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High Volatility Commercial Real Estate

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Under the current regulatory capital rules, High Volatility Commercial Real Estate (HVCRE) loans have a higher risk weighting than a typical commercial loan. HVCRE loans are defined in the regulations as “a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC)” of commercial real estate, unless the facility is structured to meet all of the following:

  1.  The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to value ratio in the regulatory real estate lending standards.
  2. The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15 percent of the real estate as completed value.
  3. The borrower(s) contributed their funds before the bank distributed any funds.
  4. The capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project. The life of a project concludes only when the credit facility is converted to permanent financing, is sold or paid in full.

We recommend setting up a product specifically for HVCREs in PrecisionLender. This product would be set up similarly to a Commercial Construction, with some important changes:

  • Raise the Base Target Return
  • Adjust for capital risk weight by selecting 'High Volatility Commercial Real Estate' under Allowable Exposure Types and also setting it as the default exposure type.
    • PrecisionLender will automatically increase the Minimum Capital Allocation associated with each risk rating by at least 50% more than the standard Minimum Capital Allocation when this default exposure type is selected. 
  • If justified by a credit migration study, you may also want to increase the credit capital levels.

If you have administrative privileges, you can create a new HVCRE product or edit one of your existing products with similar settings in the Administration Section. For more information on setting up new or existing products, visit Setting Up Commercial Loan Products.

 

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