United States: Basel III And HVCRE Loans - The Borrower Perspective

Last Updated: August 2 2016
Article by Erica H. Weber and Kyle J. Recker

By now, anyone who works in the real estate industry is likely to have heard of Basel III and the new requirements for HVCRE Loans. But you may be asking: what is Basel III; what constitutes an HVCRE Loan; and what is the impact to a borrower in real estate deals? The alert below answers these questions.

What is Basel III?

The Basel Committee on Banking Supervision (the "Committee") is an international committee focused on the importance of adequate capitalization in a stable international banking system. To improve regulatory oversight and risk management in the banking sector following the 2008 financial crisis, the Committee adopted a new capital accord commonly referred to as "Basel III". Congress mandated the adoption of Basel III in the United States when it passed The Dodd–Frank Wall Street Reform and Consumer Protection Act. The final rules implementing Basel III took effect on January 1, 2015.


Recent attention on Basel III has focused on the increased risk weighting of certain High Volatility Commercial Real Estate Loans (or "HVCRE Loans"), and the corresponding increase in reserve requirements for banking organizations making such HVCRE Loans. A typical commercial real estate loan has a risk weighting of 100% and a capital requirement of 8%. This means that a bank must reserve at least $8 million in capital to make a $100 million loan. An HVCRE Loan is assigned a risk rating of 150%. This means that a bank must reserve at least $12 million in capital to make a $100 million HVCRE Loan (i.e. $4 million more in reserves).

An HVCRE Loan is any loan from a banking organization that finances the acquisition, development or construction of real property, which is not considered to be "permanent financing," and specifically excludes: (1) loans on 1-4 unit residential properties; (2) community development loans; (3) agricultural loans and (4) commercial real estate loans which satisfy the following requirements:

  1. The loan-to-value ratio is less than: (a) 65% for raw land; (b) 75% for land development projects; (c) 80% for commercial, multi-family, or other non-residential construction projects; or (d) 85% for already improved property;
  2. The borrower has contributed capital in the form of cash or unencumbered readily marketable assets of at least 15% of the project's "as-completed" value; and
  3. The borrower's contributed capital and all of the project's "internally generated capital" is contractually required to remain in the project until the project is sold, or until the loan is either paid off in full or converted to permanent financing.

The HVCRE regulations currently only apply to banking organizations, although there is some speculation that this could change to also include loans from insurance companies. Mortgage REITs and private equity funds that originate commercial real estate loans are not currently subject to HVCRE regulations.

"Permanent financing" is not defined in the regulations, but based on an FAQ published in April 2015 by the relevant federal banking agencies: (1) a loan does not constitute "permanent financing" if it will have future advances and the underwriting is based on the "as-completed" value of the project and (2) "permanent financing" requires, at a minimum, that the loan satisfy the lender's "normal lending terms" and "underwriting criteria" for permanent loans.

Borrower Impact

Increased Pricing: If a loan is classified as an HVCRE Loan, the lender will face a lower return on its capital as a result of the higher capital reserve requirement. This will likely lead to increased pricing on the loan, including a higher interest rate, for the borrower. If possible, lenders will want to ensure that a loan is not classified as an HVCRE Loan. Borrowers should expect to see loan provisions addressing that the exemptions to being classified as an HVCRE Loan have been satisfied.

Required Capital: In the HVCRE Loan analysis, the loan-to-value requirement is a relatively straightforward calculation that is standard for all commercial real estate loans. The requirement that a borrower will be required to have contributed capital in the form of cash or unencumbered readily marketable assets of 15% of the project's "as completed" value is more complicated. Since such capital must be contributed prior to the disbursement of any loan proceeds, this requirement may create obstacles to disbursement of loan proceeds at closing.

Borrowers should first understand what may be included as "capital" in the form of cash or unencumbered readily marketable assets. "Capital" includes cash paid to purchase land and out-of-pocket development expenses. It does not include: (1) the value of any contributed land (including any increase in land value that may result from improved market conditions or a project's entitlements) or (2) any borrowed money or other collateral pledged in support of the loan, such as a second mortgage or an unsecured loan. It is unclear whether proceeds of a mezzanine loan or debt of a borrower's parent entities may be included as "capital", but a conservative lender would likely exclude such proceeds. This may cause certain joint venture structures to look more attractive. Furthermore, the capital contribution requirements are based on the "as-completed" value of a project rather than a project's cost, which is a change from conventional underwriting practices, and may increase the required capital contribution for any given project.

Capital Must Remain in the Project: Borrowers must also be aware of issues related to the requirement that a borrower's contributed capital and internally generated capital remain in the project until the project is sold, or the loan is paid in full or converted to permanent financing. This requirement prohibits a borrower from making distributions of any contributed equity and traps net operating income in the project, in each case, during the life of the loan. It is unclear whether income generated by the project can be applied to cover a project's expenses. Borrowers should therefore expect to see increases in required reserves to cover a project's carrying costs.

Cost Provisions: Borrowers may be tempted to let the lender focus on the details of ensuring a loan satisfies the requirements necessary to avoid classification as an HVCRE Loan; however, it is in a borrower's best interests to focus on this issue as well. If a loan is determined after closing to constitute an HVCRE Loan and the lender faces higher reserve requirements and capital costs as a result, the lender may attempt to pass these costs onto the borrower through the general cost and indemnification provisions that are standard in most loan documents. Borrowers should also be on the lookout for any new or special provisions specifically related to such costs

Originally published July 27, 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions