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#1994562 - 02/09/15 06:43 PM Reportable or not? Retail Conversion to Apartment
Soccerdad Offline
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Soccerdad
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I have a 36-month loan to purchase a commercial/retail building. Part of the funds are being used to convert part of the space into 20 dwelling units on the second and third floors (first floor remains retail). I don't think it can be reported as a purchase because at the time of purchase it was not a mixed-used building; rather it was commercial. In addition, I am not inclined to report it as a purchase because it is not end-financing and it appears to me to be excluded as temporary financing.
I think that it may be reportable as a home improvement because they are making improvements to real property. But, I am having second thoughts because I am wondering if the temporary nature of the loan may trump the home improvement purpose (making it unreportable). Any thought?

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#1994616 - 02/09/15 07:58 PM Re: Reportable or not? Retail Conversion to Apartment Soccerdad
David Dickinson Offline
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Central City, NE
First you have to make a decision about this building. You look at what your loan will do to the building. In other words, don't think about what the building is today. What will it become with the loan funds? You say the loan will be used to convert part of the space into 20 dwelling units. Therefore, it will be a mixed-used building (commercial/dwelling).

HMDA says: An institution may use any reasonable standard to determine the primary use of the property, such as by square footage or by the income generated. An institution may select the standard to apply on a case-by-case basis. [Commentary to 1003.2]

Classify the building as a dwelling or non-dwelling.

IF you classify it as a non-dwelling, HMDA will not apply.
IF you classify as a dwelling, your loan is being used to purchase and improve it. Purchase trumps improvement, so it would be reported as a purchase.
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#1994632 - 02/09/15 08:18 PM Re: Reportable or not? Retail Conversion to Apartment Soccerdad
Soccerdad Offline
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Ok, Thanks David. I will ignore my concerns about the "temporary" exclusion and report it as a purchase.

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#1994633 - 02/09/15 08:23 PM Re: Reportable or not? Retail Conversion to Apartment Soccerdad
Dan Persfull Offline
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I agree with David's analysis but I want to add that the dwelling space on 2 floors will most likely exceed the retail space and I would also venture a guess the 20 units will most likely generate more income than the retail space.

Based on the limited information in the post I think you may have a difficult time not classifying it as a dwelling, but as a disclaimer we don't have all the facts of the transaction.
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#1994637 - 02/09/15 08:27 PM Re: Reportable or not? Retail Conversion to Apartment Soccerdad
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
I will ignore my concerns about the "temporary" exclusion and report it as a purchase.

I guess I'm wondering how you would classify a 36 month loan as a temporary loan?
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The opinions expressed are mine and they are not to be taken as legal advice.

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#1994661 - 02/09/15 09:14 PM Re: Reportable or not? Retail Conversion to Apartment Dan Persfull
Soccerdad Offline
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Thanks Dan!
I think I could use the square footage to justify reporting it as a dwelling secured mixed-use property.
However, I got hung up thinking about the 36-month term as "temporary".
I think the shorter-term is largely bank driven to avoid prolonged interest rate risks.
What impact does the relatively short 36-month term do to this analysis?
I don't think this loan meets the splash and dash "purchase" scenario because this borrower typically is buy and hold.

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#1994676 - 02/09/15 09:25 PM Re: Reportable or not? Retail Conversion to Apartment Soccerdad
Soccerdad Offline
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Dan, in response to the 36-month as temporary, the loan write-up calls the loan a "construction" loan and I have often seen 24-month construction loans, so 36-months seemed out there, but not impossible. I think the longer construction periods include time to market the units and get them mostly occupied.

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#1994717 - 02/09/15 10:40 PM Re: Reportable or not? Retail Conversion to Apartment Soccerdad
David Dickinson Offline
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David Dickinson
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Central City, NE
"Construction" means the first time. The loan officer might use that term, but this isn't a construction loan. It might be 2-phase financing, but that's a long 1st term and I'm going to bet most examiners won't buy into the "temporary" argument.

Back to Dan's original comment about this being "more dwelling". While I don't want to take an opinion since we don't have all the facts, I think HMDA allows you to consider more than just the 50% income or 50% square footage issues. I've seen many buildings that have retail space or restaurants on the first floor and then have 2 or 3 floors of apartments above. The argument was made that the borrower purchased the building because of the business on the first floor. They are also not letting the dwelling space go to waste, but that's not the primary reason for purchasing the building. Hence, HMDA allows you to apply this on a case-by-case basis.

Again, we don't have the facts. You do. You'll need to determine what this building is. And be sure to document your logic. Good luck!
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#1994732 - 02/09/15 11:09 PM Re: Reportable or not? Retail Conversion to Apartment Soccerdad
Soccerdad Offline
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Thanks Dave!

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