First, we note that the federal banking agencies’ appraisal regulations (for your institution, the FDIC appraisal regulations) do not require an appraisal for renewals of loans, unless there have been material changes in circumstances requiring a new appraisal. 12 CFR 323.3(a)(7). However, you still must obtain “an appropriate evaluation of real property collateral that is consistent with safe and sound banking practices.” 12 CFR 323.3(b).

We urge caution in using an evaluation covering only a portion of a building as the basis for renewing a loan. The Interagency Appraisal and Evaluation Guidelines (“Guidelines”) provide more detail on examiner expectations for evaluations. (See Section XII, Evaluation Development, and Section XIII, Evaluation Content, of the Guidelines.) The Guidelines state that evaluations “must be consistent with safe and sound banking practices and should support the institution’s decision to engage in the transaction. An institution should be able to demonstrate that an evaluation, whether prepared by an individual or supported by an analytical method or a technological tool, provides a reliable estimate of the collateral's market value as of a stated effective date prior to the decision to enter into a transaction.” If your institution determines that an evaluation of the market value of just one unit in this multiunit building will provide a reliable estimate of the overall building’s value (i.e., that it would reasonably approximate one-eighth of the building’s value), it may be acceptable to evaluate only one unit, but be prepared to document the reasons why in order to justify this approach with your examiners.

Also, Appendix A (Appraisal Exemptions) of the Guidelines specifically discusses the use of evaluations in the context of loan renewals. (See Part 7, Renewals, Refinancings, and Other Subsequent Transactions.)  Here, the Guidelines note that institutions may use existing appraisals or evaluations when renewing a loan “as long as the institution verifies and documents that the appraisal or evaluation continues to be valid.”

Notably, the Guidelines discourage institutions from choosing evaluation methods based on the costs or time involved: “An institution should establish policies and procedures for determining an appropriate collateral valuation method for a given transaction considering associated risks. These policies and procedures should address the process for selecting the appropriate valuation method for a transaction rather than using the method that renders the highest value, lowest cost, or fastest turnaround time.” If you are choosing to use an evaluation method that entails only a single unit in a multiunit property, you also should document why your decision was not solely based on the cost difference between evaluating one unit versus the entire building.