The Cost of Capital- Update from NAR

BACKGROUND


As you may recall, on June 12, 2012, the Federal Reserve, OCC and FDIC proposed regulations implementing the Basel III capital accords. Basel III is an international agreement that updates capital and liquidity requirements for banks and other financial institutions. This 750 page regulation will impact the ability of non-financial businesses to raise capital and increase their costs of borrowing.
In a series of three separate but related proposals, the regulators proposed substantial revisions to the U.S. regulatory capital regimen for banking organizations that, if adopted, will have a significant impact on the entire U.S. banking industry. The U.S. rules are based on the core requirements of the 2011 international Basel III Accord and in significant part on the “standardized approach” for the weighting and calculation of risk-based capital requirements under the 2004-2006 Basel II Accord. Importantly, the proposals will extend large parts of a regulatory capital regime that was originally intended only for large, internationally active banks to all U.S. banks and their holding companies, other than the smallest bank holding companies (generally, those with under $500 million in consolidated assets).
Commercial Real Estate

Most commercial loans will continue to be risk-weighted at 100 percent. The one significant change is for “high volatility” commercial real estate loans (“HVCRE loans”), a subset of ADC loans. HVCRE loans will be risk-weighted at 150 percent. A lender may be able to return an ADC loan to the 100 percent risk weight through underwriting and the imposition of certain terms, as follows:

• The LTV ratio is less than or equal to the “applicable maximum supervisory LTV ratio.”

• The borrower has contributed at least 15 percent of the appraised “as completed” value of the property. The contribution may take the form of cash or unencumbered readily marketable assets, or the borrower may have paid development expenses out of pocket.

• The borrower has paid to the bank the capital charge that the bank will have to incur on the loan and has done so before the bank advances any funds.

• The contributed capital, which may eventually include capital generated internally by the project, must remain in place until the project is completed, the facility converts to permanent financing, or is sold or paid in full.

• Permanent financing by the bank must conform to the bank’s underwriting criteria for long-term commercial mortgage loans. An ADC loan to finance one- to four-family residential properties, however, may continue to be risk-weighted at 100 percent.

Residential Construction and Multifamily Loans

The current risk-based capital rules assign a risk weight of 50 percent to certain one-to-four family residential presold construction loans and to multifamily loans. A 100 percent risk weight applies to a presold construction loan if the purchase contract is cancelled. These risk weights are fixed by statute and cannot be changed. The proposed Standardized Approach, however, adds several new conditions to both kinds of loans in order to qualify for these risk weights.

Presold construction loans must meet several prerequisites designed to ensure that the property will, in fact, be sold on completion. Two notable new requirements are, first, that the builder incur at least the first 10 percent of the direct costs of construction (land, labor, and construction) before the builder may begin to draw down on the loan; and, second, that the loan amount may not exceed 80 percent of the sales price of the presold residence.

Loans secured by mortgages on multifamily properties will remain eligible for the 50 percent risk weight if several conditions are met. For example, a newly originated multifamily loan cannot be risk-weighted at 50 percent and must be weighted at 100 percent. If, after at least one year, the borrower has made all principal and interest payments on time, the loan will be eligible for the 50 percent risk weight, if other conditions are satisfied.

These conditions include the following: (i) the LTV ratio does not exceed 80 percent on a fixed rate loan or 75 percent on a loan where the rate may adjust; (ii) amortization of principal and interest must occur over a period of not more than 30 years, and the original maturity for repayment of principal is not less than seven years; and (iii) annual net operating income of the property must exceed annual debt service by 20 percent for a fixed-rate loan or 15 percent for a loan where the rate may vary.

Basel III Working Group

We have formed a staff level working group with various real estate groups in Washington. This group is meeting regularly to share information and develop a collective strategy on these proposed rules.

Media Mogul Sees a Bright Future for Industry

Mark Scifres is Chairman, CEO and President of Pavlov Media, which he started while working on his engineering degree at the University of Illinois in Champaign.  Mark comes from a family with a strong engineering background.  

While at the U of I, Mark had an idea that off-campus and private certified housing could be networked together.  These were the early days of data—Netscape didn’t even exist.  Mark’s vision was a network that provided data throughout the off-campus housing area.  That project was right in line with Mark’s engineering studies.  Long story short, Mark designed a network, built it and things took off from there!

That was more than 17 years ago and Pavlov Media has grown into a multi-million dollar operation, providing television, broadband and telephone services in more than 140 markets in 34 states.

The company has grown to more than 90 employees and has deployed network facilities to more than 70,000 registered users.  Along the way, Pavlov Media has acquired Wavelength Broadband—a major player in the emerging broadband industry—and made other acquisitions, as well.

In addition, Mark is a patent holder on specialized network processes.  

As part of Mark’s work as CEO, he led the construction and deployment of a network that provides television, broadband and other services to tens of thousands of apartments, hotels and other MDU’s (Multi-Dwelling Units).  He also led the wireless mesh deployments in Champaign, Illinois and New York City, which includes the free downtown wireless project in Champaign.

Under Mark’s leadership, Pavlov Media has become an industry leader in serving MDU’s and private cable operators.  To watch the entire TV interview with Mark Scifries CLICK HERE.

A Legend in the Industry-An Interview With Mark Rubel

Since 1980, Mark Rubel has made about a thousand recordings at his Pogo Studio in downtown Champaign IL for many wonderful artists including Hum, Alison Krauss, Rascal Flatts, Fallout Boy, Adrian Belew, Luther Allison, Ian Hobson and Henry Butler, for such clients as RCA, Capitol, Warner, Jive/Zomba, Volition Games, Electronic Arts, The BBC, Smithsonian, and many more. 

Mr. Rubel is on the national board of SPARS (the Society of Professional Recording Services) and belongs to the AES, NARAS, ASCAP, MEIEA, EARS, and numerous other acronyms.  Having taught audio to thousands of students since 1985, Prof. Rubel teaches recording, music business, music technology and the history of rock, and is the Audio Director at Eastern Illinois University’s $65 million Doudna Arts Center.

Mark writes for recording magazines, especially Tape Op Magazine for whom he interviewed Les Paul, Terry Manning and others. He works as a panelist, consultant, beta tester and legal expert witness.  Mark has been in the thrash oldies rock band Captain Rat and the Blind Rivets for over thirty years.  He plays many instruments badly and sings worse, and is ridiculously happy cultivating songs, students and cats along with his saintly wife, Nancy.

To watch the entire interview with Mark Rubel CLICK HERE

Good News on Flood Insurance

On June 29, 2012, both the Senate and House passed the Biggert-Waters Flood Insurance Reform Act of 2012 as a part of H.R. 4348, the Surface Transportation Conference Report.  The President will sign the measure in a few days.  This is the culmination of a successful multi-year REALTOR campaign and a final push at NAR’s Midyear Legislative Rally and Meetings in May 2012.  Congress had been extending the National Flood Insurance Program a few months at a time since 2008.  Twice this led to shut downs, including one that stalled thousands of real estate sales in June 2010 alone.  Passage of this 5-year reauthorization will bring certainty to real estate transactions in more than 21,000 communities nationwide where flood insurance is required for a mortgage.  The bill ensures the program will continue long-term for more than 5.6 million business- and homeowners who rely on it, achieves one of NAR’s top priorities for the year, and means taxpayers will spend less on federal assistance for flood disasters over the long run.