Banks are required to appraise real estate that is taken as collateral to ensure the collateral has sufficient value to cover loans. Federal appraisal regulations guide the majority of this process. One of these requirements is that appraisers should be independent of the loan transaction and, as a result, will provide an unbiased, objective opinion of the property’s value.
Jeff Thornhill, Senior Vice President/Director of Real Estate Technical Services and a tenured professional, manages the commercial appraisal process for First Bank. “After a potential business borrower applies to the bank for a commercial loan that is secured by real estate, the bank will request competitive bids from qualified appraisers,” said Thornhill. His department selects who they believe is best suited for the assignment and, once the appraisal is received, it is reviewed to ensure it complies with appraisal standards, appraisal regulations, and that the value is reasonably supported by the data in the report. “We always attempt to find the right appraiser for each assignment, who at least meets the minimum criteria for licensing; however, we often use appraisers with professional designations.”
Thornhill said that the scope of work can vary due to the size of the loan, property type, location, market conditions, and complexity of the collateral. The valuation is impacted by whether the property is owner-occupied or leased by one or many tenants. Although the standard appraisal takes approximately three to four weeks, First Bank’s team attempts to accommodate rush requests, but timing and fees are a function of the market, not dictated by the bank.
There are exceptions to obtaining appraisals and, in 2019, the minimal threshold requiring appraisals for commercial real estate was increased to $500,000 from $250,000. Therefore, any loan at or below this threshold does not need a conforming appraisal; however, a properly documented evaluation as defined by the regulations must be completed. Evaluations have significantly less data and analysis than appraisals, but they do provide a reasonable alternative, in some instances, due to their cost and time-saving benefit. First Bank generally uses these products on non-complex, owner-occupied properties.
Some borrowers think banks want low appraisals so they don’t over-lend on real estate, but that is simply not true. “The bank wants an appraisal that best represents market value, and we also believe this is in the best interest of our client,” he said. “Having nearly 40 years of experience, I can generally ascertain fairly quickly whether the appraisal makes sense. If not, we will ask appraisers to address what we believe are deficiencies, and this may or may not impact value.” Clients often believe their properties are worth more, especially if it is under contract at a higher price. He said they are willing to take an objective look at any empirical evidence or data they can provide, but it is important to note that “sale price” or “construction costs” do not necessarily equate to market value.
Thornhill’s team also manages the environmental risk process for commercial loans. They obtain environmental site assessments for certain properties to ensure the bank is not making a loan on a property that has significant environmental contamination. Such concerns range from soil and groundwater contamination to vapor intrusion from the use of hazardous chemicals or petroleum, lead paint, asbestos containing materials, and radon. Many issues can be mitigated, but depending on the issue, costs can be both expensive and time consuming. It is highly recommended that anyone purchasing real estate obtain an All Appropriate Inquiry (AAI) report to determine if a property has been environmentally contaminated. Possessing an AAI will provide the buyer with some protections under the environmental regulation known as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). According to Thornhill, without proper environmental due diligence, you could be buying future environmental liability that may adversely impact value.
If you’re contemplating a commercial loan and have questions regarding any aspect of the process, including the appraisal process, please reach out to a trusted advisor at First Bank. We’re here to help guide you while purchasing or refinancing commercial real estate.