Final Risk-Based Capital Rules Add More Complexity to Multifamily AD&C Loans

Filed in Housing Finance, Multifamily by on August 20, 2015 0 Comments

apartmentcomplexAs banks wrestle to comply with a new category of acquisition, development and construction (AD&C) loans—which include requirements that impose significant changes to how AD&C financing is structured—the home building industry is asking federal banking agencies for more clarification to accurately evaluate and classify these loans.

The agencies issued answers to frequently asked questions in April, but additional guidance is needed.

Of particular concern to multifamily builders and developers, the new rules contain provisions specific to a new category of AD&C loans called High Volatility Commercial Real Estate (HVCRE) loans.

As of Jan. 1, banks are required to evaluate all AD&C loans, in portfolio and new originations, and classify any that do not meet certain underwriting criteria as HVCRE loans. HVCRE loans generally include commercial real estate projects with a loan-to-value greater than 80% and borrower-contributed capital of less than 15% of the project’s “as completed” value.

All loans classified as HVCRE loans require a capital charge of 150% or 50% higher than the capital charge for other commercial real estate loans.

NAHB sent a comment letter to the federal banking agencies on the proposed rule in October 2012. The letter expressed concerns that the HVCRE classification was too broad and would encompass too many commercial and multifamily financings, potentially causing banks to pull back from lending on commercial and multifamily projects, or apply burdensome compliance requirements or high fees and high interest rates to these loans to compensate for the cost of holding additional capital.

NAHB also participated with a group of real estate organizations representing commercial and multifamily real estate borrowers and investors to send comments to the federal banking agencies specific to HVCRE concerns.

NAHB continues to work with other industry trade groups on solutions for this issue. It is important to hear from our members who may have experienced negative consequences as a result of the HVCRE rules. Please contact Michelle Kitchen, 800-368-5242 x8352 or Becky Froass, x8529 with questions and comments.

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