Insurance Code § 425.118

Sec. 425.118. AUTHORIZED INVESTMENTS: OBLIGATIONS SECURED BY REAL PROPERTY LOANS. (a) Subject to this section, an insurance company may invest in a note, an evidence of indebtedness, or a participation in a note or evidence of indebtedness that is secured by a valid first lien on real property or a leasehold estate in real property located in the United States. (b) The amount of an obligation secured by a first lien on real property or a leasehold estate in real property may exceed 90 percent of the value of the real property or leasehold estate only if: (1) the amount does not exceed 100 percent of the value of the real property or leasehold estate and the insurance company or one or more wholly owned subsidiaries of the company owns, in the aggregate, a 10 percent or greater equity interest in the real property or leasehold estate; (2) the amount does not exceed 95 percent of the value of the real property or leasehold estate and: (A) the property contains only a dwelling designed exclusively for occupancy by not more than four families for residential purposes; and (B) the portion of the unpaid balance of the obligation that exceeds 90 percent of the value of the property or leasehold estate is guaranteed or insured by a mortgage guaranty insurer authorized to engage in business in this state; or (3) the amount exceeds 90 percent of the value of the real property or leasehold estate only to the extent the obligation is insured or guaranteed by: (A) the United States; (B) the Federal Housing Administration under the National Housing Act (12 U.S.C. Section 1701 et seq.), as amended; or (C) this state. (c) The term of an obligation secured by a first lien on a leasehold estate in real property may not, as of the date the obligation is acquired, exceed a period equal to four-fifths of the unexpired term of the leasehold estate, including any renewal options exercisable by the lessee, and the obligation must fully amortize during that period. The term of the leasehold estate, including any renewal options exercisable by the lessee, may not expire sooner than the 10th anniversary of the expiration date of the term of the obligation. (d) An obligation secured by a first lien on a leasehold estate in real property must be payable in one or more installments of an amount or amounts sufficient to ensure that, at any time during the original term of the obligation, the principal balance on the obligation is not greater than the principal balance would have been if the obligation had been amortized over the original term of the obligation in equal monthly, quarterly, semiannual, or annual payments of principal and interest with payments of interest only for the first five years of the original term of the obligation. (d-1) Subsection (d) does not apply to an obligation secured by a first lien on a leasehold estate in real property if: (1) the amount of the obligation does not, as of the date the obligation is acquired, exceed 75 percent of the value of the leasehold estate; (2) the lease agreement provides that the fee simple estate in the real property transfers automatically to the lessee on or before the expiration of the term of the leasehold estate, including any renewal options exercisable by the lessee; or (3) the lease agreement provides that the lessee has an option to purchase the fee simple estate in the real property on or before the expiration of the term of the leasehold estate, including any renewal options exercisable by the lessee, for an amount that is less than 10 percent of the appraised value of the real property, and the insurance company has a contractual right if the lessee does not exercise that option to acquire the fee simple estate in the real property for that same amount, by assignment from the lessee or otherwise. (e) Except as provided by Subsection (e-1), if any part of the value of buildings is to be included in the value of real property or a leasehold estate in real property to secure an obligation under this section: (1) the buildings must be covered by adequate property insurance, including fire and extended coverage insurance, issued by: (A) an insurer authorized to engage in business in this state; or (B) an insurer recognized as acceptable to issue that coverage by the insurance regulatory official of the state in which the real property is located; (2) the amount of insurance provided by one or more policies may not be less than the lesser of: (A) the unpaid balance of the obligation; or (B) the insurable value of the buildings; and (3) the loss clause under each policy must be payable to the insurance company as the company's interest may appear. (e-1) The property insurance otherwise required under Subsection (e) is not required if the borrower maintains a net worth as indicated in the borrower's audited financial statements for the most recent fiscal year of at least the greater of five times the amount of the indebtedness or $100 million and: (1) the insurance company has recourse against the borrower or the borrower's guarantor; or (2) for an obligation secured by a leasehold estate: (A) the tenant assigned the lease to the insurance company; and (B) the lease agreement is in writing and provides that if a building on the property is damaged or destroyed, the tenant or the tenant's guarantor is obligated to rebuild or restore the damaged or destroyed building to the building's condition immediately before the damage or destruction occurred or compensate the owner for the loss arising from the damage or destruction. (f) To the extent that a note, evidence of indebtedness, or participation in a note or evidence of indebtedness under this section represents an equity interest in the underlying real property: (1) the value of that equity interest must be determined at the time the note, evidence of indebtedness, or participation is executed; and (2) the portion of the obligation that represents an equity interest in the property must be designated as an investment subject to Section 425.119(c). (g) An insurance company's investment in a single obligation under this section may not exceed 25 percent of the company's capital and surplus. (h) An insurance company may purchase a first lien on real property after the origination of the lien if: (1) the first lien is insured by a mortgagee's title policy issued to the original mortgagee that contains a provision that inures the policy to the use and benefit of the owners of the evidence of indebtedness indicated in the policy and to any subsequent owners of that evidence of indebtedness; and (2) the company maintains evidence of an assignment or other transfer of the first lien on real property to the company. (i) For purposes of Subsection (h)(2), an assignment or other transfer to the insurance company that is duly recorded in the county in which the real property is located is presumed to create legal ownership of the first lien by the company. Added by Acts 2005, 79th Leg., Ch. 727 (H.B. 2017), Sec. 1, eff. April 1, 2007. Amended by: Acts 2017, 85th Leg., R.S., Ch. 1100 (H.B. 3803), Sec. 1, eff. September 1, 2017.