Section 350.10  Purpose

 

A method of financing real estate acquisition, development or construction projects is through lending transactions in which the state bank shares in profits, income or earnings generated by the ultimate sale or use of the real estate.  These lending transactions are often structured in such a manner that they are in essence an investment in real estate or a joint venture in which the state bank has virtually the same risks and potential rewards as those of an investor or a joint venturer.  Investments in real estate or a joint venture are not authorized under Sections 3 or 5 of the Illinois Banking Act ("the Act") [205 ILCS 5/3 and 5].  This Part sets forth the general criteria for determining whether acquisition, development or construction lending transactions are an investment in real estate, a joint venture or a loan.

 

Section 350.20  Definitions

 

            "ADC" means acquisition, development or construction.

 

            "ADC lending transaction" means a loan or extension of credit for the purpose of real estate acquisition, development or construction.

 

            "Commissioner" means the Commissioner of Banks and Real Estate.

 

            "creditworthy" means having the financial capacity to issue an irrevocable letter of credit, take-out commitment, non-cancellable sales contract or lease commitment.

 

            "substantial assets" means tangible, saleable assets other than the acquisition, development and construction project which have a determinable sales value and are not pledged as collateral for other loans.

 

            "substantial equity investment" means any of the following:

 

            cash payments;

 

            contribution of land or other assets; or

 

            value added by future development or construction as a result of the borrower's efforts.

 

Section 350.30  Permissible ADC Lending Transactions by State Banks

 

State banks may engage in or purchase participations in ADC lending transactions unless such transactions are structured in such a manner that the state bank has the same risks and potential rewards as those of an investor or a joint venturer in real estate.

 

Section 350.40  Characteristics of ADC Lending Transactions Implying Unauthorized Investments in Real Estate or a Joint Venture

 

Factors which are relevant, if applicable, in determining whether the risks and rewards to the state bank as a result of an ADC lending transaction are similar to those associated with an unauthorized investment in real estate or a joint venture include the following:

 

a)         The state bank agrees to provide more than 90% of the necessary funds to acquire and develop the property.  Although the borrower has title to the property, its equity interest is less than 10% of the funds needed to acquire and develop the property;

 

b)         The state bank funds the interest and fees during the term of the loan by adding interest and fees to the loan balance;

 

c)         The state bank funds the loan commitment or origination fees or both by including them in the amount of the loan;

 

d)         The loan is secured only by the acquisition, development or construction project.  The state bank has no legal right to liquidate other assets of the borrower and the borrower does not guarantee the loan;

 

e)         The ADC lending transaction will not generate income for the state bank unless the property is sold to independent third parties, the borrower obtains refinancing from another source or the property is put to productive use and generates sufficient net cash flow to service debt principal and interest; and

 

f)         The ADC lending transaction is structured so that foreclosure during the project's development is not possible because the borrower is not required to make any loan payments until the project is complete and therefore the loan cannot become delinquent.

 

Section 350.50  Characteristics of ADC Lending Transactions Implying Loans

 

Factors which are relevant, if applicable, in determining whether the risks and rewards to the state bank as a result of an ADC lending transaction are similar to those associated with a loan include the following:

 

a)         The borrower has a substantial equity investment in the acquisition, development or construction project that is not funded by the state bank;

 

b)         The borrower has provided an irrevocable letter of credit to the state bank from a creditworthy third party for the full amount of the loan and the entire term of the loan;

 

c)         A take-out commitment for the full amount of the loan has been obtained from a creditworthy third party;

 

d)         Non-cancellable sales contracts or lease commitments from creditworthy third parties are currently in effect and will provide sufficient net cash flow upon completion of the project to service principal and interest; and

 

e)         Upon default, the state bank has a legal right to liquidate substantial assets of the borrower in satisfaction of the debt.

 

Section 350.60  Procedure

 

A state bank may request a declaratory ruling pursuant to Section 5-150(a) of the Illinois Administrative Procedure Act [5 ILCS 100/5-150(a)] from the Commissioner that an ADC lending transaction is permissible by submitting a written request to the Commissioner which describes the proposed transaction and addresses the factors set forth in Section 350.50.