Letter states that when a national bank makes loans to two entities related through common control ("A" & "B") and A and B each pays more than 50% of its gross annual expenditures to a third related entity ("X"), substantial financial interdependence exists and the loans to A & B will be attributed to X under 12 C.F.R. 32.5(c)(2) and thus combined for purposes of the legal lending limit, even where X does not borrow directly from the national bank.

O

Comptroller of the Currency

Administrator of National Banks

Central District Office

One Financial Place, Suite 2700

440 South LaSalle Street

Chicago, Illinois 60605

January 18, 2001 Interpretive Letter #938

July 2002

12 USC 84(d)(2)(b)

Dear [ ];

This is in response to your letter of December 11, 2000. You have requested the OCC’s

opinion as to whether certain loans made by [ ] (“Bank”) to two separate

borrowing entities that are related through common ownership would be combined for lending

limit purposes. Based on the information you provided in your letter and subsequent e-mails,

it is my opinion that the two Bank loans may be combinable for purposes of the legal lending

limit during the year 2001 for the reasons set forth below.

I. Facts

The Bank has two outstanding credit facilities totaling $14,620,000 to two limited liability

companies managed by [ ] (“Inc.”). [ Inc. ] is wholly owned by

[ A ], [ B ], and [ C ].

The first credit is a $9,620,000 line of credit to [ ] (“West”) for the purposes

of land acquisition and site development. The acquired property is 67 acres located on the west

side of Rt. [ # ] in [ City, State ]. West will develop the site for shopping center lots

for sale to retailers. Repayment of the loan is expected from sale of the developed lots to various

retailers, including [ #1 ] and [ #2 ]. The owners of West are:

[ A ]

29.5%

[ B ]

29.5%

[ C ]

29.5%

[ D ]

8%

[ E ]

2.5%

[ Inc. ]

1%

City, State ]. West will develop the site for shopping center lots

for sale to retailers. Repayment of the loan is expected from sale of the developed lots to various

retailers, including [ #1 ] and [ #2 ]. The owners of West are:

[ A ]

29.5%

[ B ]

29.5%

[ C ]

29.5%

[ D ]

8%

[ E ]

2.5%

[ Inc. ]

1%

2

The loan is guaranteed by [ Inc. ], [ A ], [ B ], and [ C ]. West may use [

] (“Inc.2”), a wholly-owned subsidiary of [ Inc. ], to perform the site

development work.

The second credit is a $5 million line to [ ] (“East”). The purpose of

this loan is to finance the land acquisition and site development phase of a two-phase

shopping center development project. The second phase, involving the construction of retail

stores on the site, will be financed through a conventional commercial construction loan. The

phase two financing will not be underwritten until a majority of the leases with the major

tenants are executed. [ Inc. ] currently has secured letters of intent from 100% of the major

tenants (i.e., [ #3 ], [ #4 ], [ #5 ], [ #6 ], and [ #7 ]). The expected

source of repayment of the loan will be a take out by the phase two financing. East is owned

by:

[ A ]

24.83%

[ B ]

24.83%

[ C ]

24.83%

[ D ]

22%

[ E ]

2.5%

[ Inc. ]

1.01%

The loan is guaranteed by [ Inc. ], [ A ], [ B ], and [ C ]. East may also use [Inc.2 ] to

perform the site development work.

The projected cash expenditures for East and West for the development period are as

follows (in thousands):

EAST

2000

2001

TOTAL

Land Acquisition

4,709

0

4,709

Site development

1,500

8,700

10,200

Other

876

1,526

2,402

Total

7,085

10,226

17,311

WEST

2000

2001

2002

TOTAL

he loan is guaranteed by [ Inc. ], [ A ], [ B ], and [ C ]. East may also use [Inc.2 ] to

perform the site development work.

The projected cash expenditures for East and West for the development period are as

follows (in thousands):

EAST

2000

2001

TOTAL

Land Acquisition

4,709

0

4,709

Site development

1,500

8,700

10,200

Other

876

1,526

2,402

Total

7,085

10,226

17,311

WEST

2000

2001

2002

TOTAL

3

WEST

2000

2001

2002

TOTAL

Land Acquisition

9,302

0

130

9,432

Site development

1,230

1,075

0

2,305

Other

468

419

60

947

Total

11,000

1,494

190

12,684

II. Legal Analysis

Generally, a national bank’s total outstanding loans to one borrower may not exceed 15% of

the bank’s capital and surplus, plus an additional 10% of capital and surplus if the amount over

the 15% general limit is fully secured by readily marketable securities.1 A “borrower” includes

a person who is named a borrower or debtor in a loan or extension of credit.2 Also, loans to

one borrower will be attributed to another person and both will be considered a borrower (1)

when the proceeds are used for the direct benefit of the other person, or (2) when a common

enterprise is deemed to exist between the persons.3

The proceeds of a loan to borrower will be deemed to be used for the direct benefit of another

person and will be attributed to that other person when the proceeds, or assets purchased with

such proceeds, are transferred to that other person, other than in a bona fide arm’s length

transaction where the proceeds are used to acquire property, goods, or services.4

A common enterprise is deemed to exist when:

(1)

the expected source of repayment for each loan is the same and neither borrower has

another source of income from which the loan and the borrower’s other obligations

can be repaid;

h proceeds, are transferred to that other person, other than in a bona fide arm’s length

transaction where the proceeds are used to acquire property, goods, or services.4

A common enterprise is deemed to exist when:

(1)

the expected source of repayment for each loan is the same and neither borrower has

another source of income from which the loan and the borrower’s other obligations

can be repaid;

(2)

the borrowers are related through common control and there is substantial financial

interdependence between or among the borrowers;

1 See 12 U.S.C. § 84(a); 12 C.F.R. § 32.2(a).

2 12 C.F.R. § 32.2(a).

3 See 12 C.F.R. § 32.5(a). A guarantor is considered a “borrower” only if that guarantor is deemed to be a

borrower under the direct benefit or common enterprise tests set forth at 12 C.F.R. § 32.5. See 12 C.F.R. § 32.2(a).

4 12 C.F.R. § 32.5(b)

4

(3)

the borrowers use the loan proceeds to acquire more than 50% of a business

enterprise; or

(4)

the OCC determines that a common enterprise exists based on the facts and

circumstances of particular transactions.5

Thus, in determining whether a loan to one borrower should be attributed to another borrower

for lending limit purposes, one must apply each of the five loan combination/attribution tests

set forth above -- the one direct benefit test and the four common enterprise tests -- to the

specific facts of each loan relationship.6

A.

Direct Benefit Test

According to your letter, loan proceeds for both the West and East loans will be used to

acquire land and pay for site development costs. Some of those proceeds may be paid to [

Inc.2 ] for site development work. As long as payments to [ Inc.2 ] result from bona fide

arm’s length transactions, the proceeds of the West and East loans paid to [ Inc.2 ] will not

be attributed to [ Inc.2 ] under the direct benefit test at 12 C.F.R. § 32.5(b).

B

oans will be used to

acquire land and pay for site development costs. Some of those proceeds may be paid to [

Inc.2 ] for site development work. As long as payments to [ Inc.2 ] result from bona fide

arm’s length transactions, the proceeds of the West and East loans paid to [ Inc.2 ] will not

be attributed to [ Inc.2 ] under the direct benefit test at 12 C.F.R. § 32.5(b).

B.

Common Enterprise Test # 1 - Common Expected Source of Repayment

The expected source of repayment on the West loan is the sale of the developed lots to various

retailers. The expected source of repayment on the East loan will be the proceeds of the phase

two construction loan. Since the expected sources of repayment of the two loans are different,

the loans will not be combined for purposes of the lending limit under the common enterprise

test at 12 C.F.R. §32.5(c)(1).

C.

Common Enterprise Test # 2 - Common Control and Significant Financial

Interdependence

As stated above on page three, one way in which a common enterprise is deemed to exist is

when:

(1)

the borrowers are related through common control, and

5 See 12 C.F.R. § 32.5(c).

6In addition to the general limit on loans to one borrower, there is an additional limit which applies to loans

to a corporate group. See 12 C.F.R. § 32.5(d). Loans to a corporate group may not exceed 50% of a national bank’s

capital and surplus. 12 C.F.R. § 32.5(d)(1). A corporate group is defined as a person and all of its subsidiaries. Id.

For the purpose of this rule, a corporation or limited liability company is a subsidiary of a person if that person owns

more than 50% of the voting interests of the corporation or company. Id. This limit is independent of the general

15% limit on loans to one borrower set forth at 12 U.S.C. § 84 and 12 C.F.R. § 32.3. This special limit applies to a

corporate group regardless of whether loans to different members of the corporate group are combined for the

general 15% limit.

5

ary of a person if that person owns

more than 50% of the voting interests of the corporation or company. Id. This limit is independent of the general

15% limit on loans to one borrower set forth at 12 U.S.C. § 84 and 12 C.F.R. § 32.3. This special limit applies to a

corporate group regardless of whether loans to different members of the corporate group are combined for the

general 15% limit.

5

(2)

there is substantial financial interdependence between or among the borrowers.7

Borrowers are related through common control when one person or entity controls another, or

two or more entities are each controlled by the same person or entity. For the purposes of this

combination rule, control is deemed to exist if a person directly or indirectly, or acting through

or together with one or more persons either (1) owns or controls 25% or more of the voting

securities of another person, (2) controls in any manner the election of a majority of the

directors or trustees of another person, or (3) has the power to exercise a controlling influence

over the management or policies of another person.8

Based on the information in your letter, West, East, [ Inc.2 ] and [ Inc. ] are related through

the common control of [ A ], [ B ], and [ C ]. The next question, then, is to determine

whether substantial financial interdependence exists between or among the control group

members. Substantial financial interdependence is deemed to exist when 50% or more of one

person’s annual gross receipts or gross expenditures are derived from transactions with the

other person. 12 C.F.R. § 32.5(c)(2)(ii). In determining whether substantial financial

interdependence exists, we look at the borrower’s gross receipts or gross expenditures “on an

annual basis.” When calculating a borrower’s gross receipts or gross expenditures on “an

annual basis,” the relevant annual period will generally be the fiscal year used by the

borrower.9 Both West and East have a calendar year fiscal period

§ 32.5(c)(2)(ii). In determining whether substantial financial

interdependence exists, we look at the borrower’s gross receipts or gross expenditures “on an

annual basis.” When calculating a borrower’s gross receipts or gross expenditures on “an

annual basis,” the relevant annual period will generally be the fiscal year used by the

borrower.9 Both West and East have a calendar year fiscal period.

Accordingly, if 50% or more of West’s annual gross receipts or gross expenditures were

received from or paid to East, [ Inc.2 ], or [ Inc.], then substantial financial interdependence

would exist between West and such entity or entities, and loans to West would be attributed to,

or combined with loans to, such entity or entities. Similarly, if 50% or more of East’s annual

gross receipts or gross expenditures were received from or paid to West, [ Inc.2 ], or [ Inc. ],

then substantial financial interdependence would exist between East and such entity or entities,

and loans to East would be attributed to, or combined with loans to, such entity or entities.

The same analysis would apply to each member of the common control group.

Assuming that all of the site development costs incurred by West and East will be paid to [

Inc.2 ], those payments to [ Inc.2 ] will represent 85% and 72%, respectively, of

West’s and East’s gross annual expenditures for the fiscal year 2001.10 Thus, for the year

7 See 12 C.F.R. § 32.5(c)(2).

8 See 12 C.F.R. § 32.2(g). The term "person" as used section 32.2(g) means, among other things, a

corporation, limited liability company, partnership or a trust. See 12 C.F.R. § 32.2(k).

9 See OCC Interpretive Letter from Jonathan Rushdooney, Attorney (December 24, 1986) (unpublished)

l year 2001.10 Thus, for the year

7 See 12 C.F.R. § 32.5(c)(2).

8 See 12 C.F.R. § 32.2(g). The term "person" as used section 32.2(g) means, among other things, a

corporation, limited liability company, partnership or a trust. See 12 C.F.R. § 32.2(k).

9 See OCC Interpretive Letter from Jonathan Rushdooney, Attorney (December 24, 1986) (unpublished).

10 West’s projected site development costs for 2001 of $8,700M divided by its total projected expenditures

for 2001 of $10,226M equals 85%; East’s projected site development costs for 2001 of $1,075M divided by its total

projected expenditures for 2001 of $1,494M equals 72%.

6

2001, there will be substantial financial interdependence between West and [ Inc.2 ] and

between East and [ Inc.2 ].11

Consequently, for the year 2001 loans to West will be attributed to [ Inc.2 ] because (1) the

two entities are related through common control, and (2) substantial financial interdependence

exists between the two entities for the year 2001. Likewise, for the year 2001 loans to East

will be attributed to [ Inc.2 ] because (1) the two entities are related through common control,

and (2) substantial financial interdependence exists between the two entities for the year 2001.

Thus, the loans to West and East will be attributed to [ Inc.2 ] during 2001, and therefore

are combined for the purpose of the lending limit under 12 C.F.R. § 32.5(c)(2).

D.

Common Enterprise Test # 3 - Borrowing to Acquire Control

This test is not applicable to the West and East loans.

E

,

and (2) substantial financial interdependence exists between the two entities for the year 2001.

Thus, the loans to West and East will be attributed to [ Inc.2 ] during 2001, and therefore

are combined for the purpose of the lending limit under 12 C.F.R. § 32.5(c)(2).

D.

Common Enterprise Test # 3 - Borrowing to Acquire Control

This test is not applicable to the West and East loans.

E.

Common Enterprise Test # 4 - Facts and Circumstances

OCC rulings and interpretations reveal that a very strong evidentiary record based upon a

number of factors must exist before a common enterprise will be found to exist solely on the

basis of the facts and circumstances test.12 In administrative opinions and interpretive letters,

the OCC has considered the following facts and circumstances to be relevant to a common

enterprise determination: engaging in supporting lines of business, interchange of goods and

services, common ownership of assets, common management, use of common facilities,

commingling of assets and liabilities, closely related business activities, similarity in structure,

financing and holding, use of same business address, centralized cash management program,

likelihood that a financially troubled member of the group would receive financial aid from

11 Note that the critical issue here is the percentage of West’s and East’s gross expenditure paid to [ Inc.2

], not whether 100% of the site development cost will be paid to [ Inc.2 ].

12Interpretive Letter No. 563, reprinted in [1991-1992 Transfer Binder] Fed. Banking L. Rep. ¶83,314, at

71,439 (September 6, 1991).

ld receive financial aid from

11 Note that the critical issue here is the percentage of West’s and East’s gross expenditure paid to [ Inc.2

], not whether 100% of the site development cost will be paid to [ Inc.2 ].

12Interpretive Letter No. 563, reprinted in [1991-1992 Transfer Binder] Fed. Banking L. Rep. ¶83,314, at

71,439 (September 6, 1991).

7

other members of the group, family relationships among the borrowers, and pledging of assets

to support another person's loans.13

13Id.; see also Kenneth C. Rojc, National Bank Lending Limits - A New Framework, 40 Bus. Law. 903,

923-24 (1985)(citing various OCC interpretive letters).

Based on the information provided in your letter, I am unable to determine with any certainty

whether the loans to West and East should be combined for lending limit purposes under the

facts and circumstances test.

III. Conclusion

Based on the information provided and the assumption that all of the site development costs

will be paid to [ Inc.2 ], the loans to West and East will be attributed to [ Inc.2 ] for

the year 2001 under the common enterprise test at 12 C.F.R. § 32.5(c)(2) and thus combined

for purposes of the legal lending limit. If all of the site development costs will not be paid to [

Inc.2 ], but where payments by West and East to [ Inc.2 ] during a fiscal period will

still represent 50% or more of each company’s gross expenditures for that period, the same

attribution and combination results.

I trust this is responsive to your request. If you have any further questions, please contact me

at (312) 360-8805.

Very truly yours,

-signed-

Christopher G. Sablich

Senior Attorney