The SBA recently released further updates to its Standard Operating Procedures [SOP 5010 5(H)] with the intent to streamline and better manage risk in lending processes. Some of these changes – which became effective May 1, 2015 – affect the appraisal requirements for construction loans, including SBA 504 and 7(a) loans.
Appraisals used in underwriting loans used to finance new construction or substantial renovation of an existing building must include an estimate of the market value upon completion of the proposed improvements. Naturally, if the completed improvements vary significantly from improvements used to determine the as-completed value, the collateral may be inadequate to support the loan. To avoid this problem, SBA requires the lender to verify that the work was completed in accordance with, or with only minor deviations from the plans & specs upon which the original estimate value was based. Until the May, 2015 revision, SBA required the appraiser to provide this verification, but the revision now provides for verification by (1) a Construction Management Firm (2) the Project Architect (3) the Appraiser or (4) the General Contractor for the project.
Under the new system, it is important to ensure that the construction manager, contractor or architect understands that this is different from other certifications they may be asked to provide. Rather than certifying completion in accordance with plans and specifications approved by the municipality or owner, the verification requires an understanding of the documents used in the appraisal. Any change from the appraisal documents will have to be evaluated for materiality.
The revision did not provide guidance as to what would be considered to be a minor deviation. As a result, it may be prudent for lenders to require that the verification explain how deviations from the appraised documents were evaluated. Presumably, the objective of the verification is to validate the value of the property to assure the adequacy of the collateral. To accomplish this, deviations that affect the use or occupancy of the property, building area, site area or improved site area, changes in the use of any part of the property, the extent of renovations completed, or the construction materials or finish materials used would likely be considered as less-than-minor.
SBA has made a number of changes to its SOP guide in the last few years, and staying up to date with the latest developments is critical to ensuring compliance and the effective issuance of SBA loans. If and how construction lenders will adjust lending procedures as a result of these latest changes remains to be seen.