A final rule increasing the appraisal threshold from $250,000 to $500,000 for commercial real estate (CRE) transactions – the first increase in nearly a quarter century – was released Monday by the federal banking regulators; the new rule takes effect upon publication in the Federal Register (likely later this week).
However, CRE transactions exempted from the higher appraisal requirement must continue to receive an evaluation, the agencies said.
In a release, the Federal Reserve said that it, acting with the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC), had originally proposed to raise the 24-year-old threshold to $400,000. However, the agencies determined that the $500,000 level would “materially reduce regulatory burden and the number of transactions that require an appraisal,” the release stated.
The agencies also determined that raising the threshold to the higher level would not pose a safety and soundness threat to institutions, according to the release.
Specifically, the final rule defines a CRE transaction as a real-estate-related financial transaction not secured by a single 1-to-4 family residential property. The final rule excludes all transactions secured by a single 1-to-4 family residential property; therefore, construction loans secured by a single 1-to-4 family residential property are excluded, the Fed said.
“For commercial real estate transactions exempted from the appraisal requirement as a result of the revised threshold [of $500,000], regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices,” the final rule states.
Evaluations, according to the Fed’s press release, “provide a market value estimate of the real estate pledged as collateral, but do not have to comply with the Uniform Standards of Professional Appraiser Practices and do not require completion by a state licensed or certified appraiser.”
The Fed said the final rule issued by the three agencies partly responds to concerns raised by financial institutions that a $250,000 appraisal threshold did not keep pace with rising prices in commercial real estate over nearly the last quarter century. The change was also in response to comments raised about regulatory burden during the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process completed in March 2017, the Fed said.
The FDIC on Monday also provided details to supervised commercial and savings institutions via Financial Institutions Letter (FIL) 14-2018.