Policy Issues

HIGH VOLATILITY COMMERCIAL REAL ESTATE (HVCRE)

ISSUE

The problematic HVCRE regulation within the Basel III capital requirements, effective as of Jan. 1, 2015, has been clarified with the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) that President Trump signed into law on May 24, 2018.  This measure would help “right-size” regulations on regional banks and relax restrictions on parts of the banking industry – representing the most significant changes to Dodd-Frank since its enactment in 2010.

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Position

The Roundtable supports finalizing a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures as stipulated in Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155).  In a November comment letter sent to three banking agencies, The Roundtable detailed the importance of enacting this measure which is expected to add up to $120 billion in commercial real estate lending capacity.

The measure will also help clarify and promote sustainable acquisition, development, and construction and lending by addressing key deficiencies in the agencies’ current and proposed regulations governing the criteria for HVCRE or HVADC loans. It more realistically aligns the requirements for HVCRE loans on commercial real estate projects with the actual periods of development or construction risk. It will also aid economic growth and job creation, while maintaining capital levels to manage the risks associated with ADC lending.

Background

The Real Estate Roundtable’s support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a Nov. 26 comment letter to three banking agencies.  The measure is expected to add up to $120 billion in CRE lending capacity.

The Agencies — tasked with developing a rule consistent with Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) to clarify the capital treatment of HVCRE Acquisition, Development, or Construction (ADC) loans — invited comments on their Notice of Proposed Rulemaking.

The measure will help clarify and promote sustainable acquisition, development and construction and lending by addressing key deficiencies in the agencies’ current and proposed regulations governing the criteria for HVCRE or HVADC loans. It provides for the following modifications and clarifications:

• The 15% equity requirement would be revised to expressly include contributed land/property at the appreciated land value as determined by a FIRREA appraisal and bank review (versus the cost basis under the current rule).
• Clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don't trigger the capital penalty.
• A new exemption would be added to the HVCRE rule covering acquisition/refinancing loans for performing income producing properties.
• Allows borrowers to use internally generated capital in the project and, once the development/construction risk period has passed, outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
• All ADC loans made prior to January 2015 would be grandfathered and would not have to satisfy current HVCRE exemption criteria.
• Banks would able to withdraw HVCRE status prior to the end of an ADC loan’s term.

Other Resources

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