Appraised Value Now Counts as Contributed Capital
If land is used to satisfy a borrower’s 15% capital contribution requirement, the Act allows the appraised value of land to be considered in measuring the amount of the borrower’s capital contribution. Previously, only the cash the borrower paid for the land was counted. Now, if a borrower’s land has appreciated since it was acquired, the appreciated value now counts toward the 15% capital contribution requirement.
Types of Loans Triggering HVCRE Requirements Narrowed
The Act limits the types of loans for which banks need to carry higher capital reserves to what the Act now defines as “HVCRE ADC loans.” Previously, the capital requirements were triggered by any acquisition, development, or construction loan (absent one of the statutory exceptions). Now, the loan must “primarily” finance or refinance the acquisition, development, or construction of real property, the loan’s purpose must be to provide financing to acquire, develop, or improve real property into income-producing real property, and the repayment of the loan must be dependent on future income or sales proceeds from, or refinancing, of the real property. We expect federal regulators to elaborate on what it means for a loan to “primarily” finance ADC activities.
Loans Can Now Be Reclassified as Non-HVCRE ADC
HVCRE ADC loans can now be reclassified as Non-HVCRE ADC once the construction or development being financed is “substantially complete” and the project is generating cash flow sufficient to support debt service and property expenses. Previously, following loan origination, banks were only released from the increased capital requirements when the loan “convert[ed] to permanent financing.”
Borrowers Can Now Withdraw and Use Internally Generated Capital In Excess of the 15% Requirement
Borrowers can now use and withdraw capital that is internally generated by the project so long as the required 15% capital contribution remains satisfied. Previously, “internally generated” capital had to stay in the project “throughout the life of the project” for the HVCRE exception to apply. The Act eliminates this language. The statute still requires that the borrower be contractually required (by the loan documents) to keep the initial 15% contributed capital in the project until the loan is reclassified as Non-HVCRE ADC. The Act suggests that initially contributed capital in excess of the 15% minimum may be also withdrawn and used by the borrower, but the language is not clear. Hopefully, federal regulators will issue written guidance confirming their interpretation of the word “such” in this context, i.e., whether “such minimum amount of capital contributed” refers to (1) only the capital required to maintain the 15% contribution or (2) the entirety of the initially contributed capital.
HVCRE Exceptions for Projects with Sufficient Existing Cash Flow
The Act added two exceptions to the definition of HVCRE ADC Loan that relieve banks from the additional capital reserve requirements where the project is already producing income and the cash flow is sufficient to satisfy the bank’s underwriting criteria for permanent financings. One exception relates to acquisition and refinance loans and the other relates to construction loans.
Pre-2015 Loans Exempt
Loans made prior to January 1, 2015, are now expressly exempt from HVCRE capital reserve requirements. There is no need to carry additional capital reserves for pre-2015 loans that would be deemed HVCRE ADC loans if originated today.