HVCRE Demystified

If you are a real estate investor planning a fix and flip or small ground-up development, there is a good chance you will come across the term HVCRE. It stands for High Volatility Commercial Real Estate, and it refers to a specific category of loans that banks must treat differently under federal banking regulations.

What Is HVCRE?

An HVCRE loan is a type of loan that finances the acquisition, development, or construction of real estate. Under federal regulations, if a bank makes a loan that qualifies as an HVCRE ADC loan, it must set aside more capital to back that loan. This increased capital reserve is designed to protect the bank from the higher perceived risk of these types of projects.

To mitigate their exposure, banks typically respond by tightening underwriting standards. This means:

• Higher equity contributions required from borrowers

• Limited flexibility in loan structuring

• Stricter timelines for contributions

• Reduced willingness to allow preferred equity, mezzanine debt, or early release of borrower equity

Private Lenders Are Not Bound by HVCRE

Private lenders, on the other hand, are not subject to HVCRE regulations. They are free to structure deals in ways that make more sense for small to mid-size investors. Because they are not required to hold additional capital for construction and development loans, they can offer:

• Full funding of construction budgets

• Lower up-front equity requirements

• Staged capital contributions

• Early release of equity upon project milestones

• Greater flexibility with deal structures

HVCRE regulations sometimes conflict with fix and flips

Example

Let us consider a borrower who finds a distressed property for $400,000. The plan is to invest $180,000 in renovations and then either sell or refinance. The borrower has $120,000 in cash to invest.

Option 1: Borrowing from a Bank

A typical bank, operating under HVCRE guidelines, may only lend up to 70 percent loan-to-cost (LTC), and will often require that the entire equity contribution be made up-front and in cash.

Total project cost: $400,000 + $180,000 = $580,000

Max loan at 70 percent LTC: $406,000

Required equity: $174,000

Available equity: $120,000

Gap: $54,000 short

This deal may not move forward with a bank lender.

Option 2: Borrowing from a Private Lender

A private lender may agree to finance 100 percent of the construction budget and 80 percent of the acquisition.

Loan amount: $320,000 (80 percent of purchase) + $180,000 (full construction) = $500,000

Required equity: $80,000

Available equity: $120,000

Deal works, and borrower retains $40,000 in liquidity

This structure allows the project to move forward without delay and gives the borrower breathing room during construction.

Conclusion

HVCRE may not be a household term, but it plays a significant role in how construction and development deals get financed. For smaller projects and time-sensitive deals, private lenders are often able to offer terms that banks cannot, simply because they are not constrained by the same regulatory capital requirements.

Before choosing a lender, understand what framework they are operating under. And if you are unsure, speak to an attorney who does.