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.
Construction and land loans are the part of real estate lending that examiners track most closely. The first screen in the 2006 interagency CRE guidance is total reported loans for construction, land development and other land at 100 percent or more of the bank’s total capital. For commercial banks that loan total is Call Report Schedule RC-C item 1a, and total capital means total risk-based capital.
The guidance says it does not set a limit, and that banks should not treat the screens as a safe harbor. A bank at or over the level is expected to have stronger risk management and capital for that book.
This matters to a builder or developer because a bank’s room for one more construction loan depends on this ratio as well as on its size. A large bank already near 100 percent may pass on a project that a smaller bank at 40 percent would take. A bank’s construction book also turns over as projects finish and pay off, so room opens and closes during the year. Ask the lender how much construction lending it wants to add this year.
How it shows up in the data here
Each bank page shows construction to capital: construction, land development and other land loans held, divided by tier 1 capital plus the allowance, with the range for similar banks. This is our calculation and not the guidance test, which divides by total risk-based capital. Find lenders that hold construction loans or see construction books ranked.
Go further
- Construction lenders: Banks and credit unions that hold construction and land loans.
- Construction books ranked: Lenders ordered by construction loans held.
- 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.
- How to pick banks for a deal with public data: Public filings cannot tell you which bank will say yes. They can tell you which banks are large enough, already hold loans like yours and lend where the property is. That is enough to turn four thousand banks into six phone calls.
- 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
- CRE concentration: A bank's commercial real estate loans measured against its capital. Federal guidance from 2006 flags 300 percent of total capital, with 50 percent growth in 36 months, for closer review.
- 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.
- 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.
- Total risk-based capital: The sum of a bank's tier 1 and tier 2 capital. The capital rule requires it to be at least 8 percent of the bank's risk-weighted assets.
- Unused commitment: The part of a legally binding promise to lend that the borrower has not drawn yet, such as the open amount on a line of credit or the unfunded balance of a construction loan.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.