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#1652426 - 01/18/12 09:01 PM Appraisal on Commercial Property
shea930 Offline
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Joined: Dec 2008
Posts: 267
We have several commercial borrowers that keep several loans with us secured by the same peice of commercial property. Most of the time these loan are short term and renew annually. Just wondering how long commercial appraisal are good for. (For example if we have an appraisal less than 12 months old and they want an additional loan secured by same property would we be okay siting that appraisal or would a new one be required every time.) We just don't see the reasoning for getting an new one based on the fact that most of the time the comparables used in commercial appraisal are usually more than 12 months old anyways.....just wondering how some of you are handling these.

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#1652441 - 01/18/12 08:59 PM Re: Appraisal on Commercial Property shea930
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,030
Bloomington, IN
You will find this discussed in the Appraisal Guidelines.

XIV. Validity of Appraisals and Evaluations

The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. Therefore, an institution should establish criteria for assessing whether an existing appraisal or evaluation continues to reflect the market value of the property (that is, remains valid). Such criteria will vary depending upon the condition of the property and the marketplace, and the nature of the transaction. The documentation in the credit file should provide the facts and analysis to support the institution’s conclusion that the existing appraisal or evaluation may be used in the subsequent transaction. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as:
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The opinions expressed are mine and they are not to be taken as legal advice.

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#1652527 - 01/18/12 11:16 PM Re: Appraisal on Commercial Property Dan Persfull
SouthoftheBorder Offline
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Joined: Feb 2002
Posts: 335
The South
We tell our lenders - if you renew a loan it must have an appraisal or an evaluation PRIOR to loan closing.

The evaluations are performed by loan officers other than the lender - evaluators are chosen from a revolving list.

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#1652934 - 01/19/12 05:24 PM Re: Appraisal on Commercial Property shea930
shea930 Offline
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Joined: Dec 2008
Posts: 267
What do your evaluations consist of? We used to have an independent loan officer do evaluations on appraisals less than 18 months old, however during a recent Safety and Soundness exam they told us our evaluations were not sufficent. Basically a loan officer doesn't have the expertise to complete all the necessary requirements for an evaluation.

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#1654163 - 01/23/12 01:31 PM Re: Appraisal on Commercial Property shea930
shea930 Offline
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Joined: Dec 2008
Posts: 267
Anyone else been through an exam yet on appraisals???

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#1654529 - 01/23/12 07:52 PM Re: Appraisal on Commercial Property shea930
HRH Okie Banker Offline
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Joined: Jan 2003
Posts: 3,070
Oklahoma
I. We are OCC and just completed an exam (last week). They reviewed quite a few of our commercial and ag loan files this year and were highly complimentary on our documentation. We require the compeletion of a "Useful Life Validation" with renewals to document:

The estimate of value within the above appraisal or evaluation continues to be acceptable based on the following factors:

Passage of time:

Volatility of the local market:

Changes in terms and availability of financing:

Natural disasters:

Limited or over supply of competing properties:

Improvements to the subject property or competing properties:

Lack of maintenance of the subject or competing properties:

Changes in underlying economic and market assumptions, such as capitalization rates and lease terms:

Changes in zoning, building materials, or technology:

Environmental

Each bullet has to be completed. We do not allow the completion of such a form if the property is not within our target markets. Should the property be out of areas familar to us we would require a new evaluation/appraisal.

II. Per the Interagency 2010 Guidelines on Evaluation content:

Evaluation Content

An evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision. An evaluation’s content should be documented in the credit file or reproducible. The evaluation should, 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 records);
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.
Last edited by Okie Banker; 01/23/12 07:53 PM.
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#1654638 - 01/23/12 09:06 PM Re: Appraisal on Commercial Property shea930
shea930 Offline
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Joined: Dec 2008
Posts: 267
Who do you have completing these forms, independent loan officers?

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#1659698 - 02/02/12 03:26 PM Re: Appraisal on Commercial Property shea930
Cornfed Turtle Offline
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Joined: Mar 2006
Posts: 1,323
"...Somewhere in Middle Americ...
Same question here. We have someone in-house that does evaluations for us when an appraisal is not required. He has a form that he completes. It gets reviewed and presented at loan committee, etc, etc.

But we have a ton of these loans for which we have a dated commercial or agricultural appraisal in the file. Our commercial market is stable and our agricultural values have done nothing but skyrocket. Most of these are low LTV loans and Loan officers are concerned about having the full evaluation done, even by our in-house guy. It would add a bit to his workload and, therefore, the closing time.

I was thinking about devising a checklist type of form along the lines of the guidance. Glad to here you got good reviews, Okie, as we are eagerly awaiting a visit!

But who does the "validation of market or whatever" form? Another loan officer? I wouldn't think that would qualify as independent. We have the option of putting it in my area....internal audit, but that presents a problem for me. If I do it, I can't audit it! (Not sure that would be a problem for the LOs either!) Could this be one of those moments when we could ask for that "small or rural" excpetion? Too many questions running around in my head!

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#1660503 - 02/03/12 06:13 PM Re: Appraisal on Commercial Property shea930
Gigi03 Offline
Member
Joined: Feb 2008
Posts: 78
In our recent FDIC S&S exam, the use of evaluations (completed by an independent loan officer or asset manager) was criticized because there was not enough info on comps and adjustments related to those comps. When the Appraisal guidelines changed last year, we contacted some local appraisers for assistance in preparing the evaluations, and were told they would charge us nearly the same as an appraisal, and would prefer to not do an evaluation. We were told to go back now and get appraisals on some of these credits.....at the bank's expense....before the next exam visit. We were using an 18 month period, but have backed down to 12 months after the exam. Our market has not had much deterioration in values.

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#1660530 - 02/03/12 06:25 PM Re: Appraisal on Commercial Property Gigi03
Cornfed Turtle Offline
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Joined: Mar 2006
Posts: 1,323
"...Somewhere in Middle Americ...
G: Are you getting a new appraisal on commercial and ag renewals every year? Or are you validating the old appraisal by some process?

Like I said, we are struggling with getting the "free" eval done, can't imagine shelling out for a commercial appraisal every year.

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#1662164 - 02/08/12 06:52 PM Re: Appraisal on Commercial Property shea930
Gigi03 Offline
Member
Joined: Feb 2008
Posts: 78
We have not always obtained a new appraisal for a commercial line of credit renewal. Management implemented the evaluation level of valuation for smaller credits, and when there was an appraisal in file older than 18 months. We do not have a trained appraiser on staff but an independent loan officer or our asset manager would prepare the evaluation after a site visit. I've heard our local FDIC office is more stringent than some, with some differing interpretations hitting banks.

We are not updating appraisals for amortizing credits, or asked to do that at this point, as our market values are holding fairly well.

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#1663337 - 02/10/12 04:08 PM Re: Appraisal on Commercial Property shea930
HRH Okie Banker Offline
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Joined: Jan 2003
Posts: 3,070
Oklahoma
There is just no cut and dried answer to this question. So much has to do with the property itself rather than age of appraisal. There is a big difference between renewing a loan with a 12 month old appraisal on 160 acres in a community well known to you with current comps/auction prices and everyone knows the condition of the property versus renewing a loan with a 9 month old appraisal on an apartment complex not in your area. Has there been a recent inspection? Sales in the area? Do you have a current rent roll to determine occupancy? Did the property reach occupancy in the time allowed in the original appraisal.

It goes back to Dan's original response above. Does the credit file contain convincing evidence that the bank is congnizant of the current value of this property, including current condition, the surrounding area.... that would allow the bank to make an informed decision on the transaction.
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