ADC loan

A loan to acquire land, develop it or build on it, repaid from the sale, lease-up or refinance of the finished project. Banks report these as construction, land development and other land loans.

ADC stands for acquisition, development and construction. One loan, or a series of loans, pays for the land, then the roads, utilities and lots, then the buildings. The loan is repaid when the finished property is sold, leased up and refinanced, or moved to a permanent loan.

Three sets of federal rules meet on an ADC loan. The supervisory loan-to-value table caps each phase: 65 percent for raw land, 75 percent for land development, and 80 percent for commercial and multifamily construction. The capital rule may treat the loan as an HVCRE exposure with a 150 percent risk weight unless an exemption is met. And the 2006 CRE guidance screens a bank’s total construction and land loans at 100 percent of total capital.

For a borrower this means the lender will budget each phase on its own, fund by draws against work in place, and ask for equity up front. It also means the bank’s own balance sheet matters. Ask a lender how its construction book stands before you spend weeks on a package.

Go further

• Construction lenders: Banks and credit unions that hold construction and land loans.
• Construction books ranked: Lenders ordered by construction loans held.
• LTV and LTC calculator: Loan to value and loan to cost, the equity a lender will ask for, and the federal supervisory limit for the property type.
• Supervisory loan to value limits and HVCRE, explained: Two federal rules shape how much a bank will lend against real estate: a table of loan to value ceilings, and a capital rule that makes some construction loans cost the bank more to hold.
• The CRE concentration guidance, explained: Bank regulators watch how much commercial real estate a bank holds against its capital. The guidance sets two screens. It does not set a limit, and it does not count owner-occupied buildings.
• Construction loan package checklist: A construction lender is lending against a building that does not exist yet. The package has to show what it will cost, who will build it, where every dollar comes from, and how the loan gets repaid when it is done.

Related terms

• HVCRE exposure: A land, development or construction loan that a bank must carry at a 150 percent risk weight under the capital rule unless the project meets an exemption, such as 15 percent borrower capital.
• Construction and land concentration: A bank's construction, land development and other land loans measured against its capital. The 2006 guidance uses 100 percent of total capital as a screen for closer review.
• Supervisory LTV limits: Loan-to-value ceilings in the federal real estate lending guidelines, from 65 percent for raw land to 85 percent for improved property, that a bank's own limits should not exceed.
• A&D loan: One loan that pays to buy land and to develop it into finished lots.
• Construction loan: A short-term loan that pays for building or renovating a property, advanced in stages as work is finished and repaid from a sale or a permanent loan.
• Land loan: A loan to buy land that has not been developed, repaid from other income or from a later sale or development loan.
• Horizontal development: The work that turns raw land into buildable lots: grading, streets, sewer and water lines and utilities, before any building goes up.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.