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#803472 - 08/27/07 08:20 PM
Debate on what appraised value to lend on.
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100 Club
Joined: Aug 2004
Posts: 168
Missouri
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I'm having a discussion with a loan officer about what value to lend on. We are contemplating a construction loan to build a spec office building. We have two market values from the appraiser. One is the "as stabilized" market value of $2,800,000 as of 2/10 which is assuming 95% occupancy at that time. The other market value is the "as completed" value at 2/08 of $2,300,000. He got the $2,300,000 value by subtracting the rent loss and tenant finish from the $2,800,000 number. It looks like the appraiser did it right and is leaving it up to us to decide what to loan on. The loan officer believes we should loan 80% of the $2,800,000 value as of 2/10. He bases this on his contention that all Banks loan on the "as stabilized" value. It seems to me that we should only be loaning on the "as completed" value. I base this on Federal Reserve SR94-55 SR94-55 which says in part "For proposed and rehabilitated rental developments, the appraiser must make appropriate deductions and discounts for items such as leasing commissions, rent losses, and tenant improvements from an estimate based on stabilized occupancy." I'm wondering what other Banks are lending on and why?
Last edited by Frodo2; 08/27/07 08:50 PM.
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"A nickel isn't worth a dime today."- Yogi Berra
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#803640 - 08/28/07 11:13 AM
Re: Debate on what appraised value to lend on.
Frodo2
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Joined: Jul 2001
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Galveston, TX
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On a construction loan, the lendable amount should not exceed the lower of either the construction costs or 80% of the "as completed" value. Stablilized value is pie in the sky until it happens. In an economy that could possible be looking at a downturn, stablilization may not happen for a number of years, regardless of the appraiser's estimate.
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#803706 - 08/28/07 01:28 PM
Re: Debate on what appraised value to lend on.
rlcarey
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Joined: Jan 2003
Posts: 3,070
Oklahoma
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In addition you may not be able to realize stabilization value at liquidation if as rlcarey says :stabilization may not happen for a number of years".
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#804351 - 08/28/07 09:10 PM
Re: Debate on what appraised value to lend on.
rlcarey
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100 Club
Joined: Aug 2004
Posts: 168
Missouri
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the lendable amount should not exceed the lower of either the construction costs or 80% of the "as completed" value. Is that specified in the appraisal regulations or guidelines somewhere. It would seem to be the prudent way to approach things these days but I'm being asked by the lender if loaning on a "stabilized value" is specifically prohibited or if it is just something we have to decide on a case by case basis. The argument is that the lender has talked to a former examiner who has told him that there is not an actual regulatory prohibition on it so he wants to make his case to the loan committee that in this case the borrower is strong enough to take a chance on loaning on the higher value. I can't seem to find a specific cite that would say we can't do it. I can find in the appraisal regulation where it says the appraiser has to make appropriate discounts and I can see in the guidelines where the "stabilized value" has to be appropriately discounted. It sounds to me like the regulators are strongly hinting that they don't want us loaning on "stabilized values" but I can't see where it says we are limited to the "as completed" value.
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Not a legal opinion, just my personal opinion.
"A nickel isn't worth a dime today."- Yogi Berra
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#804487 - 08/28/07 10:45 PM
Re: Debate on what appraised value to lend on.
Frodo2
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Joined: Jan 2003
Posts: 3,070
Oklahoma
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I don't know of any documented prohibition and I've reviewed the appraisal guidelines extensively.
Your lender wants to lend against the stabilized value based on the strength of the Borrower, whereby his reason has nothing to do with the real estate or appraisal.
If your lender wanted to use the stabilized value, based on advise from an examiner, he'd better paper the file to support that and I'd be interested to see how he justifies loaning $60,000 less than the actual A&D costs?
I'm not privy to the conversation with the examiner, but if put to me I'd have answered "it depends on the situation, loan amount and what the stabilization is based on - 3 months or two years, executed in-hand lease agreement or to be leased....
I'd also consider Supervisory Loan to Value guidelines.
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#804488 - 08/28/07 10:46 PM
Re: Debate on what appraised value to lend on.
Frodo2
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Joined: Jul 2001
Posts: 85,422
Galveston, TX
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It is not a prudent banking practice. Is he talking about letting a borrower take cash out of a deal while it is under construction?? If he wants to do a cash out equity loan I would not even contemplate it until the project was completed so his argument is moot at this point. I don't understand the reasoning??????? Sounds fishy to me.
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#804580 - 08/29/07 12:23 PM
Re: Debate on what appraised value to lend on.
rlcarey
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Joined: Feb 2007
Posts: 65
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My Bank on a residential construction perm loan lends on the basis of the Appraised value not the Sales Price.
This is in the Fannie/Freddie regs somewhere.
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#805054 - 08/29/07 05:22 PM
Re: Debate on what appraised value to lend on.
rlcarey
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Joined: Aug 2004
Posts: 168
Missouri
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No, he wants to loan 80% of market value not to exceed 100% of cost but for market value he wants to use $2,800,000 instead of $2,300,000.
$2,800,000 x 80% = $2,240,000 loan
$2,300,000 x 80% = $1,840,000 loan
The purchase of the land and the cost of construction = $2,300,000 + $150,000 in interest carry = $2,500,000 total cost
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Not a legal opinion, just my personal opinion.
"A nickel isn't worth a dime today."- Yogi Berra
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#805150 - 08/29/07 06:55 PM
Re: Debate on what appraised value to lend on.
Frodo2
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Joined: Jan 2003
Posts: 3,070
Oklahoma
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Lending $2,240,000 against an "as is" appraised value of $2,300,000 and cost to build, including interest of $2,450,000 is out of the norm. If the transaction is documentated that loan is in excess of in-house loan to value policy and supervisory loan to value and if the transaction received the proper approval based on all the info provided, including the fact that increased loan amount is based, in part, on the strength of the Borrower your job is done.
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#805188 - 08/29/07 07:31 PM
Re: Debate on what appraised value to lend on.
HRH Okie Banker
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Posts: 85,422
Galveston, TX
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Your telling us that the value of the completed building is less than construction costs? Doesn't sound like a very viable deal.
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#805292 - 08/29/07 08:51 PM
Re: Debate on what appraised value to lend on.
HRH Okie Banker
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100 Club
Joined: Aug 2004
Posts: 168
Missouri
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Non-conforming status would be another question. If the regulations are not clear on whether we can use "as completed" value or "as stabilized" value and we end up using the "as stabilized" value to lend on then we won't have a non-conforming loan or policy exception. The regulations and our policy just says "80% of market value not to exceed 100% of cost."
I'm going to try to contact our regulator and get an opinion from there before we do anything but right now I think we'll end up loaning only on the $2,300,000. That would seem to be the prudent approach regardless of what the regulations would allow or are silent on.
If we end up going the other route then we'll have a market value of $2,800,000 and will loan 80% of that or $2,240,000 which would be less than 100% of cost.
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Not a legal opinion, just my personal opinion.
"A nickel isn't worth a dime today."- Yogi Berra
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#805323 - 08/29/07 09:06 PM
Re: Debate on what appraised value to lend on.
rlcarey
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100 Club
Joined: Aug 2004
Posts: 168
Missouri
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Good point. Why would someone want to spend $2,500,000 to get something worth $2,300,000 when it's done? It may not be a feasible project. I know the argument from the lender is going to be that it's really worth $2,800,000. I'm thinking it won't be worth $2,800,000 for two years and then only if it rents up as planned.
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Not a legal opinion, just my personal opinion.
"A nickel isn't worth a dime today."- Yogi Berra
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