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New Joint Ventures are Being Planned for Problem Assets

Thursday, April 01, 2010 - Frank Gonzalez,CPA / CFF

Frank Gonzalez

Banks that are considering the disposition or restructuring of some of their real estate loans and real estate owned could have access to a new alternative structure by the end of 2010.Currently, there are reports that advisory firms are forming a type of joint venture limited liability corporation (LLC) that would manage and provide new capital for loans and properties that banks place within the joint venture.

Under the new LLC, banks would retain partial ownership of the loans and properties that are accepted by the joint venture, which would manage those assets with a goal of holding them until their market values recover or until it can arrange sales at prices that are acceptable to participating banks. Joint ventures that are being formed would consider all types of residential and commercial properties and loans, including loans on which payments are current, for inclusion under the management structure. A bank would pay the joint venture manager a fee for its services.

Assets placed within the joint venture would continue to be accounted for under U.S. Generally Accepted Accounting Principles. A bank would need approval from its regulators and from accountants and attorneys to participate in the joint venture.It is anticipated that some banks that have been considering sales of assets would find economic and operational attractions in this kind of joint venture.

Numerous banks in Florida and other states have already written down the value of many non-performing loans and classified real estate assets. When they attempt to sell those assets, they are usually finding prices that are considerably lower than carrying value. If banks sell assets at those low prices, they will need to take money from their loan loss reserves – while also eliminating their opportunity for a recovery of value.

The joint venture's real estate and financial professionals would manage and pay ongoing taxes and other expenses for maintaining each asset, with a pre-determined plan for a timeframe of holding. In each case, the goal would be to recapture 100 percent of current book value, through a sale or through holding the asset until its market price recovers.

Banks that place assets under the management of the joint venture would reduce the amount of time and expense that their management spends on real estate workouts, and instead utilize those resources on lending and other operations.

Participation in the type of joint venture described above and in other programs for management or for sales of real estate assets could be permissible by regulators and otherwise appropriate for some banks, but not all banks. Before entering into any such program, banks should review the program's business plan and terms of condition with auditors and legal counsel.

Special consideration should be given to the following accounting standards that deal with sales of assets and consolidation issues:

  • Subtopic 810-10-05 of the Financial Accounting Standards Board's (FASB) Accounting Standards Codification, originally issued as Financial Interpretation 46(R) Consolidation of Variable Interest Entities.
    • This was later amended as Statement of Financial Accounting Standards No. 167 Amendments to FASB Interpretation No. 46(R).
    • It is Subtopic 810-10-(30-65) under the Accounting Standards Codification.
  • Subtopic 860-10-65 of the Accounting Standards Codification, originally issued as Statement of Financial Accounting Standards No. 166 Accounting for Transfers of Financial Assets.
    • Also part of Subtopic 860-10-65 is Statement of Financial Accounting Standards No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
    • In future Balance Sheet articles and in Bank Advisories, MBAF will provide additional information about new programs for management and disposition of real estate assets.

The purpose of this newsletter is to provide general information on tax, audit and other issues related to the financial services industry. The information contained herein may not apply to all institutions or organizations and their specific circumstances. Financial services organizations are encouraged to consult directly with an accounting expert before making tax and accounting decisions.