Commercial real estate lenders need to be ready for a myriad of new regulations set forth by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). These new regulations impose more stringent capital requirements on “high volatility commercial real estate” (i.e. HVCRE) exposures.
The FDIC, OCC, and Federal Reserve approved these rules in an effort to comply with the Basel III Capital Accords, which are international banking standards, along with new risk-based and leverage capital requirements for financial institutions under Dodd-Frank.
What Exactly is an HVCRE Exposure?
An HVCRE exposure, under the new rules, is when the acquisition, development, or construction of real property is financed by a credit facility and the facility fails to meet any of the following capital requirements:
The loan-to-value ratio is equal to, or less than, the maximum allowed loan-to-value ratio. This ratio is established in a regulatory agencies’ real estate lending standards. Generally, this is approximately an 80% loan-to-value ratio for a commercial real estate loan.
The borrower contributes capital to the project of at least 15% of the real estate’s appraised “as-completed value.”
The borrower contributes the required capital before the lender advanced funds under the credit facility, and the capital stays in the project until the financing is paid in full or the credit facility is converted to permanent financing.
Which Loans Fall Under These Rules?
All loans for the acquisition, development, or construction of real property are subject to these rules, even if the loans were made prior to the effective date of the new rules. Though, there are certain loan facilities that do not fall under the HVCRE classification. These excepted facilities include ones that finance one-to-four-family residential properties, community development investments, and agricultural land, according to an article published on Lexology.com.
Real Estate Industry Reacts
The real estate industry is not happy with these new HVCRE regulations. Concerns were raised about the dramatically high risk weight and the deleterious effects it would have on local commercial development. The Commercial Real Estate Development Association has gone so far as to claim that these new regulations will wind up moving better loans out of the banking system and increase the cost of capital, or decrease its availability, for commercial real estate loans.
Another major issue is how the regulations impact the valuation of land contributed as capital. Multiple real estate and banking organizations asserted that the value of contributed land is a better metric than its purchase price, for purposes of determining the amount of contributed capital.
Contact an Experienced Real Estate Attorney Today
As you can see, the regulatory landscape surrounding commercial loan transactions is only becoming more complex and treacherous for business owners and real estate developers to navigate. You need an experienced real estate attorney to help guide you through this regulatory minefield. Kristina Reed is here to help. She is responsive and attentive to her clients’ needs and has experience working on complex real estate transactions.