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4000 - Advisory Opinions

Whether an Appraisal is Required Under 12 C.F.R. § 323.2(g) Where Real Estate Held as Collateral for Existing Loan Changes Legal Form and Where Institution Subordinates its Interest in Leasehold Collateral to Subsequent Lender

FDIC-91-90 December 12, 1991 Walter P. Doyle, Counsel

Thank you for your December 6 letter requesting confirmation of certain opinions stated by me in our telephone conversation on that date regarding the need to obtain an appraisal under FDIC regulations when there is a change in the legal form in which real estate is held as collateral for an existing loan, such as from long-term lease to fee simple ownership or from a cooperative share/proprietary lease to condominium ownership.

Where the only significant change in the terms of a loan is the substitution as collateral of a fee simple interest in the same real estate in which a long-term leasehold interest originally served as collateral, I believe the substitution of collateral would not meet the definition of a "real estate-related financial transaction" under § 323.2(g) of our regulation for reasons quite similar to those discussed in FDIC Advisory Opinion 90-72, referred to in your letter.

Likewise, where the only significant change in loan terms is the substitution as collateral of a fee simple interest in the same condominium unit as to which a cooperative share and proprietary lease interest previously served as collateral, I do not believe the substitution would be a "real estate-related financial transaction" that would trigger the need for an appraisal under our regulation.

However, I certainly do not recall that our phone conversation touched upon the issue of subordination as described in the last full paragraph on page 2 of your letter. In my opinion, a regulated institution's subordination of its interest in long-term leasehold collateral to the interest of a subsequent lender who finances the purchase by the borrower of the reversionary interest in the leased collateral would constitute a "refinancing of real property or interests in real property" under § 323.2(g)(2) of our regulation, thereby necessitating an appraisal thereunder. Nor do I believe that the "renewal" exemption in § 323.3(a)(4) would apply to such a subordination because the obvious intent in clause (iv) thereof is that the regulated institution's "collateral protection" should not be jeopardized. While subordination is not specifically mentioned in clause (iv), an overvaluation of, and consequent overpayment for, the reversionary interest could be construed, in conjunction with the subordination, as an "obvious and material deterioration in market conditions" that would render the exemption inapplicable. Certainly the suborindation could affect the institution's collateral protection just as adversely as the advancing of new funds or a deterioration in the borrower's credit standing.

Please let me know if I can be of any further assistance in this regard.

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