As-Complete Appraisals for California Construction Loans: What Private Lenders Need to Know About SB 978

New construction is one of our strengths. We appraise it for private money lenders, from ground-up multifamily and new condo projects to mixed-use, industrial and commercial buildings, and the subdivisions and development land those projects start on. This guide covers what an as-complete value is, what the statute actually says (we quote it, we do not paraphrase the parts that matter), and how to get a construction appraisal ordered without losing days.

What is an as-complete appraisal?

A construction loan is made against a property that does not exist yet, at least not in its finished form. So a construction appraisal usually answers more than one question:

• As-is value. What the property is worth today, in its current condition: the land, or the building before the rehab.
• As-complete (or as-completed) value. What the property should be worth on the date the planned improvements are finished, based on the plans, specifications and budget.
• As-stabilized value, for income property. What it should be worth once it is built and leased up to a stable occupancy.

The as-complete value is a prospective opinion. The report has to say what it assumes: that the project is built as described in the plans, on the stated budget, in a workmanlike manner. That is why the documents you send matter so much. An appraiser who cannot see the plans and the budget is guessing.

What does SB 978 say about construction loans?

SB 978 (Vargas, Chapter 669, Statutes of 2012) added Section 10232.3 to the Business and Professions Code. The section applies to “any transaction that involves the sale of or offer to sell a note secured directly by an interest in one or more parcels of real property or the sale of an undivided interest in a note secured directly by one or more parcels of real property.” In other words, it is written for notes and fractional interests in notes that real estate brokers sell to investors.

For those transactions, the section caps the loan, together with any senior liens, at a percentage of “current market value.” Under the current text, the cap is 65 percent for “commercial properties and income-producing properties” and 50 percent for land that is not income producing but is zoned for (and if required, approved for subdivision as) commercial or residential development, among other categories. A broker can exceed those percentages only within further limits and with a written statement of the reasons.

Then come the two paragraphs construction lenders care about.

When more than $100,000 is withheld for construction or rehab at the start of the project (Section 10232.3(a)(4)), “current market value” may be deemed “the value of the completed project” if all of these safeguards are met:

1. An independent neutral third-party escrow holder handles all deposits and disbursements for the construction or rehabilitation.
2. The loan is fully funded, with the entire loan amount deposited in escrow before the deed of trust records.
3. A comprehensive, detailed draw schedule is used.
4. Draws are based on verification from an independent qualified person (a licensed architect, general contractor, structural engineer or active local government building inspector who is not an employee, agent or affiliate of the broker) who certifies the work.
5. “An appraisal is completed by a qualified and licensed appraiser in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).”
6. The documentation describes what happens if the project is not completed, whether from default, insufficient funds or other causes.
7. “The entire amount of the loan does not exceed two million five hundred thousand dollars ($2,500,000).”

When $100,000 or less is withheld (Section 10232.3(a)(5)), the list is shorter: full funding into escrow, a detailed draw schedule, the USPAP appraisal by a qualified and licensed appraiser, the failure-to-complete documentation and the same $2,500,000 loan limit. The independent escrow holder and the third-party draw verification are not on that shorter list.

The plain takeaway: for the loans this section covers, a broker’s own evaluation can support an as-is value, but using the completed value as “current market value” requires a USPAP appraisal by a licensed appraiser. The full current text is on the California Legislature’s site at leginfo.legislature.ca.gov. This is general information, not legal advice. Whether your transaction falls under Section 10232.3, and how the rest of the Real Estate Law applies, is a question for your attorney or your compliance counsel.

What about the appraisal on the lender disclosure?

A related section, Business and Professions Code 10232.5, covers the disclosure statement a broker gives a prospective lender. It calls for the “estimated fair market value of the securing property as determined by an appraisal, a copy of which shall be provided to the lender,” and adds that “a lender may waive the requirement of an independent appraisal in writing, on a case-by-case basis,” in which case the broker provides a written estimate with the objective data behind it. Under Section 10232.6, a broker who engages an appraiser licensed or certified by the Office of Real Estate Appraisers and delivers that appraisal as Section 10232.5 requires has met that part of the disclosure duty and does not need a separate broker estimate. That section does not apply when the appraiser is the broker’s employee.

What goes into an as-complete appraisal?

The analysis is the same discipline as any commercial appraisal, applied to a property that is still on paper:

• Highest and best use. Is the planned project legally permitted, physically possible and financially feasible on this site? A lender wants to know before funding, not after.
• Cost approach. The construction budget is tested against what comparable projects actually cost, plus land value and a reasonable allowance for entrepreneurial incentive. A budget that is too thin is a completion risk.
• Sales comparison. Completed sales of similar new product in the market: new condos, new apartment buildings, new industrial space.
• Income approach, for income property. Achievable rents, vacancy and expenses for the finished building, and what a buyer would pay for that income.
• Timing. The effective date of the as-complete value lines up with the projected completion date, and the report explains the market conditions it assumes.

The projects that cause problems tend to be the ones where the budget, the plans and the rent assumptions do not tell the same story. Catching that early is the point of the appraisal.

What should a lender send the appraiser?

Send it all at once. For a construction or heavy rehab loan, that usually means:

• Plans and specifications (or the best available set if they are not final)
• The construction budget and the draw schedule
• The construction contract and the general contractor’s name
• Permit and entitlement status
• The projected completion date
• For income property: pre-leasing, letters of intent or projected rents
• The intended use of the report and the values you need (as-is, as-complete, as-stabilized)

Why do private lenders call PM Appraisal directly?

Because you talk to the appraiser, not an associate at an appraisal management company. When your credit team has a question about the budget, the comparables or the completion date, the person who walked the site and wrote the report picks up the phone. We are your ears and eyes on the property.

A few things lenders tell us matter to them:

• We do everything everywhere in California. One appraisal firm can cover a pipeline that runs from San Diego to Sacramento.
• Track record with private lenders. Our team has completed more than 2,500 appraisals for California Mortgage Association members, and PM Appraisal is on the approved appraiser lists of Val-Chris Investments, Inc., Stonecrest and East West Bank.
• Independence. On a 113-unit Holiday Inn Express near the gate of Yosemite, a prior appraisal had the hotel at $60 million. Our value came in at about $38.5 million. An independent number is what protects a lender.
• Range. Assignments run from the roughly $86 million Procore campus in Carpinteria to plenty of half-million-dollar properties.
• Speed. Rush commercial appraisals in 5 to 7 business days, and standard commercial reports typically take about 7 to 10 business days.

Our fees are never tied to the appraised value, and we never promise a number. That is what makes the as-complete value worth relying on.

Keep reading

• Hard money and private lender appraisals
• Fix-and-flip and after-repair value (ARV) appraisals
• Rush commercial appraisals in 5 to 7 business days
• How long does a commercial appraisal take in California?

This article is general information, not legal or tax advice. Talk to your attorney or CPA about your situation.