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BASEL III defines high-volatility commercial real estate transactions

March 21, 2017 / 2 min read

Recent guidance from BASEL III evolved to strengthen pre-recessionary lending practices — meaning developers must have more skin in the game. Here's what you need to know.

The regulatory capital rules (BASEL III) that went into effect Jan. 1, 2015 introduced the concept of High-Volatility Commercial Real Estate (HVCRE) — and raised questions among bankers and developers. The guidance defines HVCRE as loans that finance the acquisition, development, or construction (ADC) of real property. The definition excludes loans used to finance one- to four-family residential property, community development projects, or land used for agricultural purposes.

The new rules require all loans that meet the definition of HVCRE to be reported separately from other commercial real estate loans and assigned a risk weighting of 150 percent for risk-based capital purposes. Prior to Jan. 1, 2015, these loans typically would have been assigned a risk weighting of 100 percent.

For call reporting purposes, loans meeting the HVCRE definition are to be reported in Schedule RC-R, Part II, items 4.b and 5.b, and assigned a risk weighting of 150 percent — unless the loan, or a portion of the loan, meets certain criteria that allow for a lesser risk weighing.

ADC loans must meet certain loan-to-value specifications and borrower equity conditions that would exclude them from the HVCRE designation. These are:

If you have questions about the rules or other questions about HVCRE, please give us a call.

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