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My husband and I own an apartment building in Chicago near White Sox Park. It has foundation issues and a water line issue. It has 3 apartments. One apartment is gutted and we have not done any work on it yet. We have a 48K equity loan. With this equity, can we tear down the building and get a construction loan?

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    Have you asked your lender yet? What did they say?
    – Ben Miller - Remember Monica
    Sep 14, 2018 at 20:28
  • one option, IF you simply sell it, will that clear the 48k debt and leave you some cash money?
    – Fattie
    Sep 15, 2018 at 4:10

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If it is worthwhile for you tear the building down, presumably the building is not contributing to the value of the property. What would an appraisal say? If the building itself is already worthless, then your lender has nothing more to lose. If the land alone is worth more than $48K, your lender has even less reason to care. So even if the lender has the right to object, they may approve.

Generally the interests of your lender and you are aligned regarding management of the collateral. The things a lender wants to prevent you from doing are things that would be a bad idea for you too, like failing to insure or maintain the property. You seem to have a building beyond economic repair, a dead house standing. How it got that way is another issue -- I'll assume it wasn't negligence by you, or by someone else who needs to be sued, or some incident that your required insurance would cover.

Getting a construction loan would be similar to any other case where you own a property with some existing debt and want to build/improve. The loan might even cover the cost of the teardown if that is part of the approved construction plan.

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When you say that you have an "Equity Loan", are you saying that you have a line of credit that uses your building as collateral?

If I understand your position correctly - The lender will periodically value the collateral (usually at least every year) and will cancel the line of credit as soon as they find out that the Available Line Amount is larger than the value of the collateral itself. I'm sure they have clearly outlined against destroying the building. But it's worth asking...

Even if you somehow get past them, finding a lender who will approve you for a construction loan will be impossible. They'll see how leveraged you are without any underlying assets to back the loan obligation/credit line for the previous Bank.

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    I wouldn't be shocked if the land value itself is significantly more than 48K
    – D Stanley
    Sep 14, 2018 at 22:12
  • "a construction loan will be impossible" -- an overstatement. $48K is not necessarily large in relation to the deal. As D Stanley says, the land has value. People can have some amount of debt and still get a construction loan.
    – nanoman
    Sep 15, 2018 at 2:43

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