You work for a bank or commercial lending institution. You oversee a loan secured by commercial real estate that is underperforming or nonperforming. You are considering your options and have referred, or will be referring, the matter to outside counsel. One of your questions is whether to order an appraisal of the loan collateral. The answer is -- you should strongly consider it but don’t have to.
Big picture. Before entering into workout negotiations and/or filing a foreclosure complaint, it is advisable that lenders and their counsel undertake certain steps to analyze the loan collateral. This would include a determination of priority in title and value. For example, my September 14, 2009 post states that secured lenders should always consider an environmental liability analysis of commercial real estate collateral. In the same vein, my October 14, 2009 post talks about obtaining a title commitment. Likewise, a property appraisal should be on one’s list of things to consider.
Not necessary. Similar to a Phase I, we recommend that lenders contemplate getting an appraisal even though an appraisal is not legally or procedurally required to initiate a mortgage foreclosure suit, to obtain a judgment or to acquire the real estate at a sheriff’s sale. Appraisals can be expensive, and the benefits of obtaining an appraisal should be weighed against the costs. Depending upon the age of the loan, a prior appraisal report already in a lender’s file could provide sufficient data going forward. Having said that, the valuation landscape, particular with regard to commercial property, has changed substantially over the last several months.
Caveat. Although not legally required for purposes of foreclosure, clients have told me that bank regulators and examiners, or perhaps internal bank policies, mandate that at a certain stage in the process an appraisal must be obtained. But please do not mistake this post as an opinion about regulatory matters. This article is limited to what Indiana state court mortgage foreclosure law requires in terms of filing the lawsuit, obtaining a judgment and bidding at the sheriff’s sale. An appraisal technically is not required at any stage. (Caveat No. 2: as articulated in my April 22, 2008 post “How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sheriff’s Sale?”, an appraisal could play a role in the lender’s bid at the sheriff’s sale.)
Wise. Although not necessary, lenders should strongly consider an appraisal of the property. Along these same lines, depending on the particular type and location of the real estate, an inspection of the property also may be warranted. A determination of the market value and condition of the property may drive decisions with regard to pre-suit settlement or subsequent workout negotiations, or whether to move forward with a foreclosure in the first place. Foreclosure and repossession often may not the best options.
The bottom line is that it is good practice, when dealing with problem loans, to have an understanding of the value of the loan collateral vis-à-vis the amount of the debt. Knowing the present value of the collateral (is that possible these days?) will be helpful with decisions regarding its disposition and will assist in estimating the potential amount of a deficiency judgment. It’s all about putting yourself in the best position to evaluate the further handling of the case.