{"id":1004121341,"date":"2015-06-17T07:56:48","date_gmt":"2015-06-17T15:56:48","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004121341"},"modified":"2022-12-04T11:22:59","modified_gmt":"2022-12-04T19:22:59","slug":"speedbumps-ahead-for-borrowers-banks","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/speedbumps-ahead-for-borrowers-banks\/","title":{"rendered":"Speedbumps Ahead for Borrowers, Banks"},"content":{"rendered":"

By\u00a0Jay Maddox, Principal, Avison Young\"James<\/a><\/em><\/p>\n

During the Great Recession, government regulators took a big gamble by instructing the commercial banking industry to \u201cdelay and pray\u201d on their problem real estate loans, instead of flooding the already distressed property markets with a massive wave of foreclosed properties.\u00a0 Fortunately, that strategy appears to have worked: by avoiding fire sales and not repeating the sins of the past, the U.S. banking system got healthy again.<\/p>\n

However, the other shoe inevitably dropped.\u00a0 The government has enacted broad regulatory reforms designed to curb excessive risk-taking by banks in order to ensure they would remain adequately capitalized in the event of another catastrophic economic collapse.\u00a0 (Never mind that the banks were not the worst offenders\u2026 most of the excessive risk-taking was driven by investment in risky CMBS, RMBS, CDO\u2019s, derivatives and credit default swaps, fueled by the rating agencies.)<\/p>\n

The newest wave of regulation affecting real estate took effect in January, and while initially overlooked or misunderstood, the market is just now beginning to feel the impact.\u00a0 Under the new rules, U.S. banks must hold 50 percent more capital reserves against so-called \u201chigh volatility\u00a0commercial real estate\u201d (HVCRE) loans as compared to other commercial real estate loans.<\/p>\n

HVCRE loans include all credit facilities other than permanent loans that finance acquisition, development and construction (ADC) projects, except for: (1) one- to four-unit residential properties (2) qualifying community redevelopments (3) farm land, and (4) commercial real estate projects with an LTV ratio below 80 percent, contributed cash equity before the bank advances funds of at least 15 percent of the \u201cas completed\u201d value, and funds generated by the project may not be distributed for the life of the ADC loan.<\/p>\n

As with all regulations, there is ambiguity, conflict and potential loopholes.\u00a0 However, for the most part, the cards are stacked against the borrower as never before.\u00a0 Worse, there is no \u201cgrandfathering\u201d of existing loans made the year before the regulations went into effect, which means costs on existing loans may potentially be passed along to the borrower.\u00a0 There are areas where banks can no longer be flexible that are particularly troublesome for borrowers.\u00a0 For example, appreciated land value can\u2019t be counted toward the equity requirement (nor can a pledge of unrelated real estate be treated as collateral) and a new, updated appraisal obtained after the loan closes doesn\u2019t change the analysis.<\/p>\n

These new regulations may result in curtailment of ADC lending by some commercial banks.\u00a0 In any event, borrowers can expect some major changes such as: lower going-in LTV ratios; increased up-front cash equity requirements; cash equity as opposed to land equity; requirements to maintain minimum cash equity in the project and limit or prohibit distributions; pressure to obtain takeout financing prior to loan maturity in order to declassify the loan as HVCRE; shorter loan terms; higher interest spreads; and increased syndication or sale of HVCRE loans to other lenders to reduce balance sheet exposure (perhaps resulting in increased loan administration costs).<\/p>\n

No doubt savvy lenders and Wall Street will figure out some creative approaches to skirt these new regulations, and some already have.\u00a0 Construction lending is too important a profit center to eliminate, especially for smaller regional banks.\u00a0 And, much to developers\u2019 relief, there are a number of non-bank, unregulated construction lenders entering the market that offer enticing alternatives such as non-recourse ADC loans with higher proceeds, albeit at a higher cost than a bank loan.\u00a0 You have to know where to look, and it isn\u2019t easy to find them, but they are out there.<\/p>\n

There are definitely going to be some speedbumps ahead for high velocity CRE loans, but the party isn\u2019t over.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Jay Maddox, Principal, Avison Young: The market is just now beginning to feel the impact of the government’s latest wave of bank regulation.<\/p>\n","protected":false},"author":952,"featured_media":1004507557,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[37301],"tags":[],"class_list":["post-1004121341","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"yoast_head":"\nSpeedbumps Ahead for Borrowers, Banks - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/speedbumps-ahead-for-borrowers-banks\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Speedbumps Ahead for Borrowers, Banks\" \/>\n<meta property=\"og:description\" content=\"By Jay Maddox, Principal, Avison Young: The market is just now beginning to feel the impact of the government's latest wave of bank regulation.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/speedbumps-ahead-for-borrowers-banks\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2015-06-17T15:56:48+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-12-04T19:22:59+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/03\/James-Maddox-6.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"390\" \/>\n\t<meta property=\"og:image:height\" content=\"336\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Anna Spiewak\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/speedbumps-ahead-for-borrowers-banks\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/speedbumps-ahead-for-borrowers-banks\/\",\"name\":\"Speedbumps Ahead for Borrowers, Banks - 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