When is a Commercial Engagement Letter Needed?

 

If there’s one saying that holds true across many fields, it’s “get it in writing.” We often jokingly say that nothing is official until it’s in writing, but when it comes to engagement letters, getting something in writing can be far from a joking matter. In commercial real estate appraisals, an engagement letter is used to provide information to understand the assignment and the contract terms between the bank and the appraiser. Essentially, once everyone has signed an engagement letter, it is a binding agreement.

RESIDENTIAL & COMMERCIAL ENGAGEMENT LETTERS

It’s important to note that residential engagement letters and commercial engagement letters are strikingly similar. In fact, there really shouldn’t be much of a difference between the two, so if you’re familiar with residential engagement letters, developing a commercial engagement letter should be a breeze. As you begin the process, make sure that the terms and scope of work are clearly stated. General topics covered in an engagement letter should include the bank’s contact information, the appraiser’s contact information, loan/transaction information, property and owner contact information, a property description, the scope of work, and any property specific or special circumstance instructions. Property specific instructions might include everything from requirements regarding particular loan types, like SBA loans, to instructions to the appraiser about when the owner is available to be present to inspect the property. The engagement letter should also address appraiser independence, and who the appraiser should contact for invoicing, late charges, and questions.

• Pro Tip: The engagement letter should cover all of the issues that are important to both parties. Because it is a contract, it should protect both the bank and the appraiser.

WHAT’S OFTEN OVERLOOKED?

Another tip from us? Be mindful of often overlooked areas that should be included in an engagement letter. Engagement letters should adequately describe a property. If they don’t, the appraiser might make assumptions prior to accepting the commercial real estate appraisal assignment which may then be found to be untrue. Make sure to double check that the contact information is complete and without errors. If not, you might be facing a situation in which the appraiser’s work is slowed when they try to set an inspection or obtain necessary information for the commercial real estate valuation. Finally, check that your commercial engagement letter addresses appraiser independence. Appraiser independence ensures that an appraiser can provide an objective opinion without any outside influence; essentially, nothing can be done to coerce an appraiser’s opinion of a commercial real estate valuation. Remember: you can ask for clarification, question facts that might be wrong, or present further information, but that’s it.

Because properties vary so greatly, it’s important to accurately describe a property within the engagement letter. Doing so will only create a more thorough background for the appraiser. For commercial real estate appraisals, include things like whether the property and/or the land is leased, the terms of the lease, how many units and unit types there are, the building’s use (warehouse, warehouse and office, distribution space, etc.), the building’s class, and even tenants that might be leaving. It can be incredibly complex to describe a property, so not only is it important to include all of the information, but it’s important to check with the appraiser to make sure that they understand the property that they are appraising, too.

Think of an engagement letter as rope between your boat and your anchor. In order to know if your anchor is going to hit the bottom of the sea, you have to make sure you have enough rope to get from point a to point b. That means knowing everything from the depth of the water to the floor that’s waiting for you below. Having that information up front will ensure a sturdy resting point.

Still a little murky about engagement letters? Let’s chat. We’re happy to help you smooth out any uncertainty.