HVCRE Loans: Guidance for Developers and Lenders on New ADC Rules, Impact on Loan Covenants

The Economic Growth, Regulatory Relief and Consumer Protection Act (the Act) includes significant reforms to the HVCRE rules. Basel III standards caused an increase in the cost of lending (and, as a consequence, borrowing) concerning certain loans financing real estate ADC loans, as banks are required to retain more capital to address the risk weighting given to such investments.

To avoid higher risk weightings and capital retention requirements as a result of HVCRE classification, loans must fall into at least one of several exceptions to the general rule that all ADC loans constitute HVCRE loans. The Act provides some clarity regarding factors such as a borrower's contributed capital, maximum LTV ratio, and conversion to permanent financing in determining when an ADC loan is subject to the application of the HVCRE rules or is exempt from HVCRE treatment.

Lenders and borrowers have attempted to establish best structuring practices and loan documentation to avoid inadvertent HVCRE treatment, but continue to face uncertainties over financing issues, including the impact of mezzanine debt, preferred equity and actual cash flow.

Listen as our authoritative panel guides you through the capital retention rules for HVCRE loans and the HVCRE exemption criteria. The panel will address the recent Dodd-Frank amendments and will also review how lenders are revising covenants in loan documentation in response to the HVCRE loan rules and the uncertainties facing borrowers.

1. Basel III rules
   1. Definition of an HVCRE loan
   2. Exemption criteria
   3. Impact on real estate and construction lending landscape
2. Outstanding issues addressed by bank regulator FAQs
   1. Contributing additional capital to an existing HVCRE loan
   2. Grandfathering of current ADC loans
   3. Cash provided by the second mortgage on a property
   4. As-stabilized value
   5. Land committed to a new development
   6. Soft costs as contributed capital
   7. Subsequent appraisal/valuation resulting in LTV no longer exceeding maximum LTV ration
   8. Contributed capital remaining in the project
3. Impact of mezzanine debt
4. Typical loan covenants addressing HVCRE rules
5. Borrower concerns

The panel will review these and other critical issues:

• Can the borrower contribute additional capital to an existing HVCRE loan after funds have been advanced to exclude the loan from the definition of HVCRE?
• Can the as-stabilized value be used to determine whether the loan is an HVCRE exposure?
• Are soft costs part of the borrower's contributed capital as development expenses?
• If land purchased with cash is subsequently contributed to a new development, does it count as contributed capital?