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  Category: Articles » Finance » Loans » Article
 

Commercial Loans: The Power of Permits




By Craig Higdon

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.
 
 
About the Author
Craig Higdon, "The Mortgage Black Belt," is a commercial mortgage broker. He publishes the weekly "Investment Property Insider" e-zine and the "Real Estate Secrets Blog" (www.RealEstateSecretsBlog.com). Sign up now and get a bonus FREE report at http://www.InvestorPropertyResouces.com/CommercialNewsletter.

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  Some other articles by Craig Higdon
Effective Real Estate Strategies for Slow Markets
Speeding Commercial Real Estate Sales in Slow Markets Effectively building commercial real estate wealth requires the ability to ...

How to Purchase Underperforming Properties with Construction Loans
A SECRET STRATEGY TO TURN LOSERS INTO WINNERS I received a question from a Realtor last week that will give you insight into a purchase strategy that you can use with a commercial ...

Commercial Real Estate Syndication: Controlling the Property
Getting Control of the Property We've been discussing the process of assembling groups of investors for the purpose of acquiring income producing commercial real estate. As ...

Apartment Loans: Common Multifamily Misconceptions
I had the opportunity this past week to answer a number of questions about apartments. I find a great deal of misinformation ...

Commercial Real Estate Syndication: Property Selection and Purchase, Part 2
We've been discussing the process of assembling groups of investors for the purpose of acquiring income producing commercial real estate. The first part of this article can be found at www.InvesmentPropertyInsider.com/?p=97. We'll assume for the ...

Commercial Real Estate Syndication: Property Selection and Purchase, Part 1
Let's assume that you've decided to start assembling groups of investors to buy investment real estate. If you followed my Roadmap of a successful syndication in my previous articles (Part 1 and Part 2), ...

  
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