Current through Register Vol. 63, No. 9, September 1, 2024
In addition to the foregoing, the following requirements apply
to a construction and development loan made by a credit union.
(1) For the purposes of this section, a
construction or development loan means any financing arrangement to enable the
borrower to acquire property or rights to property, including land or
structures, with the intent to construct or renovate an income producing
property, such as residential housing for rental or sale, or a commercial
building, such as may be used for commercial, agricultural, industrial, or
other similar purposes. It also means a financing arrangement for the
construction, major expansion or renovation of the property types referenced in
this section. The collateral valuation for securing a construction or
development loan depends on the satisfactory completion of the proposed
construction or renovation where the loan proceeds are disbursed in increments
as the work is completed. A loan to finance maintenance, repairs, or
improvements to an existing income producing property that does not change its
use or materially impact the property is not a construction or development
loan.
(2) A credit union that
elects to make a construction or development loan must ensure that its
commercial loan policy includes adequate provisions by which the collateral
value associated with the project is properly determined and established. For a
construction or development loan, collateral value is the lesser of the
project's cost to complete or its prospective market value.
(a) For the purposes of this section, cost to
complete means the sum of all qualifying costs necessary to complete a
construction project and documented in an approved construction budget.
Qualifying costs generally include on-site or off-site improvements, building
construction, other reasonable and customary costs paid to construct or improve
a project, including general contractor's fees, and other expenses normally
included in a construction contract such as bonding and contractor insurance.
Qualifying costs include the value of the land, determined as the lesser of
appraised market value or purchase price plus the cost of any improvements.
(A) For land that has been held for an
extended period, generally more than 12 months, by a borrower or principal, the
credit union may use the market value of the land, as documented by a current
appraisal.
(B) Any appreciation
represented in the real estate valuation must be realistic and well-supported
by current market conditions in an appraisal.
(C) Qualifying costs also include interest, a
contingency account to fund unanticipated overruns, and other development costs
such as fees and related pre-development expenses. Interest expense is a
qualifying cost only to the extent it is included in the construction budget
and is calculated based on the projected changes in the loan balance up to the
expected "as-complete" date for owner-occupied non-income producing commercial
real estate or the "as-stabilized" date for income producing real estate.
Project costs for related parties, such as developer fees, leasing expenses,
brokerage commissions, and management fees, are included in qualifying costs
only if reasonable in comparison to the cost of similar services from a
third-party. Qualifying costs exclude interest or preferred returns payable to
equity partners or subordinated debt holders, the developer's general corporate
overhead, and selling costs to be funded out of sales proceeds such as
brokerage commissions and other closing costs.
(b) For the purposes of this section,
prospective market value means the market value opinion determined by an
independent appraiser in compliance with the relevant standards set forth in
the Uniform Standards of Professional Appraisal Practice. Prospective value
opinions are intended to reflect the current expectations and perceptions of
market participants, based on available data. Two prospective value opinions
may be required to reflect the time frame during which development,
construction, and occupancy occur. The prospective market value "as-completed"
reflects the property's market value as of the time that development is to be
completed. The prospective market value "as-stabilized" reflects the property's
market value as of the time the property is projected to achieve stabilized
occupancy. For an income producing property, stabilized occupancy is the
occupancy level that a property is expected to achieve after the property is
exposed to the market for lease over a reasonable period of time and at
comparable terms and conditions to other similar properties.
(3) A credit union that elects to
make a construction and development loan must also ensure that its commercial
loan policy meets the following conditions:
(a) Qualified personnel representing the
interests of the credit union must conduct a review and approval of any line
item construction budget prior to closing the loan;
(b) A credit union approved requisition and
loan disbursement process is established;
(c) Release or disbursement of loan funds
occurs only after on-site inspections, documented in a written report by
qualified personnel representing the interests of the credit union, certifying
that the work requisitioned for payment has been satisfactorily completed, and
the remaining funds available to be disbursed from the construction and
development loan is sufficient to complete the project; and
(d) Each loan disbursement is subject to
confirmation that no intervening liens have been filed.
Statutory/Other Authority: ORS
723.102
Statutes/Other Implemented: ORS
723.152,
723.156 &
723.512
