4000 - Advisory Opinions
Appraisal Exemption May Not be Used to Condition Financing of Development Project Beyond $100,000 Upon Receipt of Appraisal; Total Amount Covered by Loan is Transaction Value, Not Separate Value of Each Construction Project/Unit
December 15, 1992
Walter P. Doyle, Counsel
Thank you for your December 1 letter inquiring about application of the exemption in § 323.3(a)(1) of the FDIC's appraisal regulation (for transactions of $100,000 or less) to construction or development financing where the regulated institution would condition its obligation to lend more than $100,000 per transaction (or per project) upon receipt of an appraisal conforming to the regulation, but would lend up to that amount prior to receiving such appraisal.
The purpose of requiring an appraisal is to permit the regulated institution to make an informed judgment as to whether or not to enter into a particular transaction in the first place. For an institution to "wade into" a transaction pursuant to the $100,000 exemption, without obtaining an appraisal, would seem analogous to a person wading into murky waters to ascertain the presence of alligators.
In fact, we would consider such a practice to be imprudent, as well as impermissible under the regulation. We believe that "transaction value" as defined in § 323.2(k) of our regulation must be interpreted in a realistic way in the context of the particular transaction, and not in an excessively legalistic sense. In the case of construction lending, for example, the loan amount would not normally be considered to be an amount necessary to build two-thirds of a $150,000 house, or one-fiftieth of a $5 million townhouse project, just because the lender has reserved the legal right to back out if a conforming appraisal is not forthcoming.
The answer to your second question is similar. If a single note or loan agreement is intended to cover the financing of several construction projects, the global amount covered by the note or agreement is the transaction value, not the separate value of each individual project or unit. To conclude otherwise, in our opinion, would be to promote wholesale evasion of the regulatory requirements and to encourage institutions to wade into unknown waters that may subsequently prove to be treacherous.