I've had real incentive to consider this week's topic: How permits affect commercial loan underwriting. To be clear, "un-permitted" work on a property is work that was done without the local city building and safety department knowing about it. When you ran into that property with un-permitted work, you may have been initially surprised to learn that lender involved disallowed any income or value attributable to those improvements.
I've had real incentive to consider this week's topic:
How permits affect commercial loan underwriting.
Those of you in the business for a while have undoubtedly come across an apartment project, office, or retail project with "un-permitted" additions.
To be clear, "un-permitted" work on a property is work that was done without the local city building and safety department knowing about it.
Even though it may have been done to the latest code, it was done without the local authority's blessing.
When you ran into that property with un-permitted work, you may have been initially surprised to learn that lender involved disallowed any income or value attributable to those improvements.
I'll also bet that it didn't make a lot of sense to you.
The tenant was there, the square footage was there, the lights worked, the toilets flushed ... why wouldn't it count?The theory goes something like this:
The city has the right, once it learns about the un-permitted work, to require the owner to provide access to city inspectors to all of the improvements done, whether or not the current owner did the work! This particularly applies to any building safety related work such at plumbing, electrical, and structural.
So if the city required that of an owner, it means that walls get broken into, floors get jack hammered, and life around the un-permitted work generally becomes hell.
If there happens to be a tenant ...
who pays rent ... around this work, then it's not altogether unreasonable to assume that rent might stop and for a potentially long time! It's possible that the un-permitted work could be disallowed entirely.
This would mean less income for the property, potentially putting the lender's loan in jeopardy.
The moral of the story:
Before taking on a property with un-permitted improvements, make a stop at the Building and Safety office of the local city to find out what is allowed and what the "re-permitting" process will entail.
It could save you thousands of dollars.
Where Have all the Commercial Lenders Gone?
Government Agency guaranteed or sponsored transactions, including: SBA 7(a) and 504, HUD construction loans for multifamily projects, Community Reinvestment Act loans, USDA Business and Industry loans, and to a lesser extent, Fannie Mae and Freddie Mac multifamily loans.
Trading Up Using the 1031 Exchange
A powerful method for building real estate holdings is the use of 1031 Exchanges, which lets investors defer capital-gains assessment on investment property.
Segregate Costs for Better Cash Flow
While costs such as office equipment and furniture are easily recognizable as personal property, construction-related costs that are often included as part of real property may also qualify.
