HVCRE exposure

A land, development or construction loan that a bank must carry at a 150 percent risk weight under the capital rule unless the project meets an exemption, such as 15 percent borrower capital.

Under the capital rule, an HVCRE exposure is a credit facility secured by land or improved real property that mainly finances acquisition, development or construction, where the property is meant to produce income and repayment depends on future income, sale or refinancing. A bank must assign it a 150 percent risk weight, so it ties up more capital than an ordinary commercial loan and often costs the borrower more.

Several kinds of loans are outside the definition: 1-4 family residential projects, certain community development projects, agricultural land, and loans on existing income-producing property whose cash flow already supports the debt.

The exemption borrowers meet most often has two parts. The loan-to-value must be at or under the supervisory maximum, and the borrower must contribute capital of at least 15 percent of the property’s appraised as completed value. That capital can be cash, unencumbered readily marketable assets, development expenses already paid, or contributed real property. It must be in before the bank advances funds and stay in until the loan is reclassified.

This is why a construction lender asks for proof of equity early and limits distributions during the build.

Go further

• Construction lenders: Lenders that hold construction and land loans.
• LTV and LTC calculator: Check the loan against value and cost.
• LTV and LTC calculator: Loan to value and loan to cost, the equity a lender will ask for, and the federal supervisory limit for the property type.
• Supervisory loan to value limits and HVCRE, explained: Two federal rules shape how much a bank will lend against real estate: a table of loan to value ceilings, and a capital rule that makes some construction loans cost the bank more to hold.
• Construction loan package checklist: A construction lender is lending against a building that does not exist yet. The package has to show what it will cost, who will build it, where every dollar comes from, and how the loan gets repaid when it is done.

Related terms

• ADC loan: A loan to acquire land, develop it or build on it, repaid from the sale, lease-up or refinance of the finished project. Banks report these as construction, land development and other land loans.
• Supervisory LTV limits: Loan-to-value ceilings in the federal real estate lending guidelines, from 65 percent for raw land to 85 percent for improved property, that a bank's own limits should not exceed.
• Construction loan: A short-term loan that pays for building or renovating a property, advanced in stages as work is finished and repaid from a sale or a permanent loan.
• Equity injection (SBA): The cash or other equity an owner puts into an SBA-financed project. A 7(a) start-up or business purchase needs at least 10 percent of total project cost; a 504 project needs 10, 15 or 20 percent.
• As-complete value: An appraiser's estimate of what a property will be worth on the date construction is expected to be finished.
• Total risk-based capital: The sum of a bank's tier 1 and tier 2 capital. The capital rule requires it to be at least 8 percent of the bank's risk-weighted assets.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.