On January 1, 2015, the final Basel III rules took effect. They impose new requirements on banks for high volatility commercial real estate (HVCRE) loans, meaning loans for the acquisition, development or construction (ADC) of commercial real property. If a loan is considered HVCRE, lenders will need to assign a 150 risk weighing to the loan, as opposed to a traditional 100 risk weighing. A commercial real estate ADC loan may avoid HVCRE classification if:
The U.S. Federal Banking Agency has issued 17 “frequently asked questions” about how to apply the HVCRE test. It is clear that the appreciated value of land will not count toward the 15% capital requirement. However, under FAQ #7, if cash is used to purchase land, and that land is subsequently contributed to an ADC project, the cash paid will count toward the 15% capital requirement.[2] Thus, if you buy land with cash, and shortly thereafter get a loan, the cash paid for the land will meet the 15% requirement. Under the FAQ’s, it is unclear whether the initial purchase price would or would not count toward that requirement as the FAQ’s do not address this hypothetical. Therefore, if land was purchased for $100,000 ten years ago, but is now worth $500,000, would $100,000 count toward the 15% requirement? Under a strict reading of the rule, land purchased years ago does not appear to meet the definition of “cash” being contributed to the ADC project. Under the new HVCRE rules, there do not appear to be any changes in how the LTV is calculated. In other words, there does not appear to be anything which prohibits the current value of appreciated land to be used in calculating the LTV. Thus, in the prior example, the full $500,000 would count in determining the project’s total value, even if the appreciated amount would not count toward the 15% test. If additional cash were needed, it seems possible that you might be able to get a loan on another property and use those proceeds to meet the 15% test. FAQ 16 provides: If a banking organization lends a borrower 15 percent against the property, independent of the project, can the proceeds from the loan count towards the obligor’s 15 percent capital contribution to the project? No. Proceeds from a loan from the banking organization that is financing the ADC project does not count toward the 15 percent contributed capital amount. The bottom line is -- the HVCRE rules make it more expensive (but not impossible) for commercial borrowers to get development loans when they are relying primarily on appreciated land values for equity. [1] The 15% must remain in the project for the “life of the project” which ends when the loan is converted into permanent financing.
[2] Pledging unencumbered land not related to the ADC project does not satisfy the 15% test pursuant to FAQ #3. “Soft costs” such as brokerage fees, marketing, permits, feasibility studies, etc., do count toward the 15% requirement under FAQ #8.
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Mortgage loans are frequently assigned, sold and securitized. As a part of the continuing fallout from the collapse of the real estate market, some borrower have sought to recover damages for “wrongful foreclosure” on the basis the party who commenced the foreclosure had no authority to do so based on the inability of the foreclosing party to establish a chain of ownership to the mortgage loan and deed of trust. Gomes was followed in Jenkins v. JP Morgan Chase Bank (2013) 216 CA4th 497. In Jenkins, the borrower alleged the “entity who initiated the nonjudicial foreclosure process did not have authority to do so because … the entity was not the owner of the promissory note that was secured by the deed of trust” (id. at 512). Following a demurrer, the court held that “like the appellant in Gomes, she fails to identify legal authority for such a preemptive action in the statutory provisions setting forth the nonjudicial foreclosure scheme. After our own examination of the nonjudicial foreclosure statutes, we agree with the Gomes court that the provisions do not contain express authority for such a preemptive action” (id. at 513). Multiple other cases have reached the exact same result (Keshtgar v. U.S. Bank. (2014) 226 CA4th 1201; Herrera v. Federal Nat. Mortg. Assn. (2012) 205 CA4th 1495; Siliga v. Mortgage Electronic Registration Systems, Inc. (2013) 219 CA4th 75). |
blogHi. I'm Stephen Flynn. Attorney and founder of the Law Offices of Stephen M. Flynn. This is my blog. Enjoy! Archives
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