WHAT HVCRE MEANS FOR COMMERCIAL LENDING

The acronym HVCRE stands for “High Volatility Commercial Real Estate”. The new regulations affecting HVCRE were part of the Basel III banking laws passed into law between 2010 & 2011. These new regulatory capital rules officially came into effect in January of 2015, but most financial institutions were granted an extension until December of 2016, to adhere to these new guidelines. The new regulation requires banks as well as all savings and loans institutions, to set aside 50% more capital against certain construction and development loans that are deemed HVCRE. What types of properties / loans are considered HVCRE? What does this mean for our borrowers?

What qualifies as HVCRE?

All loans used for acquisition, development, and construction of real property prior to a conversion to permanent financing are considered HVCRE unless one of the following criteria is met:

  1. One-to-four-family residential properties;
  2. Community development loans;
  3. The purchase or development of certain agricultural land;
  4. And other commercial real estate projects in which the loan-to-value (LTV) ratio is less than a supervisory ratio established by bank regulators, and the borrower has contributed equity of at least 15 percent of the appraised “as completed” value.

The Effect on our Borrowers.

It will take some time to fully understand the impact of the HVCRE, but I believe the following will hold true.

  1. A number of lending institution will exit the construction / development lending space; thus eliminating competition.
  2. The cost of construction lending will increase significantly to cover the cost of this additional capital reserve requirement. I’m guessing between 100 & 150 basis points.
  3. More conservative Loan-To-Cost & Loan-To-Value requirements. Leverage will fall to 60% - 65% LTC / LTV.
  4. More competition for stabilized assets. As lenders exit the construction lending space, they will look to place money on stabilized CRE. The improved competition will push spreads down while increasing leverage.

The ultimate impact of HVCRE requirements remains to be seen, but mounting pressure on development costs and downward pressure on land values appear to be inevitable.