Page 18 - 2Q2017 Reporter
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BASEL III Defines
High-Volatility
Commercial Real Estate
Fred Transactions
Alford
Recent guidance from BASEL III evolved to pocket expenses. Any one of these vehicles, or
strengthen pre-recessionary lending practices — any combination, is acceptable, as long as they
meaning developers must have more skin in the total 15 percent of an “as completed” appraisal.
game. Here’s what you need to know. n The borrower capital contribution is required to
The regulatory capital rules (BASEL III) that be at least 15 percent of the commercial real
went into effect Jan. 1, 2015 introduced the estate’s appraised “as completed” value.
concept of High-Volatility Commercial Real Estate n Borrower equity, up to 15 percent, is required
(HVCRE) — and raised questions among bankers to be the first dollars disbursed prior to
and developers. The guidance defines HVCRE as disbursement of any construction loan funds. The
loans that finance the acquisition, development, or 15 percent equity contribution cannot be layered
construction (ADC) of real property. The definition over future construction draws.
excludes loans used to finance one- to four-family
n The 15 percent capital contribution by the
residential property, community development
borrower is contractually required to remain in
projects, or land used for agricultural purposes.
the project throughout the project life. Project
The new rules require all loans that meet the life and the HVCRE designation conclude
definition of HVCRE to be reported separately from only when the loan is converted to permanent
other commercial real estate loans and assigned a financing, or is paid in full. If the loan is converted
risk weighting of 150 percent for risk-based capital to permanent financing, the property should
purposes. Prior to Jan. 1, 2015, these loans typically evidence adequate cash flows to service the
would have been assigned a risk weighting of 100 underlying principal and interest debt service,
percent. which conforms to the banks’ loan policy or
For call reporting purposes, loans meeting the internal guidance for stabilized properties.
HVCRE definition are to be reported in Schedule n The regulatory capital rule does not provide for
RC-R, Part II, items 4.b and 5.b, and assigned a risk the grandfathering of existing loans. Therefore,
weighting of 150 percent — unless the loan, or a ADC loans made before the effective date of the
portion of the loan, meets certain criteria that allow regulatory capital rule are not exempt from the
for a lesser risk weighing. definition of HVCRE.
ADC loans must meet certain loan-to-value If you have questions about the rules or other
specifications and borrower equity conditions that questions about HVCRE, please give us a call.
would exclude them from the HVCRE designation.
These are:
n The borrower is required to contribute equity
Fred Alford
to the project, defined as cash, unencumbered
readily marketable securities, the documented fred.alford@plantemoran.com
value of the purchase price of the underlying 312-602-3543
property to be developed (not the appraised
value), and documented development out-of-
15
Second Quarter 2017 IllInoIs RepoRteR
