Appraisal Detail

          – Not Just Minutiae

Submitted by Ann Scott, March 14, 2016

Appraisals contain a lot of data. The information can be ignored or it can be viewed with an eye towards usefulness. Sometimes the untrained eye will gloss over details that are critical to a loan structure. Following are just a few items that can be critical to a lending decision.


Words to watch for are “grandfathered” or “subject to zoning change.” When subject collateral is grandfathered it typically means the zoning has changed and the current zoning would not allow for the subject to be constructed today if the lot were vacant. This requires further analysis. The lender needs to know what is permissible given the current zoning. Say the subject is a 12 unit apartment building and new residential zoning would limit the number of units to four if the lot were vacant. It’s fairly easy to ascertain that the cash flow from 12 units will probably exceed the cash flow from four units. The lender will need to carefully examine the insurance coverage as a precaution should the improvements be destroyed.

If a property is appraised “subject to zoning change,” the appraisal should also include the “as is” value based on its current zoning. Knowing when the zoning change is to occur and documenting the approval of such is critical. A borrower may apply pressure to close a deal prior to a zoning change. Full funding based on the “subject to” value should not happen unless the change has occurred.


The reviewer should compare the access description and the plat (or aerial photo) for compatibility. If access is via another property, there is probably a shared access agreement or an easement. Contained within either of those agreements may be a fee or lease agreement for access along with shared maintenance costs. Sometimes these are separate from the deed and, occasionally, not referenced within a deed. Either way, the lender should take an assignment of the access document in nearly all circumstances. The fee and expenses should be considered within the Income Approach. There may also be an adjustment in the Sales Approach for properties that have standard access and no fees.


In metropolitan areas, most utilities are typically available throughout; however, newly annexed areas in some cities may lack some basic systems such as sewer. And rural areas can vary widely. Consider a proposed construction project. If an appraiser notes the lack of a “standard” utility, the lender may need to ascertain with the appropriate authority that the proposed building is legally permissible given the lack of sewer or other utility. In addition, if the appraiser notes that a septic system is in use for a commercial building, calls may need to be made to determine if the lot is in current compliance for size for perk requirements. Sometimes the word “grandfathered” is used in this situation. This means the current use is permitted but, should the building be destroyed or even if the business closes, the county may have the option to deny a building or use permit.

Flood Hazard Area

Federal regulations are very stringent regarding improvements located in a flood prone area. But simply because the improvements are not in a flood area, doesn’t make this a non-issue. Consider whether the access to the subject is in a flood area. If it is, the appraiser or lender may need to make a determination of how much business may be lost due to access. The borrower may be cooperative or may downplay the issue. As the lender should be looking at the income from the business averaged over, say, three years, this will assist in determining if the flooding creates a cash flow issue. If the borrower is showing a pro forma with ample increases, there should be evident reason as to why the increase is anticipated, despite access issues.

Building description

The appraiser should describe the age of the building and also the age of items such as the roof, the heating and cooling systems, the electrical system, the plumbing, along with the interior condition. The reviewer needs to look at the pictures and, even better, visit the property. There is a tendency for pictures to make properties appear better, from a maintenance standpoint, than they are. If the building and systems are over 10 years old, then odds are maintenance costs will be higher and, possibly, cash will be needed for capital improvements. Does the cash flow support both debt and potential cash needs?

Remaining Economic Life

When discussing improvements, the appraiser should indicate the estimated effective age and the typical economic life. The difference in these two numbers results in the remaining economic life of the improvements. The question is whether the remaining economic life is less than the proposed amortization of the loan structure. Think about this, because equipment loans are based on the life expectancy of the collateral. Based on the same thinking, the amortization of a loan should not exceed the remaining economic life.

Don’t just skip to the value line. These are just a few examples of so-called detail that can benefit a lender when considering loan structure. Find out what the appraisal can tell you about your collateral. It may ultimately change the terms and structure of the loan.

Professional Bank Services, Inc. offers commercial appraisal review, appraisal function review and loan review services to the financial services industry. We would be pleased to work with you to perform, assess or improve these important functions.



To download or print this article, click here.

Professional Bank Services
(800) 523-4778