Question
Should ADC exposures include exposures related to financing land acquisition for development and construction purposes or the development and construction of residential or commercial property for borrower’s own use?
Background on the question
ADC exposure is defined in CRR3 (4)(1)(78a) as exposures to corporates or special purpose entities financing any land acquisition for development and construction purposes, or financing the development and construction of any residential property or commercial immovable property. According to memorandum of European Comission’s proposal heightened risk of ADC exposures is due to the fact that the source of repayment at origination of the loan is either a planned, but uncertain sale of the property, or substantially uncertain cash flows. Financing of development or construction of commercial property for borrower’s own use (eg. warehouse, industrial premises) does not carry any additional risk compared to other general corporate loans because repayment of such loans is depended on the borrower’s income instead of cash flows generated by the financed property. Therefore, it would it seem reasonable to treat these exposures as exposures to the borrower rather than ADC exposures.