HVCRE Relief for Lenders

By Deborah Bayles and Nicholas Pappas

In the wake of the 2007-2008 financial crisis there was a heightened focus on the risk management and capital adequacy requirements of financial institutions. As a result, the concept of High Volatility Commercial Real Estate (HVCRE) loans were created by regulations promulgated by the FDIC.

Under the Regulations, federally regulated depository institutions are required to maintain 50 percent greater capital reserves for HVCRE loans than non-HVCRE loans because of the added risk. As a result, lenders and borrowers have tried to avoid these heightened capital requirements by attempting to structure loans as non-HVCRE. However, this was difficult to do because the definition of an HVCRE loan was broad, and few exceptions existed. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act widely rolled back the Regulations with respect to HVCRE requirements. Some of the more material changes promulgated by the Act are briefly described below:

  • The Act created a narrowed definition of what constitutes an HVCRE loan. Specifically, an HVCRE loan is now defined as a loan secured by property which finances the acquisition, development or construction of that property but which also has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property. Also, repayment of the loans must be dependent upon future income or sales proceeds from, or refinancing of, the property for the loan to qualify as an HVCRE loan.
  • In addition to the exceptions contained in the Regulations, the Act added an additional exception for loans which finance the acquisition and/or improvement of existing income-producing real property if the income being produced by the property is sufficient to support the debt service and expenses of the property in accordance with the institutions applicable loan underwriting criteria for permanent financing.
  • The Regulations exempted from HVCRE classification, loans secured by property into which the borrower had contributed a minimum of 15 percent of the "as completed" value as capital (the "Contribution Exception"). Previously, those contributions had to be in cash and could not be generated by the appreciated value of the property. Under the Act, borrowers now have the ability to use the current appraised value of land to satisfy the Contribution Exception.
  • Under the Regulations, once capital was contributed to a project, in order to qualify under the Contribution Exception, all contributed capital must remain in the project until the loan paid off or was converted to permanent financing. Under the Act, borrowers only need to retain capital equal to 15 percent of the appraised "as completed" value of the project. Accordingly, if allowed by the lender, borrowers can now make distributions prior to stabilization without the risk of the loan being categorized as HVCRE.
  • Under the Regulations, it was not very clear when an HVCRE loan would no longer be classified as such. Under the Act, a loan may now be reclassified by the lender as a non-HVCRE loan upon (i) the substantial completion of the development or construction of the real property being financed by the credit facility, and (ii) cash flow being generated by the real property sufficient to support the debt service and expenses of the real property, in accordance with the lender’s applicable loan underwriting criteria for permanent financings.

For questions regarding HVCRE and its applicability, please contact Deborah Bayles, Don Kirkpatrick, David Kelley or the Stinson Leonard Street contact with whom you regularly work.

Nicholas Pappas, a law student at the University of Missouri-Kansas City School of Law, co-wrote this article while working as a summer associate with Stinson Leonard Street LLP.


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