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The Essentials of Commercial Evaluations
- 1. Evaluation Solutions By Cushman & Wakefield The Lower-Cost Response to Regulatory Exemptions May 24, 2017
- 2. Cushman & Wakefield Mr. Ping has a distinctive background which provides clients with an advantage over many of their competitors. He has been actively involved in the real estate valuation and consulting profession since 1983 with employers in the banking and public accounting arenas. His extensive experience in real estate ranges from the valuation of single assets to entire bank loan portfolios. In 2012, he joined Cushman & Wakefield and is currently serving as National Director of the Alternative Valuation Services Group of Valuation & Advisory for Cushman & Wakefield Global Services, Inc. In this role he is responsible for new business generation, supplying platforms, processes, and procedures, and quality control for the reviews for various appraisals and evaluations. In the 17 years prior to joining Cushman & Wakefield, he served as Chief Appraiser at PNC Bank and Huntington Bank. Mr. Ping has experience and knowledge of the regulatory environment associated with valuation issues and with underwriting policies and procedures. He continues to enjoy a very integrated relationship with the regulatory agencies. Paul E. Ping, MAI National Director Alternative Valuation Services The Lower-Cost Response to Regulatory Exemptions Evaluation Solutions
- 3. Cushman & Wakefield 1. All transactions in which the “transaction value” is $250,000 or less 2. Real estate-secured business loans with a transaction value of $1,000,000 or less and when the sale of, rental income derived from real estate is not the primary source of repayment for the loan; and 3. Renewals, refinances, or other transactions involving existing extensions of credit. a. There has been no obvious and material change in market conditions or physical aspects of the property that threaten the adequacy of the institution’s real estate collateral protection after the transaction, even with the advancement of new monies; or b. There is no advancement of new monies other than funds necessary to cover reasonable closing costs. Regulatory Basis for Evaluations When are Evaluations an option? There are at least three acceptable scenarios for using an Evaluation
- 4. Cushman & Wakefield Key Definition from the Agencies’ Appraisal Regulations Transaction Value • For loans or other extensions of credit, the amount of the loan or extension of credit; • For sales, leases, purchases, and investments in or exchanges of real property, the market value of the real property interest involved; and • For the pooling of loans or interests in real property for resale or purchase, the amount of the loan or market value of the real property calculated with respect to each such loan or interest in real property. For purposes of this definition, the transaction value for loans that permit negative amortization should be the institution’s total committed amount, including any potential negative amortization.
- 5. Cushman & Wakefield Appraisal or Not… Evaluation: A valuation permitted by the Agencies’ appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption, or subsequent transaction exemption. That should clear up any confusion! Seriously, the subtlety of the definition is important. The word valuation versus the word appraisal is key. An Evaluation is not necessarily an Appraisal… but an Appraisal can be an Evaluation as an Appraisal is a valuation. What is an Evaluation?
- 6. Cushman & Wakefield Appraisal or Not… From a regulatory perspective, an Evaluation is not required to be completed by an appraiser; however, in some states Evaluations are encompassed in the state licensing laws and requires the use of an appraiser. In the agency guidelines, • The person selected possesses the requisite education, expertise, and experience to competently complete the assignment, and • Persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued. Such persons may include appraisers, real estate lending professionals, agricultural extension agents, or foresters. • The person is unbiased, independent and has no direct, indirect, or prospective interest, financial or otherwise, in the property or the transaction. What is an Evaluation?
- 7. Cushman & Wakefield Is it more simple to order appraisals? Evaluations typically cost less in terms of money and time than appraisals. If not, you may be ordering appraisals from the wrong people. The agencies are enamored by a risk-based decision- making approach. Every institution operates in different types of markets, have different portfolio dynamics, and have credit cultures. Take advantage of where the regulations allow an institution to be cost effective. Why Use Evaluations?
- 8. Cushman & Wakefield When to be careful • Loans with combined loan-to-value ratios in excess of the supervisory loan-to- value limits; • Atypical properties; • Properties outside the institution’s traditional lending market; • Transactions involving existing extensions of credit with significant risk to the institution; or • Borrowers with high risk characteristics Why Use Evaluations? These risk factors can be minimized when ordering an Evaluation from a qualified individual with the requisite experience.
- 9. Cushman & Wakefield Why have a different process/procedure? The Need for an Evaluation Program Simply put… Cost Reduction and Speed of Execution • Make your customer’s happier • Reduce your administrative burden, thus internal costs • Address safety and soundness • Differentiate between risk parameters
- 10. Cushman & Wakefield Why Choose Us? The Cushman & Wakefield Experience We know there are others that provide Evaluation reports, but Cushman & Wakefield differentiates our services and product from the industry. • Reviewable Restricted Appraisal Report on “steroids” • Fully customized report, not a checkbox form • Completed by a full-time, state licensed Cushman & Wakefield employee in the area of the property • Draw upon our extensive brokerage and leasing network • Process managed by experienced personnel with bank valuation oversight history
- 11. The Lower-Cost Response to Regulatory Exemptions Cushman & Wakefield Evaluations Let’s open this up for Q&A
- 12. ©2017 Cushman & Wakefield. The material in this presentation has been prepared solely for information purposes, and is strictly confidential. Any disclosure, use, copying or circulation of this presentation (or the information contained within it) is strictly prohibited, unless you have obtained Cushman & Wakefield’s prior written consent. The views expressed in this presentation are the views of the author and do not necessarily reflect the views of Cushman & Wakefield. Neither this presentation nor any part of it shall form the basis of, or be relied upon in connection with any offer, or act as an inducement to enter into any contract or commitment whatsoever. NO REPRESENTATION OR WARRANTY IS GIVEN, EXPRESS OR IMPLIED, AS TO THE ACCURACY OF THE INFORMATION CONTAINED WITHIN THIS PRESENTATION, AND CUSHMAN & WAKEFIELD IS UNDER NO OBLIGATION TO SUBSEQUENTLY CORRECT IT IN THE EVENT OF ERRORS. Jodi Kane Administrative Assistant Alternative Valuation Products Valuation & Advisory T +1 614 222 0972 M +1 614 554 6336 F +1 614 224 3898 Jodi.Kane@cushwake.com Paul E. Ping, MAI National Director Alternative Valuation Products Valuation & Advisory T +1 614 222 2476 M +1 614 915 6135 F +1 614 224 3898 paul.ping@cushwake.com Brad Belcher, MAI Senior Director Valuation & Advisory T +1 404 853 5344 M +1 770 363 8119 F +1 404 874 8046 Brad.Belcher@cushwake.com
Editor's Notes
- Evaluations are exemptions to FIRREA’s appraisal requirements and are used to fulfill the requirements for loans meeting the de minimis thresholds. Interesting concept is the definition of de minimis Webster defines this as: lacking significance or importance : so minor as to merit disregard What this tells us is that the real estate in question is not the source of repayment is really ancillary in the decision to extend credit. Typically we talk about owner occupied real estate wherein the bank also has a loan on the operations of the owner and are looking at the source of repayment from the cash flow of the business operations. The real estate would only come into play when there is a foreclosure scenario. As banks do not go into a loan assuming foreclosure, the real estate is a secondary or tertiary source of repayment
- The important thing to understand is that the transaction value is not the property value, but rather the loan amount. The distinguishing characteristic is that the loans should be “stand-alone”. Individual loans to borrowers may need to be aggregated to determine transaction value.
- The agencies do not give us a really good idea of what an Evaluation is but rather make a key differentiation by not using the word “appraisal”. The December 2010 Interagency document tells us what should be in an Evaluation, but not the form in which the report should be presented.
- Another important aspect is that we are told Evaluations are not required to be completed by appraisers. Only someone with the requisite education, expertise and experience. Appraisers can complete Evaluations as long as they follow the USPAP guidelines. In order to accomplish this the Evaluation must be completed in either a Restricted appraisal report or an Appraisal report.
- Look back at the concept of the definition of de minimis. Look at the risk of the transaction as a function of how it fits into the bank’s credit requirements, culture and portfolio. RISK is key to the agencies philosophy regarding most transactions and the due diligence that is required.
- There are instances when the agencies tell us that Evaluations may not be the best product to use. However, even these situations may be overcome by using a competent source for the Evaluation. For example: A golf course is considered by many to be a unique property. If you were to use a leading industry golf course specialist to complete the Evaluation, the risk may be mitigated.
- The agencies explain that a program should be documented and a process/procedure put in place for the entire valuation function. An Evaluation is a component of the valuation function and thus you should have a procedure in place to utilize Evaluations correctly.
- Cushman & Wakefield is uniquely qualified to complete Evaluations. We use of existing employees (state licensed/certified appraisers) familiar with the local markets to complete Evaluations. Following USPAP we use the format of a restricted appraisal report to fulfill the Evaluation requirements. The key difference between our product and others is that our restricted appraisal report is more in-depth and provides the bank with the information necessary to review and understand the logic used by the appraiser. Most all the competitors use a form driven, check box approach by independent contractors throughout the country. They may not even have a state license or certification. Of note: the Appraisal Institute recently had a seminar on how appraisers can provide Evaluations to banks…..REALLY? We have been providing this product for over 5 years and the appraisers are just now understanding this? I came to this firm with the intent to create this product and provide to institutions what is really been missing. In all my years of banking, Evaluations were a source of irritation. There was never a credible source for acquiring Evaluations from external sources. Internally prepared? Many banks have internal departments to handle this but the cost of production of a variably demanded product with fixed costs can be detrimental to a cost effective program.