A Feasibility Study Is Not an Appraisal: What Each Document Answers, and What Each Cannot

Two Reports in the Same Credit File

A loan secured by an operating property can bring two outside reports into one credit file, and at a glance they resemble each other. Each describes the site and its surroundings, each surveys competing properties, each works with revenue and expense figures, and each closes with a conclusion its author signs. The likeness is misleading. The two documents are built to answer different questions, they answer to different rules, and the conclusion of one cannot be read off the other.

The appraisal answers a question about property. The FDIC's appraisal regulation defines it as "a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s)" ^[1], and the OCC's rule for national banks repeats the definition word for word ^[2]. What an appraisal delivers is an opinion of value: one figure, or a small set of figures for stated dates and conditions, each saying what the property would bring if sold.

The feasibility study answers a question about a project and the debt placed on it. The plainest regulatory definition sits in USDA's rule for its guaranteed loan programs. There the study is a report that carries an opinion or finding, written by a consultant who must be both qualified and independent, weighing the economic, market, technical, financial and management sides of the proposed project or operation, judged "in terms of its expectation for success" ^[3]. The same rule gives financial feasibility a meaning of its own: whether the project can generate the income, credit and cash flow to keep itself going over the long term and to "meet all debt obligations" ^[4]. What a study delivers is a finding about whether the market, the costs and the operating cash flow can carry the loan under review.

This article sets the two documents beside each other: what each one answers and, as much use to a lender, what each cannot. It covers the rules behind each, the market evidence they share, the line between business value and real estate value, when each is required and how a lender reads them together, and it explains why every page in this series says Not an appraisal under its title.

Wave 1 already covers neighbouring ground: the article on the conventional bank method works through the appraisal thresholds and loan-to-value limits for sizing a bank loan, and the USDA program article reads the B&I appraisal section; neither is repeated here. Among the archived posts, How to Review an Appraisal Report: A Step-by-Step Guide takes the reviewer's chair and Feasibility Studies, Business Plans, and Investment Memos: What Banks Really Need sets a study against a borrower's plan and a bank's memo. Neither sets the study against the appraisal.

The Appraisal as the Regulations Define It

The regulatory definition repays a slow reading, because nearly every clause in it marks a line that a feasibility study stays behind.

Written, and enough to decide on. For a federally related transaction, the appraisal must be in writing and must hold enough information and analysis to support the institution's decision to go ahead with the transaction ^[5].

Prepared by a credentialed appraiser. Outside a list of exemptions, the FDIC rule requires an appraisal performed by a State certified or licensed appraiser for every real estate-related financial transaction ^[6]. A federally related transaction is one the FDIC or a regulated institution engages in or contracts for that requires an appraiser's services ^[7]. The credential requirement follows from the kind of transaction, not from the length of the report or the standing of whoever writes it.

An opinion of market value. Market value has a fixed meaning in the rule: "the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale" ^[8]. The definition goes on to assume a sale completed at a specified date, with title passing from seller to buyer ^[9]. Every appraisal for a federally related transaction must rest on that definition ^[10], and the interagency guidelines put the point in the affirmative: each appraisal must contain an estimate of market value as the regulations define it ^[11]. The opinion concerns a hypothetical sale between informed parties, not whether this borrower, running this business with this loan, will make the payments.

An adequately described property. The rule's real property is land: an identified parcel or tract, with its improvements, together with easements, rights of way and similar rights in the tract ^[12]. A business that operates on the land is not in that definition. That one sentence, more than any other, explains why an operating property needs two documents, a point the going concern section below takes up.

As of a specific date. An appraisal speaks at a date. Where a building is to be constructed or renovated, a lender would generally ask for the current value of the property as it stands and, where they apply, prospective values upon completion and upon stabilization ^[13], and those prospective opinions should rest on current and reasonably expected market conditions ^[14]. Even the forward-looking figures are values at a date: the day the building is finished, or the day it is expected to reach stabilized occupancy.

Supported by market information. The last clause of the definition wants the opinion "supported by the presentation and analysis of relevant market information" ^[1]. Here the two documents begin to touch, since a study is largely a presentation and analysis of market information too; they differ in what that analysis concludes.

Set the study against the same clauses and the contrasts are plain. Its object is a project or an operation ^[3], not a parcel. Its time frame is the long term, measured against all of the project's debt obligations ^[4], not a single effective date. Its conclusion is a finding about prospects for success ^[3], not a price. And its reader is asking about capacity to repay, the first of the credit factors in the bank lending guidelines, where the value of the mortgaged property is listed as a separate factor beside it ^[15].

USPAP, Scope of Work and the Appraiser's Obligations

An appraisal in a federally related transaction is a regulated product with a statutory standard behind it. Title XI of FIRREA directs each federal financial institutions regulatory agency to prescribe appropriate standards for the performance of real estate appraisals in federally related transactions ^[16]. At a minimum those rules must require appraisals performed under generally accepted appraisal standards, as evidenced by the standards the Appraisal Standards Board of the Appraisal Foundation promulgates ^[17], and they must provide for checking each appraisal against USPAP, whose full name is the Uniform Standards of Professional Appraisal Practice ^[18].

The FDIC's rule opens with the purpose: Title XI protects federal financial and public policy interests by "requiring real estate appraisals used in connection with federally related transactions to be performed in writing, in accordance with uniform standards, by appraisers whose competency has been demonstrated" ^[19]. Its minimum standards then make USPAP binding, unless safe and sound banking calls for something stricter ^[20], and require each appraisal to be subject to review for USPAP compliance ^[21]. The OCC's rule imposes the same USPAP condition on national banks ^[22].

The 2010 interagency appraisal and evaluation guidelines explain what that standard means in practice for a lender's file. Under USPAP's Scope of Work Rule, the appraiser is responsible for setting the scope of work behind the opinion of market value ^[23], while the institution should make sure that scope fits the assignment ^[24]. The appraisal must include every approach to value (cost, income and sales comparison) that is applicable and necessary to the assignment ^[25], and the appraiser must analyze and reconcile what the approaches show to arrive at the estimate ^[26]. The report should also discuss market conditions, including value trends, demand and supply factors and exposure time ^[27], and it should analyze the property's sales history and give an opinion of its highest and best use ^[28].

Little that is comparable governs the study in the federal texts this series reads. USDA's rule allows that what makes a study acceptable may vary with the scope of the project, and asks that a qualified and independent third party write it ^[29]. For a large B&I loan to a new business it is more exact about the author, an outside consultant whom the Agency accepts as qualified and independent ^[30]. Only once does 7 CFR 5001 tie a feasibility report to a named professional standard, in its community facilities section: there a financial feasibility study with examination opinion follows the attestation standards of the AICPA, the American Institute of Certified Public Accountants ^[31]. The bank lending guidelines leave the content of studies to each bank, whose policy is expected to say when a study is needed and what testing of the projection goes with it ^[32], for construction projects and completed commercial properties alike ^[33].

An appraisal's credibility starts from a standard the regulation names, and a reviewer can test the report against it. A study has no such floor beneath it, so its credibility has to be built inside the document. A study should state where every market figure comes from and when it was read, mark every figure that is an assumption, print the arithmetic that turns inputs into conclusions, and keep the conclusions inside what the evidence supports. The worked examples in this series are written that way, with each input labelled as sourced or assumed and every table recomputing from the inputs printed beside it.

The Study's Question, and Where the Two Documents Meet

Table 1 sets the two documents next to each other on the features a lender is likely to check first.

The documents meet in the market. An appraisal is expected to discuss demand and supply and the trend of values ^[27]. For a tract development, which the rule defines as a project of five units or more built as a single development ^[38], the guidelines go further: projected sales prices and the pace of sales should be supported by the demand expected when the units come to market ^[39]. A study draws on the same kinds of evidence, the trade area, the competing supply, achievable rents or prices and the pace at which comparable properties filled. Two competent authors reading one market should not reach incompatible views of it, and where they do, the lender has learned something.

The guidelines also say how far market work can travel inside the valuation file. The sentence concerns homes, not commercial property, and it reads: "information on local housing conditions and trends, such as a competitive market analysis, does not contain sufficient information on a specific property that is needed, and therefore, would not be acceptable as an evaluation" ^[40]. In the same breath they allow that such information, insufficient on its own, "may be useful to develop an evaluation or appraisal" ^[41]. Applying that to a commercial study is this article's reading, not the guidelines' words. On that reading, a study's rent survey or supply count is evidence an appraiser may test and use, and never a substitute for the appraiser's opinion. The evidence may be shared. The conclusion may not.

The documents part at the conclusion. The appraiser reconciles the approaches into one estimate of what the property would bring at the effective date ^[26]. The study takes the operating projection year by year, sets the cash available for debt service against the payments the loan requires, including the years before the project stabilizes, and then asks how far the inputs can move before the payments fail. The bank guidelines tie that last step to the study requirement itself, and their example is how far projected income moves with interest rates, vacancy and operating costs ^[32]. An appraisal can be entirely sound and still say nothing about whether a first-year cash shortfall will force a default. A study can be entirely sound and still say nothing about what the lender would recover if one occurred.

The arithmetic a study uses to connect cash flow with debt follows the conventions of the series' worked examples, stated once here and applied in the illustration further down.

Conventions. This article follows the conventions of the Loan Analytics worked examples. Coverage is tested against the program floor the site's program page states, where the program has one, and against a stated 1.25x lender assumption, and the higher of the two binds. Equity is measured at the loan the cash flow supports, with fees recomputed on that loan. An acquisition is tested on the seller's historical earnings, not on projections.

The debt service coverage article in this wave builds the ratio from its parts. For this article, the relevant point is that coverage and value are separate tests run on separate documents, and that a loan has to pass both.

Going-Concern Value and Real Property Value

When a building is leased to tenants who run their own businesses in it, those businesses are not part of what is sold or mortgaged with the building. For a hotel, an RV park, a marina or a fuel station sold as an operating business, the price of the whole includes the business, its operating record and its equipment, and the real estate is only part of what changes hands. The lending rules insist that the parts be kept apart.

The interagency guidelines define going concern value as "The value of a business entity rather than the value of the real property" and say it rests on the business's existing operations and current operating record, assuming the business will continue to operate ^[42]. The guidelines then bar such figures from standing in for market value in a federally related transaction, naming going concern value, value in use and a special value to one particular user among them ^[43]. An appraisal may contain separate opinions of those values, provided each is clearly identified and disclosed ^[44].

USDA's rule turns the same principle into a calculation. Where an appraisal puts a number on the business, the rule is direct: "the business valuation or going concern value must be deducted from the reconciled market value prior to discounting" ^[45]. Responsibility for making sure the appraised values reflect the actual value of the collateral in an arm's length transaction sits with the lender ^[46]. The same rule lets intangible assets serve as collateral only when they are not the primary collateral ^[47], and it keeps appraisal gains off the borrower's side of the ledger in plain words, "Equity cannot include appraisal surplus or bargain purchase gains" ^[48], appraisal surplus being the amount by which an asset's market value exceeds its cost or depreciated book value ^[49].

Here the two documents start to depend on each other. The going concern component of an appraised figure is, by its own definition, value that exists only if the business keeps operating on its record ^[42]. Whether the business can keep operating while carrying the new debt is precisely the question the study is built to answer. A study that finds the cash flow too thin to carry the debt is describing the case in which the lender would most need its collateral, and in that case the business component is the part of the appraised figure least likely to survive. That is one way, on this article's reading, to see why the rules keep it out of collateral value: what remains to secure the loan is the real property and the equipment. In the other direction, the appraiser's allocation tells the reader of the study how much of the security does not depend on the projection at all.

A study should therefore read the appraisal's allocation, when the appraisal is in the file, and say whether its own evidence on the business supports the operating record the business component assumes. It should not restate the allocation as its own finding, and it should never make one. The archived post on how an appraiser's allocation bears on an SBA loan looks at the same split from the SBA side; this article stays with the federal regulation texts.

A Worked Illustration: One Request, Two Tests

The illustration below follows a purchase of an operating lodging property sold as a going concern. Apart from one published rate, each number in it is an assumption and is marked as one. The appraisal figures stand for what an appraiser's report would supply, and they are entered as given: the illustration does not estimate them and neither would a study. The cash flow stands for the study's finding on the seller's historical statements, consistent with the series' convention for purchases of operating businesses. The contract price is assumed to be no lower than the appraised figure; on a purchase below appraisal, the bank lending guidelines would cap value at the price ^[50]. The one sourced input is the bank prime loan rate published in the Federal Reserve's H.15 release ^[51]. Table 2 lists every input.

Rounded as shown; lines may not foot by one unit in the last place.

Table 3 takes the appraisal's figure for the whole operating property and removes what the rules keep out of real estate collateral.

The appraisal in this illustration reports $5,000,000 for the operating property as a going concern, of which it separately identifies $900,000 as the business and going concern component and $400,000 as furniture, fixtures and equipment. Real property market value is what remains, $3,700,000. At the assumed advance rates, the lender counts $2,960,000 for the real property and $200,000 for the equipment, a discounted collateral value of $3,160,000. The 80 percent advance rate on real property is a lender policy assumption; a bank's internal loan-to-value limits should not exceed the supervisory limits, which are set at 85 percent for improved property ^{[52] [53]}, and the guidelines add that a ceiling reached is no proof of a sound credit ^[54].

Table 4 runs both tests on the request and then varies one document at a time.

In the base case the two documents disagree about the request, and the lower figure governs. The study's cash flow of $440,000 against an annual debt service of 9.66% of the loan amount, at an 8.50% interest rate over 25 years, supports a loan of $3,642,865 at the 1.25x lender assumption, and coverage on the requested $3,500,000 is 1.30x. On the study alone, the request passes. On the appraisal alone, it does not: discounted collateral is $3,160,000, which is 90.3% of the request, so the loan both tests support is $3,160,000 and the shortfall is $340,000. Here it is the appraisal, not the study, that sets the loan.

The second column shows the reverse. With the study's cash flow at $374,000, coverage on the request falls to 1.11x and the loan the cash flow supports drops to $3,096,435, below the collateral figure, so the cash flow binds and the shortfall widens to $403,565. The third column lowers every figure in the appraisal together; discounted collateral falls to $2,686,000, 76.7% of the request, and the shortfall reaches $814,000.

The last column is the error the going concern rules exist to prevent. If the business component were left inside the collateral, discounted collateral would read $3,880,000, 110.9% of the request, and the loan both tests support would equal the full $3,500,000 with no shortfall at all. The study is the same in both columns; the only difference is $900,000 of value that depends on the business continuing, counted as though it were land and buildings. Read alone, the study misses the base case shortfall, an appraisal read without the going concern split misses it too, and an appraisal read without the study gives no view of the second column at all.

A real file would replace every assumption here with the lender's own rates and minimum, the program floor where there is one, the appraiser's actual allocation and a study's full projection with its stresses. The principle would not change: the loan is the smaller of what the collateral supports and what the cash flow supports, and each figure comes from a different document.

When the Program Texts Call for Each Document

The rules on when an appraisal is required are detailed and differ by lender and program. The rules on when a study is required are shorter and mostly permissive. Table 5 sets out the federal texts for the three kinds of loan this series covers.

Three features of the table deserve a closer look.

The first is the treatment of the government guarantee. The FDIC rule lists among its exemptions any transaction that is wholly or partially insured or guaranteed by a United States government agency ^[60], so a 7(a) or B&I guaranteed loan made by an FDIC-supervised bank falls outside the part 323 appraisal requirement. The 504 structure works differently. SBA guarantees the Debenture ^[62], whose proceeds fund the CDC's loan on a second lien ^[63], while the bank's Third Party Loan takes the first lien ^[64] and is the bank's own loan, not SBA's ^[65]. The exemption turns on a guarantee and that first-lien loan carries none, so an FDIC-supervised bank making it needs an appraisal under part 323 unless another exemption applies ^[6]. USDA's rule then provides that, notwithstanding any exemption for federally guaranteed transactions, every appraisal the lender obtains under part 5001 must conform to the interagency appraisal and evaluation guidelines of the lender's primary regulator, where they apply ^[70]. SBA's regulation instead places appraisals and feasibility studies in one sentence of conditions SBA may impose ^[61]. SBA's own procedural requirements for appraisals rest on a text this series does not have in an official copy, so this article says nothing about them.

The second is the business loan exemption in the bank rule. A business loan of $1 million or less escapes the appraisal requirement only if it does not depend on the sale of, or rental income from, real estate as its primary source of repayment ^[58], and even then an appropriate evaluation of the collateral takes the appraisal's place ^[59]. The agencies expect the institution itself to determine that the primary source of repayment is the business's operating cash flow rather than rent or a sale of real estate ^[75], but the evidence for that determination is the kind a study assembles: how much of the revenue comes from operating the business and how much from occupancy or rent. A study that separates those revenue streams clearly gives the lender the facts the exemption turns on, without the study deciding anything.

The third is the asymmetry between the two columns. An appraisal requirement is triggered by the transaction, its size and its collateral. A study requirement, where one exists in the texts, is triggered by uncertainty about the project. USDA requires a study for the large new-business loan ^[30]. For the applications its larger-loan paragraph covers ^[76], it may also call for a study whenever neither the lender's own analysis nor the borrower's plan or other project material settles technical feasibility, market feasibility or economic viability ^[73], and at or below $1,000,000.00 it adds one more trigger, a project that will significantly affect the operations of an existing business ^[74]. The bank guidelines ask each bank to set its own requirements ^[32]. The appraisal rules protect the collateral position wherever a transaction crosses their thresholds; the study is called for where the repayment story is new, large or untested.

How a Lender Reads the Two Together

Each of the three lending rulebooks read here asks the lender to weigh both questions. In the bank lending guidelines, sound underwriting of a real estate loan weighs every relevant credit factor, naming first whether the borrower, or the income from the property, can adequately service the debt, and listing the value of the mortgaged property as a separate factor ^[15]. The SBA rule is brief on this point: "Loans must be so sound as to reasonably assure repayment" ^[77]. Its list of the criteria lenders, CDCs and SBA may weigh includes "the earnings or cashflow of applicant; or where applicable any equity or collateral of the applicant" ^[78]. USDA's rule has the lender review five credit factors ^[79], beginning with character ^[80]. Capacity, the second, asks whether the borrower can generate the cash to repay as agreed, which the rule says takes in "the feasibility and likelihood of the project and borrower to produce sufficient revenues to service the project's debt obligations over the life of the guaranteed loan" ^[81]. Collateral is a separate factor, and for it the lender must determine market value as an appraisal establishes it ^[82].

The appraisal side of that reading has its own review procedure. Before a final credit decision, an institution should review its appraisals and evaluations for compliance with the appraisal regulations, supervisory guidance and its own policies ^[83], and the review should let it judge whether the valuation methods, assumptions and data sources are appropriate and well supported ^[35]. A reviewer cannot change the original appraisal's value conclusion, though a USPAP review by a qualified and competent state certified or licensed appraiser may result in a second opinion of market value ^[84]. A feasibility study is not that review and should never be presented as one, but its independent reading of the same market gives the reviewer something concrete to test the appraisal's assumptions against.

A credit officer with both reports open can compare them on six points.

Dates. The appraisal states an effective date, and its prospective values state their own ^[13]. The study states when its market data were read. If one document's evidence is a year newer than the other's, the two describe different markets.

Stabilization. A prospective value upon stabilization assumes the property reaches stabilized occupancy, and the guidelines expect prospective opinions to rest on current and reasonably expected market conditions ^[14]. The study's ramp-up schedule makes its own claim about when stabilization arrives. The two should agree within reason, and each should cite evidence for its own timing.

Income. Where an appraisal uses the income approach ^[25], it rests on an estimate of what the property will earn, and so does the study's operating projection. A material gap between the two, in occupancy, rate, rent or expense, is not a defect in either document until someone explains it.

Supply. Both documents should name the same competitors. A competing project that one document counts and the other omits changes absorption in the study and value in the appraisal.

The value premise on a purchase. On a purchase, the price can cap the figure: the bank lending guidelines use "the lesser of the actual acquisition cost or the estimate of value" ^[50]. A study that uses the appraised figure in place of a lower contract price when it reports a loan-to-value ratio has used the wrong number.

Independence. The guidelines treat the collateral valuation program as part of credit underwriting that should be isolated from the influence of loan production staff ^[85]. Appraisers must have no direct, indirect or prospective interest in the property or transaction ^[86]; the lender or its agent has to hire a fee appraiser itself ^[87]; and the guidelines put it bluntly: "Independence is compromised when a borrower recommends an appraiser or a person to perform an evaluation" ^[88]. No rule in the bank texts governs who commissions a feasibility study, while USDA asks for a qualified, independent third party ^[29]. A study should therefore state who commissioned it and confirm that its author has no interest in the project, so that a reader can weigh it knowing both facts.

On the USDA side the reading has one further step, because the lender discounts the appraised collateral. The rule asks the lender to consider the type, quality, location, marketability and alternative uses of the collateral, and the basis of its valuation ^[89], and to justify the discounts it applies ^[90]. Marketability and alternative use are market questions, and a study's account of the competing operators, the specialization of the improvements and other possible uses is evidence the lender can draw on, again without the study naming a value.

Why a Study in This Series Never States a Value

Every article and worked example in this series carries the words Not an appraisal beneath its title, including those signed by an author who holds an appraisal designation. The rule is the series' own, and it rests on four reasons drawn from the texts above.

The first is definitional. An appraisal is defined by what it says: a written opinion of the market value of an adequately described property as of a date, independently prepared by a qualified appraiser ^[1]. A study that printed a value for the subject property would place a figure in the credit file that looks like an appraisal's conclusion without the credential the rule requires ^[6], the USPAP standard ^[20], the review ^[21] or the direct selection by the lender ^[34]. The designation of the author does not change the analysis. What makes a document an appraisal is its content, so the safe course for a study is to contain no opinion of value at all.

The second is that the figure could not be used. The bank lending guidelines leave no room for a third source: "Value means an opinion or estimate, set forth in an appraisal or evaluation, whichever may be appropriate, of the market value of real property" ^[91]. A study is neither of those two. A market analysis is not acceptable as an evaluation ^[40], and a valuation method that does not provide market value with enough analysis to support it is not acceptable either ^[37]; an evaluation must give a reliable estimate of the collateral's market value as of a stated effective date before the credit decision ^[92]. A value printed in a study therefore has no place to go in a regulated loan file except as a source of confusion.

The third is the integrity of the two documents. The appraisal's role in underwriting depends on its independence from loan production ^[85] and from the borrower ^[88]. No rule in the bank texts says who commissions a study, so it may be ordered by the sponsor, and it may be written while the deal is still being shaped. If it carried a value conclusion, that figure could reach the appraiser or the credit memo as an anchor, and two documents that should test each other would echo each other instead. Keeping value out of the study keeps the two readings separate.

The fourth is that the study's own question does not need a value. Whether a project can carry its debt is answered with demand, supply, cost, operating income, debt service and the margin between them. None of those needs a view on the price a buyer would pay for the property. Where the loan amount depends on value, the study takes the appraised figure as an input from the lender's file, labels it as the appraiser's, and shows what the lender's own advance rate or loan-to-value limit does with it, as the illustration above does. It never derives a value of its own by capitalizing its projected income.

The worked examples show what that looks like in a file. The Michigan owner-occupied retail example lists an as is and stabilized appraisal among the items a lender would want added before relying on it. The North Dakota RV park example budgets the appraisal as a project cost, in one line with the other third-party reports. The Kentucky marina example treats the federal shoreline lease as the collateral question, testing the years left on the lease against the loan's maturity, a question about the interest an appraiser would be asked to value rather than about the value itself.

What the SBA Loan Record Can Add

Three asset classes in the Loan Analytics dataset sit squarely where the going concern question arises: hotels and motels, RV parks and campgrounds, and marinas, each a property built around one operating business. For them the 7(a) record offers counts, loan sizes and loss floors. It offers nothing on value, because no appraised figure, collateral ratio or study travels with a loan into the FOIA files, as What the SBA Loan File Cannot Tell You: The Limits of FOIA Data in Underwriting explains.

Table 6 prints three such classes under 7(a), beside the national floors. The hotel and motel class is the largest of the three, with 8,942 ^[93] approvals in the window and a median loan of $2,200,000 ^[93]. The RV park and campground class holds 645 ^[94] approvals with a median of $821,000 ^[94], and the marina class 220 ^[95] approvals with a median of $461,750 ^[95].

Those medians are worth setting against the bank appraisal rule, with one caution. A 7(a) loan is a guaranteed transaction and, for an FDIC-supervised lender, sits outside the part 323 appraisal requirement ^[60], so the comparison describes what the same loan would face if a bank made it without the guarantee. On that footing, a commercial real estate transaction of $500,000 or less needs no appraisal but an evaluation ^{[57] [59]}, and a federally related commercial transaction above $500,000 needs a State certified appraiser ^[55]. The marina median of $461,750 ^[95] sits below the commercial threshold, the RV park median of $821,000 ^[94] above it, and the hotel median of $2,200,000 ^[93] above the separate line at which any federally related transaction of $1,000,000 or more needs a certified appraiser ^[56]. For the RV park and marina medians, the business loan exemption could also come into play, depending on whether repayment rests mainly on the operation or on rent from the real estate ^[58].

The charge-off rates in the block are approval-cohort floors. Each one sets the loans charged off to date against the loans disbursed from the FY2017 to FY2021 approval years, and loans that are still open stay in the count, so the rate can only rise as the cohort ages. Across all classes, the 7(a) floor stands at 6.33 percent ^[96] and the 504 floor at 0.35 percent ^[97]. The hotel and motel floor is 0.99 percent ^[93], the RV park floor is 0.00 percent ^[94] and the marina floor 0.00 percent ^[95], each on a cohort of 30 loans or more with no charge-off recorded so far. The Approval-Cohort Charge-Off Floor: Why a Published SBA Loss Rate Can Only Understate gives the reasoning behind the floor.

A low floor in a class built on real estate is tempting to read as proof that the collateral protected the lender. The record cannot support that reading. It holds no value for any property, it records a charge-off but not what was recovered, and this article asserts no cause for the differences between classes. The floors can frame the business risk a study discusses for one of these classes; they stand in for neither the appraisal's view of the collateral nor the study's view of the project.

Loan Data Behind This Article

Every figure in this table comes from the Loan Analytics loan dataset, analytics-loan-data freeze-3 (commit 360c856), and carries its key. SBA rates are approval-cohort floors and are withheld when fewer than 30 loans stand behind them.

Checks for Lenders and Borrowers

A lender holding both documents, or a borrower commissioning either, can run these checks.

Does the study state a value? It should not. A figure in a study labelled market value, as is value or stabilized value, other than one quoted from the appraisal with its source, puts in the file something that looks like an appraisal's conclusion without the credential and standard an appraisal must meet ^{[6] [20]}.

Is the appraisal's going concern component separated? For an operating property, the business and going concern value cannot serve as market value for a federally related transaction ^[43], and under B&I it comes off the reconciled value before any discount ^[45]. A collateral figure that includes it overstates the security, as the last column of the sizing illustration shows.

Do the two documents describe one market? The appraisal's discussion of demand and supply ^[27] and the study's market analysis should be reconcilable on dates, competitors, rents, occupancy and timing, and any gap should be explained.

Which test sets the loan? Run both and take the smaller of two figures: the loan the discounted collateral will carry, and the loan the cash flow will carry at the lender's minimum ratio. Either document can bind. A file that reports only one of them has answered half the question.

Is the study written to be tested? With no named professional standard behind it in the bank or B&I texts ^[29], a study earns its weight through traceable sources, labelled assumptions, printed arithmetic and stresses ^[32].

Who commissioned each document? The lender or its agent must select and engage the appraiser directly ^[34]. The study's author and sponsor should be disclosed, along with any interest the author has in the project.

Is the appraisal current? Under B&I an appraisal may be no more than one year old, and the Agency may ask for a newer one ^[72]. A study prepared after a market shift should say whether the shift touches the appraisal's assumptions, so that the lender knows to ask.

None of these checks asks either document to do the other's work. Each asks that the study and the appraisal be complete on their own terms, consistent with each other where they read the same market, and kept apart where they reach their conclusions.

Related Pages on Loan Analytics

• The Loan Analytics methodology series (all articles)
• How a feasibility study is done: the Loan Analytics methodology
• SBA feasibility studies (7(a) and 504)
• USDA feasibility studies
• Bankable feasibility studies for conventional loans
• Loan data by state
• Loan data by asset class
• Worked examples (case studies)
• Worked Example: USDA Business and Industry Loan RV Park Feasibility Study in North Dakota
• Worked Example: Conventional Bank Marina Acquisition and Dock Expansion Feasibility Study in Kentucky
• Worked Example: SBA 504 Owner-Occupied Retail Feasibility Study in Michigan
• How to Review an Appraisal Report: A Step-by-Step Guide
• Feasibility Studies, Business Plans, and Investment Memos: What Banks Really Need
• Conventional Bank Loan Method: Appraisal Rules, Supervisory LTV Limits and the Study a Bank Reads
• Trade Area and Demand Methods: Capture Rates, Penetration Rates and Gravity Models

Commission a Feasibility Study

Loan Analytics prepares lender-grade feasibility studies for SBA 7(a), SBA 504, USDA Business and Industry, conventional and EB-5 financing, built on the methods this series sets out. A study is not an appraisal: it tests whether a project's market, costs and cash flow can carry the debt a lender is asked to approve. To discuss a study for your project, contact Loan Analytics.

Daniel Smith, MAI, Loan Analytics