Broker: Basel 3 Reg Makes Appearance In Some DC Construction Loans
WASHINGTON, DC—The High Volatility Commercial Real Estate has been in place more than a year but gateway market borrowers might not have noticed its effect because of investors' strong interest in markets like Washington DC, according to CREFC's Christina Zausner.
By
Erika Morphy |
erikamorphy |
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Updated on March 22, 2016
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The Thornton WASHINGTON, DC—Last January, a Basel III regulation went into effect that should have begun to tighten the availability of construction financing in the DC area. It didn’t, or at least brokers and borrowers didn’t notice or talk about its affect that much, because Washington DC is a gateway market and gateway markets tend to be immune (at least in a practical sense) from such regulations as equity wants to be in these markets no matter what. For example, one reason borrowers in the DC area might not have noticed the regulation’s impact is because of the influx of non-bank equity, which is not subject to the regulation. Given all this, it is telling that one broker reports that the regulation has started to pop up in conversations with lenders more and more over the last six months and, in particular, last 90 days. The regulation in question is called High Volatility Commercial Real Estate (HVCRE). It established a new risk-weight category requiring banks to hold more capital — 150% or one and half times as much — for such loans. In fact, this regulation went into effect even before 2015 for the largest banks as Basel is having it roll out in stages. It was last year, as the rules for the smaller banks and some of the reporting mandates went into effect, that the market really took notice of its impact, Christina Zausner VP of Industry and Policy Analysis at the Washington, DC-based CRE Finance Council told GlobeSt.com. This year, more of the rule will roll out with the smallest banks reporting their HVCRE compliance. That may be the reason why Andrew McAllister, executive director of Washington DC-based MAC Realty Advisors has started to notice the regulation play a role in certain local deals in recent months. He has noticed it in deals in which:
The construction loan has been in place for some time and it now needs to be modified.
The transactions are smaller sized.
Land equity is part of the capital stack. Typically, the owner has owned the land for a while and it has appreciated in value. But that no longer can count for equity under Basel 3.
That said, the regulation is not a major factor in construction finance in this market, McAllister said. Even as recently as last October, when McAllister and colleagues Bruce Levin, Warren Dahlstrom, and Caren Garfield shopped around the construction financing for The Thorton, a 439-unit apartment community in Old Town Alexandria that Foulger-Pratt is developing, HVCRE was not a significant factor, according to McAllister – although that might have been due to the high level of equity that was placed alongside the construction loan, he added. The company secured a $40 million joint venture equity investment from a US-based private equity real estate fund and a $93.5 million construction loan from a national lender. The transaction closed in February 2016. The timing was fortuitous because for a while equity had gotten skittish about DC deals due to the capital market turmoil, McAllister said. Then, late in the summer “we got a sense that equity was starting to rotate back into DC,” he said.
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