{"id":1004185681,"date":"2017-08-02T08:14:12","date_gmt":"2017-08-02T16:14:12","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004185681"},"modified":"2022-12-08T15:44:34","modified_gmt":"2022-12-08T23:44:34","slug":"high-volatility-cre-revisited","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/","title":{"rendered":"High Volatility CRE, Revisited"},"content":{"rendered":"<p>By Jay Maddox, Principal, Avison Young<\/p>\n<p><a href=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg\"><img loading=\"lazy\" decoding=\"async\" data-attachment-id=\"1004135146\" data-permalink=\"https:\/\/www.commercialsearch.com\/news\/finance-column-are-we-in-a-bubble\/maddox\/\" data-orig-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg\" data-orig-size=\"800,602\" data-comments-opened=\"1\" data-image-meta=\"{&quot;aperture&quot;:&quot;0&quot;,&quot;credit&quot;:&quot;&quot;,&quot;camera&quot;:&quot;&quot;,&quot;caption&quot;:&quot;&quot;,&quot;created_timestamp&quot;:&quot;0&quot;,&quot;copyright&quot;:&quot;&quot;,&quot;focal_length&quot;:&quot;0&quot;,&quot;iso&quot;:&quot;0&quot;,&quot;shutter_speed&quot;:&quot;0&quot;,&quot;title&quot;:&quot;&quot;,&quot;orientation&quot;:&quot;0&quot;}\" data-image-title=\"jay maddox\" data-image-description=\"&lt;p&gt;Image courtesy of Avison Young&lt;\/p&gt;\n\" data-image-caption=\"&lt;p&gt;Jay Maddox  &lt;\/p&gt;\n\" data-large-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg?w=800\" class=\"alignright wp-image-1004135146 size-medium\" src=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg\" alt=\"jay maddox\" width=\"300\" height=\"226\" srcset=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg 800w, https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg?resize=300,226 300w, https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg?resize=768,578 768w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a>Two years ago, the real estate industry was dealing with the\u00a0pending <a href=\"https:\/\/www.commercialsearch.com\/news\/speedbumps-ahead-for-borrowers-banks\/\">implementation impact<\/a> of the High Volatility Commercial Real Estate (HVCRE) rules for both borrowers and banks. It seemed appropriate to revisit the topic to see what has actually occurred, and highlight current efforts that are aimed at softening this burdensome rule.<\/p>\n<p>HVCRE was part of a suite of rules designed under Basel III after the 2008 financial crisis to help ensure that banks have an adequate capital cushion to withstand market volatility. It was adopted by the Federal Reserve Board in 2013 and became effective in 2015. The HVCRE rule requires U.S. banks to hold 50 percent more capital reserves against loans that finance commercial and multifamily acquisition, development and construction (ADC) projects (with a few exceptions), and has greatly affected the availability of ADC loans from banks.<\/p>\n<h2>Borrower impact<\/h2>\n<p>To avoid HVCRE classification, the borrower must have contributed cash equity of at least 15 percent of the \u201cas completed\u201d value before the bank advances loan funds. Also, the 15 percent equity requirement translates to a much higher up-front cash equity requirement as a percentage of the project\u2019s costs, since by definition the \u201cas completed\u201d value exceeds project costs. Consequently, yesterday\u2019s 65 percent loan-to-cost is 55 percent today.<\/p>\n<p>Further impacting borrowers, the common practice of counting appreciated market equity in the property toward the equity requirement was discontinued. A\u00a0pledge of unrelated real estate could no longer be treated as collateral for the purposes of the minimum loan-to-value test, and a new, updated appraisal obtained after the loan closed wouldn\u2019t change the analysis. Finally, profits or other funds generated by the project could no longer be distributed to the owners for the life of the ADC loan.\u00a0<\/p>\n<p>The rules are problematic for banks.\u00a0 They <span style=\"text-decoration: underline\">do not<\/span><em><u>:<\/u><\/em><\/p>\n<ul>\n<li>\u201cGrandfather\u201d loans made prior to the 2015 introduction of the HVCRE regulations;<\/li>\n<li>Define when a project is deemed \u201ccompleted&#8221;; or<\/li>\n<li>State the conditions under which an HVCRE loan could be declassified, and therefore no longer subject to the higher capital standards.<\/li>\n<\/ul>\n<p>Finally, it is unclear whether mezzanine loans or preferred equity would be treated as equity for HVCRE purposes. These and other factors led to increased uncertainty and costs for bank ADC loans.<\/p>\n<p>As I predicted in 2015, the HVCRE rules have contributed to a pullback from ADC lending by banks, and those that remain are increasingly conservative in their underwriting and loan sizing. This pullback has spawned a cottage industry of alternate ADC lenders, including private equity funds, family offices, offshore investors and REITs. Some of these lenders offer \u201cHVCRE compliant\u201d mezzanine debt or preferred equity that is structured to qualify as equity under HVCRE rules, thereby providing borrowers with increased leverage for new construction and value-added projects.\u00a0<\/p>\n<p>Fortunately, help is on the way. A new bipartisan bill (H.R. 2148) has recently been introduced in the House of Representatives that addresses some of the problems created by the original HVCRE rules, and specifically exempts loans funded prior to 2015. New acquisition financings for existing income-producing commercial properties would potentially be excluded, as well as loans for improvements to such properties if the property meets the bank\u2019s debt coverage requirements for permanent financing. The bill does not address the treatment of mezzanine debt and preferred equity, and there are several other problems areas that aren\u2019t covered, but it appears to be a good start.\u00a0 To be sure, changes are inevitable as the bill winds its way through the legislative process. Until it becomes law, both borrowers and lenders will continue to face speedbumps.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Avison Young Principal Jay Maddox discusses how the implementation of HVCRE rules has negatively impacted borrowers and created uncertainty for lenders, as well as the current efforts to soften the regulation. <\/p>\n","protected":false},"author":1101,"featured_media":1004135146,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[23891,21684],"tags":[33022,35990,33205],"class_list":["post-1004185681","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-national","category-viewpoint","tag-avison-young","tag-high-volatility-commercial-real-estate","tag-jay-maddox"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v24.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>High Volatility CRE, Revisited - 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\/high-volatility-cre-revisited\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"High Volatility CRE, Revisited\" \/>\n<meta property=\"og:description\" content=\"Avison Young Principal Jay Maddox discusses how the implementation of HVCRE rules has negatively impacted borrowers and created uncertainty for lenders, as well as the current efforts to soften the regulation.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/\" \/>\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=\"2017-08-02T16:14:12+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-12-08T23:44:34+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"602\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Jay Maddox\" \/>\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\/high-volatility-cre-revisited\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/\",\"name\":\"High Volatility CRE, Revisited - Commercial Property Executive\",\"isPartOf\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg\",\"datePublished\":\"2017-08-02T16:14:12+00:00\",\"dateModified\":\"2022-12-08T23:44:34+00:00\",\"author\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/2412e83b6ef1eb66b86fee2886e4c40d\"},\"breadcrumb\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#primaryimage\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg\",\"contentUrl\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg\",\"width\":800,\"height\":602,\"caption\":\"Jay Maddox\"},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.commercialsearch.com\/news\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"High Volatility CRE, Revisited\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#website\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/\",\"name\":\"Commercial Property Executive\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.commercialsearch.com\/news\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/2412e83b6ef1eb66b86fee2886e4c40d\",\"name\":\"Jay Maddox\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/66cc1208184e957f92134360612c919127681cc36046f6be80a9f79f624b7fe5?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/66cc1208184e957f92134360612c919127681cc36046f6be80a9f79f624b7fe5?s=96&d=mm&r=g\",\"caption\":\"Jay Maddox\"},\"url\":\"https:\/\/www.commercialsearch.com\/news\/author\/jaymaddox\/\"}]}<\/script>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"High Volatility CRE, Revisited - Commercial Property Executive","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/","og_locale":"en_US","og_type":"article","og_title":"High Volatility CRE, Revisited","og_description":"Avison Young Principal Jay Maddox discusses how the implementation of HVCRE rules has negatively impacted borrowers and created uncertainty for lenders, as well as the current efforts to soften the regulation.","og_url":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/","og_site_name":"Commercial Property Executive","article_publisher":"https:\/\/www.facebook.com\/CPExecutive","article_published_time":"2017-08-02T16:14:12+00:00","article_modified_time":"2022-12-08T23:44:34+00:00","og_image":[{"width":800,"height":602,"url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg","type":"image\/jpeg"}],"author":"Jay Maddox","twitter_card":"summary_large_image","twitter_creator":"@cpexecutive","twitter_site":"@cpexecutive","schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/","url":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/","name":"High Volatility CRE, Revisited - Commercial Property Executive","isPartOf":{"@id":"https:\/\/www.commercialsearch.com\/news\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#primaryimage"},"image":{"@id":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#primaryimage"},"thumbnailUrl":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg","datePublished":"2017-08-02T16:14:12+00:00","dateModified":"2022-12-08T23:44:34+00:00","author":{"@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/2412e83b6ef1eb66b86fee2886e4c40d"},"breadcrumb":{"@id":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#primaryimage","url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg","contentUrl":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg","width":800,"height":602,"caption":"Jay Maddox"},{"@type":"BreadcrumbList","@id":"https:\/\/www.commercialsearch.com\/news\/high-volatility-cre-revisited\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.commercialsearch.com\/news\/"},{"@type":"ListItem","position":2,"name":"High Volatility CRE, Revisited"}]},{"@type":"WebSite","@id":"https:\/\/www.commercialsearch.com\/news\/#website","url":"https:\/\/www.commercialsearch.com\/news\/","name":"Commercial Property Executive","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.commercialsearch.com\/news\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/2412e83b6ef1eb66b86fee2886e4c40d","name":"Jay Maddox","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/66cc1208184e957f92134360612c919127681cc36046f6be80a9f79f624b7fe5?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/66cc1208184e957f92134360612c919127681cc36046f6be80a9f79f624b7fe5?s=96&d=mm&r=g","caption":"Jay Maddox"},"url":"https:\/\/www.commercialsearch.com\/news\/author\/jaymaddox\/"}]}},"jetpack_featured_media_url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2016\/01\/maddox-e1458067279361.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004185681","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/users\/1101"}],"replies":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/comments?post=1004185681"}],"version-history":[{"count":4,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004185681\/revisions"}],"predecessor-version":[{"id":1004614868,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004185681\/revisions\/1004614868"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/media\/1004135146"}],"wp:attachment":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/media?parent=1004185681"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/categories?post=1004185681"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/tags?post=1004185681"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}