Responding to investor and lender concerns regarding the time and costs associated with completing smaller real estate transactions, the Federal Reserve Board, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency today proposed raising the sale price threshold for commercial real estate transactions requiring an appraisal to more than $400,000 from the current level of $250,000.
The banking agencies proposed the sale-price threshold for residential real estate transactions should remain unchanged.
The agencies believe raising the threshold for commercial property sale transactions will significantly reduce the number that require an appraisal, while not undermining the safety and soundness of financial institutions.
The FDIC estimates that 17% of all current CRE property sales currently fall below the $250,000 threshold and do not require loan appraisals. Moving the threshold to $400,000 would increase that percentage of sales not requiring appraisals to 28%.
"(This) will be a meaningful reduction in regulatory burden, particularly for rural banks who would be expected to originate many of these smaller transactions," noted FDIC Chairman Martin J. Gruenberg in a statement announcing the proposal.
The revised threshold arose during a regulatory review process conducted as part of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA), which requires federal banking agencies to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations. During the most recent review, financial industry representatives raised concerns that the current exemption level had not kept pace with price appreciation in the CRE market.
“The current commercial real estate appraisal thresholds have been in place for a long time, about 23 years, and were the subject of frequent comment during the EGRPRA review process,” Gruenberg said. “In particular, bankers in rural parts of the country at outreach sessions expressed significant concerns with delays in completing real estate transactions due to a scarcity of appraisers in those areas.”
Appraisers Oppose Move
Federal banking regulators will be accepting comments on the proposal for the next 60 days. The Appraisal Institute, the nation’s largest professional association of real estate appraisers, said it is working on an official comment to the proposal. The institute has been urging federal regulators against increasing the appraisal threshold for commercial property sales since 2014,
“The Appraisal Institute is concerned by today’s announcement. We remain opposed to the proposed increase in the appraisal threshold level from $250,000 to $400,000 for commercial real estate loans,” said Appraisal Institute president Jim Amorin. “The agencies’ proposal contradicts federal bank regulators’ concerns regarding the state of the commercial real estate market and the quality of evaluation reports.”
Instead of an appraisal, the proposal would require that CRE transactions at or below the $400,000 threshold require just an evaluation for approving a loan. As defined by agency guidelines, these evaluations are less detailed than full appraisals. They do not require completion by a state-licensed or certified appraiser while still providing a market value estimate of the property pledged as collateral.
“Although the proposal represents a modest increase, as pricing in commercial real estate has increased, so have investment risks,” Amorin said. “If anything, federal bank regulators should be calling for heightened due diligence by regulated institutions - not an undoing of a fundamental risk management activity.”
The banking agencies proposed the sale-price threshold for residential real estate transactions should remain unchanged.
The agencies believe raising the threshold for commercial property sale transactions will significantly reduce the number that require an appraisal, while not undermining the safety and soundness of financial institutions.
The FDIC estimates that 17% of all current CRE property sales currently fall below the $250,000 threshold and do not require loan appraisals. Moving the threshold to $400,000 would increase that percentage of sales not requiring appraisals to 28%.
"(This) will be a meaningful reduction in regulatory burden, particularly for rural banks who would be expected to originate many of these smaller transactions," noted FDIC Chairman Martin J. Gruenberg in a statement announcing the proposal.
The revised threshold arose during a regulatory review process conducted as part of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA), which requires federal banking agencies to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations. During the most recent review, financial industry representatives raised concerns that the current exemption level had not kept pace with price appreciation in the CRE market.
“The current commercial real estate appraisal thresholds have been in place for a long time, about 23 years, and were the subject of frequent comment during the EGRPRA review process,” Gruenberg said. “In particular, bankers in rural parts of the country at outreach sessions expressed significant concerns with delays in completing real estate transactions due to a scarcity of appraisers in those areas.”
Appraisers Oppose Move
Federal banking regulators will be accepting comments on the proposal for the next 60 days. The Appraisal Institute, the nation’s largest professional association of real estate appraisers, said it is working on an official comment to the proposal. The institute has been urging federal regulators against increasing the appraisal threshold for commercial property sales since 2014,
“The Appraisal Institute is concerned by today’s announcement. We remain opposed to the proposed increase in the appraisal threshold level from $250,000 to $400,000 for commercial real estate loans,” said Appraisal Institute president Jim Amorin. “The agencies’ proposal contradicts federal bank regulators’ concerns regarding the state of the commercial real estate market and the quality of evaluation reports.”
Instead of an appraisal, the proposal would require that CRE transactions at or below the $400,000 threshold require just an evaluation for approving a loan. As defined by agency guidelines, these evaluations are less detailed than full appraisals. They do not require completion by a state-licensed or certified appraiser while still providing a market value estimate of the property pledged as collateral.
“Although the proposal represents a modest increase, as pricing in commercial real estate has increased, so have investment risks,” Amorin said. “If anything, federal bank regulators should be calling for heightened due diligence by regulated institutions - not an undoing of a fundamental risk management activity.”
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