Treatment of rural exposures as Commercial Property (ARS 230.0) and Income Producing Real Estate (IPRE) (APS 113) by Internal Ratings-Based (IRB) ADIs - frequently asked question

The Instruction Guide for ARS 230.0 sets out a general definition of ‘commercial property exposure’ based on whether the exposure is subject to the performance of the property market, and further states the following regarding the treatment of rural exposures:

• Rural exposures will generally not meet the definition of commercial property, unless the property has been acquired specifically for lease or resale, and where the servicing of the debt is dependent on such lease or resale (and/or the lease or resale of other properties). 

APRA considers that it would be appropriate to treat rural exposures as commercial property exposures where both of these conditions are met:

• the property has been acquired specifically for lease or resale, and
  
   
• the servicing of the debt is dependent on such lease or resale. 

Where an IRB ADI satisfies itself that the exposure can be appropriately serviced on a principal and interest basis over a commercial term, by looking through any lease arrangement to the underlying productive capacity of the rural land based on normal seasonal conditions, then it may consider that the second condition is not met, and the exposure does not require classification as commercial property exposure for reporting purposes under ARS 230.0. 

APG 113 paragraph 3(d) provides guidance on what constitutes IPRE as covered by APS 113 paragraph 43. Paragraph 3(d) notes the primary dependence on cashflows generated by the property (generally through lease income or re-sale) for repayment of the obligation and further considers the distinguishing characteristic of IPRE is that there is a strong correlation between the prospects of repayment and prospects for recovery in the event of default. Where an ADI considers a rural exposure in terms of the underlying productive capacity of the rural property, in many cases neither the primary dependence test, or the strong correlation test would be met. In these cases, the exposure need not be considered as IPRE and could be risk weighted under the advanced or foundation IRB approach rather than according to the slotting approach for specialised lending exposures. 

Given this distinction, APRA expects that these exposures and their respective valuations would be considered by an agricultural lending specialist team, rather than a commercial property specialist team, should any such teams be in place at the particular IRB ADI.