August 2, 2018 – First, thanks to a bank client for sharing some real-world situations with me and allowing me to post them to my blog. Also, thanks to the regulators for providing anonymous explanations of how FIRREA applies.
SCENARIO – Any City USA – We financed one 4-plex (units cannot be sold individually) and eventually there may be more than four 4-plex properties. At what point do we consider this tract development, therefore would need discounted cash flow analysis completed?
Assumption – Ignore any land for future development
Assumption – All development occurs in same development
FIRREA Application Under Several Situations:
First 4-Plex – This is a SINGLE 1-4 Family residential property. Therefore, the $250,000 threshold applies and an evaluation is required if the loan amount is $250,000 or lower. As always, the bank can choose to order an appraisal. If the loan amount is above $250,000 then an appraisal is required.
Two 4-Plexes at once – This falls under Commercial Real Estate Transaction and the new $500,000 threshold. A loan amount at or below the threshold requires an evaluation and above the threshold requires an appraisal.
Five or more 4-Plexes – This meets the definition of Tract Development and would need a discounted cash flow analysis completed. Some exceptions are possible, but generally a DCF analysis is performed. The $500,000 threshold applies as to whether the DCF is done in an evaluation or appraisal.
With the new definition of Commercial Real Estate Transaction and the new threshold of $500,000, the above project shows the realm of possibilities.
As always, please contact me if you want to discuss this.
Also, as always, I encourage you to contact the authors of the 2018 interagency bulletin that introduced the new definition and threshold. They can give an ‘official’ opinion on how to handle your particular situation. You do not need to provide a borrower’s name or such. They simply want to help you follow FIRREA correctly.
I will be posting a few more scenarios over the next few weeks….check back often:)