© 2016 OnCourse Learning California Real Estate Finance Fesler & Brady 10th Edition Chapter 12 Construction Loans

Objectives After completing this chapter, you should be able to: – List five types of construction lenders. – List and define at least six technical words and terms that are common to the field of construction lending. – Explain borrowers’ costs under a construction loan. – List the stages followed in processing a construction loan. – Discuss the supporting documentation used in connection with construction financing. – Outline the steps to take in filing mechanics’ liens. – Cite three California laws that deal with assessments for the cost of construction of public improvements.

Outline Nature of Construction Loans Evaluation and Lending Process Take-Out or Permanent Loans Public Construction

Nature of Construction Loans Funds come from – Personal credit line – Construction loan Short term (9 – 12 months) Could be with permanent (Take-out loan) Advanced on stages of construction Interest only

Construction and Permanent Financing Construction-to- Permanent – One loan closing – Builder contracts with ultimate owner – Builder develops tract and sells to many owners Interim, short term – Two lenders – Two loan closings – Permanent may involve another borrower

Evaluation and Lending Process Plans and specifications Cost breakdown – Hard costs – materials, labor, etc. – Soft costs – (permits, engineering, plan copies, etc.) Construction contract – Between builder and owner Source of repayment Financial data

Lending and Disbursement Procedures Loan application Appraisal Title examination Building Loan Agreement (See Figure 12.1) Escrow and settlement procedure Loan servicing

Loan Payout Schedule Aka vouchers, disbursements, payouts, draws, progress payment, and advances Work, material and lot > total paid out Waivers of liens obtained Borrower and lender jointly authorize all draws Sufficient funds in possession of the lender to complete construction Disbursement – Draw system – Voucher system – Builder’s control service

Take-Out or Permanent Loans Some banks require permanent lending be in place before construction loan – Fannie Mae has HomeStyle Construction-to-Permanent Mortgage Subordination clauses – Agree to subordinate existing deed to future deed Partial release clauses – Used for developments with a blanket trust deed – As each house sells, partial reconveyance deed issued Rental achievement clauses – When sufficient rental agreements are signed, then funds above “floor loan” are released – Could obtain gap financing if “floor” is all one lender offers

Mechanics’ Liens and Their Impact on Construction Loans Builder does not finish Builder does not pay suppliers, subcontractors, and workers Should be filed days after completion

Notices When done – Notice of Completion When not completed – Notice of Cessation of Labor – Notice of Abandonment Notice of Nonresponsibility – Filed by owners who did not contract for work

Release of Mechanic’s Liens Expires after 90 days Recording a Release of Mechanic’s Lien (See Figure 12.7) Issuance of bond to release Judgment lien against debtor Dismissal of action by court when not sustainable

Public Construction Assessments paid by property owners for off- site improvements – Street widening – Curbs – Gutters – Sidewalks – Storm drains – Sewers – Street lights

Public Construction Laws Vrooman Street Act – City councils can build streets, sewers and other improvements Street Improvement Act of 1911 – Bonds can be issued to cover public construction Improvement Bond Act of 1915 – Bonds can be issued to cover public construction Mello-Roos Community Facilities Act – Proposition 13 restricted districts from raising taxes on sale or transfer of property – Local government can issue bonds to cover public construction for specific housing developments – Then each homeowner is assessed costs for public improvements

Questions and Comments?