Commercial property appraisal in an SBA business acquisition
Short answer
When real estate is part of an SBA 7(a) acquisition, the lender needs two separate reports: a business valuation (excluding real estate) and a commercial real estate appraisal. Under SOP 50 10 8.1 the appraisal must be prepared by an independent state-licensed or state-certified appraiser (state-certified if value exceeds $1 million), comply with USPAP, name the lender as client or intended user, and be dated within 12 months of the application.
SBA appraisal requirements (7(a))
- Independent state-licensed or state-certified appraiser; state-certified if value exceeds $1,000,000.
- USPAP-compliant Appraisal Report.
- Lender named as client and/or intended user.
- Dated within 12 months of the application.
- Not prepared for the seller or applicant; cost may be passed to the applicant.
- No contributory value of rental income or intangibles in the collateral value.
- If the business was transferred within 36 months before the application: a review appraisal or a senior lender staff site visit as well.
Why real estate changes the deal math
Improved real estate counts at up to 85% of market value for SBA's "fully secured" test, and real estate in the deal is subject to the same equity rules as the business. If real estate is financed with a 504 loan, the 504 contribution rules apply to that part. See SBA collateral rules and 7(a) vs 504.
How the two reports fit together
The business valuation and the real estate appraisal answer different questions and should be ordered so they don't contradict each other. The real estate appraisal values the property; the business valuation values the operating business without it. If the business currently occupies its own building rent-free, the valuer should deduct a market rent from earnings, because the buyer either buys the building separately (and the business then pays rent or the buyer carries the mortgage) or leases it. Otherwise the business value quietly includes the value of free occupancy, and the same dollars get counted twice.
Illustration, not a real deal. Contract price $2,400,000 for a machine shop and its building. Real estate appraises at $900,000. Business Purchase Price: $2,400,000 - $900,000 = $1,500,000, which is under the $3 million QoE trigger. The business valuation deducts a market rent of $72,000 a year from earnings, since the shop has never paid rent to its owner.
Timing and the estimate rule
The appraisal can come in with the application or before closing. If the lender plans to get it at closing, the application must include an estimate of the real estate's value, identified in the credit memo along with the requirement that the appraisal support it. When the appraisal arrives, the 90% test applies: at or above 90% of the estimate the lender can close with a written explanation; below 90%, a non-PLP lender needs SBA's prior written permission, and a PLP lender may close but must keep a written justification and its remedy (such as more equity or collateral) in the file.
A lender's ordering checklist
- Engage an independent state-licensed or state-certified appraiser (certified above $1,000,000) who is outside loan production.
- Name the lender as client and/or intended user.
- Ask for market value as-is for existing buildings; as-completed for new construction or substantial renovation.
- Tell the appraiser not to include contributory rental income or intangible value in collateral value.
- Share the business valuation scope so both reports treat occupancy consistently.
- Diary the 12-month limit against the application date.
Special purpose property
For limited-market properties such as hotels, the SOP calls for a Certified General Real Property Appraiser with at least four going-concern appraisals of equivalent property in the last 36 months, and an allocation among land, building, equipment and intangibles. See special purpose rules.
Getting both reports scoped the same way at the start, with the same assumptions about occupancy and what's included, saves a round of revisions on almost every deal that has real estate in it.
Special purpose property: hotels, car washes, storage
SOP 50 10 8.1 defines a special purpose property as a limited-market property with a unique physical design, special construction materials or a layout restricting it to the use it was built for. When an acquisition includes an owner-occupied special purpose property integral to the business, the valuation must allocate value among land, building, equipment and intangibles by a qualified Certified General Real Property Appraiser; the loan can run up to 25 years if real estate is 85%+ of project cost; projections can satisfy DSC within two years if the appraisal fully collateralizes; and no QoE is required.
| Rule | Requirement |
|---|---|
| Valuation | Separate values for land, building, equipment, intangibles; Certified General Real Property Appraiser, 4+ equivalent going-concern appraisals in 36 months, USPAP. Lender may value internally at ≤ $350,000 without a close relationship. |
| Maturity | Up to 25 years if 85%+ of total project cost is real estate, and the property can't be separated from and is integral to the business |
| DSC | Historical and projected both analyzed. If appraised value fully collateralizes, two years of projections may satisfy DSC within two years of funding (or of construction end). No rental income from the property in projections. |
| QoE | Not required regardless of price |
| Documentation | Memo explains why the property qualifies, why it's integral, why projections are appropriate; both DSCs entered in SBA's system |
Examples in practice: hotels, self storage, gas stations and car washes.
What counts as special purpose property
The SOP defines it as a limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built. The test is about the building, not the business: a hotel, a car wash tunnel, a self-storage facility or a fuel station with tanks and canopies can't easily be turned into something else, so the property's value is bound up with the business operating in it. That's why SBA asks for a going-concern appraisal that splits the components, rather than a business valuation and a separate real estate appraisal.
Why the component split matters
Illustration, not a real deal. A 60-room limited-service hotel. The Certified General Real Property Appraiser concludes a going-concern value of $6,000,000 and allocates it:
| Component | Allocated value | What it means for the lender |
|---|---|---|
| Land | $900,000 | Part of improved real estate collateral |
| Building | $4,100,000 | Part of improved real estate collateral |
| Furniture, fixtures and equipment | $600,000 | Discounted heavily for collateral purposes |
| Intangibles (flag, going concern) | $400,000 | No collateral value |
| Total | $6,000,000 |
For the "fully secured" calculation, improved real estate counts at no more than 85%: 85% x $5,000,000 = $4,250,000. Furniture and fixtures count at no more than 10% of net book value or appraised value: 10% x $600,000 = $60,000. Collateral credit totals $4,310,000 against a $6,000,000 value.
The gap between value and collateral credit is normal for these deals, and it's why the business's cash flow and the operator's experience carry so much weight in the credit decision.
The appraiser requirements, in practice
The appraiser must be a Certified General Real Property Appraiser who has completed at least four going-concern appraisals of equivalent special use property in the last 36 months, shown in the report's qualifications section, and the assignment must instruct them to comply with current USPAP. A lender ordering one should ask for the list of those four assignments (property type and date, not client names) before engaging, because a general commercial appraiser without going-concern work on the same property type doesn't meet the test.
Underwriting differences to plan for
- No Quality of Earnings is required for owner-occupied special purpose property acquisitions, whatever the price.
- Projections can carry more weight: if appraised value fully collateralizes the loan, two years of projections may satisfy DSC, with coverage met within two years.
- Rental income from the property isn't included in projections.
- The credit memo must explain why the property qualifies, why it's integral to the business and why projections are appropriate.
Common questions
Can I use the seller's recent appraisal?
No. The lender may not use an appraisal prepared for the seller or the applicant.
Why is real estate removed from the purchase price?
SBA's Business Purchase Price excludes owner-occupied commercial real estate; the lender subtracts its appraised value so the business valuation covers only the business.
What if the appraisal comes in low?
At 90% or more of the estimate the lender documents why; below 90% a non-PLP lender needs SBA's prior written permission, and a PLP lender must document its justification.
Can the appraisal include rental income or goodwill?
Not for valuing the collateral: SBA says the appraisal may not include the contributory value of rental income or intangible assets.
Does a business with a leased location need a real estate appraisal?
Not for the business purchase itself. The lease matters to the valuation instead: its term, rent and assignment to the buyer.
Related guides
Sources
This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.