California Real Estate Finance
Fesler & Brady
10th Edition
Chapter 12
Construction Loans
© 2016 OnCourse Learning
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
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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
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Short term (9 – 12 months)
Could be with permanent (Take-out loan)
Advanced on stages of construction
Interest only
Construction and Permanent
Financing
• Construction-toPermanent
– 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
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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 30-90 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 offsite 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?