High Volatility Commercial Real Estate Loans: Guidance for Developers and Lenders on HVCRE Rules and Loan Covenants

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Presenting a 90 minute encore presentation High Volatility Commercial Real Estate Loans: Guidance for Developers and Lenders on HVCRE Rules and Loan Covenants Navigating Borrower Contributed Capital Rules, Maximum LTV Ratio, Conversion to Permanent Financing and More WEDNESDAY, SEPTEMBER 5, 2018 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Joseph Philip Forte, Partner, Sullivan & Worcester, New York Matthew (Matt) Galligan, President, Real Estate Finance, CIT, New York Gregg Gerken, Executive Vice President, U.S. Head of CRE, TD Bank, New York William G. Lashbrook, Senior Vice President, PNC Bank, Pittsburgh The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

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Comparison of High Volatility Commercial Real Estate (HVCRE) with H.R. 2148/S. 2155 Proposed High Volatility Acquisition, Development, and Construction Loans, and Basel III Revisions Last updated on May 24, 2018 Reprinted with permission of CRE Finance Council Disclaimer: The information provided herein is general in nature and for educational purposes only. CRE Finance Council makes no representations as to the accuracy, completeness, timeliness, validity, usefulness, or suitability of the information provided. The information should not be relied upon or interpreted as financial, tax, accounting, investment, commercial or other advice, and CRE Finance Council disclaims all liability for any such reliance. 2018 CRE Finance Council. All rights

Compared Documents HVCRE Final Rule & FAQS Rule Effective January 1, 2015 FAQs Released March 2015 H.R. 2148/S. 2405 H.R. 2148 introduced April 2017; Passed House November 2017 S. 2405 introduced February 2018 H.R. 2148/S.2405 incorporated into S.2155, which passed Senate in March 2018. S. 2155 Passed House May 2018 Signed into Law by the President on May 24, 2018 and effective immediately Notice of Proposed Rulemaking on HVADC Proposed September 2017 Comment Period Closed December 2017 Basel Committee Standard (Dec. 2017) 2018 CRE Finance Council. All rights 6

List of Compared Topics Applicability Banks Scope Loans Exemptions Definition of Permanent Loan Conversion to Non HVCRE Contributed Capital Grandfathering Risk Weight 2018 CRE Finance Council. All rights 7

Topic Current HVCRE H.R. 2148/S. 2155 HVADC Basel III (Dec 2017) References C.F.R. 12 324.2 H.R. 2148 Bill Text S. 2155 Bill Text NPR Text Basel III: Finalizing post crisis reforms Applicability Banks Same definition for both Advanced Approaches (AA) and Standard Approach (SA). SA risk weight is 150%; AA risk weight is variable. Same definition and risk weight for both AA and SA. HVADC definition and risk weight apply only to SA. AA maintain current HVCRE weights and definition. Scope Loans a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property, (1) a credit facility secured by land or improved real property that, prior to being reclassified by the depository institution as a Non HVCRE ADC Loan : (A) Primarily finances, refinances or has financed the acquisition Development, or construction of real property; (B) has the purpose of providing financing to acquire, develop, or improve such real property into income producing real property; and (C) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility; a credit facility that is originated on or after [effective date] and that: (1) Primarily finances or refinances the: (i) Acquisition of vacant or developed land; (ii) Development of land to prepare to erect new structures including, but not limited to, the laying of sewers or water pipes and demolishing existing structures; or (iii) Construction of buildings, dwellings, or other improvements including additions or alterations to existing structures Note: Commentary defines "primarily finances" as more than 50% of the loan proceeds will be used for ADC activities. The primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of a broader commercial enterprise CRE exposures secured by properties of types that are categorized by the national supervisor as sharing higher volatilities in portfolio default rates; Loans financing any of the land acquisition, development and construction (ADC) phases for properties of those types in such jurisdictions; and Loans financing ADC of any other properties where the source of repayment at origination of the exposure is either the future uncertain sale of the property or cash flows whose source of repayment is substantially uncertain (eg the property has not yet been leased to the occupancy rate prevailing in that geographic market for that type of commercial real estate). 2018 CRE Finance Council. All rights 8

Topic Current HVCRE H.R. 2148/S. 2155 HVADC Basel III (Dec 2017) Exemptions 1. 1 4 family residential 2. Community Development Investment 3. Agriculture land 4. CRE Projects with: A. LTV ratio within applicable standards; B. 15% borrower contributed capital C. Capital contribution and internally generated funds required to remain in project until permanent conversion, sale, or paid in full. 1. 1 4 family residential; Community Development Investment; Agriculture land; 2. Acquisition or refinancing of incomeproducing real property if cash flow is sufficient; 3. Improvements to existing incomeproducing real property if cash flow is sufficient; 4. CRE Projects with: A. LTV ratio within applicable standards; B. 15% borrow contributed capital (clarifications) C. 15% capital contribution required to remain in project until reclassification. Excess contribution can be withdrawn 1. 1 4 family residential 2. Community Development Investment 3. Agriculture land 4. Permanent loan 1. Commercial ADC loans exempted from treatment as HVCRE loans on the basis of certainty of repayment of borrower equity are, however, ineligible for the additional reductions for SL exposures described in paragraph 58. Definition of Permanent Loan Not Defined institution s applicable loans underwriting criteria for permanent financings A permanent loan for purposes of this definition means a prudently underwritten loan that has a clearly identified ongoing source of repayment sufficient to service amortizing principal and interest payments aside from the sale of the property. For purposes of this section, a permanent loan does not include a loan that finances or refinances a stabilization period or unsold lots or units of for sale projects. Not Defined 2018 CRE Finance Council. All rights 9

Topic Current HVCRE H.R. 2148/S. 2155 HVADC Basel III (Dec 2017) Conversion to Non HVCRE/HVADC Not Defined Upon (1) completion of development or construction of real property; and (2) cash flow is sufficient to support the debt service and expense of real property, to satisfaction of lender in accordance with permanent financing. Commentary suggests that even if a credit facility does not meet the definition of a permanent loan at origination, it could subsequently meet the definition as the property generates additional revenue sufficient to service amortizing principal and interest payments. In such a case, the facility may become exempt from the HVADC exposure category, provided the loan was prudently underwritten at origination. Not Defined Contributed Capital 15% borrower contributed capital of as completed. Contributed land value can be only purchase price, not current appraised value. 15% borrower contributed capital of appraised as completed value. Contributed land value shall be appraised value in accordance with FIRREA. Exemption eliminated. For ADC exposures to residential real estate, borrower contributed capital to the real estate s appraised as complete value. National supervisors to provide further guidance on equity at risk. Grandfathering Existing loans not grandfathered. Applied to all past and future loans. Grandfathers loans originated prior to January 1, 2015. Only applies to exposures originated on or after the final HVADC rule s effective date for SA banks. Current outstanding HVCRE loans still retain original HVCRE treatment for all banks. AA banks maintain existing treatment (though they also have to run SA calculations for the purposes of conforming to the Collins Amendment and also in the context f the stress tests). Not discussed. Implementation target date of January 2022. Risk Weight 150% (SA) AA current model 150% 130% (SA) AA 150% (SA) 95% to 250% Scale (AA) 2018 CRE Finance Council. All rights 10

Thank You Joseph Philip Forte jforte@sandw.com Matthew (Matt) Galligan matthew.galligan@cit.com Gregg Gerken gregg.gerken@td.com William G. Lashbrook william.lashbrook@pnc.com 2017 CRE Finance Council. All rights 11