Agenda - Council - 05/31/1983 - Laserfiche WebLink

Home

If I I I I I I I I I I I I I I I I I Letter of Credit Letter of Credit and the Borrower As noted above, for most purposes regulators regard a Letter of Credit as a potential losn, and evaluate the request with at least as stringent standards as a loan request. Borrowers find they have both a lender imposed borrowing limit, based upon the credit risk as evaluated by the lender, and a legal lending limit~ imposed by statute and based upon a percentage of capital. When issued, the letter of Credit would be totalled with all other existing ~bbt and evaluated as against both the lender imposed borrowing limit and the legal lending limit. Therefore, a borrower could not get $750,000 from a lender for a Letter of Credit Lf the lender has a $600,000 legal lending limit. Furthermore~ a lender with a $750,000 legal limit could not issue a Letter of Credit for an amount causing the Letter an~d other borrowings to exceed $750,000. In short, letters of Credit, when issued, use up the borrowing capacity of the borrower, whether the legal borrowing capacity or the lender imposed borrowing limit. As noted, many Letters of Credit m fully collateralized~ often by a first real estate mortgage on a property being developed. Common lending practice would 5_ndicate that a lot development with a finished value of $1,OOO, O00 would support a letter of Credit of no more than $500,000 secured by a first real estate mortgage. In addition~ almost without exception-the borrower would have to personally - guarantee the Letter of Credit. ~his guarantee in turn would create a contingent liability on the borrower's balance sheet, restricting the borrower's borrowing capacity from other lenders. and a mortgag~ ~hough I was not asked, in this letter, to respond to the. proposed standard for Ramsey, I will. I believe it is prudent for the City to seek a 35% Letter of Credit (which falls somewhere between the most restrictive and most liberal requirements). I believe~ however, that c=~ling for a first real estate mortgage in addition to a Letter of Credit~ for the reasons explained below and above, would eliminate nearly aL1 potential developers from considering Ramsey. It seems to me that the people most likely to see the ~potential of a piece of land and be willing to risk all they would under a 35~Letter requirement would not be the long time landowner (certainly there will be a few, such as H & S) but professional developers. Those developers would not or could not~ in most cases, supply a first real estate mortgage. Allow me to explain. As I have noted above, most Letters of Credit are coLlateralized. Most often that collateral is the very laud to be developed unless the developer has substan- tial outside assets, free and clear, which he is willing and able to pledge for the Letter.