Landmark Links May 29th – Relaxed


Lead Story…. As most of you are probably aware a measure that rolled back some provisions of the Dodd Frank Act was signed into law last week.  Somewhat buried in the bill was a provision that could have a major impact on commercial real estate development and construction lending: a change to the capital contribution language for Basel III’s High Volatility Acquisition, Development and Construction (HVCRE) financial requirements.

Before your eyes glaze over and you skip to the WTF section to avoid reading about bank regulatory minutiae, allow me a few sentences to explain why this is a very, very big deal.  I think its safe to say that HVCRE turned the construction lending world on its head when it was first rolled out in 2015.  HVCRE was the portion of the Basel III bank regulations that sought to limit the risk that banks took in lending for high risk real estate projects – meaning construction and development.  It accomplished this by requiring banks to reserve 12% of capital against loans classified as HVCRE as opposed to only 8% for non-HVCRE commercial real estate loans, thus making it quite punitive and expensive for lenders to finance projects that didn’t comply.

One of the most challenging provisions in the HVCRE classification rules was the borrower needed to have 15% of the as-as completed value of the project – as determined by an appraisal – contributed as cash equity.  Here’s why that has been problematic: Let’s say that you own a piece of land and you have either 1) owned it for a long time and it has appreciated substantially in value; or 2) you have caused the value to go up substantially above your basis by entitling entitling it.  Now you decide that you would like to develop it. Under HVCRE rules, in order to obtain debt capital to improve the site, banks were required to size the loan based upon your cash basis in the land, NOT the actual value of the land when it was contributed as collateral.  This caused all sorts of problems for long term owners or those who had taken entitlement risk as they were now required to either put in substantially more cash, effectively over-collateralize the project in order to get a loan or bring in an equity partner, substantially diluting returns in the process while taking on the same amount of risk.  This was clearly punitive from a bottom line perspective for a developer / long term owner.  It was also a pain in the ass since it meant that someone who owned a property for years would have to establish a cash basis, accounting for costs going back to the purchase of the property – which could be decades in some cases.

The Economic Growth, Regulatory Relief and Consumer Protection Act that was signed into law last week amended this onerous provision with the following passage (emphasis mine):

(c) Value Of Contributed Real Property—For purposes of this section, the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property as determined under standards prescribed pursuant to section 1110 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the extension of the credit facility or loan to such borrower.

It’s difficult to overstate how much of a big deal this is for CRE sponsors who have a low basis in a property and want to take out a loan to re-position or build it out.  The HVCRE classification made a mess of commercial real estate finance for several years, dis-incentivizing property owners from developing underutilized property and stymieing banks who would have otherwise lent in the space. I, for one am thrilled to see that mess finally start to get cleaned up.


Monkey See, Monkey Do: Several Silicon Valley cities are contemplating head taxes similar to the one recently passed by Seattle, purportedly to deal with the negative consequences of rapid economic growth caused by refusal to build adequate housing.  Looks like the culprits behind the problem are going to try to bite the hand that feeds once again.

Wreaking Havoc: The dollar has been on the rise for a couple of months now and its causing all sorts of issues in emerging markets.


Unique Issues:EB-5 defaults are on the rise and having a capital source that is fragmented, unsophisticated and dealing with potential immigration consequences make them particularly challenging to deal with.


Just the Beginning: Private equity rentals, rising costs, tax disincentives, a construction worker shortage and growing household formation point to the housing supply crisis continuing to get worseRelated:US Home values are surging at their fastest pace since before the financial crisisSee Also: To solve affordability crisis, Bay Area housing stock must grow 50% in 20 years.

Big Business: How Wall Street and Silicon Valley institutionalized the formerly mom and pop industry of house flipping.

Start Up Round Up: Open Door Labs Inc is new startup wants to help you trade in your old home and put you in a new one (h/t Scott Ramser) See Also: Ribbon is a startup backed by some large investors that partners with buyers to submit a cash offer in exchange for a fee, making it more likely that the buyer’s offer is accepted.  Ribbon’s equity is then refinanced out after closing.


Tremendous Store of Value: Over $1.2 billion in cryptocurrency has been stolen by hackers since the beginning of 2017.

Unicorn Killer: Awesome New York Magazine profile of John Carreyrou, the Wall Street Journal reporter who took down scam blood test company Theranos and it’s founder Elizabeth Holmes.

Astronomical: Escalating tuition and easy credit have yielded a class of student-loan borrowers with spectacular debt they may never pay back.  The example of the orthodontist who has student debt over over $1MM in this story is unreal.

Chart of the Day 

This is going to leave a mark

Source:Global Macro Monitor


Frivolous: Two McDonalds customers are suing the fast food giant for $5MM over being charged for cheese that they don’t want on their Quarter Pounders because Florida.  (h/t Mike Deermount)

Sendoff: A woman was fired from her job at a Michigan company for bringing laxative-filled brownies to a coworker’s sendoff party (h/t Steve Sims).

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links May 29th – Relaxed

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