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4000 - Advisory Opinions

New Appraisals of Real Estate Collateral Not Required Where New Obligor is Alter Ego of Prior Obligors and Where Four Criteria Set Forth in Refinancing Exemption (12 C.F.R. § 323.3(a)(4)) are Met


May 7, 1993

Walter P. Doyle, Counsel

Thank you for your recent letter accompanied by a letter dated April 29, 1993 from your client, ***, describing a corporate reorganization that involves changes in corporate obligors and guarantors on certain real estate loans previously originated by *** and then sold, either outright or through participations, to various FDIC-insured institutions. The question is whether FDIC's appraisal regulation (12 CFR Part 323) requires new appraisals due to the changes in loan terms necessitated by the reorganization.

While ***'s letter referred to various exhibits that were not received therewith, that letter does describe the transactions in considerable detail and states that existing obligors have performed satisfactorily under the original loan terms, that their credit standing has not deteriorated, that no new funds are to be advanced except as previously agreed, and that there has been no obvious and material deterioration in market conditions or in the property itself. Since the loans as proposed to be reconstituted pursuant to the reorganization seem to comply with all four criteria in the refinancing exemption in § 323.3(a)(4) of our regulation, the crucial issue would seem to be whether the consolidation of corporate obligors and guarantors called for by the reorganization would render that exemption inapplicable--primarily because the previous obligors are to be replaced by a new corporate obligor resulting from the reorganization. In this regard, ***'s letter states as follows:

"The corporate reorganization described in this letter does not, on its face, result in a material increase in the lenders' reliance on the real property collateral as a source of repayment. The Borrower Subsidiaries are single-asset corporations that have substantially integrated operations, common ownership, common management, guaranties from their owners and, to some extent, cross-guarantees and cross-collateralization among themselves. In the Reorganization, the assets of the Borrower Subsidiaries will be consolidated under a single organization ([Holding Company]) that will be controlled by the same persons ([X and Y]) who, through Enterprises, controlled the Borrower Subsidiaries. [X] and [Y] will continue to guarantee the Loans. The net worth of [Holding Company] will exceed the aggregate net worth of the Borrower Subsidiaries. Day-to-day management of the individual motel facilities will remain essentially unchanged."

In circumstances such as these where the new obligor is essentially the alter ego of the prior obligors and where the four criteria in the refinancing exemption (§ 323.3(a)(4)) are otherwise complied with, it would be our opinion that the exemption applies and that new appraisals of the real estate collateral are not therefore required by the regulation.

Please let us know if we can be of any further assistance.

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