On July 2, the Federal Reserve Board approved the Basel III capital standards final rule. The new rule aims to prevent another widespread capital shortfall among banks of all sizes by establishing a regulatory capital framework to address shortcomings in capital requirements, particularly for larger, internationally active banking organizations. Given the debt-intensive nature of multifamily ownership and development, the rule’s effect on bank lending could have secondary repercussions for the apartment industry.
Some commercial real estate groups have concerns that the Basel III capital standards, which require banks to hold significantly larger capital reserves and also comply with more stringent reporting and monitoring requirements, will cause banks to make less capital available for lending. The fear is the additional risk weight for many types of commercial real estate loans will reduce incentives for the banks to extend the amount of debt needed in the market, affecting both liquidity and harming investment.
However, for the apartment sector, the concerns are more limited. The additional capital holdings required by increased risk weighting excludes apartment loans, as their risk weights remain at pre-Basel III levels. In fact, some finance experts suggest that, due to the change in other high volatility commercial real estate (HVCRE) property types, banks are likely to consider multifamily loans a preferred income property loan, as they require less Tier 1 capital to be held by banks.
These provisions reflect industry comments to limit the higher risk weights by limiting the capital requirements to acquisition, development and construction loans, defined as HVCRE. Further, there are some accommodations for HVCRE loans with 20 percent or more borrower equity.
The rule will take effect on Jan. 1, 2014, with full implementation by Jan. 1, 2015.
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