Wonky Ruling Raises Q’s About Risky Commercial Real Estate Loans

Modern High-Rise Apartment Community - Copyright Eunika Sopotnicka — Copyright Eunika Sopotnicka

Last summer, after a drawn out comment period, the federal banking regulators, Federal Reserve, Office of the Comptroller of the Currency and FDIC issued the final ruling on the implementation of the Basel III banking regulations. Among the massive number of changes to the regulatory and capital requirements for banks was a section that looked to address the higher risk in Acquisition, Development and Construction loans known as High Volatility Commercial Real Estate Loans (HVCRE).

Why It Matters

Effective January 1, 2015, the regulation requires the banks to increase the amount of regulatory capital held from 100 percent to 150 percent for these loans. This could increase borrowing costs from 40 to 125 basis points. It has created much confusion among the banking industry on how to interpret and implement it as part of their business practices.

On March 31, 2015, the regulators issued an FAQ in an effort to clarify and answer questions raised since its implementation. Although the FAQ provides clarity on certain provisions, it leaves several areas unanswered given the unique circumstances that arise for these types of loans.

NMHC/NAA is working with its members to determine what additional guidance and relief would be helpful for our membership.

HVCRE In-Depth

HVCRE loans are defined as "a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction of real property," subject to certain exclusions.

Exclusions are granted if the loans meet the following criteria:

1. The loan-to-value ratio must be less than or equal to 80 percent for multifamily;

2. The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15 percent of the real estate's appraised "as completed" value; and

3. The borrower contributes the amount of capital required before the bank can advance funds under the credit facility. In addition, the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project.

This regulation only impacts loans that are not permanent; upon conversion to permanent the HVCRE capital requirements are extinguished. It has been in place for only four months so the impact on the multifamily industry is still being evaluated.

NMHC/NAA is closely monitoring the regulations impact and welcomes feedback from its members who have been impacted.

Comments and Questions? Please contact NMHC’s Dave Borsos at dborsos@nmhc.org.

Dave Borsos dborsos@nmhc.org

Bernard Fulton bfulton@nmhc.org

Wonky Ruling Raises Q’s About Risky Commercial Real Estate Loans

April 30, 2015

Staff Resource

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