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CHAPTER 7: SECURITY 

REQUIREMENTS [7 CFR 3560.60]

7.1 INTRODUCTION 

Multi-Family Housing loans made by the Agency must be secured in a manner that 

protects the Government’s financial interest in the loan. Adequate security means that the 

borrower has control of the land to be developed, the value of the project provides sufficient 

collateral for the loan, and, in cases where additional funding has been provided by other 

sources, the Agency maintains an acceptable lien position. 

This chapter describes the requirements that protect the Agency’s financial interests and 

outlines procedures for reviewing applications and appraisals to ensure that the Agency obtains 

adequate security for Multi-Family Housing project loans. 

7.2 ADDRESSING SECURITY REQUIREMENTS DURING THE ORIGINATION 

PROCESS 

Security requirements are addressed throughout the loan application process. 

 During Stage 1, the application provides evidence that the applicant will control the 

land prior to closing. Also, for projects with participation loans, a participation 

agreement is negotiated, establishing the Agency’s lien position. 

 During Stage 2, the security value of the property is established through the appraisal. 

 At closing, the borrower must provide clear evidence of control of land and execute 

documents establishing the Agency’s lien on the property. 

SECTION 1: SECURITY REQUIREMENTS 

7.3 CONTROL OF LAND 

To provide adequate security for the loan, a borrower must control the housing and 

related land. At the time of application, borrowers must provide sufficient evidence that they 

will have control of the land. Before closing, the borrower must own or hold a leasehold interest 

to the property. 

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A. At Time of Application 

 At the time of application, borrowers must be able to demonstrate that they will have 

control of the land at the time of closing. An application that does not provide adequate 

evidence of site control will be rejected. Evidence can be provided in one of three forms: 

 Proof of title or a lease interest: If the borrower already has control of the land, 

then the options discussed in Paragraph B, below, are acceptable. 

 Purchase or Lease Option: If the borrower does not yet own the property, an option 

to purchase or lease the property can be provided as evidence of land control. The 

option must be for a term long enough to process the loan (generally, at least six 

months, preferably, a year) and require no renewal or extension fees. 

 Letter of Intent: If the property is being donated to the borrower, the borrower may 

provide a letter of intent from the donor stating that the site will be donated to the 

borrower and that the borrower will assume control prior to closing. 

B. At Loan Closing 

At loan closing, the applicant must have proof of either the title or the lease interest. 

1. Ownership 

The borrower must have fee-simple ownership, under which the borrower holds a 

fully marketable title to the property. This title is evidenced by a deed that vests full 

interest in the property to the borrower. 

2. Lease Interest 

The borrower may lease land only if it is not available for purchase (for example, land 

owned by a nonpublic body, state, political subdivision, public body, public Agency, or 

American Indian tribal lands) and the following conditions are met: 

 A recorded mortgage has been given as security; 

 The amount of the loan against the property does not exceed the property’s 

estimated market value; 

 The unexpired lease term must be at least 25 percent longer than the repayment 

term; 

 The rent charged under the lease does not exceed the rent paid for similar leases 

in the area; 

 The loan applicant’s interest is not subject to summary foreclosure or 

cancellation; and 

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 The lease permits the following: 

 The right to foreclose the mortgage and transfer the lease; 

 The Agency to bid at a foreclosure sale and to accept voluntary conveyance of 

the security in lieu of foreclosure; 

 The Agency to occupy or sublet the property and sell the leasehold for cash or 

credit if the leasehold is acquired through foreclosure, or if the Agency 

accepts voluntary conveyance in lieu of foreclosure, or if the borrower 

abandons the property; and 

 The loan applicant, in the event of default or inability to continue with the 

lease and the loan, to transfer the leasehold, subject to the mortgage, to a 

transferee that will assume the program debt. 

7.4 ADEQUATE SECURITY FOR THE LOAN 

To ensure that the value of the project provides adequate collateral for the loan, the 

Agency requires that the loan be no more than the appraised value of the property or the total 

allowable development costs minus the borrower’s equity in the project. 

For further guidance on obtaining and reviewing appraisals, see Section 2. 

7.5 LIABILITY 

Agency loans to borrowers will establish the borrower’s personal liability, except for 

loans to limited partnerships. Loan processing staff must make sure that the loan agreement 

includes appropriate language on personal liability. 

7.6 ACCEPTABLE LIEN POSITION 

The Agency encourages the use of funding and loans from other sources to aid in the 

financing of Multi-Family Housing projects. Agency loans provided to projects in conjunction 

with funding other than the borrower’s contribution are referred to as participation loans. 

The terms of participation loans must protect the Agency’s security in the project. 

Therefore, when additional sources of funding or financing are used, the Agency will negotiate a 

participation (or intercreditor) agreement that establishes an acceptable lien position for the 

Agency. (See Chapter 6 for a full discussion of participation loans and intercreditor agreements.) 

A. Acceptable Lien on Property 

To protect its interest in the project, the Agency will seek first or parity lien position 

on the property. A junior lien position is acceptable only if it is necessary to the project 

and the Government’s financial interests are adequately protected (see Chapter 6, 

paragraph 6.5 A for additional information). 

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B. Acceptable Lien on Project Revenue 

Agency will seek first/parity lien on project revenue. Such liens provide that if the 

project is subject to a servicing action, the Agency has first or parity claim on project 

rents and other revenue. The Agency’s lien position must be specified in the intercreditor 

agreement. 

 

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SECTION 2: ASSESSING THE VALUE 

OF THE SECURITY-APPRAISALS 

7.7 PURPOSE OF THE APPRAISAL 

High quality appraisals are key to ensuring that the Agency obtains adequate security for 

its loans. The appraisal serves two functions. 

 The appraisal provides an objective opinion of the value of the property. The 

appraiser concludes the value for the real property and for each type of favorable 

financing involved, if applicable. Several types of subsidies, including below-market 

financing (e.g., Agency interest credit and non-Agency low-interest loans), lowincome housing tax credits, grants, as well as project-based rental assistance and 

expense abatements, add value to a Multi-Family Housing property. Each type of 

subsidy should be thoroughly discussed, and each type of favorable financing should 

be separately valued in the appraisal. For loan origination, these opinions of value 

serve as a basis for establishing the collateral’s loan value and insurable value. 

 The appraisal also serves to expand on some of the information in the loan 

application. Factual data contained in the report, such as regional, neighborhood, site, 

and apartment market data, aids the reviewer in evaluating the feasibility of the 

project. 

7.8 REQUIREMENTS FOR APPRAISALS [7 CFR 3560, Subpart P]

Appraisals must meet the following requirements: 

 Qualified Appraiser: All Agency Multi-Family Housing appraisals must be written 

by a state certified general appraiser. Contract appraisers must be certified (or 

registered for Non-Resident Temporary Practice) in the state in which the subject 

property is located. The appraiser must have the specialized knowledge and 

experience necessary to be competent to appraise subsidized housing. The appraiser 

must understand the housing programs, value types and definitions, real and 

intangible property rights, use restrictions, pertinent tax considerations, and methods 

for valuation of various types of favorable financing involved in the appraisal of 

subsidized housing. 

The Agency will typically contract with qualified state certified general 

appraisers. However, when a contract appraiser is not available at an acceptable cost 

or is unable to complete an appraisal within 45 days, a qualified Agency appraiser 

may conduct the appraisal. An Agency appraiser must possess the same 

qualifications as those required for contract appraisers, except that an Agency 

appraiser is only required to be certified in one State or territory to perform real 

property appraisal duties as a Federal employee in all States and territories. 

 Standards: All appraisals must be in compliance with the current edition of the 

Uniform Standards of Professional Appraisal Practice (USPAP) and Agency 

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appraisal requirements, which can be found in 7 CFR 3560, subpart P, and this 

chapter of the handbook, including the attachments. 

 Nondiscrimination: The appraiser may not use factors that are discriminatory on the 

basis of race, color, religion, sex, disability, familial status, or national origin in 

conducting the appraisal and valuing the property. 

 Timing: The appraisal will be ordered once the applicant has been determined 

eligible and sufficient information has been collected to enable the appraiser to value 

the property. This should occur at the beginning of Stage 2 of the Loan Origination 

process (See Chapters 4 and 5). 

 Documentation: Form RD 1922-7, Appraisal Report for Multi-Unit Housing, may 

be used for Multi-Family Housing appraisals. Form RD 1922-7 is equivalent to 

FNMA Form 1050 and FHLMC Form 71A. None of these forms are compliant with 

USPAP; however, they are standard forms used in the appraisal industry for the 

valuation of multi-family housing. Form RD 1922-7, or one of the equivalent forms, 

or the Uniform Commercial Industrial Appraisal Report (UCIAR) form is acceptable. 

However, the form must be modified, or attachments must be added, so that USPAP

requirements are met. Appraisers must make the following additions when using 

these forms. 

 Identification of the type of appraisal report (e.g. self-contained, summary, or 

restricted use); 

 Identification of the client and any intended users of the appraisal; 

 Statement of the intended use of the appraisal; 

 Statement of the property rights appraised; 

 Statement of the type(s) of value to be concluded, including the definition(s) of 

the value type(s) and the source(s) of the definition(s); 

 Description of the scope of work used to develop the appraisal; 

 Disclosure (clear and conspicuous) of all extraordinary assumptions and 

hypothetical conditions; and statements that their use might have affected the 

assignment results; 

 Description of the information analyzed, the appraisal procedures followed, and 

the reasoning that supports the analyses, opinions, and conclusions; 

 Statement of the use of the real estate existing as of the date of value and the use 

of the real estate reflected in the appraisal; 

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 Statement and explanation of any permitted departures from specific requirements 

of USPAP Standard 1 and the reason for excluding any of the usual valuation 

approaches; 

 Signed certification in accordance with USPAP Standards Rule 2-3; 

 Analysis of all agreements of sale, options, or listings of the subject property at 

the time of the appraisal and analysis of all sales of the subject property that 

occurred within the 3 years prior to the effective date of the appraisal; 

 Inclusion of prospective value (when this is the assignment, for proposed 

developments of real property), with the effective date of the appraisal being 

subsequent to the report date and based on the estimated date of completion of the 

proposed or on-going construction; and 

 Estimation of reasonable exposure time, when market value is to be concluded. 

An appraisal report in a narrative format, in lieu of a form report, is also 

acceptable, provided it complies with USPAP and Agency appraisal requirements. A 

narrative appraisal report is not required to have an attached Form RD 1922-7. See 7 

CFR 3560.753(c)(2) for a list of items that must be contained in a narrative report. A 

narrative format is more appropriate than a form format for Agency Multi-Family 

Housing appraisals due to the complexity of the property type, the scope of work 

involved, and the necessity to include a significant amount of required information on 

attachments to the form. When contracting for appraisals, a narrative appraisal 

should typically be ordered. 

 Use of Third Party Appraisals: Rural Development may use appraisals for which it 

did not contract, including those obtained by participating lending institutions, state 

or local housing authorities, or owners/applicants. The Agency reviewer should be 

especially diligent in reviewing these appraisals to ensure they meet USPAP and 

Agency appraisal requirements. 

7.9 VALUING MULTI-FAMILY HOUSING PROJECTS 

A. Basic Components of an Appraisal 

 Types of Value: The value type(s) that should be used in an Agency Multi-Family 

Housing appraisal are specific to the loan-making, loan-servicing, preservation, or 

disposition decision for which the appraisal is ordered. In other words, the intended 

use of the appraisal determines the value type(s) to be requested and reported. 

Depending on the decision to be made, several value types may be required in one 

appraisal, including the separate values of different types of favorable financing. 

Value types used in RHS Multi-Family Housing appraisals are defined and discussed 

in Attachment 7-A, Value Types Used in Multi-Family Appraisals. Attachment 7-

C, Specific Value Types to be Requested and Reported Based on Intended Use of 

Appraisal, is a guide to be used by the State Contracting Officer, in consultation with 

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the State Appraiser, to determine which value types to request in the appraisal 

Statement of Work (SOW) and Request for Quote (RFQ). 

 Property Rights Appraised: The appraiser is required to state the property rights 

being valued. Attachment 7-B, Property Rights Valued, provides guidance on this 

issue. 

 Highest and Best Use Analysis: “Highest and Best Use” is defined by the 4th

Edition of The Dictionary of Real Estate Appraisal as “the reasonably probable and 

legal use of vacant land or an improved property, which is physically possible, 

appropriately supported, financially feasible, and that results in the highest value. 

The four criteria the highest and best use must meet are legal permissibility, physical 

possibility, financial feasibility, and maximum productivity.” The appraiser must 

conclude the Highest and Best Use of the subject site as though vacant and for the 

subject property as improved, if improvements have been made. 

 Approaches to Value: Multi-Family Housing appraisals may contain one, two, or 

three approaches to value, as described below, depending on the specific assignment.

 The Cost Approach is a set of procedures through which a value indication is 

derived for a property by estimating the current cost to build a proposed structure 

or construct a reproduction of (or replacement for) an existing structure, including 

an entrepreneurial incentive, deducting depreciation from the total cost, and 

adding the estimated land value. 

 The Sales Comparison Approach is a methodology by which a value indication is 

concluded by comparing the property being appraised to similar properties that 

have been sold recently, then applying appropriate units of comparison and 

making adjustments to the sale prices of the comparables based on the elements of 

comparison. This approach may be used to value improved properties, vacant 

land, or land being considered as though vacant. 

 The Income Approach is a set of procedures through which an appraiser derives a 

value indication for an income-producing property by converting its anticipated 

benefits (cash flows and reversion) into property value. This conversion can be 

accomplished using direct capitalization or yield capitalization. Direct 

capitalization is a method used to convert an estimate of a single year's income 

expectancy into an indication of value in one direct step, either by dividing the 

income estimate by an appropriate rate or by multiplying the income estimate by 

an appropriate factor. Yield capitalization is a method used to convert future 

benefits into present value by discounting each future benefit at an appropriate 

yield rate (discounted cash flow) or by developing an overall rate that explicitly 

reflects the investment's income pattern, value change, and yield rate. 

 Reconciliation: In all Agency Multi-Family Housing appraisals, each of the 

approaches to value should produce a value indication that is reasonably consistent 

with the others. Industry convention specifies that the results should not vary by 

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more than 10 percent. Any variance of more than 10 percent between value 

indications from any two approaches to value must be reasonably justified in the 

reconciliation section of the report. 

B. Valuation of Favorable Financing 

Multi-layered financing, involving multiple financing sources, has become the norm 

in the building and rehabilitation of affordable housing. Favorable financing is offered to 

developers of subsidized housing to offset external obsolescence that results from a weak 

apartment market and/or restrictions placed on the properties by the financing sources. 

Several types of favorable financing can be used to develop Section 514 and Section 515 

projects, including Section 514 and Section 515 direct loans with interest rates as low as 

one percent, low-interest loans from non-Agency sources, tax-exempt bond financing, tax 

credits, and grants. 

When determination of market value, subject to restricted rents, is part of an 

appraisal assignment, all favorable financing in place at the time of the appraisal must 

also be valued, but separately from the real property. Favorable financing is valuable to 

the developer/owner, and an appraiser can calculate the value of each type of favorable 

financing. When favorable financing is involved, the appraisal report must contain a 

narrative identifying each source of financing. The amount and terms of each type of 

favorable financing must be described, and each type of favorable financing must be 

valued separately from the market value, subject to restricted rents. The appraisal SOW 

should specifically request each value type required, including the value(s) of each type 

of favorable financing. 

Valuation of “interest credit subsidy” from Section 514 and Section 515 direct loans 

must be consistent with Attachment 7-H, Guide for Valuation of Interest Credit Subsidy. 

The methodology presented in Attachment 7-H can also be used to calculate the value of 

low-interest loans from non-Agency financing sources. 

7.10 THE APPRAISAL PROCESS—ROLES AND RESPONSIBILITIES 

To ensure that appraisals used by the Agency are of consistently high quality, each office 

should have standard procedures for requesting, writing, and reviewing appraisals. Several 

different actors play key roles in this process. These procedures and roles are outlined below. 

Additional detail is provided in the following paragraphs. 

A. The Appraisal Process 

The appraisal process involves several steps: 

 Step 1: Request the appraisal. The Loan Originator requests an appraisal. After an 

applicant has been determined to be eligible, the Loan Originator should submit to the 

appraisal staff the information needed to complete the Statement of Work (SOW) and 

the Request for Quote (RFQ) for the appraisal. It is the responsibility of the State 

Contracting Officer to write a SOW and an RFQ when contracting for appraisals that 

are consistent with the instructions in this chapter. The State Contracting Officer 

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should consult with the State Appraiser when writing the SOW and the RFQ to ensure 

that Agency appraisal requirements and information necessary to complete the 

assignment are accurately conveyed to the appraiser. It is recommended that the State 

Appraiser act as the Contracting Officer's Representative (COR) in the contracting 

aspect of the appraisal process. This may involve actually writing the appraisal SOW 

and RFQ. 

The State Contracting Officer or State Appraiser can use Attachment 7-D, Standard 

Statement of Work (SOW) for Multi-Family Housing Contract Appraisals, as a 

template in writing an appraisal SOW. It is intended as a guide that should be 

modified when contracting for a specific appraisal assignment. This standard SOW 

lists the Agency's requirements for a typical complete appraisal. 

The State Appraiser should provide all of the appraisal information that is necessary 

to enable the State Contracting Officer to write a complete RFQ. Attachment 7-E, 

Appraisal Information Sheet (Example), Attachment to SOW, should be used as a 

template for this purpose. The RFQ must contain adequate information regarding the 

scope of work of the appraisal assignment to enable the contract appraiser to make an 

appropriate quote. 

Attachment 7-F, Appraisal Data Package Checklist, is a list of data that the Agency 

should provide to the appraiser at the time of the assignment. Appraisal staff may 

establish a standard procedure for collecting this information. It is not necessary for 

all the items in this list to be collected before the assignment is made, but the 

appraisal data package should be as complete as possible. 

The appraiser should be provided with instructions for accessing, via the internet, 7 

CFR 3560, subpart P, and this chapter of the handbook, including the attachments, 

along with the SOW and data package, at the time an appraisal assignment is made. 

 Step 2: Select an appraiser. Appraisal staff, working with the contracting staff, 

selects an appraiser. In most cases, the Agency relies on contract appraisers to 

perform appraisals. The process for selecting contract appraisers is described in RD 

Instruction 1922-B, Exhibit C. Establishing and maintaining a list of qualified 

appraisers who consistently deliver high quality appraisals is one of the keys to a 

successful appraisal system. 

 Step 3: Discuss the SOW. A representative of the Contracting Officer (typically the 

Staff Appraiser or the Loan Originator) will discuss the contract SOW with the 

contract appraiser and then give permission to proceed with the appraisal. 

 Step 4: Perform the appraisal. The appraiser performs the appraisal in accordance 

with the contract SOW, Agency appraisal requirements, and USPAP. The Staff 

Appraiser should be available to answer questions and provide property contacts and 

required data during the course of the appraiser’s assignment. The appraiser is 

required to notify the Agency as soon as possible if the delivery deadline will not be 

met. 

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 Step 5: Review the appraisal. A Rural Development State designated 

Appraiser/Reviewer performs a technical review of the appraisal to ensure it is 

acceptable. An appraisal review report that is compliant with USPAP Standard 3 and 

Agency review requirements must be written and filed for every Multi-Family 

Housing appraisal review, unless the appraisal was performed by a State Appraiser. 

Paragraph 7.13 describes the appraisal review process. 

 Step 6: Analyze the results of the appraisal. The Loan Originator analyzes the 

results of the appraisal. Once the appraisal is deemed acceptable, the Loan Originator 

can use the results to make the value determinations needed to make a decision 

regarding the applicant’s proposal. Paragraph 7.14 provides a full description of this 

analysis. 

B. Roles and Responsibilities 

The appraisal review system involves staff from the State and National Offices. A 

description of key staff responsibilities follows. Note that in some offices, roles may 

overlap. For example, an office may have only one appraiser who serves as the Senior 

Appraiser as well as Staff Appraiser. 

 Loan Originator. The Loan Originator is responsible for requesting the appraisal and 

for reviewing it to make determinations in the loan approval process. The Loan 

Originator will use the appraisal to determine the loan amount, the insurance amount, 

and the overall feasibility of the project. 

 Senior Appraiser. The Senior Appraiser is charged with maintaining acceptable 

appraisal quality within the state. Appraisals must meet industry standards and 

Agency and USPAP requirements. The Senior Appraiser is appointed by the State 

Director and should be a state certified general appraiser qualified to write and review 

appraisals of subsidized apartment properties. (See 7 CFR 1922.6 and 1922.7). 

Senior Appraiser duties include the following: 

 Oversee the review of appraisals. The Senior Appraiser should supervise the 

work of staff appraisers and review a sample of the appraisals to ensure the 

overall quality of work. The Senior Appraiser may conduct both desk and field 

reviews. 

 Perform appraisals. The Senior Appraiser will perform appraisals on an asneeded basis when contract appraisers are not available. 

 Provide program orientation to contract appraisers. The Senior Appraiser must 

hold occasional orientation sessions to educate contractors and potential 

contractors about Agency appraisal policies and procedures. 

 Staff Appraiser. The Staff Appraiser must be properly trained and possess the 

appropriate education and experience to perform technical appraisal reviews and 

conduct appraisals as needed. The person should be a state certified general 

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appraiser, certified in the state where the duty station of the appraiser is located, or be 

working toward certification (see 7 CFR 1922.6 and 1922.7). Under the supervision 

of the Senior Appraiser, Staff Appraisers will: 

 Conduct desk and field reviews of contract appraisals for compliance with the 

SOW, Agency policy, and USPAP. 

 Manage appraisal contracts; and 

 Conduct appraisals as needed. If the Staff Appraiser is not a state certified 

general appraiser, any in-house appraisal written by the Staff Appraiser must be 

reviewed and signed by an Agency Senior Appraiser. 

 State Appraiser. State Appraiser, as the term is used in this handbook, refers to both 

Senior Appraisers and Staff Appraisers. 

 Contracting Officer. The Contracting Officer coordinates the contractual 

arrangements with the contract appraiser, ensuring that the contract and the selection 

of the contractor meet Agency requirements. 

 National Office. The National Office may request to review a sample of appraisals 

on a periodic basis to provide general oversight of the appraisal process. Quality 

reviews and regular training of State Appraisers by the National Office Review 

Appraiser will be performed to help ensure consistent procedures nationally. 

7.11 SELECTING AN APPRAISER 

The Appraiser must be selected following Agency contracting requirements. This may 

be achieved using a Blanket Purchase Agreement or a request for contract services. 

A. Blanket Purchase Agreement 

A Blanket Purchase Agreement (BPA) allows the Agency to maintain a list of eligible 

contractors that can be engaged at any time. Regarding the BPA list of approved 

appraisers: 

 The Contracting Officer should develop a BPA list in accordance with Agency 

contracting procedures. 

 When a contractor is needed, the Staff Appraiser can contact an appraiser on the BPA 

list. At this time, the Staff Appraiser should: 

 Confirm that the contractor’s price for the appraisal is within an acceptable range 

(based on experience with local costs). 

 Confirm that the appraiser can complete the appraisal within the required 

timeframe (see paragraph C below). 

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 If the appraiser cannot meet these two criteria, the next appraiser on the list should be 

contacted, and the process should be repeated. When using the BPA list, appraisal 

staff should make full use of all the names on the list. It is a good practice to rotate 

through the list to offer different appraisers the chance to perform the contract 

appraisal each time an appraisal is needed. 

B. Request for Contract Services 

The Agency may obtain appraisal services through a request for contract services. In 

this case, contracting staff will solicit bids for services and select the lowest responsive 

bid in accordance with standard Agency contracting procedures. The Contracting Officer 

will use the Statement of Work, developed by the appraisal staff, as the basis for the bid 

solicitation and the contract. 

Once a contractor is selected, the Contracting Officer should arrange a post-award 

meeting with the contractor as described in paragraph 7-12. 

C. Time frame for Completion of Appraisals 

A key criterion for selection of an appraiser is the proposed delivery date. 

Completion must not exceed 45 days from the date of assignment to the contractor. If the 

contractor indicates that this time frame is not acceptable, another contractor or a Staff 

Appraiser should conduct the appraisal. 

If, for reasons beyond the control of the appraiser or the Agency, the appraisal cannot 

be completed in that time frame, the Contracting Officer may grant an extension of up to 

30 days. 

7.12 WORKING WITH THE APPRAISER 

A. Post-Award Conference with the Appraiser 

Before authorizing the contractor to start work, the Contracting Officer’s 

Representative (COR) should discuss the contract SOW with the appraiser to ensure that 

the work to be performed is well understood. This may be done by telephone or in a 

face-to-face meeting. Following the discussion, the COR must provide the appraiser with 

the following items: 

 Appropriate forms. The appraiser should be provided with Form RD 1922-7, 

Appraisal Report for Multi-Unit Housing (or an industry equivalent) and Form RD 

1924-13, Estimate and Certificate of Actual Cost, if appropriate for the appraisal 

assignment. 

 Statement of Work. The SOW should include all the information that the appraiser 

needs to determine the scope of work of the appraisal assignment. This includes 

information on the purpose and intended use of the appraisal as well as all pertinent 

property information. See paragraph B below for a complete description of the 

information included in the SOW. 

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 Agency appraisal regulations and instructions. The appraiser should be provided 

with instructions for accessing, via the internet, 7 CFR 3560, subpart P, and this 

chapter of the handbook, including the attachments. 

 Appraisal data package. A data package containing as many items from the Appraisal

Data Package Checklist (Attachment 7-F) as possible should be provided to the 

appraiser. 

 Handbook Letter 107 (3560), Notice to Proceed or Task Order Letter. This permits 

the contractor to begin work on the appraisal. Attachment 7-G, Sample Transmittal 

Letter, should be used as a template by the Contracting Officer in writing a letter of 

engagement to the appraiser. 

B. The Statement of Work 

The SOW must provide all available information needed by the appraiser to conduct a 

high quality appraisal. A sample SOW is provided as Attachment 7-D, Standard 

Statement of Work (SOW) for Multi-Family Housing Contract Appraisals. A good SOW 

will describe: 

 The intended use of the appraisal. The SOW should describe the Multi-Family 

Housing program and explain how the Agency intends to use the appraisal. For 

example, if the appraisal is for a loan on a new project, the SOW should state that the 

appraisal will be used to fulfill loan underwriting requirements for permanent 

financing of the subject property. For a prepayment-related appraisal, the SOW 

should state that the appraisal will be used to establish the market value of the 

property, which is to be considered in making an incentive offer to preserve the 

property as affordable housing. 

 The types of value required. The SOW should specify the value types required in the 

appraisal. Attachment 7-C, Specific Value Types to be Requested and Reported 

Based on Intended Use of Appraisal, should be used to determine the value types that 

will be requested in the SOW. 

 Required submissions. The SOW should specify the number of copies to be 

delivered, the address (es) to which the reports should be sent, and the deadline for 

delivery. The number of copies depends on the number of parties involved in the 

project—these may include an interim lender or another federal or local agency (e.g., 

a local housing authority if tax credits or HOME funds are involved). Each party 

involved should be addressed in the appraiser's letter of transmittal and identified as 

an intended user of the report. 

 Background Information. The SOW must include all appraisal and property 

information needed to complete the appraisal. Appraisal information includes the 

appraisal type (complete or limited), the report type (self-contained, summary, or 

restricted use), and the appraisal format (narrative or form). Property information 

includes property contact(s), property type, property status (existing or proposed), 

property interest appraised, property owner, property name and address, property 

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description, and project financing. Attachment 7-E, Appraisal Information Sheet 

(Example), Attachment to SOW, should be completed and provided to the appraiser at 

the time the assignment is made. 

C. Paying for Appraisals 

 Before a contract appraiser is paid, a Staff Appraiser must review the appraisal for 

consistency with the contract’s SOW and compliance with USPAP and Agency 

appraisal requirements as described in 7 CFR 3560, subpart P, and this chapter of the 

handbook, including the attachments. If the appraisal is acceptable, the Staff 

Appraiser should submit the request for payment on Form RD 838-B, Invoice Receipt 

Certification. Instructions for payment of contracts are found in RD Instruction 

2024-A, and Exhibit D. 

 If the appraisal is deficient, the reviewer must inform the appraiser of the deficiencies 

prior to payment. If the deficiencies are not addressed, the reviewer must return the 

appraisal report and a copy of the review comments to the appraiser. The Senior 

Appraiser should schedule a meeting with the contractor and the Contracting Officer 

to discuss the appraisal and contract terms. All contractual actions taken by the 

Agency must be through the Contracting Officer and comply with the Federal 

Acquisition Regulations (FAR). Continuation of the contract will be based on the 

contractor’s ability to meet or exceed the conditions of the contract SOW. 

7.13 AGENCY REVIEW OF THE APPRAISAL 

All Multi-Family Housing appraisals that were not written by an Agency certified general 

appraiser must be reviewed by an Agency certified general appraiser. This is to ensure that the 

appraisal is consistent with the Statement of Work and complies with USPAP and Agency 

requirements. The State Appraiser must write and file a technical appraisal review report that 

complies with USPAP Standard 3 and Agency appraisal review requirements. 

The reviewer should take the steps described below. If the review identifies errors and/or 

deficiencies in the appraisal, the reviewer must inform the appraiser of the errors and/or 

deficiencies. 

 Step 1: Review for Completeness. Review the appraisal for completeness using a 

checklist to ensure that all of the essential elements of a complete appraisal, as 

required by USPAP and the Agency, have been included in the report. 

 Step 2: Review for Reasoning. Confirm that the analyses, opinions, and conclusions 

in the appraisal are appropriate and reasonable and that the report provides support 

for its conclusions. Consider whether the appraiser took all relevant information into 

account, such as: 

 Using the correct rents for the type of value requested (e.g., restricted rents should 

be used for “market value, subject to restricted rents ”, while market rents should 

be used to determine “market value”); 

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 Factors that could affect the project’s value such as nearby development, or 

environmental, zoning, or encroachment issues; 

 Market information, including local rents and sales; 

 Population trends and other demographic data; and 

 Future area development plans. 

 Step 3: Review for Value(s) of Favorable Financing. There are several types of 

favorable financing that must be discussed and valued in the appraisal of subsidized 

Multi-Family Housing properties. These include interest credit subsidy from USDA 

Section 514 and Section 515 direct loans, low-interest loans from non-Agency 

sources, tax-exempt bond financing, tax credits, and grants. Each type of favorable 

financing must be valued separately from the restricted real property. Check the 

appraiser’s calculation of value for each type of favorable financing. See 

Attachment 7-H, Guide for Valuation of Interest Credit Subsidy, for guidance on the 

correct method to calculate the interest credit subsidy value. 

 Step 4: Review for Overall Conclusion. Determine whether the final value 

conclusions in the appraisal report are reliable. 

 Has the appraiser provided conclusions of the subject property’s value using all 

applicable approaches to value? 

 Have the value indications derived by each of the approaches to value been 

adequately reconciled? If the approaches do not yield a consistent value, has the 

appraiser provided an adequate explanation? 

 The reviewer must make one of four possible dispositions of the appraisal in the review 

report: (1) the appraisal is accepted; (2) the appraisal is accepted as revised by the appraiser; (3) 

the appraisal is accepted as modified by the reviewer; or (4) the appraisal is rejected. The 

reviewer must comply with the Record Keeping section of the Ethics Rule of USPAP and keep, 

or have access to, a copy of the review report for at least 5 years. A copy of the appraisal review 

report should be filed with the appraisal in the loan docket. 

7.14 RELEASE OF APPRAISALS 

Multi-Family Housing appraisals procured by the Agency will be released to owners/ 

applicants, from their own files, upon their request. (See 7 CFR 3560.752(d).) 

A. Freedom of Information Act 

The Freedom of Information Act (FOIA) does not prohibit the release of MultiFamily Housing appraisals ordered by Rural Development to owners/applicants, from 

their own files. This is because the disclosure is necessary to effectively carry out a 

governmental purpose. The governmental purpose in this case is to give owners/ 

applicants an opportunity to review their appraisals and identify any errors or deficiencies 

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HB-1-3560 

that are material to value in order to facilitate Rural Development's administration of its 

affordable housing programs. If an owner/applicant requests a copy of a Multi-Family 

Housing appraisal from his/her file, this request should not be treated as a FOIA request. 

The appraisal will be released to the owner/applicant according to the following 

procedures. 

B. Steps in Release of Appraisals 

 Step 1: Write a cover letter. The letter should be addressed to the owner/ 

applicant that requested a copy of the appraisal. Attachment 7-J, Cover Letter 

for Released Appraisal, can be used as a template. The cover letter should 

identify the appraisal, provide contact information for the State Appraiser who 

reviewed the appraisal, and inform the owner/applicant that they may contact the 

reviewer to discuss the appraisal. 

 Step 2: Redact the Appraisal. The Rural Development Office must determine if 

the appraisal report contains operating expense information of subsidized 

apartments, other than the subject property, that are administered by Rural 

Development that was provided to the appraiser by the Agency. If so, the names 

and addresses of the expense comparables must be blackened out before the 

appraisal is released. Qualified personnel, like the State Appraiser, must ensure 

that the names and addresses of the expense comparables are deleted while those 

of the rent comparables and sales comparables are preserved in the report. This 

expense data is proprietary information that belongs to the owners of apartments 

that possibly compete with the subject property. 

 Step 3: Mail, or allow access to, the appraisal. After the names and addresses of 

any expense comparables provided to the appraiser by the Agency have been 

removed from the appraisal report, the owner/applicant may either review a copy 

of the redacted appraisal report at the Agency Office, or a copy of the redacted 

report can be bound and mailed, along with the cover letter, to the owner/ 

applicant. 

When contracting with fee appraisers, the SOW should instruct the appraiser to identify 

Rural Development as the client of the appraiser and identify both Rural Development and the 

owner/applicant as “intended users” of the appraisal in the appraisal report. Identification of 

“intended users” in appraisals is a requirement of USPAP Standard 2 and will ensure that the 

appraiser does not object to the Agency releasing the appraisal to the owner/applicant. 

The Rural Development State Appraiser will make the final disposition of the appraisal. 

Although the disposition concluded in the appraisal review report may be provided to the 

owner/applicant, the review report itself is confidential, intended only for the internal use of the 

Agency, and will not be released. 

When the purpose of the appraisal review includes the reviewer developing and reporting 

an independent opinion of value about the subject property of the work under review, that 

opinion is an appraisal. The appraisal review report then also becomes an appraisal report. 

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 Appraisals will be released to owners/applicants, from their own files, upon their 

request, but appraisal review reports, including those that contain appraisals, will not be released. 

The FOIA Officer in the State Office should deny access if a written FOIA request for an 

appraisal review report is received. Exemption 5 under the FOIA, 5 U.S.C. 552(b)(5), 

deliberative process privilege, should be cited. 

7.15 EVALUATING THE RESULTS OF THE APPRAISAL 

The appraisal is a critical document in the underwriting process. It gives the Loan 

Originator information about the subject property’s region, neighborhood, market, and value and 

thereby aids the underwriter in loan-making decisions. When evaluating the results of the 

appraisal, the Loan Originator will go back to the underwriting questions outlined in Chapter 5: 

 Is the project eligible? 

 Is the project economically feasible? 

 Are the costs reasonable? 

 Are the Agency’s interests secure? 

See Chapter 5, Section 2 for a full discussion of these underwriting criteria. 

A. Is the Project Eligible? 

The appraisal provides additional information about project eligibility. 

 Site suitability: The appraisal documents boundary lines and zoning and notes 

desirable and undesirable elements in the market area and on the site. These elements 

should be reviewed to confirm the project’s eligibility. 

 Rents: The Loan Originator should compare the proposed basic rents for the project 

with the market rents provided in the appraisal. Program rules specify that basic rents 

in Agency projects may not exceed the standard Conventional Rents for Comparable 

Units (CRCU) in the market area, except under limited circumstances, as described in 

Chapter 3, paragraph 3.20(B). Therefore, if the appraisal shows basic rents in the 

project to be higher than CRCU, the project proposal must provide significant 

justification for an exception, or the applicant must seek additional financing to 

reduce rent levels. 

B. Is the Project Economically Feasible? 

The appraisal also provides information about the demand for affordable units and the 

likelihood that the property will be financially successful. This information can help the 

Loan Originator to make a final determination about the project’s feasibility. The key 

items to consider include the following: 

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 Vacancy rate: The Income Approach should indicate the vacancy rate projected for 

the project, and the reasons for the given rate should be well documented. Vacancy 

rates above five percent may suggest that sufficient affordable housing is already 

available in the market and that the project may not have enough demand to be 

feasible. 

 Community growth rate: The Loan Originator should consider whether the local 

population is growing or declining. A declining population may mean that new 

housing is not needed in the area. 

 Industry: Do local industries provide sufficient stable employment to support this 

community into the future? Again, if the local economy is in decline, the area may 

experience a drop in the need for new housing. 

 Market rents: Rent levels are also an indication of the need for new units. If basic 

rents projected for the project exceed market rents, this is an indication that the 

project is competing with conventional housing and that there is sufficient affordable 

housing in the market. 

 Capitalization rate: The capitalization rate reflects the ratio of the projected net 

operating income to the concluded value of the project. The overall rate is a measure 

of the return anticipated by an investor in the market. Generally, the greater the risk 

an investor is willing to take, the higher the expected rate of return. Therefore, the 

Loan Originator should look at the capitalization rate as a measure of anticipated risk 

in the project. According to real estate industry standards, a capitalization rate of 10 

percent or more suggests that investors consider the investment relatively risky. It 

may also indicate that there is adequate housing available at affordable rents and that 

there is insufficient demand for the project. 

C. Are the Costs Reasonable? 

The information in the Cost Approach of the appraisal can help confirm whether 

project costs are reasonable. 

 Highest and best use: The appraisal should confirm that the highest and best use for 

the property is subsidized housing. If not, this may increase the development costs 

for the project. 

 Operations and maintenance costs: The Loan Originator should examine the 

projected operating and maintenance (O&M) expenses in the Income Approach. 

They should be comparable to the O&M expenses of other subsidized projects (as 

verified by expense comparables and expense surveys from recognized sources such 

as the Institute for Real Estate Management (IREM)). For conventional properties, 

O&M expenses greater than 60 percent of effective gross income may indicate that 

the property has not been properly maintained or is not managed efficiently. 

However, for subsidized properties, a high Operating Expense Ratio (OER) may 

simply reflect relatively low income due to the property’s restricted rents. 

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D. Are the Agency’s Interests Secure? 

The appraisal is ultimately an opinion of value that aids the Loan Originator in 

determining whether the Agency’s interests are secure. In considering the project’s 

value, the Loan Originator should look at the following criteria: 

 Appraised Value: In examining the appraised value, the Loan Originator should 

compare the appraised value to the total development costs proposed by the applicant. 

In general, the appraised value should equal or exceed the estimated development 

costs to ensure that the loan is secured by the value of the property. However, in 

cases with capital subsidies (e.g., tax credits), total development costs usually exceed 

the appraised value of the real estate. 

 Value of the Land: The Loan Originator should compare the appraised value of the 

land to the land value stated in the application. If they are different, the estimated 

total development costs may not be supported by the appraised value. 

 Insurable Value: The Loan Originator must determine the appropriate amount of 

insurance for the property. The insurance is based on the insurable value of the 

property, which is the replacement cost new of the improvements plus an allowance 

for demolition. It should include direct (hard) costs, which are construction labor and 

materials and the contractor's profit, overhead, and general requirements. It should 

not include indirect (soft) costs, which are all other costs in the project, such as 

administrative costs, professional fees, and financing costs. The appraiser can 

calculate the insurable value of the property using Attachment 7-I, Insurable Value 

Calculation. (See Chapter 3 for a full description of the types of insurance required.) 

 Economic Life of the Improvements: The economic life of the improvements must 

be sufficient to cover the term of the loan. For new construction, the economic life of 

the property is considered to be 50 years (for average to good quality construction), 

and the loan is amortized over that period. However, for existing structures, the 

appraiser estimates the remaining economic life of the property, not to exceed 50 

years. The remaining economic life of the improvements must equal or exceed the 

term and amortization period of the Agency loan. If it does not, the term and 

amortization period of the loan must be adjusted to equal the remaining economic life 

of the improvements. 

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HB-1-3560 

Attachment 7-A 

Page 1 of 8 

ATTACHMENT 7-A 

VALUE TYPES USED IN MULTI-FAMILY APPRAISALS 

A discussion of the various types of value used in Rural Housing Service (RHS) appraisals 

follows. A definition of each value type and the source for each definition is provided. These 

value types and definitions are acceptable for use by State Contracting Officers in writing a 

Statement of Work (SOW) and a Request for Quote (RFQ) when contracting for an appraisal and 

by appraisers in writing a Multi-Family Housing appraisal for RHS. General procedures for 

developing and reporting some of these value types are included. 

Market Value 

The 4th Edition of The Dictionary of Real Estate Appraisal includes several definitions for 

market value. The following definition from the dictionary is used by the federal agencies that 

regulate insured financial institutions in the United States. 

“Market value: the most probable price which a property should bring in a competitive and 

open market under all conditions requisite to a fair sale, the buyer and seller each acting 

prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit 

in this definition is the consummation of a sale as of a specified date and the passing of title from 

seller to buyer under conditions whereby: 

 Buyer and seller are typically motivated;

 Both parties are well informed or well advised, and acting in what they consider their best 

interests;

 A reasonable time is allowed for exposure in the open market;

 Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements 

comparable thereto; and

 The price represents the normal consideration for the property sold unaffected by special or 

creative financing or sales concessions granted by anyone associated with the sale.” 

Most appraisers and users of Agency Multi-Family Housing appraisals understand the definition 

of market value to mean the value as a conventional or unrestricted or market property. 

However, to avoid confusion when requesting or reporting this value type, the term “as 

conventional or unrestricted” should be added to the term market value (i.e. “market value, as 

conventional or unrestricted”). 

In an appraisal report, a hypothetical condition on which the market value is based should be 

clearly and conspicuously stated. The market value of a Section 514/515 housing project is 

always based on a hypothetical condition, which is defined by the 4th Edition of The Dictionary 

of Real Estate Appraisal as, “that which is contrary to what exists but is supposed for the purpose 

of analysis.” An existing 514/515 apartment complex that is the subject of an appraisal ordered 

by the Agency is subsidized (restricted) at the time of the appraisal. A market value concluded 

for the property would be based on the hypothetical condition that the property is a conventional 

(market) property, which it is not. Uniform Standards of Professional Appraisal Practice

(02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-A 

Page 2 of 8 

(USPAP) Standards Rules 1-2(h) and 2-2(a)(viii), (b)(viii), and (c)(viii) require the appraiser to 

identify and state any hypothetical conditions necessary in the assignment. 

Market value should be requested by the Contracting Officer and reported by the appraiser when 

the intended use of the appraisal is to aid in determining: 

 the appropriate amount of an equity loan as a prepayment incentive; 

 the amount of an equity loan in a preservation transfer; 

 a reasonable sale price, or the basis for a liquidation value, for a property in foreclosure; or 

 a reasonable sale price for a non-program property. 

Market Value, subject to restricted rents 

A definition of market value, subject to restricted rents, as the term is used by RHS, derived 

from the definition of market value above, is stated as follows. Market value, subject to 

restricted rents: the most probable price which a property should bring in a competitive and 

open market under all conditions requisite to a fair sale, the buyer and seller each acting 

prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit 

in this definition is the consummation of a sale as of a specified date and the passing of title from 

seller to buyer under conditions whereby: 

 Buyer and seller are typically motivated;

 Both parties are well informed or well advised, and acting in what they consider their best 

interests;

 A reasonable time is allowed for exposure in the open market;

 Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements 

comparable thereto; and

 The price represents the normal consideration for the property sold unaffected by special or 

creative financing or sales concessions granted by anyone associated with the sale. 

It considers any rent limits, rent subsidies, expense abatements, or restrictive-use conditions 

imposed by any government or non-government financing sources but does not consider any 

favorable financing involved in the development of the property. 

Market value, subject to restricted rents, refers only to the value of the subject real estate, as 

restricted, and excludes the value of any favorable financing. The market value, subject to 

restricted rents, is based on a pro forma that projects income, vacancy, operating expenses, and 

reserves for the property under a restricted (subsidized) scenario. This restricted pro forma 

includes the scheduled restricted rents, a vacancy and collection loss factor that reflects any 

rental assistance (RA) or Section 8, and operating expenses and reserves projected for the subject 

as a subsidized property. Subsidized apartments typically experience higher management, 

auditing, and bookkeeping expenses, relative to similar conventional apartments, but often have 

lower real estate tax expenses. 

Rural Development will provide a 3-year operating history of the subject property and the most 

recent operating statements for a set of expense comparables, if available, to the appraiser. 
HB-1-3560 

Attachment 7-A 

Page 3 of 8 

Expense comparables data is proprietary information. Therefore, if a copy of the appraisal is 

requested by an owner/applicant, the names and locations of the expense comparables must be 

redacted from the appraisal by the Agency before the copy is released. Much of this information 

is available on the Multi-Family Information System (MFIS). For the appraisal of a Section 

8/515 project, Rural Development should provide the appraiser with a copy of the Housing 

Assistance Payment (HAP) contract and a contact at the agency that administers the HAP 

contract for the U.S. Department of Housing and Urban Development (HUD). The appraiser 

must consider the restrictions imposed on the subject property by both the U.S. Department of 

Agriculture (USDA) and HUD in concluding the market value, subject to restricted rents. 

In the appraisal, the Income Approach for the market value, subject to restricted rents, is the best 

indication of value and should be most heavily weighted. Direct capitalization should typically 

be used when the subject's operation will be stable and restrictions will be in place long-term. A 

discounted cash flow (DCF) analysis should be used when significant net income changes are 

projected for the subject property over a foreseeable period. A DCF is the most appropriate 

method for valuing phased developments, projects that have several sources of income, and 

properties with short-term restrictions that will be converted to market apartments. 

Using direct capitalization, the Net Operating Income (NOI) from the restricted pro forma can be 

capitalized using a capitalization rate derived from sales of conventional apartments that have 

physical and locational characteristics similar to those of the subject. A base capitalization rate 

is derived from these sales and then adjusted qualitatively for factors related to specific benefits 

and restrictions of the subject property. Use of an overall rate from the conventional market, 

which reflects conventional financing, is appropriate because all favorable financing will be 

valued separately from the market value, subject to restricted rents, of the real estate. This 

procedure, a departure from the method used by the Agency for many years, is standard appraisal 

practice. National appraisal firms and their clients use this as a primary method in the valuation 

of subsidized housing. A capitalization rate derived via this method should be supported using 

other accepted methods, including the band-of-investment technique, the debt coverage ratio 

formula, and regional investment criteria surveys. 

A method that includes the use of note rate rent as Potential Gross Income (PGI) in the Income 

Approach pro forma to derive a value equal to the sum of the market value, subject to restricted 

rents, plus the value of the interest credit subsidy is not acceptable appraisal practice. Appraisers 

must not use this procedure in Agency Multi-Family Housing appraisals, and State Appraisers 

must not accept this procedure when reviewing appraisals. 

In an appraisal concluding market value, subject to restricted rents, the Income Approach is the 

most important section of the appraisal and must be complete. Appraisers must provide good 

support for the income, vacancy, expense, and capitalization rate analyses within the approach. 

The expense analysis must be well supported by the 3-year operating history of the subject and 

by expense comparables. A current expense survey from RHS or a State or local housing 

authority should be used to provide additional support. The capitalization rate selected for the 

subject must be derived from the most recent sales of similar properties in the local (or nearest 

similar) conventional apartment market. Support for this overall rate should be provided using 

 (02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-A 

Page 4 of 8 

the methods discussed above. Rural Development appraisers performing technical reviews must 

not accept appraisals unless/until all Income Approach analyses are adequately supported. 

The Cost Approach can be used to support the market value, subject to restricted rents,

indication from the Income Approach, especially for new construction. The usefulness of the 

market value, subject to restricted rents, indication via the Cost Approach for existing properties 

more than twenty years old (typical of the RHS portfolio) is questionable due to the difficulty in 

estimating the three types of depreciation. However, when ordering appraisals, the SOW should 

require the Cost Approach for determination of market value, subject to restricted rents. 

Important information, including site value, construction costs, remaining economic life, and 

external obsolescence, can be extracted from this approach. Deduction for external 

obsolescence, which is basically calculated by capitalization of the difference between economic 

NOI and restricted NOI, results in a market value, subject to restricted rents, indication in the 

Cost Approach. 

The Sales Comparison Approach is rarely applicable in concluding a market value, subject to 

restricted rents, due to the lack of sales of subsidized apartments in small rural markets and the 

difficulty of making meaningful adjustments for financing terms to the sales comparables. When 

ordering appraisals, the SOW should not require the Sales Comparison Approach for 

determination of the market value, subject to restricted rents. 

The market value, subject to restricted rents, must include the value of any rental assistance 

(RA) available. When the subject property has RA, the appraisal must include a discussion of 

the Section 521 Rental Assistance Program, the number of RA units at the subject, and how RA 

affects the market value, subject to restricted rents, of the property. Rental assistance is a rent 

subsidy provided to owners of 514/515 projects. The renter of an RA unit is required to pay a 

tenant contribution toward the approved shelter cost (rent plus tenant based utilities) of the unit 

that is equal to no more than 30 percent of his/her income. RA is the portion of the approved 

shelter cost paid by the Agency to compensate a borrower for the difference between the 

approved shelter cost and the tenant contribution. RA usually adds value to a 514/515 project in 

three ways: 1) it guarantees that the scheduled base rate rent for all occupied RA units will be 

attained; 2) it usually increases demand for the subject's units and consequently decreases the 

vacancy rate; and 3) it reduces the risk of investment in the subject project by improving the 

durability of the income stream. Rental assistance need not be separately valued; the value of 

RA can be incorporated within the market value, subject to restricted rents. This can be 

accomplished within the Income Approach by taking into account the three ways that RA 

increases value, listed above, as follows. 1) Base rate rents should be included as Potential Gross 

Income (PGI) in the restricted pro forma; 2) a vacancy and collection loss factor that reflects the 

amount of RA at the property should be included; and 3) a capitalization rate for the subject may 

be adjusted downward to account for the reduced risk to the investor due to RA. 

When determination of market value, subject to restricted rents, is part of an appraisal 

assignment, all favorable financing in place at the time of the appraisal must also be valued, but 

separately from the real property. Multi-layered financing, involving multiple financing sources, 

has become the norm in the building and rehabilitation of affordable housing. Favorable 
HB-1-3560 

Attachment 7-A 

Page 5 of 8 

financing is offered to developers of subsidized housing to offset external obsolescence that 

results from a weak apartment market and restrictions placed on the properties by the financing 

sources. Favorable financing is valuable to the developer/owner, and an appraiser can calculate 

the value of each type of favorable financing. Several types of favorable financing can be used 

to develop 514/515 projects, including 514/515 direct loans with interest rates as low as 1 

percent, low-interest loans from non-Agency sources, tax credits, tax-exempt bond financing, 

and grants. When favorable financing is involved, the appraisal report should contain a narrative 

identifying each source of financing. The amount and terms of each type of favorable financing 

should be described, and each type of favorable financing should be valued separately from the 

market value, subject to restricted rents, of the property. The appraisal SOW should specifically 

request each value type required, including the value(s) of each type of favorable financing. 

Valuation of “interest credit subsidy” from Section 514/515 loans should be consistent with 

Attachment 7-H. The methodology presented in Attachment 7-H can also be used to calculate 

the value of low-interest loans from non-Agency financing sources. 

It is emphasized that the market value, subject to restricted rents, includes the value of any rental 

assistance at the subject property but does not include the value of any favorable financing, 

including Agency financing. The value(s) of any favorable financing must be reported 

separately. The security value of the property, which may be calculated by an Agency Loan 

Originator in making a loan decision, is typically derived from the sum of the market value, 

subject to restricted rents, plus the total value of the applicable favorable loans. However, an 

appraisal report should conclude with the value(s) of the real estate and separate value(s) for any 

intangible items, including favorable financing. These values should not be added together by 

the appraiser because their sum does not represent the market value of the real estate in appraisal 

terms. Separate reporting of value(s) of favorable financing, including the value of tax credits 

and grants, which cannot be considered collateral for a loan is advised by USPAP (Advisory 

Opinion 14) and provides useful information about the security of the project to the Loan 

Originator. 

“As-Is” Value 

The 4th Edition of the Dictionary of Real Estate Appraisal defines value as is as follows. “Value 

as is: the value of specific ownership rights to an identified parcel of real estate as of the 

effective date of the appraisal; relates to what physically exists and is legally permissible and 

excludes all assumptions concerning hypothetical market conditions or possible rezoning.” 

The term “As-Is” applies not only to the physical condition of the subject property at the time of 

the appraisal but to the legal status of the property. Therefore, the term “As-Is” should not be 

used with the term market value unless the property is a conventional or market property at the 

time of the appraisal. The term “As-Is” should precede the term market value, subject to 

restricted rents, when the market value, subject to restricted rents, of the project at the time of 

the appraisal is required. 

 (02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-A 

Page 6 of 8 

Prospective Value 

The term prospective value is defined by the 4th Edition of The Dictionary of Real Estate 

Appraisal as follows. “Prospective value: a forecast of the value expected at a specified future 

date. A prospective value opinion is most frequently sought in connection with real estate 

projects that are proposed, under construction, or under conversion to a new use, or those that 

have not achieved sellout or a stabilized level of long-term occupancy at the time the appraisal 

report is written.” 

As used in Agency regulations and instructions, the term “as-improved value” refers to the value 

of real property after completion of proposed improvements. The Agency’s intended meaning of 

“as-improved value” is the same as the definition of prospective value. However, use of the term 

“as-improved value” can cause confusion for two reasons, as follows. 1) The term “asimproved”, as used in a Highest and Best Use analysis, refers to the subject real estate as it has 

already been improved at the time of the appraisal, not as it is proposed to be improved. 

Therefore, “as-improved value” could be interpreted to refer to the value of the subject property 

as it has already been improved at the time of the appraisal. 2) There is a common 

misconception with the use of the term “as-improved value” that this is a value based on a 

hypothetical condition; that is, the value of the property as if it were improved, as proposed, as of 

the date of inspection. Since this scenario is impossible, an “as-improved value”, as of appraisal 

date (inspection date), is not useful. The term prospective value is better understood than the 

terms “as-improved value” and “as-complete value” by appraisers and users of appraisals and 

has replaced these terms in appraisal literature and common usage. Therefore, the term 

prospective value should be used when requesting or reporting a forecasted value, and the 

associated date of value should be the projected date of completion of construction. 

Value-in-Use 

The 4th Edition of The Dictionary of Real Estate Appraisal defines use value (value-in-use) as 

follows. “Use value: the value a specific property has for a specific use; may be the highest and 

best use of the property or some other use specified as a condition of the appraisal.”

Value-in-use is the type of value that should be requested in the appraisal SOW and reported in 

the appraisal of an on-farm labor housing project. The Cost Approach is the only applicable 

approach in an appraisal of on-farm labor housing. This type of property does not produce rental 

income, and sales of these projects are virtually non-existent. Consequently, the Cost Approach 

is the only approach to value that should be required in the appraisal SOW and included in the 

report by the appraiser. 

USPAP requires a Highest and Best Use (HBU) analysis in all real property appraisals when the 

value type to be developed and reported is market value. When value-in-use (not market value) 

is to be concluded, USPAP does not require a HBU analysis and neither does the Agency. The 

Agency identifies the use or intended use of the subject property as farm labor housing to the 

appraiser. Therefore, the appraisal SOW for a value-in-use appraisal should instruct the 

appraiser to value the property as farm labor housing and not require a HBU analysis as part of 

the scope of work. The appraiser should explain in the report why a HBU analysis was omitted 

(02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-A 

Page 7 of 8 

and include a limiting condition in the report that states the value-in-use is based on the specified 

use of the subject property as farm labor housing. 

Liquidation Value 

Liquidation value is defined by the 4th Edition of The Dictionary of Real Estate Appraisal as 

follows. “Liquidation value: the most probable price that a specified interest in real property is 

likely to bring under all of the following conditions: 

1. Consummation of a sale will occur within a severely limited future marketing period 

specified by the client. 

2. The actual market conditions currently prevailing are those to which the appraised property 

interest is subject. 

3. The buyer is acting prudently and knowledgeably. 

4. The seller is under extreme compulsion to sell. 

5. The buyer is typically motivated. 

6. The buyer is acting in what he or she considers his or her best interest. 

7. A limited marketing effort and time will be allowed for the completion of a sale. 

8. Payment will be made in cash in U.S. dollars or in terms of financial arrangements 

comparable thereto. 

9. The price represents the normal consideration for the property sold, unaffected by special or 

creative financing or sales concessions granted by anyone associated with the sale.” 

Liquidation value should be requested in the appraisal SOW and reported in the appraisal when it 

is in the best interests of the Agency: 1) not to take a non-program property into inventory but to 

sell it at a foreclosure sale; or 2) to dispose of a non-program inventory property when a very 

limited marketing period is available. Liquidation value should be derived from market value by 

applying a discount extracted from the market, when possible. Therefore, market value should 

always be requested in the appraisal SOW whenever a liquidation value is sought. 

Insurable Value 

A definition of insurable value acceptable for use in Agency Multi-Family Housing appraisals is 

as follows: Insurable value: the value of the destructible portions of a property which 

determines the amount of insurance that may, or should, be carried to indemnify the insured in 

the event of loss. The estimate is based on replacement cost new of the physical improvements 

that are subject to loss from hazards, plus allowances for debris removal or demolition. It 

should reflect only direct (hard) construction costs, such as construction labor and materials, 

repair design, engineering, permit fees, and contractor's profit, contingency, and overhead. It 

should not include indirect (soft) costs, such as administrative costs, professional fees, and 

financing costs. 

The term “insurable cost” is sometimes used instead of the term insurable value because it is 

based strictly on a cost estimate, not a value concluded in an appraisal. However, the term 

insurable value is more commonly used. Attachment 7-I, Insurable Value Calculation, is a 

 (02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-A 

Page 8 of 8 

worksheet that should be used as a guide by State Appraisers and fee appraisers contracted by the 

Agency in calculating insurable value. 
HB-1-3560 

Attachment 7-B 

Page 1 of 1 

ATTACHMENT 7-B 

PROPERTY RIGHTS VALUED 

In identifying the subject property, the appraiser must state and should define the particular 

rights or interests being valued. A thorough discussion is warranted in appraisals of fee simple 

estates subject to restrictive-use agreements and short-term leases. Uniform Standards of 

Professional Appraisal Practice (USPAP) Standards Rule 1-2(e)(ii) requires the appraiser to 

identify the real property interest to be valued. 

 The property interest to be valued in the appraisal of a Section 514/515 project, when the value 

type to be concluded is market value, is the fee simple estate. This property interest is subject to 

short-term leases and should therefore be referred to as the fee simple estate, subject to shortterm leases.

A Section 514/515 affordable housing project is usually subject to a restrictive-use agreement 

imposed by the U.S. Department of Agriculture (USDA) Rural Development that places 

restrictions on the property for a specified period of time. These restrictions pertain to use, 

transfer, and operation of the property. They include rent limits and restrictions on tenant 

eligibility based on income. Additionally, when tax credit financing is involved, these properties 

have deed restrictions imposed by the Low-Income Housing Tax Credit (LIHTC) program. 

These restrictions are a type of encumbrance. The 4th Edition of the Dictionary of Real Estate 

Appraisal defines encumbrance as ‘an interest or right in real property that may decrease or 

increase the value of the fee estate but does not prevent its conveyance by the owner. An 

encumbrance effects a permanent reduction in an owner's property rights, while a lien represents 

a claim against the owner's property rights, which may or may not become permanent. 

Mortgages, taxes, and judgments are liens; restrictions, easements, and reservations are 

encumbrances.” 

The property interest to be valued in the appraisal of a Section 514/515 project, when the value 

type to be concluded is market value, subject to restricted rents, is neither the fee simple estate, 

nor the leased fee estate, nor the leasehold estate. The 4th Edition of the Dictionary of Real 

Estate Appraisal defines fee simple estate as “absolute ownership unencumbered by any other 

interest or estate, subject only to the limitations imposed by the governmental powers of taxation, 

eminent domain, police power, and escheat.” Since Section 514/515 properties are encumbered 

with restrictive-use agreements, and sometimes LIHTC deed restrictions as well, the property 

interest to be valued is not the fee simple estate. However, the property interest to be valued 

could reasonably be referred to as the fee simple estate, as restricted, subject to short-term 

leases. To comply with USPAP, the appraiser should identify this as the property interest to be 

valued and provide a description of these property rights and the restrictions involved. 

(02-24-05) SPECIAL PN 
HB-1-3560 

This page intentionally left blank 

(02-24-06) SPECIAL PN 
ATTACHMENT 7-C 

SPECIFIC VALUE TYPES TO BE REQUESTED AND REPORTED BASED ON THE 

INTENDED USE OF THE APPRAISAL 

Value types that should be requested in an appraisal Statement of Work (SOW) and reported in 

an Agency Multi-Family Housing appraisal are specific to the loan-making, loan-servicing, 

preservation, or disposition decision(s) for which the appraisal is ordered. In other words, the 

intended use of the appraisal determines the value type(s) to be requested and reported. 

Depending on the decision(s) to be made, several value types may be required in one appraisal, 

including the separate values of different types of favorable financing. Specific value types that 

should typically be requested for each intended use, as they might be stated in the appraisal, are 

listed under each category. Some of the listed value types may not be required, depending on the 

needs of the State Office. The State Contracting Officer and Contracting Officer's 

Representative (COR) should use this guidance in determining which value types to request in 

the appraisal SOW and Request for Quote (RFQ). The State Appraiser or contract appraiser 

must follow this guidance when reporting values in the appraisal. The State Appraiser, when 

reviewing a contracted appraisal, should require the report to be consistent with this guidance. 

The value types listed under each intended use described below are required by Rural 

Development in appraisals used by the Agency. It is the contract appraiser’s responsibility to 

ensure compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and 

when Rural Development is partnering with other lender(s), the lender(s) must ensure 

compliance with all applicable appraisal guidelines and requirements for each funding source. 

This is a requirement of the Competency Rule and the Scope of Work Rule in USPAP. If Rural 

Development is provided written authorization from the borrower, and is included as a co-client 

and intended user of the report, information can be provided from Agency records to assist the 

appraiser in providing a credible analysis. It is expected that the applicant/borrower has properly 

notified Rural Development of their intent as required by 7 CFR Part 3560. Ultimately, the 

applicant/borrower has control over the anticipated funding sources and should be able to assist 

the contract appraiser with the appraisal requirements according to the anticipated funding 

sources. 

This guidance does not require an appraisal when it is not otherwise needed and does not restrict 

Rural Development from requesting additional values if a need for analysis, or for any other 

purpose, is determined or requested. 

On the following pages the user of this guidance will find; 

 General Guidance for Rural Development Appraisals. 

 Quick Reference of Values to Request. 

 Specific appraisal guidance for each value as shown in the Quick Reference of Values to 

Request which can be used in the SOW. 

HB-1-3560 

Attachment 7-C 

Page 1 of 10 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 

Revised (12-16-11) PN 454 
GENERAL GUIDANCE FOR RURAL DEVELOPMENT APPRAISALS

 Rural Development typically uses only Three (3) Value Types: 

1. Market Value (7 CFR Part 3560.752(b)(1)(ii). 

2. Market Value, subject to restricted rents (7 CFR Part 3560.752(b)(1)(i), (The 

appraiser must consider all restrictions and report the value of intangible assets 

individually and separately from the real estate) 

3. Liquidation Value (has a shortened marketing period defined by the client, i.e. 

30 days, 3 months, etc.).

*The value types listed above are based on a current time frame. Rural 

Development also uses a “Prospective Value”, which uses the same definition 

as the valuations stated above, but based on a specified future date such as 

“Prospective Market Value” and “Prospective Market Value, Subject To 

Restricted Rents”. Prospective Values are typically used when construction 

or improvements to the property need to be considered in the value. 

 The user of this guidance should be familiar with 7 CFR Part 3560 along with all 

applicable Handbooks. The information contained within is used to help apply the CFR, 

not replace it. They also need to know the purpose of the appraisal (new loan, determine 

equity, etc.). The appraiser should only use the value terminology as stated in 7 CFR Part 

3560 (and emphasized in this guidance), other values would not be consistent in applying 

the regulations and may result in an inappropriate value. 

 In a ‘Market Value’ appraisal, unless specifically requested to use a hypothetical 

condition to provide a credible appraisal for the intended use, the appraiser needs to 

analyze the Highest and Best Use of the property using four criteria; physically possible, 

legally permissible, financially feasible and maximally productive. The appraiser must 

consider all legal restrictions or prohibitions including, but not limited to; restricted use 

provisions, program restrictions, zoning and local ordinances. 

 Using the hypothetical condition “as unsubsidized conventional housing” according to 

7 CFR Part 3560.656(c)(1)(i) means when the appraiser develops their Highest and Best 

Use analysis they will not recognize any Rural Development restrictions or subsidies and 

must only consider the property as continued use as housing (apartments, condos, elderly, 

labor housing, etc.). They must still consider all other legal restrictions or benefits that 

apply to the property. If the appraiser determines that subsidies from other sources 

provide the highest and best use of the property this hypothetical condition according to 

7 CFR Part 3560.656(c)(1)(i) does not restrict that use. 

 When the value is “Subject To Restricted Rents” the appraiser must consider all 

restrictions and report the value of intangible assets (financing, tax credits, grants, etc.) 

individually and separately from the real estate in accordance with 7 CFR Part 3560.752 

(b)(1)(i). Since intangible assets are nonphysical assets and not real estate the appraiser 

HB-1-3560 

Attachment 7-C 

Page 2 of 10 

_____________________________________________________________________________________________________ 
should never add the value of the intangible assets to the value of the real estate. Any 

investment values that add intangible assets or cash to the real estate value will not be 

accepted. The Security value should only be calculated by the Agency underwriter, not 

the appraiser. 

 An extraordinary assumption should only be used to determine value when requesting a 

Prospective Value, since this is a forecast of future value. A hypothetical condition 

should only be used to determine value when the property qualifies for an Incentives 

Offers according to 7 CFR Part 3560.656. An extraordinary assumption or hypothetical 

condition may also be used to analyze the affects that any required changes have on a 

property. 

 All hypothetical conditions and extraordinary assumptions must be labeled as such and 

must be clear and conspicuous to the reader of the report. 

 Every appraisal should be done on the subject in its ‘Current Physical Condition’ except 

‘Prospective’ values which usually includes construction and should be based on the 

estimated date that construction would be completed and occupancy stabilized. 

 Intangible assets are nonphysical assets, as distinguished from physical assets such as 

facilities and equipment. They include rights over real property, but not rights of use and 

possession. In subsidized housing they include, but are not limited to, interest credit 

subsidies, and low-interest loans from other sources, tax-exempt bond financing, tax 

credits, and grants. 

 Security value means the value of an asset deposited or pledged as a guarantee of the 

payment or fulfillment of an obligation or debt. Security value as utilized by the Agency 

is an underwriter’s tool to assist them in the collateral requirements of a loan. The real 

estate value, personal property value and the intangible assets value should always be 

reported individually and separately in an appraisal report. The Security value does not 

always include every intangible asset. The Agency underwriter must determine which 

intangible assets are considered in the Security value. 

 This guidance should not restrict Rural Development from requesting additional values if 

a need for additional analysis or for any other purpose is determined or requested. 

 In many cases, for transfers, prepayments, rehab, etc., in utilizing QUICK REFERENCE 

OF VALUES TO REQUEST you should ask a few questions; 

(1) Does the property qualify for an Incentives Offer within 7 CFR Part 3560.656? 

Request value of property under # 3 or #4 based on the answer. 

(2) Is there an existing loan? Do we need to know the current security position of the 

property? Request the value under #2. 

(3) Is Rural Development or others providing any new funds or subsequent loans that 

may affect the value of the security? Request the values under #1. 

Other questions may apply depending on the specific intended use. 

HB-1-3560 

Attachment 7-C 

Page 3 of 10 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 

Revised (12-16-11) PN 454 
QUICK REFERENCE OF VALUES TO REQUEST 

1: NEW FUNDS OR SUBSEQUENT LOANS (By Rural Development or others) 

 New construction 

 Rehab/repair construction 

REQUEST: 

“Prospective Market Value, Subject To Restricted Rents within 7 CFR Part 3560.752(b)(1)(i)”. (The appraiser 

must consider all restrictions and report the value of intangible assets individually and separately from the real estate.) 

“Prospective Market Value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon A Hypothetical Condition AsIf Conventional Housing”. (Optional value used to analyze the affects of restrictions). 

2: EXISTING LOAN 

 Transfer 

 Loan assumption 

 Loan write-down 

 Subordination 

REQUEST: 

“Market Value, Subject To Restricted Rents within 7 CFR Part 3560.752(b)(1)(i)”. (The appraiser must consider 

all restrictions and report the value of intangible assets individually and separately from the real estate). 

3: VALUE OF PROPERTY (Does NOT qualify for Prepayment Incentives Offers within 7 CFR Part 3560.656 Incentives 

Offers). 

 Validation of sale/marketing price 

 Equity determination 

 Acquisition of property into program 

REQUEST: 

“Market Value, within 7 CFR Part 3560.752(b)(1)(ii)”. (All restrictions and prohibitions currently existing must be 

considered, including Restrictive Use Provisions). 

4: VALUE OF PROPERTY (Qualifies for Prepayment Incentives Offers within 7 CFR Part 3560.656 Incentives Offers). 

 Validation of sale/marketing price 

 Equity determination 

REQUEST: 

“Market value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon A Hypothetical Condition As-If 

Unsubsidized Conventional Housing in compliance with 7 CFR Part 3560.656(c)(1)(i)”. (In order to use this value 

the property must qualify for a prepayment incentives offer within the Code of Federal Regulations). 

5: VALUE FOR SALE - ELIGIBLE AS PROGRAM PROPERTY 

 Maintain in program, REO’s, foreclosure, etc. 

REQUEST: 

“Market Value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon A Hypothetical Condition As-If Conventional 

Housing”. 

“Market Value, Subject To Restricted Rents within 7 CFR Part 3560.752(b)(1)(i)”. (The appraiser must consider all 

restrictions and report the value of intangible assets individually and separately from the real estate). 

6: VALUE FOR SALE - NON PROGRAM PROPERTY 

 Properties leaving program, REO’s, etc.

REQUEST: 

“Market Value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon A Hypothetical Condition As-If a 

Conventional Market Property”. 

“Liquidation Value Premised Upon a Marketing Period of (enter days) Days”. (Optional value, market period 

prescribed by USDA.) 

HB-1-3560 

Attachment 7-C 

Page 4 of 10 

_____________________________________________________________________________________________________ 
 1: NEW FUNDS OR SUBSEQUENT LOANS (By Rural Development or others) 

 VALUE REQUIRED FOR: 

 New construction 

 Rehab/repair construction 

APPRAISED VALUE TO REQUEST: 

 Prospective Market Value, Subject To Restricted Rents within 7 CFR Part 

3560.752(b)(1)(i). (Must consider any rent limits, rent subsidies, expense 

abatements, and restrictive-use conditions that will affect the property. All 

intangible assets must be evaluated individually and separately from real estate.)

AND POSSIBLY: 

 Prospective Market Value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon 

A Hypothetical Condition As-If Conventional Housing. (Value estimate will be 

based upon a highest and best use analysis as-if not encumbered by USDA 

program provisions.) 

SPECIAL NOTES AND INTENDED USE: 

 All value conclusions cited in the appraisal must report and label the specific 

value as cited above in “Appraised Value To Request.” 

 The intended use of the appraised value “Prospective Market Value, subject to 

restricted rents within 7 CFR Part 3560.752(b)(1)(i)” for a new or subsequent 

loan is to assist the underwriter with calculating the security value for the basis of 

a loan or loan guarantee. 

 The intended use of the appraised value “Prospective Market Value within 7 CFR 

Part 3560.752(b)(1)(ii), Premised Upon A Hypothetical Condition As-If 

Conventional Housing” for a new or subsequent loan is for reasonable analysis 

and comparison as to how the USDA restrictions affect the property. It should not 

be used as the basis of a loan or loan guarantee. 

 “Prospective value” estimates are premised on an extraordinary assumption which 

presumes as fact uncertain information. An appraiser should only use an 

extraordinary assumption when it is reasonable to believe that the unknown 

condition is true. A prospective value for new or rehab construction should be 

based on an estimated date that construction would be completed and occupancy 

stabilized. 

 When the value is “Subject To Restricted Rents” the appraiser must consider the 

impact of USDA program participation and report the value of intangible assets 

(financing, tax credits, grants, etc.) individually and separately from the real 

estate. Since intangible assets are nonphysical assets and not real estate the 

appraiser should never add the value of the intangible assets to the value of the 

real estate. USDA will identify intangible assets to be evaluated and provide 

information relevant and necessary for the evaluation of the intangible assets. 

 All hypothetical conditions and extraordinary assumptions must be labeled as 

such and must be clear and conspicuous to the reader of the report. 

HB-1-3560 

Attachment 7-C 

Page 5 of 10 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 

Revised (12-16-11) PN 454 
 2: EXISTING LOAN 

 VALUE REQUIRED FOR: 

 Transfer 

 Loan assumption 

 Loan write-down 

 Subordination 

APPRAISED VALUE TO REQUEST: 

 Market Value, Subject To Restricted Rents within 7 CFR Part 3560.752(b)(1)(i). 

(Must consider any rent limits, rent subsidies, expense abatements, and 

restrictive-use conditions that will affect the property. All intangible assets must 

be evaluated individually and separately from real estate.)

SPECIAL NOTES AND INTENDED USE: 

 All value conclusions cited in the appraisal must report and label the specific 

value as cited above in “Appraised Value To Request.” 

 The intended use of the appraised value “Market Value, subject to restricted rents 

within 7 CFR Part 3560.752(b)(1)(i)” for an existing loan is to assist the 

underwriter with calculating the security value to determine if the existing loan is 

adequately secured. 

 When the value is “Subject To Restricted Rents” the appraiser must consider the 

impact of USDA program participation and report the value of intangible assets 

(financing, tax credits, grants, etc.) individually and separately from the real 

estate. Since intangible assets are nonphysical assets and not real estate the 

appraiser should never add the value of the intangible assets to the value of the 

real estate. USDA will identify intangible assets to be evaluated and provide 

information relevant and necessary for the evaluation of the intangible assets. 

 The use of a hypothetical (false) condition is not allowed. 

 The appraisal is to reflect the value of the property in its current physical 

condition. 

 All hypothetical conditions and extraordinary assumptions must be labeled as 

such and must be clear and conspicuous to the reader of the report. 

HB-1-3560 

Attachment 7-C 

Page 6 of 10 

_____________________________________________________________________________________________________
3: VALUE OF PROPERTY (Property does NOT qualify for Prepayment 

Incentives Offers within 7 CFR Part 3560.656 Incentives Offers). 

 VALUE REQUIRED FOR: 

 Validation of sale/marketing price 

 Equity determination 

 Acquisition of property into program 

APPRAISED VALUE TO REQUEST: 

 Market Value, within 7 CFR Part 3560.752(b)(1)(ii). (All existing restrictions 

and prohibitions must be considered including Restrictive- Use Provisions 

(RUP’s). 

SPECIAL NOTES AND INTENDED USE: 

 All value conclusions cited in the appraisal must report and label the specific 

value as cited above in “Appraised Value To Request.” 

 The intended use of the appraised value “Market Value within 7 CFR Part 

3560.752(b)(1)(ii)” is to determine the value of the property for sale/purchase and 

to determine the amount and availability of any equity. 

 Equity is determined by the appraised value of the property less all loans and liens 

against it. It is not determined by a contract price or the individual wants or needs 

of a specific buyer or seller. 

 An analysis of the highest and best use of the property using the four criteria 

including physically possible, legally permissible, financially feasible and 

maximally productive is required. 

 The use of a hypothetical (false) condition is not allowed. 

 The appraisal is to reflect the value of the property in its current physical 

condition. 

 All hypothetical conditions and extraordinary assumptions must be labeled as 

such and must be clear and conspicuous to the reader of the report. 

HB-1-3560 

Attachment 7-C 

Page 7 of 10 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 

Revised (12-16-11) PN 454 
4: VALUE OF PROPERTY (Property qualifies for Prepayment Incentives Offers 

within 7 CFR Part 3560.656 Incentives Offers. There must be no prepayment 

prohibitions and RUP’s must have expired.) 

 VALUE REQUIRED FOR: 

 Validation of sale/marketing price 

 Equity determination 

APPRAISED VALUE TO REQUEST: 

 Market Value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon A 

Hypothetical Condition As-If Unsubsidized Conventional Housing in 

compliance with 7 CFR Part 3560.656(c)(1)(i).

SPECIAL NOTES AND INTENDED USE: 

 All value conclusions cited in the appraisal must report and label the specific 

value as cited above in “Appraised Value To Request.” 

 The intended use of the appraised value “Market Value within 7 CFR Part 

3560.752(b)(1)(ii), Premised Upon A Hypothetical Condition As-If Unsubsidized 

Conventional Housing in compliance with 7 CFR Part 3560.656(c)(1)(i)” is to 

determine the value of the property that qualifies for an Incentive Offer within 7 

CFR Part 3560.656 for sale/purchase and to determine the amount and availability 

of any equity. 

 Equity is determined by the appraised value of the property less all loans and liens 

against it. It is not determined by a contract price or the individual wants or needs 

of a specific buyer or seller. 

 Using the hypothetical condition “as unsubsidized conventional housing” 

according to 7 CFR Part 3560.656(c)(1)(i) means when the appraiser develops 

their Highest and Best Use analysis they will not recognize any Rural 

Development restrictions or subsidies and must only consider the property as 

continued use as housing (apartments, condos, elderly, labor housing, etc.). They 

must still consider all other legal restrictions or benefits that apply to the property. 

If the appraiser determines that subsidies from other sources provide the highest 

and best use of the property this hypothetical condition according to 7 CFR Part 

3560.656 (c)(1)(i) does not restrict that use. 

 The appraisal is to reflect the value of the property in its current physical 

condition. 

 All hypothetical conditions and extraordinary assumptions must be labeled as 

such and must be clear and conspicuous to the reader of the report. 

HB-1-3560 

Attachment 7-C 

Page 8 of 10 

____________________________________________________________________________________________________
5: VALUE FOR SALE - ELIGIBLE AS PROGRAM PROPERTY 

 VALUE REQUIRED FOR: 

 Maintain in program, REO’s, foreclosure, etc. 

APPRAISED VALUE TO REQUEST: 

 Market Value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon A 

Hypothetical Condition As-If Conventional Housing. (Value estimate will be 

based upon a highest and best use analysis as-if not encumbered by USDA 

program provisions.) 

AND: 

 Market Value, Subject To Restricted Rents within 7 CFR Part 3560.752(b)(1)(i). 

(Must consider any rent limits, rent subsidies, expense abatements, and 

restrictive-use conditions that will affect the property. All intangible assets must 

be evaluated individually and separately from real estate.) 

SPECIAL NOTES AND INTENDED USE: 

 All value conclusions cited in the appraisal must report and label the specific 

value as cited above in “Appraised Value To Request.” 

 The intended use of the appraised value “Market Value within 7 CFR Part 

3560.752(b)(1)(ii), Premised Upon A Hypothetical Condition As-If Conventional 

Housing” is to assist in the determination of an acceptable bid or sale price. 

 The intended use of the appraised value “Market Value, Subject To Restricted 

Rents within 7 CFR Part 3560.752(b)(1)(i)” is to assist in the determination of an 

acceptable bid or sale price. 

 Unless otherwise directed, all market value appraisals will provide an analysis of 

the highest and best use of the property using the four criteria including physically 

possible, legally permissible, financially feasible and maximally productive 

 When the value is “Subject To Restricted Rents” the appraiser must consider the 

impact of program participation and report the value of intangible assets 

(financing, tax credits, grants, etc.) individually and separately from the real 

estate. Since intangible assets are nonphysical assets and not real estate the 

appraiser should never add the value of the intangible assets to the value of the 

real estate. USDA will identify intangible assets to be evaluated and provide 

information relevant and necessary for the evaluation of the intangible assets. 

 The appraisal is to reflect the value of the property in its current physical 

condition. 

 All hypothetical conditions and extraordinary assumptions must be labeled as 

such and must be clear and conspicuous to the reader of the report. 

HB-1-3560 

Attachment 7-C 

Page 9 of 10 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 

Revised (12-16-11) PN 454 
6: VALUE FOR SALE - NON PROGRAM PROPERTY 

 VALUE REQUIRED FOR: 

 Properties leaving program, REO’s, etc.

APPRAISED VALUE TO REQUEST: 

 Market Value within 7 CFR Part 3560.752(b)(1)(ii), Premised Upon A 

Hypothetical Condition As-If A Conventional Market Property. (Value estimate 

will be based upon a highest and best use analysis as-if not encumbered by USDA 

program provisions.) 

AND POSSIBLY: 

 Liquidation Value Premised Upon A Marketing Period of (enter days) Days

(marketing period prescribed by USDA) 

SPECIAL NOTES AND INTENDED USE: 

 All value conclusions cited in the appraisal must report and label the specific 

value as cited above in “Appraised Value To Request.” 

 The intended use of the appraised value “Market Value Premised Upon A 

Hypothetical Condition As-If A Conventional Market Property” is to assist in the 

determination of an acceptable bid or sale price 

 Unless otherwise directed, all market value appraisals will provide an analysis of 

the highest and best use of the property using the four criteria including physically 

possible, legally permissible, financially feasible and maximally productive 

 The intended use of the appraised value “Liquidation Value Premised Upon a 

Marketing Period of (enter days) Days” is to assist in the determination of an 

acceptable bid or sale price. 

 Request for Liquidation value is applicable only if USDA is considering selling 

within a prescribed time frame which may or may not be the same as the 

traditional marketing period. USDA staff must determine whether Liquidation 

Value is required, and supply the appraiser with the prescribed marketing time to 

be associated with the property liquidation. 

 USDA will provide a specific marketing period for a Liquidation Value. If the 

prescribed marketing period is less than the traditional marketing period as 

determined by the appraiser, the appraiser will analyze and estimate the value 

associated with the prescribed marketing period. A prescribed marketing period 

may result in a value estimate premised upon an extraordinary assumption. 

 All hypothetical conditions and extraordinary assumptions must be labeled as 

such and must be clear and conspicuous to the reader of the report. 

_____________________________________________________________________________________________________

HB-1-3560 

Attachment 7-C 

Page 10 of 10 
ATTACHMENT 7-D 

STANDARD STATEMENT OF WORK (SOW) 

FOR MULTI-FAMILY HOUSING CONTRACT APPRAISALS 

Background: USDA Rural Development provides loans to eligible applicants for multi- family 

housing properties. In support of this program, Rural Development requires the services of 

qualified persons or firms to provide appraisals of subsidized Multi-Family Housing properties. 

All appraisals must be in compliance with the current edition of the Uniform Standards of 

Professional Appraisal Practice (USPAP) and Rural Housing Service (RHS) Multi-Family 

Housing appraisal requirements (supplemental standards), which are set forth in the Statement of 

Work (SOW), 7 CFR 3560, subpart P, and Chapter 7 of the RHS HB-1-3560. The appraiser 

should note that there are other agencies within Rural Development with different appraisal 

needs and requirements. 

Professional Qualifications: All Agency Multi-Family Housing appraisals must be written by a 

State Certified General Appraiser, certified in the State in which the subject property is located. 

The appraiser must have the specialized knowledge and experience necessary to be competent to 

appraise subsidized housing. The appraiser must understand the housing programs, value types 

and definitions, real and intangible property rights, use restrictions, pertinent tax considerations, 

and methods for valuation of various types of favorable financing involved in the appraisal of 

subsidized housing. 

Request for Quote (RFQ): The RFQ will be used to request proposals from appraisers via fax 

or e-mail and will contain basic property information, services requested, special requirements, 

and any additional information the appraiser will need to bid appropriately. It is the appraiser's 

responsibility to understand the scope of the assignment and its requirements. When the 

appraiser receives the RFQ, he/she is to notify the requesting representative by fax or e-mail 

within __ hours (1) that the appraiser is unavailable to bid on the assignment, or (2) with the 

amount of the fee and the number of calendar days required to complete the assignment. 

Contract for Appraisal Services (CAS): Once the appraiser has been selected to complete the 

assignment, a Rural Development representative will provide a CAS by fax or e-mail. The CAS 

form will contain the same information as the RFQ but will also include Rural Development and 

property contacts as well as the agreed upon fee and due date. Rural Development will also 

inform the appraiser if he/she has not been awarded the assignment. The required number of 

copies of the appraisal may vary, and the appraiser must pay attention to the number specified on 

the CAS, as well as the specific delivery instructions. The CAS will specify to whom the reports 

are to be addressed and where the reports and invoice should be delivered. 

Subcontracting: The appraiser engaged by Rural Development or a qualified employee or 

associate of the appraiser, must perform the appraisal and must not subcontract it, or any part of 

it, to another person without written consent of the Rural Development Contracting Officer. 

HB-1-3560 

Attachment 7-D 

Page 1 of 6 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 
Post Award Conference: The appraiser must contact the Contracting Officer's Representative 

(COR), identified in the CAS, to schedule a post-award telephone conference. The COR 

(usually the State Appraiser) will discuss appraisal requirements with the appraiser and answer 

questions about the assignment. Furthermore, the COR will be the appraiser's contact with the 

Agency during the course of the assignment. Again, it is the appraiser's responsibility to 

understand the scope of the appraisal and its requirements. 

Client: The appraiser must understand and agree that USDA Rural Development is the 

appraiser's client, and all reports must be addressed to USDA Rural Development (and any other 

intended user specified by the Agency). Any questions related to the form or substance of the 

assignment will be directed to the COR and will not be directed to the property owner. 

Property Contact: The appraiser should call the property contact, identified in the CAS, for 

gaining access to the property and in most cases for procuring property specific data relevant to 

the assignment. Appraisal fees or turnaround times should not be discussed with the property 

contact. The appraiser must notify the COR immediately if any of the following occurs: 1) the 

appraiser cannot gain adequate access to the property, 2) the appraiser does not receive essential 

property information in a timely manner, 3) the appraiser has previously appraised or is in the 

process of appraising the property, 4) the appraiser has any other potential conflict of interest 

with respect to the assignment. 

Confidentiality: The appraiser must keep all information and materials furnished by Rural 

Development, the owner, and/or property contact regarding the subject property confidential, as 

required by USPAP and the Gramm-Leach-Bliley Act. The appraiser may use such information 

only in connection with performance of the assignment. The appraiser must agree to prevent the 

unauthorized disclosure, misuse, or alteration of the confidential information. Any information 

obtained through public sources is not considered confidential information. Disregard of this 

privacy requirement will be cause for immediate debarment as a contractor for the federal 

government. 

Nondiscrimination: All appraisals of Section 515 Rural Rental Housing or Section 514/516 

Farm Labor Housing properties must comply with the Fair Housing Amendments Act of 1988. 

According to the Act, it is unlawful for an appraiser to use factors that are discriminatory on the 

basis of race, color, religion, sex, disability, familial status, or national origin in the sale, rental, 

leasing, or financing of housing. 

Assumptions, Hypothetical Conditions, and Limiting Conditions: All extraordinary 

assumptions, hypothetical conditions, and limiting conditions must be clearly described in a 

single location near the beginning of the report and in appropriate sections of the appraisal. In 

addition, extraordinary assumptions and hypothetical conditions must be restated wherever the 

appraiser opines to the final value(s). Extraordinary assumptions and hypothetical conditions 

also must be discussed with and agreed to by the COR prior to completion of the report. General 

assumptions and limiting conditions that reduce the normal scope of appraisal due diligence are 

not allowed. 

Potential Environmental Hazards: The appraiser must note any suspected environmental 

hazards, including issues external to the property that could adversely impact the property's 

HB-1-3560 

Attachment 7-D 

Page 2 of 6 

_____________________________________________________________________________________________________ 
value. Examples of environmental hazards would include damaged asbestos-containing building 

materials, underground storage tanks, chemical leaks, spills, or staining of ground surfaces, or 

on-site waste disposal such as sludge, oil, paints, or chemical residues. If the appraiser observes 

any suspected environmental hazards, he/she must notify the COR immediately and refrain from 

finalizing aspects of the appraisal that could be impacted until resolution of the issue or until 

instructed otherwise. 

Americans with Disabilities Act (ADA): Appraisers must be familiar with the general 

provisions of the ADA because subsidized housing is a property type that is likely to be affected. 

The appraiser must consider what impact (if any) noncompliance with the ADA has on the value 

of the subject property. Any impact on value must be supported by market evidence. 

Appraisal Report Formats: The appraisal type (complete or limited), report type (selfcontained, summary, or restricted use), and report format (narrative or form) will be set forth in 

Rural Development's authorizing Contract for Appraisal Services (CAS). Narrative formats are 

preferred for most Multi-Family Housing appraisals, with the level of detail dependent on the 

scope of work and the requested appraisal type and report type. Form reports completed on 

Form RD 1922-7, Appraisal Report for Multi-Unit Housing, FNMA Form 1050, FHLMC Form 

71A, or the Uniform Commercial Industrial Appraisal Report (UCIAR) are generally acceptable, 

as long as they are modified to meet USPAP and Agency requirements and are agreed upon in 

advance. 

Approaches to Value: The approaches to value (Cost Approach, Sales Comparison Approach, 

and Income Approach) that are to be included in the appraisal depend on the specific assignment 

and will be specified in the CAS. When the purpose of the appraisal is to conclude market value, 

all three approaches to value must be included as part of a Complete Appraisal. When the 

purpose of the appraisal is to conclude market value, subject to restricted rents, the Cost 

Approach and the Income Approach must be included, but the Sales Comparison Approach is 

typically not applicable and may be excluded. When the purpose of the appraisal is to conclude 

value-in-use of an on-farm labor housing project, only the Cost Approach is applicable, and the 

other two approaches are excluded. For some assignments, an approach to value that is typically 

applicable may not be applicable. When this is the case, the appraiser, upon receiving the RFQ, 

must discuss this issue with the COR so that the CAS will correctly specify the approaches to 

value that will be included in the report. If, during the course of the assignment, the appraiser 

determines that an approach is not applicable, he/she must obtain the approval of the COR to 

exclude the approach from the report, and the CAS must be modified. 

Value Types: The types of value (e.g., market value or market value, subject to restricted rents

or insurable value) to be reported, including values of various types of favorable financing, will 

be specified in the CAS. 

Complete Appraisal Requirements: All RHS Complete Appraisals must comply with the 

following unless the CAS requires otherwise: 

1) All appraisal reports must comply with the current edition of USPAP. Specifically, all 

reports must include the following items required by Standards 1 and 2 of USPAP: 

 Identification of the appraisal type and report type, 

HB-1-3560 

Attachment 7-D 

Page 3 of 6 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 
 Identification of the client and any other intended users of the appraisal, 

 Identification of the intended use of the appraisal, 

 Description of the subject real estate, 

 Identification of the real property interest (property rights) appraised, 

 Identification of the purpose of the appraisal, 

 Identification and definition(s) of the value type(s) reported, 

 Identification of the effective date(s) of the appraisal and the date of the report, 

 Description of the scope of work used to develop the appraisal, 

 Disclosure of all assumptions, hypothetical conditions, and limiting conditions that 

directly affect the appraisal, 

 Description of the information analyzed, the appraisal procedures followed, and the 

reasoning that supports the analyses, opinions, and conclusions, 

 Description of the use of the real estate existing as of the date of value and the use of the 

real estate reflected in the appraisal; and (for market value) an analysis of the highest and 

best use of the real estate, 

 Disclosure of any permitted departures from specific requirements of Standard 1 of 

USPAP and the reason for excluding any of the usual valuation approaches, 

 A signed certification in accordance with USPAP Standards Rule 2-3. 

2) All reports must include an executive summary. 

3) All reports must include a legal description of the subject property. 

4) All reports must include photographs of the interior and exterior of the subject property and 

of the exterior of all rent comparables and sales comparables. 

5) All reports must include the following maps, showing the location of the subject: 

 Regional map 

 City map 

 Flood plain map 

 Land Sales map 

 Sales Comparables map 

 Rent Comparables map 

6) All reports must include the following exhibits of the subject property: 

 Survey 

 Site plan 

 Floor plans 

7) All analyses within the Income Approach must be well supported. When the assignment is to 

conclude market value, subject to restricted rents, the subject's 3-year operating history 

should typically be used as the primary data source to project the subject's other income, 

vacancy, and operating expenses. A set of expense comparables should be compiled from 

recent operating statements for similar restricted properties within the subject's housing 

program. This data can be obtained from Rural Development and used to support these 

projections. All expense analyses must include a tabulated set of expense comparables and 

should also include supporting information from an expense survey done by RHS or a State 

or local housing authority, if available. The capitalization rate selected for the subject must 

be derived from the most recent sales of similar properties in the local (or nearest similar) 

conventional apartment market. Support for this overall rate should be provided using other 

accepted methods such as the band-of-investment technique, the debt coverage ratio formula, 

HB-1-3560 

Attachment 7-D 

Page 4 of 6 

_____________________________________________________________________________________________________ 
and regional investment criteria surveys. If the pro forma income, vacancy, expenses, or 

capitalization rate is not adequately supported, the Rural Development Review Appraiser will 

require the contract appraiser to make revisions that provide the necessary support before the 

appraisal can be accepted. 

8) Any method that includes the use of note rate rent as Potential Gross Income (PGI) in the 

Income Approach pro forma to derive a value equal to the sum of the market value, subject 

to restricted rents, plus the value of the interest credit subsidy is not acceptable appraisal 

practice. Appraisers must not use this procedure in Agency Multi-Family Housing 

appraisals. 

9) All reports must conclude the market rents for the subject's units. A market rent adjustment 

grid showing quantitative adjustments in specific percentages or dollar amounts must be 

included and be well supported. When the assignment is to conclude market value, subject to 

restricted rents, the report must state whether the base rate (restricted) rents are less than, 

equal to, or higher than market rents. Market rents must be estimated to determine if the 

subject's base rate rents are attainable without RA. Base rate rents must not be higher than 

market rents, unless an exception is made, according to the policy of Conventional Rents for 

Comparable Units (CRCU). 

10) All reports must include an estimate of the remaining economic life of the subject. 

11) All appraisals of existing properties must include a discussion of deferred maintenance at the 

subject property. Items of deferred maintenance must be listed, and the cost to cure each 

item must be estimated, with support provided. The final value must be calculated by 

subtracting the total cost estimated to cure all deferred maintenance from the value indicated 

as if no deferred maintenance existed. 

12) When favorable financing is involved, the appraisal report must contain a narrative 

identifying each source of financing. The amount and terms of each type of favorable 

financing must be described, and each type of favorable financing must be valued separately 

from the market value, subject to restricted rents, of the property. Valuation of “interest 

credit subsidy” from Section 514/515 loans should be consistent with Attachment 7-H. 

13) When the assignment is to conclude market value, subject to restricted rents, the subject's 

operating statements for the preceding three full years and the proposed budget for the 

current year must be used in the expense analysis and included in the addenda of the report, if 

available. 

14) Appraisals of properties with proposed rehabilitation must include Form RD 1924-13, 

Estimate and Certificate of Actual Cost, in the addenda. 

15) A copy of the CAS must be included in the addenda of the appraisal report. 

Review of Appraisal: Appraisal reports are subject to review by Rural Development. 

Appraisers must be prepared to discuss their analyses, opinions, and conclusions and provide 

additional written support, clarification, and/or corrected appraisal pages if requested. 

Accountability: The engaged appraiser must inspect the subject property and be prepared to 

discuss the appraisal report. A staff appraiser or associate may participate in the appraisal 

assignment but must either sign the report or be identified, by name, as having provided 

significant professional assistance in the appraiser's certification. If a staff appraiser or associate 

wrote the majority of the report, that staff appraiser or associate may be present during any 

discussion of the assignment. However, it is the engaged contract appraiser whose work product 

HB-1-3560 

Attachment 7-D 

Page 5 of 6 

_____________________________________________________________________________________________________ 

(02-24-05) SPECIAL PN 
has been identified as acceptable by Rural Development, and that appraiser must sign the report 

and be accountable for it. 

Defense of Appraisal: The Agency may require the appraiser to defend the appraisal in court or 

in Rural Development's appeals process. This would constitute a consulting assignment that 

would be contracted separately from the original appraisal assignment. 

Payment of Services: Late delivery of any report may result in liquidated damages. Lacking 

specific arrangements in writing to the contrary, Rural Development may impose a penalty equal 

to the lesser of 5% of the appraisal fee per day, or $100 per day, for each calendar day beyond 

the scheduled due date. The late fee penalty is based on the calendar days between the due date 

and the date the appraisal report is received by Rural Development. If delivery of the report is 

30 days past due, the appraisal engagement is cancelable by Rural Development, and the 

appraiser's right to all fees associated with the assignment may be forfeited.

HB-1-3560 

Attachment 7-D 

Page 6 of 6 

_____________________________________________________________________________________________________ 
HB-1-3560 

Attachment 7-E 

Page 1 of 2 

ATTACHMENT 7-E 

APPRAISAL INFORMATION SHEET (EXAMPLE), 

ATTACHMENT TO SOW 

Appraisal Type: (Complete / Limited) 

Report Type: (Self-Contained / Summary / Restricted Use)

Appraisal Format: (Narrative / Form) 

Client: Ann Smith, Oregon State Appraiser, USDA Rural Development 

USDA Rural Development Contact: Ann Smith, Oregon State Appraiser and Contracting 

Officer’s Representative (COR); Phone: 503-414-3300 

Property Contact: Sue Jones, on-site manager; Phone: 503-679-3857 

Intended Users of Appraisal: Oregon Housing and Community Services (OHCS); Bedford 

Falls Limited Partnership (owner) 

Intended Use of Appraisal: To fulfill loan underwriting requirements for permanent financing 

of the subject property 

Purpose of Appraisal: To submit supported opinions of the required value(s), in conformity 

with USPAP and the appraisal policy of USDA Rural Housing Service 

Property Type: USDA Rural Development Section 514/516 Off-Farm Labor Housing complex 

Property Status: (Existing / Proposed) 

Property Interest Appraised: fee simple estate, as restricted, subject to short-term leases 

Property Owner: Bedford Falls Limited Partnership 

Property Name: Bedford Falls Apartments 

Property Address: 1945 Maple Avenue, Bedford Falls, OR 97055 

Property Description: (number and type of buildings, number of stories, number and type of 

units, NRA, GBA, year of construction, site size, amenities, parking, etc.) The subject property is 

a proposed 30-unit USDA Rural Development Section 514/516 Off-Farm Labor Housing 

complex, situated on a 2.50-acre site. It will have a NRA of 28,602 SF and a GBA of 32,656 SF. 

There will be five 2- and 3-story buildings with cementicious siding exteriors and pitched asphalt 

shingle roofs. 1-, 2-, and 3-BR units, ranging from 643 SF to 1,311 SF, will be offered. There 

will be a 4,054 SF community building containing offices, kitchens, and laundry facilities, as 

well as paved parking with 64 open spaces (2 handicapped spaces). Completion of construction 

is scheduled for April 30, 2005. 

Project Financing: Financing for the project will come from four sources, as follows: 

 USDA Rural Development will make a Section 514 loan for $1,300,000. The loan term is 33 

years, and the loan is amortized over that period. The effective rate of interest is one percent. 

The borrower's monthly payment is $3,855.59. 

 USDA Rural Development will make a Section 516 grant for $1,500,000. 

 The Clackamas County Community Development Division has awarded a HOME Grant in 

the amount of $500,000. 

 OHCS has awarded tax credits in the amount of $950,000. (See the borrower's Syndication 

Proposal Agreement for terms.) 

(02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-E 

Page 2 of 2 

Value Types Required: The following values are required: 

 Prospective market value, subject to restricted rents, of the fee simple estate, as restricted, 

subject to short-term leases, of Bedford Falls Apartments, as of completion of construction, 

April 30, 2005 

 Value of interest credit subsidy from the USDA Rural Development Section 514 loan 

 Value of the USDA Rural Development Section 516 grant 

 Value of the Clackamas County Community Development Division HOME grant 

 Value of the OHCS tax credits 

 Insurable value 

Approaches to Value: The Cost Approach and the Income Approach must be included in the 

appraisal. The Sales Comparison Approach is not applicable and is not required. 

Rental Assistance: (existing number of units/proposed number of units) The subject property 

will have 30 units of Rental Assistance (RA). 

Utilities: Tenants pay for: ___ Electricity ___ Gas ___ Water/Sewer 

Assumptions, hypothetical conditions, and limiting conditions: The prospective market 

value, subject to restricted rents, should be based on the specific assumption that the subject 

property retains its 30 units of Rental Assistance (RA). It should also be based on a limiting 

condition citing the market conditions from which the prospective value opinion was made. 

Number of Copies: 3 

Mail Reports to: Ann Smith (2 copies) 

State Appraiser 

USDA Rural Development 

101 SW Main St., Suite 1410 

Portland, OR 97204-3222 

 

 James Miller (1 copy) 

 Director 

 Oregon Housing & Community Services 

 725 Summer St., NE 

 Salem, OR 97309 
HB-1-3560 

Attachment 7-F 

Page 1 of 1 

ATTACHMENT 7-F 

APPRAISAL DATA PACKAGE CHECKLIST 

___ sales contract or purchase agreement 

___ legal description 

___ Rural Development Mortgage or Deed of Trust 

___ Housing Assistance Payment (HAP) contract (if applicable) 

___ description of restrictive use provisions 

___ environmental report 

___ lead-based paint inspection report 

___ Rural Development unit-by-unit inspection 

___ market study 

___ prior appraisal 

___ survey 

___ site plan 

___ floor plans 

___ unit mix (number of units by type, size, rent) 

___ recent rent roll 

___ tenants waiting list 

___ operating statements for subject property from previous 3 years 

___ operating statements for five expense comparables from last full year (property 

 name, address, age, number of units, and expense year included) 

___ proposed budget for current year 

___ plans, specs, and cost estimates (new construction) 

___ Form RD 1924-13, Estimate and Certification of Actual Cost (rehabilitation) 

___ Sources & Uses Comprehensive Evaluation (SAUCE Report) 

___ ownership history for past three years 

___ financing information (list of existing and proposed financing sources with detailed 

 descriptions of terms for each; e.g., amount of financing, loan balance, interest rate, 

 loan term, remaining loan term, amortization period, payment) 

(02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-F 

This page intentionally left blank 
HB-1-3560 

Attachment 7-G 

Page 1 of 1 

ATTACHMENT 7-G 

SAMPLE TRANSMITTAL LETTER 

_______________, 20__ 

______________________ Appraisal Services 

______________________ Member of Appraisal Institute (MAI) 

_______________________ 

_____________, (State) _____ 

Dear _______________________: 

In our recent telephone conversation you quoted a price of $__________ to complete one (1) 

Multi-Family Appraisal for the following Multi-Family Housing property: 

___________________ ________________________________________________ (Address, 

City and State, County). 

The completed appraisal shall provide __________ estimate of value. The appraisal shall 

determine the _______________ value of the project as ______________ housing. 

Rural Development is issuing Purchase Order (60-0496-0-C00xx) [sample number] to your firm. 

You will have until _________________ (date) to complete and return 3 copies of the appraisal 

to _________________________, Contracting Officer's Representative (COR), Rural 

Development, ________________________________ _____________ (Address, City and 

State). The Government is allowed fifteen (15) days from the date of receipt of the submitted 

appraisal for the appraisal review. The invoice shall be submitted to the COR's attention at the 

same address. Upon acceptance of the appraisal and receipt of a properly prepared invoice 

payment shall be processed in accordance with the Prompt Payment Act. 

We are enclosing the AD-838, Purchase Order; Form RD 2024-18, Designation of Contracting 

Officer's Representative (COR); and the Appraisal Contract Terms and Conditions which 

includes the statement of work, clauses and other information. 

Please note that this written correspondence confirms our oral discussions and establishes the 

completion dates for the performance of the Contract. 

Thank you for your prompt attention. If you have questions please contact me at __________ 

(phone number). 

Sincerely, 

______________________________ 

Contracting Officer 

Enclosures 

cc: COR/MFH Program Director, _____________ State Office, ________________ 

 MFH Housing Specialist, ____________________ AO, ____

(02-24-05) SPECIAL PN 
HB-1-3560 

This page intentionally left blank

 
HB-1-3560 

Attachment 7-H 

Page 1 of 4 

ATTACHMENT 7-H 

GUIDE FOR VALUATION OF INTEREST CREDIT SUBSIDY 

Interest Credit Subsidy 

Interest credit is a form of federal assistance available to eligible borrowers that reduces the 

effective interest rate of a loan. The USDA Rural Housing Service (RHS) offers direct loans 

with very favorable terms for affordable housing in the Rural Rental Housing Program (Section 

515) and the Farm Labor Housing Program (Section 514). Section 514 and 515 permanent loans 

for new construction and subsequent loans for rehabilitation include interest rates as low as 1 

percent. These loans are made at a “note rate” of interest, but a “basic rate” of interest to the 

borrower is typically 1 percent. A monthly mortgage payment is calculated at the note rate of 

interest, and the loan is amortized at the note rate of interest, but the borrower's actual mortgage 

payment is based on the basic rate of 1 percent. The difference between the note rate payment 

and the basic rate payment is the interest credit. The borrower is effectively subsidized with an 

income stream represented by the monthly interest credit that is available for the term of the 

loan. 

In appraisals of Section 514 and Section 515 Multi-Family Housing properties, valuation of the 

interest credit subsidy (favorable financing) is part of the assignment when the market value, 

subject to restricted rents, must be concluded. When interest credit subsidy is the only favorable 

financing involved, the security value, on which the loan is based, has two components: 1) the 

market value, subject to restricted rents, of the real estate, and 2) the value of the interest credit 

subsidy. The present value (PV) of the interest credit subsidy can be calculated with a financial 

calculator using a simple discounted cash flow if three variables are known: payment (PMT), 

discount rate (i), and period (n). Determination of each of these three variables is discussed 

below. 

Methodology for Valuation of Interest Credit Subsidy 

The first variable to consider, which is input as payment (PMT) in a financial calculator, is the 

income stream that accrues to the borrower from the savings in mortgage payments resulting 

from the interest credit. With the RHS direct loan, the borrower typically will make 360 

monthly mortgage payments based on an interest rate of 1percent. Without the RHS direct loan, 

the borrower would have to obtain alternative conventional financing at a significantly higher 

market interest rate, resulting in higher monthly mortgage payments. Therefore, the borrower's 

income stream is equal to the difference between the monthly mortgage payment that would have 

been required at the conventional rate of interest and the actual mortgage payment at the reduced 

rate. (It should be noted that the USDA note rate of interest cannot be used to calculate the 

higher conventional payment because this rate does not represent a mortgage interest rate 

available to the borrower at the time of the appraisal.) 

The second variable used in the calculation is the discount rate (i). The discount rate to be 

applied to the income stream is simply the alternative conventional mortgage interest rate. This 

is the rate of interest at which the borrower would have had to pay if a conventional loan had 

(02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-H 

Page 2 of 4 

been obtained, so this is the rate at which the borrower saves with the favorable financing. The 

conventional mortgage interest rate is extracted from the subject's lending market. 

The third variable to determine is the period (n) over which the income stream is to be 

discounted. The loan term, or remaining loan term, is known at the time of the appraisal. 

Although the borrower might hold the property for a holding period less than the loan term, the 

income stream from the favorable loan is available for the period of the loan. The interest credit 

subsidy should be valued according to the actual terms of the loan, so the appraiser should 

discount the income stream over the term of the loan. For new construction, the loan term is 30 

years for a Section 515 loan and 33 years for a Section 514 loan. The appraiser should use these 

terms for the period of the loan. For an existing property, the remaining loan term, which should 

not exceed the estimated remaining economic life of the property, should be used for the period 

of the loan. 

The value of the interest credit subsidy from RHS direct loans on most existing properties can be 

calculated by subtracting the monthly debt service at the below-market rate of interest from the 

monthly payment at the current rate offered for conventional loans and discounting the 

difference by the current conventional interest rate over the remaining loan term. For RHS direct 

loans on proposed new construction, an additional step is required if the amortization period is 

longer than the loan term. With conventional financing, a loan with a term of 30 years is 

amortized at the end of the 30-year term. However, with a RHS direct loan that has a loan term 

of 30 years and an amortization period of 50 years, a large balloon payment is due at the end of 

30 years. The PV of the balance of the RHS direct loan at the end of the 30-year loan term (the 

PV of the balloon payment) must be subtracted from the present value of the 30-year income 

stream to derive the value of the interest credit subsidy. 

Example Problem and Solution 

The following example problem is used to illustrate the method for valuing the interest credit 

subsidy. 

Problem: 

A Section 515 direct loan of $1,000,000 is offered by USDA Rural Development with a term of 

30 years and an amortization period of 50 years. The loan is to be amortized at the USDA note 

rate of interest of 6.0%, but the base rate of interest to the borrower is 1.0%. At the end of the 

30-year loan term, a balloon payment is due. Alternative conventional financing includes a 30-

year loan term, completely amortized after 30 years, and an interest rate of 7.0%. What is the 

value of the “interest credit subsidy” or below-market financing? 

Solution: 

The loan amount in the example problem is $1,000,000. With conventional financing, the 

monthly payment at 7.0% interest, amortized over 30 years, would have been $6,653.02. This 

payment can be calculated on an HP-12C calculator using the following keystrokes: 

 
HB-1-3560 

Attachment 7-H 

Page 3 of 4 

1,000,000 PV 

7.0 g i 

30 g n 

Solve for PMT = -6,653.02 

With the Section 515 direct loan and interest credit, the monthly payment, at 1.0% interest, 

amortized over 50 years, is $2,118.59 (calculated in the same way), but a balloon payment of 

$734,760 is due at the end of 30 years. The borrower makes a monthly payment based on a 1.0% 

interest rate. However, the loan is amortized at the note rate of interest at the time of the loan 

(6.0% in this example), as if the mortgage payment was the sum of the borrower's payment and 

the interest credit calculated by USDA. The balloon due at the end of 30 years on the RHS loan 

can be calculated on an HP-12C calculator using the following keystrokes: 

1,000,000 PV 

6.0 g i 

50 g n 

Solve for PMT = -5,264.05 

30 g n 

Solve for FV = -734,760 

The difference in the payments at the two different interest rates is $4,534.43 ($6,653.02 - 

$2,118.59) per month. The borrower saves $4,534.43 per month due to the below-market 

financing. Without the benefit of the favorable financing (interest credit subsidy), the owner 

would pay an additional $4,534.43 per month, at an interest rate of 7.0%, over the projected 

holding period. The projected holding period for the subject property is the loan term, 30 years. 

With the Section 515 direct loan, a large balloon payment is due at the end of the 30-year loan 

term, but a conventional loan would be fully amortized at the end of the 30-year loan term, and 

there would be no balloon. Therefore, to calculate the value of the interest credit subsidy, the 

present value (PV) of the balance of the RHS loan at the end of the 30-year loan term (the PV of 

the balloon payment) must be subtracted from the present value of the income stream resulting 

from the savings in the mortgage payments. The present value of the balloon payment is 

calculated by discounting the balloon payment ($734,760) by the current mortgage interest rate 

(7.0%) over the term of the loan (30 years). In this example, the PV of the balloon payment can 

be calculated with an HP-12C calculator using the following keystrokes: 

734,760 CHS FV 

7.0 g i 

30 g n 

Solve for PV = 90,527 

The value of the interest credit subsidy is equal to the amount of the monthly debt service saved, 

discounted by the current conventional mortgage interest rate over the remaining loan term, 

minus the present value of the RHS direct or guaranteed loan balloon payment. The value of the 

(02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-H 

Page 4 of 4 

interest credit subsidy for the subject property can be calculated with an HP-12C calculator using 

the following keystrokes: 

4,534.43 CHS PMT 

7.0 g i 

30 g n 

Solve for PV = 681,559 

90,527 – 

Value of interest credit subsidy = $591,032 

The Value of the Interest Credit Subsidy is $591,000 (rounded) 

Conclusion 

When appraising existing properties, calculation of the value of the interest credit subsidy

usually does not involve a balloon payment. Only valuation of the income stream is considered. 

The appraiser should obtain the current balance of the original loan from the Rural Development 

Office. The remaining loan balance and the remaining term of the loan are used to calculate the 

monthly mortgage payment at the current conventional interest rate. The appraiser should use 

the borrower's actual payment based on a below-market rate (usually one percent) that has been 

calculated by the Rural Development Office in this process. The difference in the payments at 

the two rates is then discounted at the current conventional mortgage interest rate over the 

remaining loan term to calculate the value of the interest credit subsidy. 

The interest credit subsidy for a RHS original loan should be valued separately from the interest 

credit subsidy of any subsequent RHS loans. Interest credit subsidy should be valued separately 

from the market value, subject to restricted rents, of the real property. 
HB-1-3560 

Attachment 7-I 

Page 1 of 1 

ATTACHMENT 7-I 

USDA Rural Development 

Insurable Value Calculation 

Property Name: 

Street Address: 

City, County, State, Zip: 

BASE COST $0.00 PSF 

 Main Structure $0.00 

 Sprinkler $0.00 

 Other $0.00 

 Adjustments and/or Multipliers 0 

TOTAL BASE COST PER SQ. FT $0.00 

 Building Area Square Footage 0 SF 

TOTAL REPLACEMENT COST NEW $0.00 

EXCLUSIONS Per SF Percent 

 Excavations $1.00 0.00% $0 

 Foundations $1.00 0.00% $0 

 Site Work $1.00 0.00% $0 

 Site Improvements $0.00 0.00% $0 

 Architect’s Fees $0.00 0.00% $0 

 Underground Piping $0.00 0.00% $0 

 TOTAL EXCLUSIONS $0 

INCLUSIONS 

 Appliance Packages $0 

 Patios / Balconies, etc. $0 

 TOTAL INCLUSIONS $0 

CONCLUDED INSURABLE VALUE 

 Total Replacement Cost New $0 

 Less Total Exclusions $0 

 Plus Total Inclusions $0 

CONCLUDED INSURABLE VALUE $0 

(02-24-05) SPECIAL PN 
HB-1-3560 

Attachment 7-J 

Page 1 of 1 

ATTACHMENT 7-J 

COVER LETTER FOR RELEASED APPRAISAL 

(date) 

USDA Rural Development 

(State Office address) 

(inside address) 

Re: Real Property Appraisal of (name and address of property)

Dear Sir or Madam: 

Enclosed is a copy of the appraisal report on the above referenced property that you requested. 

You may contact the Rural Development State Appraiser, (name; e-mail address; phone 

number), to discuss any errors or deficiencies that you identify in your review of the appraisal. 

The Rural Development State Appraiser, who will also have reviewed the appraisal, will decide 

whether any of the errors or deficiencies that you have identified are material to value and if 

revisions by the appraiser or modifications by the reviewer can or should be made. The Rural 

Development State Appraiser will make one of four possible dispositions of the appraisal: (1) 

the appraisal is accepted; (2) the appraisal is accepted as revised by the appraiser; (3) the 

appraisal is accepted as modified by the reviewer; or (4) the appraisal is rejected. Although the 

disposition concluded in the appraisal review report may be provided to the applicant/owner, the 

review report itself is intended for the internal use of the Agency and will not be released. 

Sincerely, 

(name) 

(title) 

 (02-24-05) SPECIAL PN