The bank failures resulting from overdevelopment led to the adoption of what was known as Federal Home Loan Bank Board (FHLBB) Memorandum R-41c. O'Toole (1989) noted that this memorandum was created as a result of faulty and fraudulent appraisal reports for real estate lending, noting that more than 800 (25%) of the 3,200 federally insured S&Ls had real estate loan portfolios with values based on appraisals with significant deficiencies. These appraisals overvalued the property used to secure loans by $3 billion.
O'Toole stated that loan appraisals are often viewed as a perfunctory rubber stamp. Many loan officers simply wanted to find an accommodating appraiser to"support whatever value is required". The author's conclusion was that finding that accommodating appraiser was not difficult. O'Toole notes that Federal Regulation R-41c was developed to force appraisers to incorporate substantive feasibility studies during the last U.S. banking crisis.
R-41c required an estimate of the value of proposed construction at what was said to be its time of greatest risk, which is when the development is is ready for its initial occupancy, or at the completion of development, in year 2007 in redevelopment model in Table 1.
| Problem 2 | Problem 1 | ||||||||
| Site Specific Risk Rate | Survey: 18% Risk Rate | $5,000,000 | Annual Net Income | ||||||
| # | IRR | Price/Value | Remediate | Remediate | Redevelop | Redevelop | Value | Cap Rate | Sales/SF |
| A | 18% | $4,700,000 | ($1,000,000) | ($1,000,000) | ($14,000,000) | ($14,000,000) | $50,000,000 | 10.00% | $300-$400 |
| B | 18% | $8,000,000 | ($1,000,000) | ($1,000,000) | ($14,000,000) | ($14,000,000) | $58,139,535 | 8.60% | $400-$500 |
| C | 18% | $12,000,000 | ($1,000,000) | ($1,000,000) | ($14,000,000) | ($14,000,000) | $66,666,667 | 7.50% | >$500 |
| Year | 2003 | 2004 | 2005 | 2006 | 2007 | ||||
Table 1 A model of the re-development process starting in 2003 for a brownfield.
R-41c was not codified, however, because the Appraisal Standards Board (ASB) was created to solve the problem-but it still exists. The Appraisal Standards for Land Secured Financing (ASLSF) by Shea (1996) had been developed in another attempt to force appraisers to provide substantive feasibility studies. It also called for use of the model in Table 1.