional collateral or additional investment from the Borrower and/or guarantors that will be added to the required Borrower’s Contribution and will be sufficient to address the gap in value. If additional collateral or additional investment is not available, but the applicant demonstrates strong, consistent cash flow sufficient to support the debt, then the SLPC can approve the appraisal and the CDC may close the loan. j) An appraisal must be submitted to the SLPC with the application under the following circumstances: i) Equity in land owned for 2 years or more is being contributed as part of Borrower’s contribution; ii) The real estate is Third Party Lender’s OREO; or iii) The Project will finance a transaction involving parties with a close relationship (for example, transactions between existing owners or family members). iv) The seller of the property is carrying back a loan that is part of the Borrower’s contribution. v) For both non-arm's length transactions and change of ownership projects, the property must appraise for 100% of the estimated value. The purchase price is limited to the lesser of the As-Is appraised value or the purchase price of 504 eligible fixed assets.