HVCRE

High Volatility Commercial Real Estate, or HVCRE as I've come to understand it, is a burden for the bank which is passed onto the Borrower originally passed as part of the Dodd-Frank Act.

In an acquisition or development/construction loan, the borrower must have at least 15% cash equity in the deal.

For instance, even if the Borrower retained the property a decade ago and it is considerably of higher value today, if his Cash Basis is less than 15% of the total development costs, the bank doing the loan will have to classify it as HVCRE in their books which, in turn, requires them to hold more cash on-hand as a precautionary measure, and almost always leads to an increase of the spread and coupon rate for the Borrower.

To combat this, many borrowers are taking on Preferred Equity as that can be counted as cash-equity in the capital stack. Standard Mezzanine financing is additional debt and would not be counted toward's the borrower's basis.

All of this being said, a recent law was passed by both the House and the Senate amending HVCRE rules and bridging the gap by allowing the Borrower's equity requirement of at least 15% to be based on the land's ***appraised ***value. When this law goes into effect however, I am not certain of.

If you want to follow a great source for more information I highly recommend checking out famed Real Estate Lawyer, Rick Jones' blog "Crunched Credit". He's incredibly witty and well-spoken, and offers great insight on the legal issues of the RE world.

https://www.crunchedcredit.com/