Richards Layton & Finger
 

Important Changes to Regulation of Acquisition, Development and Construction Lending

June 5, 2018

On May 24, 2018, President Trump signed into law Senate Bill 2155, which amended many of the requirements of Dodd-Frank. Among the changes that impact commercial real estate finance are amendments that modify or clarify the High Volatility Commercial Real Estate ("HVCRE") loan rules in order to relieve some of the capitalization burdens imposed on commercial banks and commercial real estate borrowers.

Under the new rules, borrowers can now help satisfy the 15% equity requirement for an HVCRE loan through the appreciated value of contributed property, where previously they could only use the cost basis of contributed property. In addition, the HVCRE rule regarding acquisition or refinance loans for performing income-producing properties now clarifies that loans made to acquire existing property with rental income or for upgrades or other improvements to that property do not trigger the HVCRE capital requirements.

The rule changes also allow borrowers to unlock internally generated capital in the project and even withdraw contributed capital once the development or construction risk period has passed. This means that borrowers are no longer forced to refinance the loan in order to avoid ongoing capital constraints, even after completion. Finally, all acquisition, development and construction loans made prior to January 2015 are considered grandfathered and do not have to satisfy current HVCRE exemption criteria. The legislation was effective when signed.

Related Practices