Your building concept has taken shape with completed architect’s plans, the finalized site, and other details. There’s one more step: You need to speak with your lender who will conduct an appraisal in order for you to obtain financing. If you’ve waited until right before you’re ready to build to speak with your lender, your facility will probably experience a delay.

“Most people don’t realize how long it takes for an accurate appraisal, especially on new construction,” says Eric Lehmayer, MAI, appraisal services manager for Lancaster, Pa.-based High Associates, Ltd., “Lenders, who usually order the appraisals, should engage an appraiser at least six weeks before the appraisal is needed.”

Although bankers are very interested in financing good projects, they need accurate appraisals to offer the right financing. But not all appraisal situations are the same.

“When financing new construction, there is nothing to go and inspect,” says Mark Poliski, senior vice president and chief credit officer for Union National Community Bank, headquartered in Lancaster, PA. “Lacking something tangible, we must deal with projections, such as determining when the construction will be completed and the likely market value at that time.”

Many intangible factors go into an appraisal. "Factors beyond bricks, sticks, and dirt might be the location, traffic patterns, adjacent uses, and general economic trends,” adds Louis Lombardi, vice president and relationship manager for Fulton Bank of Lancaster, PA. “Finding comparable buildings that have sold recently is critical to understanding market value.”

Cost vs. Value
Regardless of the construction costs, the appraised value may be lower than expected, bringing financing challenges.

“One of the most difficult concepts for people to grasp is that cost does not necessarily equal value,” explains Lehmayer.

With the rapid increases in construction materials and labor expenses, the cost to complete a building may actually be more than its initial value.

“For example, the rising cost of steel may not add value to a property, largely because owners can’t increase the price of a lease to compensate,” explains Lehmayer.
In addition, the desirability of the location may have declined or a building may have certain special-purpose components that will not interest all buyers or lessees.

The Value of Good Plans
Construction companies can help owners obtain the highest appraisal value. “The more homework a construction company does for a project, the easier it is to validate estimates used in their plans,” says Poliski. “The appraiser will then have less of a chance to say, ‘There is no way this building can be built within this budget.’”

Lombardi agrees. “Accurate and complete plans are critical to getting a quality appraisal completed on time with few exceptions,” he said. “Appraisers work best with clear and complete plans and specs.”