Fewer Commercial Deals Will Need Appraisals

April 30, 2018

A new federal rule is expected to exempt nearly one-third of commercial property sales from needing an appraisal. The rule, which was adopted by the Federal Reserve Board, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency, doubles the threshold for commercial real estate deals that require an independent appraisal. 

Under the new rule, commercial property sales of $500,000 or less are exempt from the appraisal requirement. Financial institutions will still need to perform a property evaluation for these deals, but they no longer need an independent appraiser to complete it. The rule sets out to reduce time, cost, and regulatory burdens associated with smaller real estate deals, analysts say. 

“Although the property sales total affected by this rule change is a drop in the bucket compared to overall commercial property volume, the cost savings are noteworthy,” says Justin Baskt, CoStar director of capital markets. “For example, if we estimate appraisal costs at between $2,000 and $4,000 per transaction, this represents an aggregate savings of $300 million to $600 million.” Under the new $500,000 threshold, 31.9 percent of property sales in the CoStar database would be exempt from the appraisal requirement.

Some critics have expressed concerns over the new rule. James L. Murrett, president of the Appraisal Institute, told the CoStar Group that raising the threshold is a risky move. “Without a doubt, the final rule increases risk to the commercial real estate lending system,” Murrett says. “Seen through the lens of loosening regulations, the final rule may make sense. But from a safety and soundness perspective, the final rule raises significant concerns.” He says he is concerned it causes similar conditions that occurred during the run-up to the financial crisis, when “appraisal and risk management were thrust aside to make more—not better—loans.” 

Others are welcoming the change. “The appraisal world is getting faster and cheaper, and this change creates efficiency for the banking regulators to be a little more nimble and relax some of the standards put in place after the financial crisis,” says John Busi, president of the valuation and advisory group at Newmark Knight Frank. “Of course, appraisers are going to be upset by it because many have had business on commercial property under $500,000.”

Source: “New Federal Rule Exempts Nearly One-Third of Commercial Property Sales From Appraisals,” CoStar Group (April 27, 2018)