Capital Regulations Proposed on Certain Commercial Loans

new-capital-regulations-proposedLast May, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA). To conform the regulatory definition of HVCRE to the changes made by Section 51 of the EGRRCPA, banking agencies have recently proposed revisions to the capital rules regarding HVCRE, which imposes a 50 percent heightened capital requirement on certain commercial real estate loans.

HVCRE-ADC exposure would be defined as a loan secured by improved property or land that:

  • Primarily finances, has financed or refinances the acquisition, development, or construction (ADC) of real property.
  • Is intended to provide financing to acquire, develop, or improve this real property into income-producing property.
  • Is dependent on future income, sales proceeds, or refinancing from such property to repay the loan.

The agencies define “a loan that is secured by real estate” to be one in which the estimated value of the real estate collateral at origination is greater than 50% of the principal amount of the loan.

HVCRE-ADC does not include a loan that finances the acquisition, development, or construction of properties that are one- to four-family residential properties, real property that would qualify as an investment in community property, or agricultural land. It also excludes improvements to existing income-producing improved real property secured by a mortgage if the income can support the debt service and expenses of the property (e.g. owner-occupied real estate).

Finally, HVCRE-ADC does not include any loan that was made prior to January 1, 2015.

To avoid being classified as HVCRE-ADC, proposed new regulations would also require that the loan-to-value ratio be less than or equal to the maximum regulatory LTV for the particular property type. They would also require borrowers to contribute a minimum of 15 percent of the property’s appraised “as completed” value as capital. Real property including appreciated land value can be included among this capital. So can cash, marketable assets, and out-of-pocket expenses paid by the developer before closing.

Contributed capital must be in place before the bank funds the loan, and the borrower must agree to keep the contributed capital in the project until the loan is reclassified as non-HVCRE-ADC.

In addition, the proposed new regulations would allow HVCRE status to end before an ADC loan is replaced with permanent financing in the following scenarios:

  1. Construction or development of the property being financed is substantially completed.
  2. The cash flow generated by the property is adequate to support the property’s expenses and debt service in accordance with the institution’s underwriting for permanent loans.

Contact us for more information on these regulations 417-881-0145.


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