Purpose

This statement clarifies the position of the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of Thrift Supervision (collectively, the agencies) on the inclusion of various types of financial assistance, sometimes referred to as intangible items, in the determination of market value when a federally regulated financial institution obtains an appraisal for an affordable housing construction or permanent mortgage loan.

Background

The agencies have long encouraged financial institutions to extend prudent credit to promote community development. By taking the initiative in community development, institutions may establish new markets, reinforce their identity as community institutions, and enhance their performance.

An institution that extends credit for development of an affordable housing project should consider the financial assistance that frequently accompanies these projects, such as low-income housing tax credits (LIHTC), subsidies, and grants. Such financial assistance creates an incentive for developers and investors to undertake the project.

The agencies understand that some institutions have received appraisals where the appraiser has not appropriately considered the various types of financial assistance that is provided to affordable housing projects in the estimate of the project's market value. When the benefits of such financial assistance is not appropriately reflected in a project's appraisal, the estimated cash flow of the project is negatively affected, resulting in a lower market value. Consequently, a proposed affordable housing loan may not have a loan-to-value ratio sufficient to satisfy the standards of the agencies' real estate lending guidelines or to receive favorable treatment under the agencies' risk-based capital rules.

Statement

When a regulated financial institution obtains an appraisal for an affordable housing project, the appraisal should contain a market value estimate that reflects the real estate collateral and typical interests in the real estate on a cash or cash equivalent basis.¹ The agencies' appraisal regulations permit the appraiser to include in the market value estimate any significant financial assistance that would survive sale or foreclosure, such as the value of LIHTC, subsidies, and grants.

An institution should ensure that an appraiser engage to appraise an affordable housing project is competent to perform such an appraisal: is knowledgeable about the various types of financial assistance and programs that are associated with an affordable housing project; and identifies and considers the effect on value of any significant amount of the financial assistance. Consequently, the appraisal should contain a discussion of the value of the financial assistance that would survive sale or foreclosure and how it effects the market value estimate of the project. In addition, while certain types of financial assistance such as tenant-based rent subsidies do not necessarily transfer to new ownership upon sale or foreclosure, the lender should ensure that the appraiser appropriately considers the effect of these items in the cash flow analysis, when applicable.