In case you’ve been too busy sifting through fake news to follow efforts to reform the High Volatility Commercial Real Estate (HVCRE) regulations that affect acquisition, development or construction (ADC) loans, here’s where we are and where we think we are going.

While we were all losing our minds over the regulator’s bizarre proposal to introduce a further classification system (HVADC), the House passed H.R.2148 – Clarifying Commercial Real Estate Loans, otherwise known as the Pittenger Bill. Then, on February 8, 2018, Senator Cotton and Senator Jones introduced a Senate companion bill S. 2405. But, what actually passed in the Senate earlier this week was S. 2155 the Economic Growth, Regulatory Relief, and Consumer Protection Act, which not only addresses HVCRE but also eases many Dodd-Frank Act requirements. The HVCRE portion of S.2155 is what we fondly refer to as “the sister by another mother” of the Pittenger Bill.

As we’ve previously written, we’re fans of the Pittenger Bill formulation as it provides grandfathering, removes the div stopper and allows the lender to reclassify a loan as non-HVCRE once the property generates sufficient cash flow or upon completion of construction. Besides introducing what we hope is a typo in subsection (d) on line 13 “Reclassification as a Non-HVRCE ADC Loan” (please tell us HVRCE is not yet another new classification!?), S.2155 generally follows the Pittenger Bill and, while not perfect, could bring the necessary relief to an industry burdened by the opaque and illogical HVCRE rules.

Under the proposed amendment, a loan qualifies as an ADC loan if it “primarily finances, has financed or refinances” the acquisition, development or construction of real property. We’ve seen this “primarily finances, has financed or refinances” verbiage in the HVADC proposal (remember that attempt by the regulators to introduce yet another class of loans subject to different risk weight that is still festering somewhere) and think, in addition to being overly broad, this test could be problematic in practice because it suggests that lenders should monitor loans throughout their term for changes in funding distributions, thereby forcing loans to fall in and out of HVCRE.

Talk about unintended consequences – maybe – and another reason why I’m glad I’m not in compliance. We really should pay those folks more! We’d like to see this language deleted from the final incarnation of the bill, or, at least with the following clarifications (a) what constitutes the threshold for “primarily” (is it a 50% test?) and (b) that the test of whether a loan “primarily” finances ADC be conducted once (at origination). Leaving such determinations up to the regulators will only cause more uncertainty and headaches (not to mention the same lack of uniformity in application and enforcement as we’ve seen with HVCRE).

So, what’s next? First, S.2155 is headed back to the House where we anticipate that it will go through many more revisions before (knock on wood) bringing relief to ADC lenders and borrowers. And let’s hope that relief comes in one pill not a cocktail of HVCRE/HVADC/HVRCE.