| It is important to have an understanding
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| | result in a longer processing period for
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| of what can go wrong with a business
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| | the loan).
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| loan. The focus of this article is on two
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| | Even though cost and schedule are
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| situations that will have the most severe
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| | critical issues, an even bigger issue is
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| financial consequences. A loan
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| | the appraisal value that is provided by
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| disapproval at an early point in the
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| | the appraisal. For example, I have seen
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| application process is not included here
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| | instances in which a commercial borrower
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| because it is not likely to have the
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| | thought their property was worth $500,000
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| immediate financial consequences of the
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| | but the commercial appraiser selected by
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| examples provided below. Business owners
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| | the lender produced an appraisal with a
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| should be prepared in advance for these
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| | value of $285,000. While this is not a
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| problematic circumstances so that they
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| | routine outcome, it is certainly not
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| can develop contingency plans.
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| | unusual to receive an appraisal that
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| RECALL OF A COMMERCIAL LOAN
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| | produces a value that is less than the
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| Recall provisions allow the lender to
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| | commercial borrower expects. A similar
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| call the loan (forcing the borrower to
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| | (but avoidable) problem occurs when a
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| repay early) prior to the expiration of
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| | commercial appraisal is not accepted by
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| the loan. This issue is not of concern to
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| | the lender because the appraiser did not
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| commercial borrowers whose business loan
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| | provide an appraisal meeting basic
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| does not contain provisions permitting
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| | guidelines. For example, a key element of
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| the lender to recall the loan. However
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| | a commercial appraisal is the valuation
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| many traditional commercial lenders
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| | based on analysis of income. If an
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| routinely place recall clauses in their
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| | appraiser chooses to submit an appraisal
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| loan agreements. The conditions which can
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| | based only on comparable sales data even
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| trigger a recall will vary but will
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| | though the lender stipulated in the
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| commonly include periodic review of
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| | engagement letter that an income
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| financials and credit history by the
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| | appraisal is required, then the lender
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| lender. Under these circumstances if
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| | will not accept the appraisal (and is
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| agreed levels of income and credit
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| | likely to refuse even a modified report
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| standards are not met, then the bank will
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| | from the appraiser when they violate such
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| typically notify the commercial borrower
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| | a basic appraisal requirement).
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| that they must pay off the loan within a
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| | It is important to have an understanding
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| 30-90 day period.
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| | of how the appraiser will be asked to
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| When confronted with a recall
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| | determine value as well as to realize
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| notification, commercial borrowers will
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| | that there might be significant assets
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| have little recourse other than to seek
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| | which will not even be included in the
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| refinancing from another lender. In
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| | value. Items such as equipment and
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| seeking alternative sources of commercial
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| | furniture are frequently excluded,
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| financing, prudent borrowers will
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| | especially in commercial real estate
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| eliminate potential lenders who will
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| | loans. For businesses such as funeral
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| impose similar recall provisions in new
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| | homes and assisted living facilities, it
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| financing. To avoid the recall situation
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| | is very common for the overall business
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| in the first place, commercial borrowers
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| | value to be much higher than the real
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| would be wise to consider only commercial
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| | estate value. But an appraisal based on
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| loans which will not have recall terms.
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| | the real estate value will nevertheless
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| For commercial borrowers who currently
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| | exclude the excess business value from
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| have recall provisions in their
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| | the commercial real estate value.
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| commercial financing agreement but have
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| | What contingency plans are advisable for
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| not yet received a recall of their loan,
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| | the appraisal process? First, be prepared
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| it will be equally wise to consider
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| | for the appraisal to be more expensive
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| refinancing their business loan before
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| | than initially expected and ensure that
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| such a recall occurs so that refinancing
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| | funds are available to cover this
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| is accomplished according to the
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| | possibility. Second, be prepared for the
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| commercial borrower's timetable and not
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| | appraisal to take longer than expected.
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| that of the current commercial lender.
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| | If buying a business property, the buyer
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| COMMERCIAL PROPERTY APPRAISAL COSTS AND
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| | should discuss this possibility in
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| RESULTS
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| | advance with the seller. If refinancing,
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| The commercial appraisal process is
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| | the owner should not make plans for
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| lengthy, expensive and relatively
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| | spending funds until the appraisal has
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| uncontrollable in terms of results. In
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| | been finalized and the lender indicates
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| many cases one of the unknowns is how
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| | their readiness to close the loan. Third,
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| much the appraisal will cost.
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| | consider in advance what action to take
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| Unfortunately commercial mortgage
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| | if the appraisal produces a lower value
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| appraisal costs can be unpredictable and
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| | than expected. Fourth, decide if an
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| will approach what many borrowers view to
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| | additional appraisal is warranted (this
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| be excessive for specialized commercial
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| | possibility needs to be considered
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| properties such as assisted living
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| | especially for the situation in which the
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| facilities. Appraisals for a stated
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| | appraisal is not accepted by the lender).
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| income loan will usually be more costly
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| | The purpose of this article was to focus
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| because the lender is primarily depending
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| | on business loan problems with immediate
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| on credit scores and a sound appraisal to
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| | financial consequences. There are a
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| support the loan. These appraisal
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| | multitude of other serious commercial
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| situations will cost more for commercial
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| | loan problems which borrowers should have
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| properties in rural areas because
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| | a similar awareness of in order to avoid
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| qualified appraisers may not be available
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| | unnecessary complications. Commercial
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| locally. The timetable for completing an
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| | borrowers should visit and for an
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| appraisal is another potential source of
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| | overview of strategies for avoiding
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| problems, and until the appraiser is
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| | commercial financing problems.
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| selected and commits to a schedule, the
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| | Copyright 2005-2006 AEX Commercial
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| completion date is not likely to be known
| |
| | Financing Group, LLC. All Rights
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| with any degree of accuracy (and this can
| |
| | Reserved.
|
