Bipartisan legislation introduced by Rep. Robert Pittenger (R-N.C.) and Rep. David Scott (D-Ga.) would help clarify and reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which is negatively affecting certain commercial real estate loans and impairing economic growth, according to Real Estate Roundtable and a coalition of national real estate organizations who is supporting the bill.
“Congressmen Pittenger and Scott are to be commended for recognizing the negative economic impact that the HVCRE Rule is having on acquisition, development and construction lending and for taking steps to introduce legislation intended to correct these problems,” Real Estate Roundtable President and CEO Jeffrey D. DeBoer said in the release. “The Roundtable and our coalition partners support regulatory agencies' efforts to promote economically responsible CRE lending, and the Pittenger-Scott bill will help guide the agencies in clarifying and reforming the HVCRE Rule, while encouraging sound lending practices, spurring economic growth and creating jobs in local communities."
The bill, H.R. 2148, is a key step to addressing the negative impact on commercial real estate acquisition, development and construction lending, the release said.
By amending the Federal Deposit Insurance Act to clarify capital requirements for certain ADC (acquisition, development, or construction) loans, the legislation would address concerns regarding the HVCRE rule.
As written, the release states, the rule is overly broad and applied to many stabilized loans without construction risk, unduly burdening stabilized loans with capital charges after the construction risk has passed. Many banks, including small community financial institutions, have been deterred from making this type of loan – which can represent up to 50 percent of a small bank loan portfolio.
Since introduction of the HVCRE rules in January 2015, necessary clarification for key elements of the rule have not been provided by regulators despite ongoing requests, the Roundtable said. Without modifications, the consequences of the HVCRE rule could have an adverse economic impact on commercial real estate lending, local economies and job creation.
Among the clarifications in the legislation are:
- Once the development/construction risk period has passed, and the project is cash flowing, it would allow borrowers to use internally generated cash outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
- Clarify that loans made to do general upgrades and other improvements on existing properties with rental income do not trigger the capital penalty.
- Allows banks to establish borrower land value as equity into projects as established by certain safeguards, such as a fully-compliant appraisal and thorough bank review.
- Excludes from application and compliance any loans made before Jan. 1, 2015.