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.

In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.