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Coleman Feedback Friday — Are SBA 504 Construction Loans Exempt from HVCRE Regs?

March 20, 2015

By Bob Coleman
Editor, Feedback Friday

Last week, I asked for comments about the theory SBA 504 construction loans are exempt from being classified as a High Value CRE from the regulators.

And, I got answers!

Teresa Mandelin, President of Southwestern Business Financing Corporation in Arizona writes, “I am the presenter who stated that 504s are exempt from HVCRE. The final rule clarifies that the definition of HVCRE does not apply to the purchase or development of agricultural land if the valuation of the land is limited to the value of the land for agricultural purposes or to ADC loans that otherwise qualify as community development investments.

‘Community Development Investment is further defined in 12 CFR 228.12(g) to include:

1) Affordable housing
2) Community services targeted to low or moderate income individuals
3) Activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administrations Development Company or Small Business Investment Company programs or have gross annual revenues of $1 million or less; or
4) Activities that revitalize or stabilize

‘Note that to be eligible for an SBA 504 loan you would meet both #3 and #4 above. Thus, 504 loans are excluded from the definition of HVCRE.

‘Highly volatile commercial real estate is a piece of Basel III. It is defined as a commercial real estate transaction that exceeds the regulatory LTV except for the purchase or development of agricultural land if the valuation of the land is limited to the value of the land for agricultural purposes or to ADC loans that otherwise qualify as community development investments.

‘As you can imagine, 90% LTV is well above regulatory limits.

‘If a loan is classified as HVCRE, then the reserve will be 150%. Additionally, and I have just been told this but have not been able to confirm, once classified as HVCRE it is always classified as HVCRE until repaid(or refinanced by a different institution).

‘Everyone is waiting for an anticipated “guidance” document that will be issued jointly by all the regulators.

‘The regulator from OCC stated there is no specific “SBA exemption”.

‘However as the definition below is from the regulatory rules and the CFR, I can make the exemption statement I have made.’

She concludes, ‘You might want to get more info on this from the bank 7a lenders and/or their risk asset managers.’

Anybody else care to weigh in?

Thanks!

p.s. Tip of the hat to M&T Bank’s Sean McCabe for sending me the CFR passage also.

Please send feedback to bob@colemanreport.com

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