An Inside Look at the Challenges Facing Lenders and Appraisers Today June 18, 2014 EDR Web seminar Regulatory pressures are fundamentally impacting the way that financial institutions manage the appraisal function. Our speakers will tackle the most impactful issues for both lenders and appraisals today. An expert from the Appraisal Institute, the largest appraisal membership society in the world with 23,000+ real estate valuation experts worldwide, will share first-hand research into the challenges faced by appraisers and by lenders that rely on the technical expertise of appraisal services. Attendees will learn about the concerns commercial real estate appraisers face, and the challenges their lender clients face in finding quality appraisers to help them respond to new policies and requirements. Speakers will also share insight into the latest policies from bank regulators like the OCC and FDIC that are impacting the integration of appraisals and environmental risk management. An expert in the trenches of a small community bank will share his insights into the shifting alignment of appraisals and environmental risk management at the community bank level, the importance of having a sound policy in place and actions that banks can take to best prepare for the scrutiny of examiners. BENEFITS TO AUDIENCE: - Information on how appraisers can meet today’s top challenges, align their services with the challenges lender clients face - A deeper understanding of bank regulations impacting appraisals - An insider’s take on what bank examiners look for - Advice on steps banks can take to protect themselves against examiner scrutiny - A look into the forces that are bringing appraisals and environmental due diligence functions closer together PRESENTED BY: - Bill Garber, Director of Government and External Relations, Appraisal Institute - Brian Ginter, Director - Executive Staff, Diversified Real Estate Consulting Network

1. Presented by:
Bill Garber, Director of Government and External Relations,
Appraisal Institute
Brian Ginter, Director-Executive Staff, Diversified Real Estate
Consulting Network
An Inside Look at the Challenges
Facing Lenders and Appraisers Today
Smart Data. Smarter Workflow.

2. An Inside Look at the Challenges
Facing Lenders and Appraisers Today
Bill Garber
Director of Government and
External Relations

3. About the Appraisal
Institute
• Global professional society of real estate
valuation experts
• 23,000+ members worldwide
• MAI, SRA, AI-GRS, AI-RRS Designations
• Largest appraisal education provider and
publisher in the world
• About 8 percent of members work in an
institutional capacity 3

4. Top Level Issues
• In December, 2013, AI conducted a
survey of appraisers and users of
appraisal services
• Some results follow
4

5. CRE Appraiser Concerns
– Fee pressure & expanding scope of work
– Lack of market data including comparables
– Over regulation of appraisal profession
– Formulary approach (forms, checklists, ratios,
indices) gaining more prominence
– Greater liability
– Increasing barriers to direct communication with
lenders resulting in appraisal report acceptance
and/or perceived report quality issues
5

6. Concerns of
Appraiser Clients
– Long turnaround times
– Cost of appraisals
– Misunderstandings concerning the scope of work in
engagement letters
– Compliance with standards/regulation
– Sufficiently supported value conclusions
– Quality work product
– Shortage of qualified appraisers
– Concise valuations (do not want lengthy reports)
6

7. Concerns of Staff
Appraisers Themselves
– Appraiser competency
– Work product quality and consistency
– Thoroughness of analysis/lack of analysis
– Lack of local market knowledge
– Work product inconsistent with engagement
letter/scope of work
– Use of appropriate methodology
– Timely delivery of appraisals & customer service
– Delegation of appraisal assignment to lesser-qualified
appraisers 7

8. Hottest Topics for
Staff Appraisers
– Inadequate market analyses
– Appraisal compliance with bank regulations
– Not recognizing or appreciating clients’ needs
– Insufficient details on market conditions and trends
affecting real property
– Going concern valuations (different methodologies
causing confusion)
– Reluctance to interact with client out of fear of
violating appraiser/client “firewall”
8

9. Take Aways
– Communication Breakdowns
– Tough and uncertain regulatory environment
– Unsatisfied clients and frustrated service
providers
– Clear need (and opportunity) to bridge the
gap
9

10. 1010
• Office of the Comptroller of the Currency
• Commercial Real Estate Lending Handbook,
August 20, 2013
• Third Party Relationships Guidance,
October 30 2013
• Federal Reserve
• Managing Outsourcing Risks, December 5,
2013
New Policies

11. 1111
• SEC Risk Retention
• Appraisal
• Environmental
Proposals

12. 12
• Interagency Appraisal and Evaluation Guidelines
– As-is market value
• Prospective market value “as complete”
– Environmental contamination
• Must update appraisal/evaluation if environmental
contamination is found
– “Threatened” Collateral
• “…physical aspects of the property that threatens the adequacy
of the institution’s real estate collateral protection”
– Impairment
– REO
Ongoing Issues

13. 13
• Hypothetical Conditions & Extraordinary
Assumptions
– FIRREA requires a market value “as is”. When an appraisal is
premised upon a hypothetical condition, the value is “as if” the
condition were true, not “as is.”
– An appraisal report for FRT purposes could include a value
premised on a hypothetical condition as long as the appraisal
report also includes a market value “as is”.
Ongoing Issues

14. 14
• Hypothetical Conditions & Extraordinary
Assumptions
– If information is being withheld from the appraiser so that the
appraiser is not certain whether or not there is an environmental
problem that impacts the value, the appraiser could only complete
an appraisal premised on an extraordinary assumption about the
missing information – e.g., assume that the property is not
contaminated.
– When an appraisal is premised on an extraordinary assumption
like this, it is not clear whether the value is an “as is” value. It might
be, but it might not be.
– An appraisal premised on such uncertainty would not be
acceptable for most lending purposes either.
Ongoing Issues

15. 15
• Underwriting vs. Appraisal
– There is a tendency to place the burden of some underwriting
problems on the backs of appraisers
– This includes environmental information and due diligence
– Goal of the bank should be to make informed decisions, “eyes
wide open”
Ongoing Issues

16. 16
• Suggested Best Practice
– Commission appraisal and environmental
together
– Appraisal prepared for as-is market value
– Environmental assessment returned to
bank and information provided to appraiser
to determine value as-impaired
– “As is impaired” may not = “as-is clean”
– Cost to cure because of potential
market resistance
Appraisal-Environmental
Integration

17. • Challenges
– Pressure on bank appraisal/environmental departments
– Cost to cure calculations
– Not all appraisers are competent to assess
environmental impacts (might have to call one in)
– Bidding process – appraisers would need to know this
upfront because the as-is impaired is a different kind of
assignment
– Potential project delay/cost increase
17
Appraisal-Environmental
Integration

18. Environmental Resources
• Relevant Textbooks
– The Appraisal of Real Estate
– Real Estate Damages, Applied Economics
and Detrimental Conditions
– Valuing Contaminated Properties: An
Appraisal Institute Anthology
– Appraising Industrial Properties
18

19. Environmental Resources
• Appraisal of Real Estate, 14th Edition
• Enhanced sections on environment
• Chapter 12, Land and Site Description
• Guidance on hypothetical conditions
and extraordinary assumptions
• Discussion of specialized
methodologies
19

20. 20
Environmental Resources
• Education
– Analyzing the Effects of Environmental Contamination
on Real Property
• Available to banks or local organizations and being converted into
online seminar
– Appraising Distressed Commercial Real Estate
– Condemnation Appraising
– REO Appraisal
– Valuation of Sustainable Buildings
• Four course professional development program
– Environmental Best Practices and Trends for Lenders

21. Environmental Resources
• Other activities
– Guide Notes
• Updated Guide Note 6 - Consideration of
Hazardous Substances in the Appraisal
Process
21

22. Bill Garber
Director of Government and External Relations
Appraisal Institute
122 C Street, NW, Suite 360
Washington, DC 20001
202-298-5586
bgarber@appraisalinstitute.org

23. New Regulatory Landscape and the Challenges
Facing Lenders and Appraisers
June 18th, 2014
With regulatory scrutiny on the Enterprise Risk
Management policies of lending institutions, the
linkage between valuation and environmental due
diligence platforms is more critical than ever.
Brian A. Ginter, CCIM
Director - Executive Staff
DRCN, LLC
Diversified Real Estate Consulting Network

24. Set The Stage
Bank regulators are emphasizing that environmental and valuation risk
management programs work in concert – Non-Silo Operations.
While this sounds simple, it is not without challenges…
TODAY’S OVERVIEW:
• Added detail on the environmental side
• Methodology for how banks can link environmental and valuation risk
management.
• Guidance for specific audience segments

25. The Environmental Side –
Environmental Risk Management
• Regulatory Environment/Dodd Frank - financial institutions are being forced to
develop more “robust” environmental risk management capabilities.
• THE KEY COMPONENT – Policy, Procedure, Implementation (don’t ignore)…
• Policy – How & What you’re going to do… to KNOW
• Procedure – How & What you’re going to do… after you KNOW
• Implementation – Prove You Did It. Document what you did with what
you KNOW.
Environmental PP&I often lacks the same level of development as Appraisal
PP&I.
A good start is: * OCC Revised Guidance (18-pt. checklist) on Environmental Risk Management (Pg. 69 to 71).
http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/cre.pdf (Placed at the end of this
presentation)

26. The Environmental Side –
Environmental Risk Management – Some Points and Challenges
Where to Start
Non-Silo
Operation of
departments
is critical
Regulatory
Paralysis
Always come back
to Value vs Risk
An undefined and
moving target – don’t
let it overwhelm

27. The Environmental Side –
Environmental Risk Management
Major Challenge – Limited
Staff
Environmental
issues
All reports must
be reviewed
May originate or
extend beyond the
immediate site
The in-house reviewer (if
even present) is typically
overwhelmed and/or
does not have the
required minimum
experience or training
The “two hat” concept.
How often is one
individual responsible for
everything?
How often is that person
the Sr. underwriter,
compliance officer or
even the CCO? Ever hear
“oh by the way you’re
responsible for the
environmental dept. “

28. The Environmental Side –
Environmental Risk Management
Environmental Operations – A Few More…
• Risk Matrix Program - Must be developed with increasing levels of due
diligence. Institutional Risk Tolerance Levels…
• Qualify and/or quantify (differentiate) between environmental risk and
cleanup risk.
• Staffing & Systems - A reluctance to hire qualified permanent staff or
invest in proper systems and platform.
• Vendor Management - The Bank is ultimately responsible for any out
sourced service or third party vendor.

29. Linkage:
Timing
Coordination
Appraisers - Environmental
Competency
Development and
Implementation of
policy & procedure
(valuation &
environmental)
Overall Goal: Linkage and non-silo development.
THE Challenges: Credit Risk Management in overall applications and the
linkage between the valuation and environmental components
Timing on appraisal
and environmental
engagement
Bank should provide
transaction/risk
screens minimally.
Full Environmental
Reports if available
Remember Residential Property

30. Properly developed Policy &
Procedure
Service Providers –
Appraisers/Environmental
Engineers/Data Vendors
Appraisal Institute, National
Association of Realtors,
CCIM, other organizations
EBA, MBA and other
National & Regional Banking
Organizations
Comptroller’s Handbook –
Commercial Real Estate
Lending (8/2013)*
What approaches and tools are available to improve
integration?
* OCC Revised Guidance (18-pt. checklist) on Environmental Risk Management (Pg. 69 & 70).
http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/cre.pdf

31. The Audience:
Linkage - The Service Providers
Appraisers Environmental PEs Data Providers
These are the easy ones.
The need for accountable, competent, services is greater than ever.
• Understand it’s all about Knowing – Your Job is to provide complete, accurate,
information so your client is able to make an informed decision.
• Everyone is being held accountable.
• Never Stop Asking Questions and Learning.
• Work Together… appraisers and environmental professionals need to gain a greater
understanding of each others fields.
• Appraisers need to understand what environmental issues mean and how to
determine the effect on the real estate.
• Environmental Professionals need to provide greater clarity on what is the real risk
associated with their observations… (example)

32. The Audience:
Linkage - The Bankers
Where to Start… It’s About –
Enterprise Risk Management
In addition to the environmental risk management points above…
I like thinking of an inverted pyramid - Start with the overall challenge (macro):
• Keep asking questions until you know every possible point
• Develop policy, procedure, and implementation systems that address every possible
point
• Know you will never have everything covered. So anything developed must be
nimble and adaptable to the ever changing environment – external & internal.
A FEW POINTS:
• Policy / Procedures / Implementation: Document / Document / Document -
Historically all that was needed was to show you had it… That is absolutely NO
longer an option. Not only are the written policy and procedures required, the
regulators will question, demand, how they are applied and implemented.

33. The Audience:
Linkage - The Bankers
• Education and Training at every level! Understanding the basic concepts of the
appraisal and environmental processes need to be part of any enterprise risk
management program. Know…
• Who To Ask
• What To Ask
• Where To Go – To Ask
I never understood the pushback… Get the proper information/data at the beginning of
the process. Knowing/Knowledge is the key to no surprises. Why wait to the last minute
to discover/resolve a problem? If the challenge is within your bank’s risk tolerance then
identify & deal… if not then you saved time, money, and credibility for you and your
customer.
• Vendor Management – A real regulatory hot button. The Challenge: Development
of approved services providers that are competent under today increased regulatory
scrutiny. This can be done without sacrificing long established relationships. This
should also include firms that provided data and support systems.

34. Bio / Contact Information:
I have been involved in the real estate industry for 30+ years, four of which (2009 – 2013) as
Managing VP and developer of a combined appraisal and environmental departments for a major
community bank. I currently maintain General Appraisal Certifications in multiple jurisdictions,
have achieved the prestigious CCIM Designation, sit on the Board of the Washington, DC Chapter
of the Appraisal Institute, and am completing the requirements for the MAI Designation.
Unlike typical appraisers or bankers my skill development came from being a Realtor, investor,
developer, commercial loan officer/transactional lender, real estate underwriter, and a general real
estate consultant; providing a unique understanding of valuation influences and the ability to work
independently in any environment or market on typical and complex (fractured) real estate
transactions and projects.
If you have any questions or comments do not hesitate to communicate.
Brian A. Ginter, CCIM
Director - Executive Staff
DRCN, LLC
Diversified Real Estate Consulting Network
E-Mail: brianginter@drcnllc.com
Office 703-969-6997

35. Comptroller’s Handbook – Commercial Real Estate Lending
(8/2013)

36. Comptroller’s Handbook – Commercial Real Estate Lending

37. Q&A