New Basel III Rules for Loans to High Volatility Commercial Real Estate Projects
The 2016 Winter Business Edition of Best Lawyers includes an article entitled "Basel III and New Challenges for Lending to Commercial Development." The article, which is available here, was co-authored by Verrill Dana lawyers Mark Googins and Doug Britton.
The article provides a brief overview of one component of the new Basel III rules, which the article describes as “a voluntary global regulatory framework” implemented in the US by the OCC, Federal Reserve Board, and the FDIC. Specifically, the article discusses new requirements for loans to “high volatility commercial real estate” projects, which include any “credit facility,” prior to permanent financing, made for the purpose of “financing the acquisition, development, or construction of real property.” Under the new requirements, lenders who make HVCRE loans must meet certain higher capital requirements and meet additional record-keeping requirements.
As described in the article, HCVRE loans for 1-4 family residential properties, agricultural land, and community development projects are exempt. HCVRE loans are also exempt if they meet a 3-part test related to loan-to-value ratio, the borrower makes certain capital contributions to the project, and the capital is required to remain in the project for a defined length of time.