Pub. 2 2012-2013 Issue 1

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S July • August 2012 9 to OREO-applicable holding period limitations that result in the ultimate sale of such rental properties. Regulators will expect a clear and credible approach for the ultimate sale of the property. Exit strategies may include special transaction features to facilitate the sale of OREO or rent-to-own arrange- ments with tenants. Large-Scale Residential OREO Rentals The Fed has specific expectations for institutions with large inventories of OREO properties—50 or more individual properties rented or available for rent. Such banking organiza- tions should have a documented operational framework that clearly describes how they will comply with all applicable laws and regulations. Policies and procedures should demonstrate adequate insurance policies are in place, property and other tax obligations are met on a timely basis and improvement expenses are appropriate to the value of the property and prevalent conditions in the local market. Policies and proce- dures should be in place to determine whether properties meet local building code requirements and whether improvements are needed to market them for rent. Banking organizations should establish criteria by which properties are chosen for marketing as rental properties, including the general condi- tions under which a rental approach is likely to be successful. Other unique considerations may include legal requirements on potential action against tenants, including delinquency and eviction, and contracts with third-party vendors to manage properties for adequate reporting to the banking organization. Risk Management Considerations The renting of OREO does not represent a core strength of most banking organizations, and it presents risks with which many bankers may not be familiar. Organizations are expected to comply with all federal, state and local laws and regulations, including landlord-tenant laws, landlord licensing or registration requirements, property maintenance standards and eviction protections. Banking organizations should determine whether rental activities are permissible under applicable laws before renting OREO properties. Banking organizations should review homeowner and condominiumassociation bylaws and local zon- ing laws for prohibitions on renting a property when applicable. Third-party vendors experienced in residential lending can provide the necessary expertise to assist banking organizations in rental propertymanagement. Such vendors are well versed in federal, state and local laws and regulations, as well as dealing with the challenges encountered with the rental of residential property. Third-party vendors can act as a buffer between the banking organization and tenant, allowing personnel to focus on the strengths of the banking organization. Banking organi- zations should provide for adequate oversight of vendors. Con- tracts with third-party vendors should be established to, among other things, provide for sufficient management information systems and reporting to the banking organization. Banking organizations considering OREO rental should evaluate the overall costs, benefits and risks of renting proper- ties. Given the current distressed real estate market, it may be beneficial to hold on to OREO and rent out such properties in certain circumstances. Banking organizations should be aware of the supervisory expectations and risks of renting OREO properties. If you have additional questions on how these guidelines may affect your institution, contact your accounting advisor.  Brian Mischel is a manager with BKD, LLP. Contact the author at bmischel@bkd.com Sierra Ridge Networks utilizes a personal approach — offering complete IT banking solutions to help your business climb to it ’ s O ur engineers carefully consider each clients unique needs-whether they include network development, IT capability maximization, improved support, a competitive edge or better security. Because we employ this process, we're able to provide you with a rock-solid solution. 303.357.0301 www.SierraRidgeNetworks.com Your IT Banking Professionals Banking organizations considering OREO rental should evaluate the overall costs, benefits and risks of renting properties.