Guide · Commercial real estate

What the Interagency Guidelines require in a CRE appraisal review policy

The Interagency Appraisal and Evaluation Guidelines, issued in December 2010, expect every regulated lender to have a written review function. Here is what that policy must cover, point by point, and what each point means for commercial real estate files.

1Reviewers who are qualified for the property

The policy must set the education, experience and training a reviewer needs. Competence is judged against the assignment: the property type, its complexity and its market.

For CREA reviewer of an income property must be able to test leases, expenses, the cap rate and the discounted cash flow. Special-purpose and construction loans need a reviewer who has done that work. A residential reviewer signing off on a shopping center does not meet the standard.

2Reviewers who are independent of the loan

Reviewers must be independent of loan production and of the transaction. They cannot have an interest in the property or the credit decision, and their pay cannot depend on whether a loan closes.

For CRESmall banks often cannot separate a reviewer from the lending line. The Guidelines allow outside reviewers, and an outside firm meets the independence test by structure. The bank still owns the result.

3Reviews done before the credit decision

The review must be completed before the final credit or other decision. A review done after closing documents a problem. It does not prevent one.

For CREBuild review time into the loan timeline. Large income-property reports run 150 pages or more, and revisions take days.

4Review depth matched to risk

The depth of the review should reflect the size, type and complexity of the transaction and the risk to the institution. The policy should say which loans get a fuller review.

For CREHigher-risk files deserve the deepest review:

Large loans and loans near policy limits.
Special-purpose property.
Construction and lease-up, with prospective values.
Single-tenant net lease with short remaining terms.
Any value that depends on extraordinary assumptions or hypothetical conditions.

5Tests of what a CRE appraisal must contain

The review confirms the appraisal meets USPAP and the agencies' minimum standards. It must be written, use the regulatory definition of market value, and contain enough information and analysis to support the credit decision.

For CRECheck for these:

An "as is" value, with prospective "as completed" and "as stabilized" values where the loan relies on them.
Deductions and discounts for lease-up, holding costs and incomplete construction.
A lease-by-lease rent analysis, and expenses supported by market data.
A cap rate drawn from comparable sales, not surveys alone.
Disclosure of the property's sales and listing history.

6Documented findings in the credit file

The results of each review must be documented and kept in the credit file. The record should show what was checked, what was found, and how it was resolved.

For CREExaminers look for a reviewer's own conclusion on whether the value is supported, not a completed checklist alone.

7What a reviewer may change, and what it may not

A reviewer cannot simply change the appraised value. Weaknesses go back to the appraiser to resolve. A reviewer may develop a different value only under USPAP Standard 3, with the qualifications and scope that requires.

For CREA lender cannot fix a deficient appraisal by ordering a second one in search of a better number. If a report cannot be relied on, the policy should state when to order a new appraisal and who decides.

8Escalation of rejected reports and suspected fraud

The policy must say what happens when an appraisal is rejected, and how suspected appraiser misconduct is referred to the state appraiser regulatory agency. Suspected fraud also triggers the institution's Suspicious Activity Report process.

For CREPressure on value most often appears in larger income-property loans and in refinances that need a number to close. The escalation path should name who receives the referral and who files.

9Oversight of outside reviewers

An institution may use third-party reviewers, but it remains responsible for the review. The policy should cover how outside reviewers are selected and how their qualifications, independence and work are checked.

For CREAsk an outside reviewer for its reviewers' commercial credentials, its engagement and independence terms, and a sample review.

10Evaluations below the appraisal threshold

Transactions that qualify for an evaluation instead of an appraisal still need a review suited to their risk. An evaluation must be consistent with safe and sound lending and support a credible market value.

For CREThe federal appraisal threshold for commercial real estate is $500,000. Below it, a loan may use an evaluation, but the institution's own risk may call for an appraisal anyway. The policy should say when.

This guide summarizes the Interagency Appraisal and Evaluation Guidelines for commercial real estate lenders. It is not legal advice. Each institution's regulator, its own credit policy and the full text of the Guidelines govern.

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What the Interagency Guidelines require in a CRE appraisal review policy

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