FDICIA notes that the term "value" means the lesser of the actual acquisition cost or the estimate of value in the case of a purchase transaction. Are there any guidlines if improvements are being made to the property? For example, if the property is purchased for $2MM and $500M in improvements are made, resulting in an "as will be" appraised value of $3.2MM.....can I use the appraised value in this case to calculate the LTV for FDICIA purposes, or do I still have to use the cost of $2.5MM?? Thanks!

I would use the appraised value. I would base that opinion on the following from the Interagency Real Estate Lending Policy:

"The supervisory loan-to-value limits should be applied to the underlying property that collateralizes the loan. For loans that fund multiple phases of the same real estate project (e.g., a loan for both land development and construction of an office building), the appropriate loan-to-value limit is the limit applicable to the final phase of the project funded by the loan; however, loan disbursements should not exceed actual development or construction outlays."

I would use the purchase price plus improvements, $2.5MM
Frodo2 quote refers to which category loan to value limit you should use on mulitple phase projects. (e.g. loan for land development and constructio) It says to use the limit applicable to the final phase, which would be construction of 80 or 85 percent as opposed to land development at 75 percent.

Just as further clarification of my original answer, I believe this should be treated as a multiple phase project. The first phase being the purchase of the existing building and the second phase being the improvements to the building which based on the appraisal will result in a much higher value than the cost involved. If the loan was only to purchase the existing building and there were no or minimal improvements made then I would agree that you would have to base your LTV on the cost ($2.5 million). The reason is because there would be no apparent justification for using a higher value than purchase price if there were no improvements being made to support using a higher value. The way I read the guidelines the loan you contemplate would be treated the same as a construction loan for LTV purposes and assuming that it is a commercial real estate type property the appropriate LTV would be 80% of the appraised value ($3,200,000 x 80% = $2,560,000) but with funding not to exceed 100% of the cost of $2,500,000 ($2,000,000 purchase price of the building plus $500,000 for improvements).

Sorry, that last post was mine. I forgot to login.

If my final phase is a permanent commercial real estate loan, could I use 85% or do I have to use the 80% guideline during the construction phase?

Well, I hate to admit it but I may have been wrong initially about what LTV can be used. I found the following in the June 2005 OTS Examination Handbook: "Appendix A: One- to Four-Family Residential Real Estate Lending Section 212:


"19. If a bank makes a loan to a borrower to purchase a property and make improvements that will enhance the value over the original cost, on what value should the LTV be based?"

"In general, the LTV should be based on the original cost plus the improvements, however,use the fair market value (per the appraisal or evaluation) as completed after the
improvements are made."

It sounds like based on the OTS interpretation that you could only loan 85% of the $2,500,000 cost initially and then when the improvements are done and the permanent loan is put in place it could be based on 85% of the as completed value of $3,200,000.

I'm not sure what their reasoning is on it but apparently that is the approach the OTS takes and I assume the other Agencies would be in agreement.

The Interagency Guidelines for Real Estate Lending Policies state:

"The supervisory loan-to-value limits should be applied to the underlying property that collateralizes the loan. For loans that fund multiple phases of the same real estate project (e.g., a loan for both land development and construction of an office building), the appropriate loan-to-value limit is the limit applicable to the final phase of the project funded by the loan; however, loan disbursements should not exceed actual development or construction outlays."

That's what I cited in my original response to Anon as support for using the appraised value instead of cost as the appropriate basis for applying the LTV. OTS in their answer to the FAQ states that it should be based on cost initially. Am I interpreting the Interagency guideline wrong or is OTS interpreting it wrong? In the past, I have been considering purchase and rehabs as two phase loans and having a LTV based on the "as completed" appraised value and using 80% during the inital phase and then 85% when the permanent loan is put in place.