HIP 11 - Residential Construction Collateral Ruleset Amendment
Overview
This improvement proposal seeks to amend the Residential Construction Collateral Ruleset established in HIP 8 to better align with market conditions and provide clearer guidelines for both lenders and borrowers. The amendments include updates to property requirements, borrower qualifications, loan terms, disbursement schedules, and lender requirements while maintaining the existing token parameters and risk management framework.
Existing $RCC1 Parameters (Unchanged)
- Collateral Ceiling: 10M
- System Wide Credit Limit: $5M
- 125% collateralization ratio (80% loan-to-value)
- Fixed oracle value: $1 per token
Summary of Key Changes from HIP 8 Ruleset
- Property Requirements
- Reduced minimum property value from $500,000 to $150,000
- Loan Terms
- Removed fixed 1-2% loan origination fee in favor of market-based fees
- Expanded financing options to include Interest Reserve
- Simplified personal guarantee requirements, while maintaining 50% limit on personal guarantee portion of total collateral.
- Documentation Requirements
- Broadened insurance requirement scope to “all necessary insurance” rather than specific types
- Process Improvements
- More flexible fee structure based on market conditions
- Clearer disbursement guidelines
- Added option for full disbursement at origination when using escrow or construction management firm
- Maintained core risk management features like 80% LTV ratio
Residential Construction Ruleset
- Property Requirements
- Residential properties only (single-family, multi-family, townhomes, condominiums).
- Minimum property value of $150,000.
- Borrower Qualifications
- No loans to individual borrowers, professionally managed business entities only.
- The Borrower must agree to not grant any other party a security interest in the Collateral without the Lender’s prior written consent.
- Loan Terms
- Loan origination fees as appropriate.
- Maximum Loan-to-Value (LTV) Ratio of 80% of the property’s value.
- Personal Guarantee: Borrowers with good credit who wish to pledge other personal assets as additional collateral may do so, but the Personal Guarantee should make up 50% or less of the collateral securing the loan.
- Loan term up to 24 months, with an option for a 12-month extension, and should only extend through the construction and sale phase of the project.
- Maximum loan amount of $2 million per property.
- Prepaid interest, Interest Reserve, or Interest-only payments as appropriate during construction, followed by principal and interest payments for loans over 1 year.
- Collateral may include other land or property. Subject to the same requirements.
- Disbursement
- For new construction funds are disbursed in stages as construction milestones are met. The exact schedule can vary depending on the project, but the following draw schedule provides a guide for Lenders to adhere to:
- Initial draw: This covers the cost of permits, plans, and initial site preparation. It’s usually a larger percentage of the total loan, around 10-20%.
- Foundation: Typically 10-15% of the loan.
- Framing: Including the roof, windows, and doors, 15-20% of the loan is disbursed.
- Rough mechanicals: Rough electrical, plumbing, and HVAC, 10-15% is released.
- Insulation and drywall: Insulation and drywall, another 10% of the loan is typically disbursed.
- Finishing: Interior finishes like trim, cabinets, and flooring, 10-15% is released.
- Final draw: The remaining 10-15% of the loan is disbursed after the final inspection and a certificate of occupancy is issued.
- Before each draw is released, the lender sends an inspector or checks government records to verify that the work has been completed according to the plans and building codes. The borrower is responsible for submitting draw requests and providing any necessary documentation.
- Interest is charged only on the amount of money that has been disbursed at each stage.
- Full disbursement at origination may be permitted when utilizing escrow or a construction management firm.
- For new construction funds are disbursed in stages as construction milestones are met. The exact schedule can vary depending on the project, but the following draw schedule provides a guide for Lenders to adhere to:
- Lender Requirements
- As appropriate, perfect your security interest and establish priority over future creditors.
- If there are existing liens on the collateral, consider requiring the borrower to obtain subordination agreements from the other creditors to ensure your priority position.
- Documentation and Due Diligence:
- Comprehensive loan application and supporting documentation.
- Detailed project budget and timeline.
- Contractor agreements and necessary permits.
- All necessary insurance.
- Regular inspections and progress reports during construction.
Rationale
The amendments address several key market needs while maintaining robust risk management:
- Increased Market Accessibility:
- Lower minimum property value ($150,000) enables broader market participation
- Accommodates smaller-scale residential projects and renovations
- Streamlined Processes:
- Simplified personal guarantee requirements
- More flexible fee structure based on market conditions
- Clearer disbursement guidelines
- Maintained Robust Risk Management:
- Maintained 80% maximum LTV ratio
- Clear limits on personal guarantee portion of collateral
- Disbursement schedule structured to accommodate a wider range of projects
Implementation
Upon approval, the following implementation steps will occur:
- The amended Residential Construction Ruleset will replace the existing ruleset established in HIP 8
- All new loans will be originated under the amended ruleset
- Existing loans will continue under their original terms until maturity
- No changes to existing legal agreements are required as amendments fall within current agreement scope
- Lending partners and designee will be notified and provided updated documentation
Legal Framework
The amended ruleset operates within the existing legal framework established by:
Voting
The proposal will go live Friday, November 13, 2024, with voting beginning on Sunday, November 15, 2024 (48-hour delay). Upon majority approval:
- Hifi DAO will formally adopt the amended Residential Construction Ruleset
- Lending partners and designees will implement the updated requirements
- The new minimum property value and other amendments will take effect immediately for new loans
If the majority vote disapproves, the existing Residential Construction Ruleset will remain in effect without amendments.
