Any borrower seeking a construction loan in the last 12 months has likely encountered a five-letter abbreviation that has the potential to present new and considerable challenges on the path to the closing table: HVCRE. HVCRE (Highly Volatile Commercial Real Estate) is a classification that today’s construction loan borrower must be aware of, as its impact could be very costly. Before we can understand the impact to commercial real estate borrowers, we must first understand what HVCRE is, how it is classified and what banks must do to accommodate it.
HVCRE is derived from the Basel III regulatory framework that took effect January 1, 2015, although its implementation by the banking community has been staggered since its introduction. It should be noted that the regulation applies to all commercial real estate loans meeting certain criteria; however, we will focus on the regulation’s specific impact on construction loans.
According to the regulation, a loan is classified as HVCRE if, “prior to conversion to permanent financing, [the loan] finances or has financed the acquisition, development or construction (ADC) of real property” – otherwise known as ADC loans. While there are a few groups of exempted ADC loans (agricultural land, one- to four-family residences) from the HVCRE classification, the most applicable exemption relates to loans that meet all of the following criteria