Bank Call Report FAQ: When is a Loan Owner Occupied?
The call report guidelines for coding loans are more complex than many bankers realize. So continuing our blog series on call report frequently asked questions, today we will address the often confusing topic of owner occupied vs. non-owner occupied commercial real estate.
Definition
The instructions for Schedule RC-C define owner occupied non-farm, non-resident loans as loans for which the primary source of repayment of the loan is the cash flow from the ongoing operations and activities conducted by the party that owns the property (or an affiliate). Therefore, the primary source of repayment cannot be from rental income or from the sale or refinancing of the building.
As a result, an owner occupied loan has less to do with where the owner is physically located and much more to do with how the loan will be repaid.
An Example to Consider
Jane Smith owns a strip mall containing 3 units. The first unit is 5,000 square feet and is rented to a bakery for $4,000 per month, the second unit is 8,000 square feet and rented to a retailer for $6,000 per month, the third unit is Jane’s art gallery, which generates net income of $2,000 per month. The monthly P&I on the loan is $9,000.
For call report purposes, should this loan be considered owner-occupied or non-owner occupied?
Assuming Jane doesn’t have significant income from other sources, this loan should be considered non-owner occupied even though Jane’s business physically occupies the space. This is because the cash flow to repay the loan is dependent on the tenants.
There Are Always Exceptions
Per the call report instructions, certain types of loans should always be classified as owner occupied for call report purposes unless the property is owned by an investor who leases the property out to an operator. These include:
- Hospitals
- Golf Courses
- Recreational facilities
- Car Washes
Other types of loans should always be classified as non-owner occupied regardless of the source of repayment including:
- Hotels and Motels
- Dormitories
- Nursing Homes and Assisted Living Facilities
- Mini-storage warehouses and similar properties
Next Steps
Regulators routinely consider a bank’s concentration in non-owner occupied commercial real estate loans as part of their analysis of the overall risk in a bank’s loan portfolio. So properly and consistently coding commercial real estate loans can be critical.
We recommend that banks designate someone to review their more complicated loan structures and to make the final decision on how loans should be coded for call report purposes.
If you have questions about the call report or loan coding, CLA is here to help. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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