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THE DISTRESSED ECONOMY requires appraisers to take extra steps to get accurate assessments of real estate's true value, according to participants in a recent RMA audioconference on appraisals. With "comps" and surveys of little or no value and the prevailing uncertainty about when land will be developed, appraisers need to know their markets better than ever before.

"In the past it was 'three comps and send me the check,'" said Brian Raley, vice president and manager, Commercial Appraisal Department, Union Bank, Orange, California. "Now appraisers really need to interview market participants and get to know their properties. Good appraisers talk with the brokers, the buyers, and the sellers to get a feel for the market.

"In the case of commercial land, we're seeing appraisers valuing the land from the last realistic point it was feasible to develop it and establishing that price. Then they're estimating when the property will return to a price level that will support development and discounting back by an alternate investment rate. Obviously, it is a very rough estimate, but it's the best way to do the appraisal."

Paul Ping, chief appraiser and real estate reporting officer at Huntington Bancshares, Columbus, Ohio, said it's taking longer for appraisers to do their jobs. That's because they need more time to research past sales and find a point where pricing was based on more balanced buying and selling than exists currently.

Condominium loans have been characterized lately by longer absorption periods for sales, said participants.

"Formerly, we never looked at projects that had an absorption period greater than two years," said Ping. "To avoid lengthy absorption periods, you might have to look at curtailments or right-sizing."

Good appraisals are critical in guiding banks in how to deal with lenders, said Joyce Weidenaar, senior vice president for commercial real estate loan approvals at HSBC Bank USA in New York City.

"The regulators certainly look to the bulk value for loan-to-value purposes, but the retail value is very important to us from a credit perspective because it tells us how many units need to be sold for us to get repaid. That information is very important in setting loan strategies," she said.

Audioconference participants said that each of their banks has a formal reappraisal policy.

"Depending on the product, we are doing desktop evaluations as often as monthly, but more often quarterly," said Jim Nielsen, a real estate credit administrator for City National Bank in Los Angeles. "If the quarterly desktop evaluation indicates an impairment [defined as greater than 92% loan-to-value], our policy requires a reappraisal of the product."

Weidenaar said HSBC goes back to the original appraisal assumptions: "We ask ourselves, 'Do these assumptions still seem reasonable and have they held up?'"

Noted Raley, "We have an ongoing monitoring program by our relationship managers. As the property deteriorates or changes, they compare it to the original appraisal and determine whether a new appraisal is necessary or not. Once property has become adversely graded, there are set periods in which it must be reappraised."

Regulators are keeping a close eye on bank appraisal practices, participants said.

"The regulators expect credit people to know the contingent liabilities of their borrowers and where the tugs and pulls on their cash flow will be," said Nielsen.

Raley added that regulators "were very clear that we must have an appraisal policy, it must be written, and it must be adhered to. And they really look at how you are taking into consideration deterioration in the loans."

Underwriting standards are tightening in response to the crisis.

"It's really important for us to avoid evergreen land loans," said Weidenaar. "If we have a land loan that has been on the books for a number of years, we're going to want some initial paydown and meaningful amortization
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