Appraisals and Evaluations: Renewals, Extensions, and Modifications

Can the bank rely on an existing appraisal for renewals, extensions, or modifications if no new money is being added? This is a somewhat commonly asked question since lenders and borrowers are always looking to minimize costs, and even more so in our current environment.  In general, the answer is “yes” – but like many things dealing with regulations, there is a caveat.

There is a two-part test to consider – whether the current appraisal/evaluation is valid, and whether the subsequent transaction requires a new evaluation. Let’s tackle the second part first.

The interagency guidelines provide that an appraisal is not required if the transaction involves an existing extension of credit at the lending institution, provided that a) there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the collateral protection after the transaction, even with the advancement of new monies, or b) there is no advancement of new monies, other than funds necessary to cover reasonable closing costs.

However, even though a new appraisal may not be required under the above, you will still need to have an evaluation done under this exception. Specifically, the regulation provides that for a transaction that does not require an appraisal, the institution must obtain an appropriate evaluation of real property collateral that is consistent with safe and sound banking practices.

So, even if you are exempt from obtaining an appraisal, your institution is still required to obtain an evaluation. Which brings us to the next question: is your existing appraisal/evaluation “valid”, and can it be used for the subsequent transaction?

The interagency guidelines provide that institutions are allowed 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, that it 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 the 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 cap rates and lease terms), changes in zoning, building materials or technology, or environmental contamination.

So, while the bank may not be required to obtain a new evaluation if you have an existing appraisal, you still need to do an analysis that includes the factors listed above. This is particularly important for transactions that don’t involve any new money. While the transaction is clearly exempt from the appraisal requirement, you would only be able to circumvent the new evaluation requirement if you considered, analyzed, and verified the factors showing the old appraisal is still valid.

Again, much of this is going to depend on the specific facts and circumstances of your situation, so if you have questions feel free to reach out to us on the Hotline and allow us to help you determine what the right solution is for your scenario.