Status as of 2025: The $500,000 appraisal threshold adopted in 2018 remains in effect today. No rule has repealed or updated this standard, so transactions above $500,000 still require a certified appraisal.
The next time you purchase a new property, a new rule may apply that impacts your need for a commercial real estate appraisal. The new rule comes from the agencies that regulate all FDIC-supervised banking institutions. Essentially, under the change to federal rules, many commercial real estate properties will now be exempt from the need for a certified third-party appraisal during the sale and loan transaction process. On April 14, 2018, the newly amended rule called “Real Estate Appraisals” was filed. The new rule doubled the appraisal threshold for all real estate-related transactions. The new threshold for properties is now $500,000.
Here’s what the FDIC says about the change in its April 2nd Financial Institution Letter:
“The Appraisal Rule creates a new definition of, and separate category for, commercial real estate transactions and raises the threshold for requiring an appraisal from $250,000 to $500,000 for those transactions, which will exempt an additional 15.7 percent of transactions from the appraisal requirements.”
Historical & Market Context
The minimum for appraisal on commercial property had not risen since 1994, when it was established at $250,000. Over the past two decades, the commercial real estate market saw major shifts, including rising prices, inflation, and more sales above the old threshold. Federal Reserve data showed that small commercial property prices rose sharply during that period, leaving many modest deals still subject to full appraisal.
Regulators by 2018 found the $250,000 threshold no longer a barometer of today’s real estate values. Its increase to $500,000 was seen as a way of keeping banking rules in pace with today’s market conditions but reducing regulatory burden on lenders and borrowers. The adjustment therefore brought a rule outdated with escalating real estate values, particularly in city areas where even small commercial properties were currently above the old threshold.
New Category for Commercial Real Estate Appraisals
By creating a separate category for commercial real estate transactions, the law exempts more than 15% of real estate transactions. It does this by allowing lenders to finance properties sold at $500,000 or less without requiring commercial real estate appraisals. Lenders must still evaluate the property’s value. However, this rule should make smaller real estate transactions easier, faster, and less costly. With average appraisal costs close to $3,000 per transaction, this represents significant savings to borrowers, especially small businesses.
Commercial Real Estate Appraisal Lender Requirements
The Federal Reserve Board (the Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (the Agencies) signed off on the new rule. The purpose of the change was to reduce burdensome banking requirements. Qualifying business loans must be less than $1,000,000 and not rely on rental income or sale of the property as the primary source of repayment for the loan secured by the commercial real estate. As you would expect, financial institutions must still document a reasonable and appropriate evaluation of the property. To do this, they must use sound banking practices. However, someone other than a certified or licensed appraiser can perform the evaluation.
Risks & Criticisms of the Rule
Although the new threshold can minimize expenses and accelerate financing, some concerns have been brought up by industry professionals. Appraisers and certain regulators are concerned that internal assessments will not have the independence and scrutiny of certified appraisals. Without the check of a third-party review, there is a possibility that property values will be inflated, which will result in greater loan losses if the market weakens or if a borrower defaults.
The Appraisal Institute and other industry groups have argued that exempting more transactions reduces oversight and increases exposure to systemic risk, particularly for community banks with less diversified loan portfolios. Further, investors in mortgage-backed securities or commercial real estate debt instruments may view loans below $500,000 as riskier if they lack standardized appraisal documentation.
In short, while the rule cuts cost, it also puts more burden on lenders to make their internal evaluations robust and defensible — something that may be hard to achieve in volatile markets.
Documentation for Commercial Real Estate Appraisal Under $500,000
With this change, business owners may be able to get financing more quickly. Now, bankers can underwrite loans for these properties for properties valued at under $500,000. And, now they can save the time and expense of contracting a formal appraisal. However, borrowers must still provide the same type of documentation and factual data to the lender that would have previously been shared with a third-party appraiser. Typically, the data required includes:
- Purpose of the loan
- Intended use of the property
- Building drawings and photos
- Leases and rent rolls
- Property expense and cash flow information
- Financials and tax statements
- Other information pertinent to the transaction
Many lenders and borrowers now rely on CRE appraisal software to organize and analyze this documentation efficiently.
Evaluations vs. Appraisals: Key Differences
Note that the new provision does not require official valuations, but it does require lenders to perform an “evaluation” valuation. The FDIC, Federal Reserve, and OCC provide detailed guidance on how to make commercial real estate evaluations.
Key elements of a successful evaluation include:
- Independence: The person performing the evaluation must avoid direct involvement in loan production.
- Material Data: Appraisals must consider recent comparable sales, rent statistics, operating expense statistics, and market conditions.
- Methodology: Though less detailed than an appraisal, the evaluation must apply accepted methods and reasonably determine the property’s market value.
- Documentation: Lenders must have records of how they arrived at the value of the property, including supporting data and assumptions.
In practice, this means using qualified staff, AVMs, or BPOs, as long as they meet regulatory standards. More cost-effective than a full-blown appraisal, these estimates must hold up to regulatory analysis and sound banking procedures.
$500,000 Commercial Real Estate Appraisals Threshold Overview
The new $500,000 commercial real estate appraisal threshold could prove to be a major benefit for many business owners and lenders. Above all, the rule loosens restrictions on financing smaller commercial real estate loans. Instead, financial institutions may now complete internal property evaluations up to that threshold. The change effectively eliminates the need for contracting third parties for smaller transactions. Eliminating the formal appraisals has the potential to save thousands of dollars on each transaction. Additionally, the change reduces the time your lender needs to complete an internal commercial real estate evaluation and approve your loan. At the end of the day, who doesn’t like that?
Contact STRATAFOLIO for a demo and see how our software can also save you thousands of dollars every year!
