Our prior article about the Highly Volatile Commercial Real Estate (HVCRE) rule that was part of the Dodd-Frank Act’s Basel III capital rule needs an update.
May 22, 2018, the unclear and illogical HVCRE rule was amended. It now allows land to be valued at a current appraised value! This is a huge and welcome change. Previous to that, contributed land value was valued based on the prior sale. The new rule states, “the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property.” Hopefully, this will help regulated banks make more loans on commercial real estate for acquisition, development, and construction.
The new rule better defines an HVCRE acquisition, development and/or construction (ADC) loan. It also allows banks to make such loans without the 150% capital weight– a huge penalty for a bank. And for borrowers, there would no longer be a 15% cash contribution requirement (because the land would be accepted capital) and once the property begins to produce income, that income could “taken out,” for example, to payback the project’s investors.