The HVCRE 15% rule for construction loans, explained
If you’re borrowing from a bank to build, the bank’s capital rules can set your equity requirement before its credit committee does. A loan the rules classify as high volatility commercial real estate (HVCRE) costs the bank 150% risk-weighted capital instead of the usual 100% (12 CFR 324.32(j)), which shapes how a bank prices and structures the loan.
What makes a loan HVCRE
The definition in 12 CFR 324.2 (the FDIC’s version; the OCC and Fed rules match it) covers a credit facility secured by land or improved real property that primarily finances acquisition, development or construction, is meant to turn the property into income-producing real estate, and depends on future income, sale proceeds or refinancing to be repaid. That describes nearly every ground-up construction loan.
The exclusion most developers use
A commercial project loan is not HVCRE if all three of these are true:
- The loan-to-value is at or below the supervisory maximum for the property type (80% for commercial and multifamily construction).
- The borrower has contributed capital of at least 15% of the property’s appraised “as completed” value, in cash, unencumbered readily marketable assets, paid out-of-pocket development expenses, or contributed real property or improvements.
- That capital went in before the bank advances funds (other than a nominal sum to secure the loan), and stays in the project until the loan is reclassified.
A worked example
A project costs $40 million to build and appraises at $50 million as completed. The 15% test is on the $50 million, so the borrower needs $7.5 million of qualifying capital in before the first draw. Contributed land counts at its appraised value under the rule, not what the borrower paid for it. If the land appraises at $5 million and the borrower has spent $1.5 million on design and permits, that’s $6.5 million: $1 million short, even though it’s 16.25% of cost. Bring in another $1 million in cash or the loan is HVCRE.
That’s where the rest of the stack comes in. Mezzanine or preferred equity can fill the gap in your own equity, but whether a given structure counts as the borrower’s “contributed capital” is a question for the bank and its counsel, so raise it before you sign the term sheet.
Loans the rule leaves out
Loans for one-to-four family residential property, community development, agricultural land, and the acquisition, refinance or improvement of existing income-producing property whose cash flow supports the debt are excluded, as are loans made before January 1, 2015.
Questions people ask
What is an HVCRE loan?
A bank loan secured by real estate that primarily finances acquisition, development or construction, is meant to turn the property into income-producing real estate, and depends on future income, sale proceeds or refinancing for repayment. Banks must hold capital against it at a 150% risk weight unless an exclusion applies.
Does land count toward the 15% contributed capital?
Yes, at its appraised value. The regulation counts contributed real property or improvements, along with cash, unencumbered readily marketable assets and paid out-of-pocket development expenses, toward capital of at least 15% of the "as completed" appraised value.