We would like to finance the sale of an OREO property to a buyer who cannot provide the required down payment to satisfy the initial investment required by the OREO accounting rules (10% in this case). Can the buyer satisfy the initial investment requirement by providing another property as collateral, or by making substantial improvements valued over 10%? What if we were to provide a bridge loan to the buyer for improvements before selling the property to the borrower? Our FDIC examiners are telling us that these approaches are acceptable for the full accrual accounting method, but our accounting firm disagrees.

We cannot provide guidance on whether any of these approaches would satisfy the criteria for full accrual accounting, and we recommend following the advice of your accounting firm. To ensure that you are on the same page with your FDIC examiners, we recommend reviewing the FFIEC Call Report Instructions and the relevant FASB Accounting Standards.

The FFIEC Call Report Instructions direct banks to ASC Subtopic 360-20 when accounting for sales of real estate where the bank provides financing to the buyer. Within that Subtopic, Section 360-20-40-10 states that the buyer’s initial investment must be one of four categories (cash, notes supported by irrevocable letters of credit from an independent lending institution, payments by the buyer to third parties to reduce an existing indebtedness on the property, or “other amounts paid by the buyer that are part of the sales value”). Section 360-20-40-13 specifically excludes “payments by the buyer to third parties for improvements to the property” and “any funds that have been or will be loaned, refunded, or directly or indirectly provided to the buyer by the seller.” Also, Section 360-20-55-67 states that “purchased property or other assets pledged as security for a note should not be included as part of the buyer’s initial investment.”

Taken together, these statements appear to prevent the use of collateral or improvements as part of the required initial investment. We are not experts on accounting standards, but our instincts tell us to defer to your accounting firm to the extent they are advising a more cautious approach than your examiners in this situation.

For resources related to our guidance, please see:

FFIEC Call Report Instructions (June 2015), page 630 (“The primary accounting guidance for sales of foreclosed real estate is ASC Subtopic 360-20, Property, Plant, and Equipment – Real Estate Sales (formerly FASB Statement No. 66, ‘Accounting for Sales of Real Estate’). This standard, which applies to all transactions in which the seller provides financing to the buyer of the real estate, establishes the following methods to account for dispositions of real estate. If a profit is involved in the sale of real estate, each method sets forth the manner in which the profit is to be recognized. . . .”)

ASC Subtopic 360-20, Section 360-20-40-10 (“The buyer’s initial investment shall include only the following: a. Cash paid as a down payment; b. The buyer’s notes supported by irrevocable letters of credit from an independent established lending institution, that is, an unrelated institution such as a commercial bank unaffiliated with the seller; c. Payments by the buyer to third parties to reduce existing indebtedness on the property; d. Other amounts paid by the buyer that are part of the sales value.”)

ASC Subtopic 360-20, Section 360-20-40-13 (“The initial investment shall not include any of the following: a. Payments by the buyer to third parties for improvements to the property; b. A permanent loan commitment by an independent third party to replace a loan made by the seller; c. Any funds that have been or will be loaned, refunded, or directly or indirectly provided to the buyer by the seller or loans guaranteed or collateralized by the seller for the buyer. As an example, if unimproved land is sold for $100,000, with a down payment of $50,000 in cash, and the seller plans to loan the buyer $35,000 at some future date, the initial investment is $50,000 minus $35,000, or $15,000.”)

ASC Subtopic 360-20, Section 360-20-55-67 (“This Subtopic precludes profit recognition under the full accrual method for this transaction because purchased property or other assets pledged as security for a note should not be included as part of the buyer’s initial investment.”)