In addition to making the widely reported, headline-grabbing consumer and institutional Dodd-Frank rollbacks, Senate Bill 2155 (the Act) also provides much needed relief for the Commercial Real Estate industry. Included within the Act are long-sought-after revisions and clarifications to the flawed, and almost universally despised, High Volatility Commercial Real Estate (HVCRE) regulations that came onto the banking scene in January of 2015.
Section 214 of the Act—entitled “Promoting construction and development on Main Street”—adopts, almost identically, the text of H.R. 2148 which was first introduced in 2017 by Congressmen Robert Pittenger (R-NC) and David Scott (D-GA) as a stand-alone HVCRE clarification bill.
Once signed into law by the President, Section 214 of the Act will, among other things:
- Exempt loans made prior to January 1, 2015 from the HVCRE classification.
- Clarify that loans used to finance the improvement of existing income producing property would not be considered a HVCRE loan if the cash flow currently generated by the property is sufficient to support the debt service and expenses of the property in accordance with the bank’s underwriting criteria for permanent financing.
- Allow the current appraised value of the property contributed by the borrower to be used for purposes of determining satisfaction of the borrower’s equity requirement (as opposed to using the borrower’s cost).
- Permit the use and withdrawal of capital that is internally generated and which is in excess of the minimum required equity threshold.
- Allow the bank to reclassify a loan as “non-HVCRE” once construction has been substantially completed and the cash flow generated by the property is sufficient to support the debt service and expenses of the property in accordance with the bank’s underwriting criteria for permanent financing (as opposed to requiring that it actually be converted to a permanent loan).
While the Act doesn’t revise or clarify all of the problematic HVCRE regulations (including the continued utilization of the “as complete” appraised value in calculating a borrower’s equity requirement), the partial relief provided by the Act will be welcomed with open arms by virtually all bankers, developers, equity providers and attorneys in the commercial real estate industry.
This is the first in a series of articles we will be publishing to explain the implications involved in the recent decision.
Brian Corbett is a financial services attorney at Poyner Spruill. He represents banks, financial institutions and other corporate clients in a wide array of commercial, corporate and real estate finance transactions, banking transactions and loan portfolio sales, purchases and servicing arrangements. He can be reached at 919.783.2826 or at firstname.lastname@example.org.