Small Business: Listen up, lenders: SBA clears air on appraisals

This SOP was updated recently for the first time in many years, reducing its length significantly and clarifying many points that during the years had produced questions. This was very much a good thing. With changes, however, there are new questions and even some misconceptions about what some of the language might mean.

Appraisal requirements

Concerning the need for appraisals for SBA deals, I think there is some bad information circulating, in particular from The Coleman Report Web site.

Contrary to comments widely published, there is no requirement for an appraisal when a loan exceeds $350,000. Rather, there is a requirement for a “valuation of the business.” The SOP is clear that this evaluation is not an appraisal and not meant to establish a market value or purchase price but is to evaluate the ability of the business to service the debt.

This is a far cry from an appraisal of real, personal or financial assets of the business. Contrary to what Scott Gabehart says on the May 20 audio loop on the Coleman Report page, there is no requirement that the valuation be performed by a “certified” appraiser – only an “independent, qualified source.” This could be a certified public accountant.

In contrast, a real estate appraisal is required if the estimated value of the project property is greater than $250,000, or less if it might be necessary for the appropriate evaluation of creditworthiness (page 276 of the SOP.) This appraisal, as

opposed to valuation of the business, is required to be performed by an independent appraiser who is either “state-licensed or state-certified.”

This is NOT the certification provided by various and competing appraisal societies, institutes and associations touted by Gabehart. Those certifications – some sterling, some not – are irrelevant in the SBA context.

The appraiser may hold Appraisal Institute MAI certificate No. 1 and be the acknowledged dean of real estate appraisers yet be ineligible to perform an appraisal on an SBA deal. Lenders are cautioned that they should have in the loan file a copy of a current state-issued license or certification for any and all appraisers performing work on SBA loans, or any other loans for that matter.

A copy of the appropriate level license/certificate should be placed in the file at the time the appraisal is performed, as they expire annually, and it could be difficult to reconstruct the file on this issue for a purchase request submitted years after closing.

Also, we need to bear in mind that in some states, Missouri included, a “licensed appraiser” is someone who has passed the real estate appraiser examination but is not eligible for certification pending accumulation of the requisite 2,000 experience hours and, in the interim, is limited to appraisal of residential properties not exceeding $100,000. The distinction between licensed and certified appraisers may well vary state to state, therefore the admonition above that the loan file reflects the appropriate level of licensure/certification.

There may well be some fine-tuning of the SOP within the month to better define the respective roles of business valuations and acceptable appraisals.

As with every written document, clarity is important and rarely is a regulation written that cannot be improved.

Sam Jones is the Region VII SBA Administrator, serving Missouri, Kansas, Iowa and Nebraska.