A recent change in federal regulation could spur more commercial real estate lending at smaller banks.
The FDIC, the Board of Governors of the Federal Reserve and the Office of the Comptroller of the Currency have amended the real estate appraisal rule, raising the current threshold on commercial real estate transactions requiring appraisals from $250,000 to $500,000.
Experts and bankers say the change has been long awaited; it should reduce costs on originating smaller loans and enable banks to close deals faster.
“I think this was kind of a necessary change,” Jack Mulcahy, a credit risk analyst at the Boston-based CoStar Group, told Banker & Tradesman. “The cost of lending will go down.”
The appraisal threshold was last adjusted in 1994; since that time, real estate prices have obviously increased, Mulcahy said.
There were 430,000 commercial real estate properties in the U.S. valued under $250,000 in 1994, according to data from CoStar. As of the end of 2017, there were 160,000 properties nationwide valued under $250,000 and 314,000 properties under $500,000 in value.
“That they didn’t change it sooner is kind of surprising,” said Mulcahy.
The rule change opens up a lot of opportunity for community banks in Massachusetts. There are 17,700 commercial real estate properties in Massachusetts valued between $250,000 and $500,000, according to an analysis from The Warren Group, publisher of Banker & Tradesman.
An appraisal can cost a bank as much as $4,000, said Brandon Quinones, a risk management consultant at North Carolina-based Sageworks.
“A several thousand-dollar appraisal might now just be a fraction of the cost,” he said. “Another benefit for rural community banks is the speed of the deal making the difference. Some small institutions lose business when they can’t operate at the same speed as larger institutions with more resources at their disposal.”
The rule change is unlikely to have much of an impact in major metro markets like Boston, where there are fewer commercial properties in the $250,000 to $500,000 price range.
But in an area like Central Massachusetts, the rule change should benefit community banks and customers such as small manufacturers, warehouses and retail, who often bear the brunt of the appraisal fee, said Chris Watson, senior vice president and senior lending officer in the business banking division at Webster Five.
“Properties under $250,000 are few and far between, so it didn’t cover a lot of properties at all,” he said, referring to the old appraisal threshold.
Webster Five typically paid $2,000 or $2,500 for a full appraisal, Watson said, a cost passed on directly to the property owner. He expects the rule change to reduce appraisals by 20 to 25 percent.
The bank will also be able to determine certain property values in about a week or so, as opposed to the three or four weeks it took for a full appraisal, he said.
A Common-Sense Approach
Critics of the rule change argue that giving banks more autonomy over appraisal values is risky, largely because faulty appraisal values played significant roles in several of the big financial crises.
Some of Quinones’ clients have told him they still intend to do full appraisals on properties in this price range. But for those that do not, he said banks must still have a qualified professional do an evaluation and document in their procedures how they go about determining a property value.
Webster Five intends to use resources such as broker opinions, tax assessed property values and sales databases to help determine the value of a property in the $250,000 to $500,000 range, Watson said.
“I think things are tighter now and the values are more accurate than in the early 1990s,” he said. “The rise of the Internet has made information gathering a lot easier.”
Watson added that it ultimately comes down to being able to prove a stable economy and that the proposed property and loan have a reasonable loan-to-value ratio.
“We’ve always tried to look at it from a common-sense approach,” he said.
