$12,000,000 Multi-Unit Additional SF, San Fernando Valley, CA

Overview

Commercial Lending Solutions recently closed a $12,000,000 construction loan for the expansion and renovation of an existing occupied multifamily property in the San Fernando Valley. The deal required structuring around California's Rent Stabilization Ordinance, phased permitting on a live asset, and a capital markets landscape with almost no appetite for this specific combination of risk factors. It closed. Here is how it got done.

The Deal

The sponsor owned a multifamily property in the San Fernando Valley that was already operating, already carrying rent-stabilized tenants, and already generating income. The goal was not to tear it down and start over. The sponsor wanted to add square footage and net new units to the existing asset while keeping the property occupied and the in-place rents covering debt service through the construction period. The total loan request came in at $12,000,000, sized to fund hard costs, soft costs, and interest carry across a phased build timeline.

On paper, it sounds like a straightforward value-add construction loan. In practice, it was anything but.

The Challenge

The first problem was the regulatory environment. Adding units to an occupied RSO building in Los Angeles is not the same as building on a vacant lot. The City's Rent Stabilization Ordinance, combined with just-cause eviction protections, meant construction had to be sequenced carefully around tenant relocation requirements. Any lender underwriting this deal had to understand that phased permitting and tenant displacement logistics were not afterthoughts. They were load-bearing parts of the construction timeline and therefore load-bearing parts of the loan structure.

The second problem was the appraisal. Most construction lenders want to underwrite off a stabilized as-complete value. On a ground-up project on a vacant lot, that number is relatively straightforward to support. On an occupied building where the sponsor is adding units in phases, the as-complete appraisal is a projection built on top of an operating asset, layered with entitlement assumptions and a post-construction rent roll that does not yet exist. Very few lenders have the underwriting infrastructure to get comfortable with that kind of appraisal, and fewer still want to take on the entitlement risk of a phased-permit expansion on a building already subject to RSO.

The third problem was deal size. At $12,000,000, the loan was too small for a life company construction-to-perm program. Life companies writing construction debt at this level of complexity want loan sizes that justify the underwriting cost, and $12,000,000 does not get there. CMBS was a non-starter given the construction nature of the loan, and agency programs do not touch occupied value-add expansion deals mid-build. The capital had to come from a lender with genuine Los Angeles multifamily construction experience, real familiarity with RSO dynamics, and actual appetite for this asset type at this loan size.

On top of all of that, post-2023 California construction economics had reset the cost basis assumptions that lenders were using even two years prior. Materials, labor, and insurance costs had all moved materially, which meant any lender pricing off a template from a prior vintage was going to be working with the wrong numbers from the start.

The Solution

Trevor Damyan and the Commercial Lending Solutions team structured the financing as a hybrid that addressed each of these pressure points directly.

The existing in-place NOI was underwritten to support interest carry during the construction period, which removed the lender's exposure to a fully dark debt service scenario during the build. This was not a ground-up deal with zero income. The asset was producing rent, and the structure reflected that reality rather than ignoring it.

The cost basis was rebuilt from current market data, not prior-cycle assumptions, accounting for the actual run-up in California hard costs and insurance. This gave the lender a defensible underwriting foundation and gave the sponsor a loan sized to actually complete the project without a mid-construction capital call.

The completion guaranty was structured to be executable. That means it was sized, scoped, and supported in a way that a regional bank or a CRE-focused debt fund could actually underwrite and approve, not a theoretical guarantee that collapses under scrutiny. The winning capital came from a lender with direct experience in Los Angeles multifamily construction, including occupied value-add work, who could evaluate the RSO sequencing plan and the phased permitting risk without treating them as automatic deal-killers.

Loan-to-cost came in at a level that reflected the complexity of the deal without being punitive to the sponsor, and the loan was structured with a floating rate tied to a recognized index, with a term long enough to accommodate the phased construction schedule and an interest reserve sized to the realistic timeline.

The Outcome

The sponsor closed a $12,000,000 construction loan on a deal that most lenders declined to quote. The structure kept in-place income working through the build, gave the lender the credit support it needed to approve the file, and gave the sponsor a realistic path to completing a meaningful expansion of a San Fernando Valley multifamily asset without displacing the deal into a capital market where it simply did not fit.