Last week the U.S. House of Representatives passed a bill that seeks to delineate what causes a commercial real estate loan to be classified as a “high volatility commercial real estate loan,” or, as it’s more commonly referred to, as a “HVCRE loan.”  Since the rule regarding HVCRE loans was promulgated, there’s been much debate and confusion around that fundamental question.  A synopsis of HVCRE loans and the implications of HVCRE classification can be found here.

The bill, H.R. 2148, the Clarifying Commercial Real Estate Loans Act, defines an HVCRE loan as a loan that is secured by land or improved real property and meets the following criteria:

(1)          it primarily finances, has financed, or refinances the acquisition, development, or construction of real property;

(2)          it has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and

(3)          it is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility.

Additionally, H.R. 2148 details which commercial real estate loans do not constitute HVCRE loans—that is, which loans are exempted from HVCRE classification.  These include, but are not limited to, loans that finance the acquisition or refinance of real property producing cash flow sufficient to service the contemplated debt and the property’s expenses.  Loans financing improvements to real property producing that level of cash flow are also exempt.  The bill keeps the existing exemption for a loan that meets both the applicable loan-to-value ratio requirement and the 15% borrower capital contribution requirement but modifies it in two respects.  First, when calculating a borrower’s capital contribution, the value of land will be based upon a recent appraisal rather than its purchase price.  Second, until the loan is reclassified as a non-HVCRE loan, only an amount equal to that 15% contribution must stay in the project; in other words, any equity in excess of that 15% amount may be withdrawn by the borrower.

Importantly, H.R. 2148 also addresses when a HVCRE loan may be reclassified as a non-HVCRE loan.  That reclassification occurs when (1) completion of the development or construction of the real property being financed by the loan occurs, and (2) cash flow being generated by the real property is sufficient to support the debt service and expenses of the project.

The bill will now go before the Senate.

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Photo of Kyle R. Blackmer Kyle R. Blackmer

Kyle Blackmer represents clients in a variety of real estate and real estate finance transactions. He currently focuses on representing lenders on loans involving all types of real estate, including multi-family housing, mixed-use, office, charter schools and retail.