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Federal Register / Vol. 86, No. 163 / Thursday, August 26, 2021 / Proposed Rules
apartment rental income would not qualify for this exclusion.16
Loans used solely to acquire undeveloped land would not qualify for this exclusion; the credit facility would also have to include financing for the construction of oneto four-family residential structures. Moreover, credit facilities that do not finance the construction of oneto four-family residential structures as defined above, but instead solely finance improvements such as the laying of sewers, water pipes, and similar improvements to land, would not qualify for this exclusion. A credit facility that combines the financing of land development and the construction of oneto four-family structures would qualify for this exclusion.
2. Agricultural Land
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We propose to exclude from the HVCRE definition credit facilities financing agricultural land, as defined in FCA regulation 619.9025, or real estate used as an integral part of an aquatic operation. Section 619.9025
defines agricultural land as land improved or unimproved which is devoted to or available for the production of crops and other products such as but not limited to fruits and timber or for the raising of livestock.
This exclusion would apply only to financing for the agricultural and aquatic needs of bona fide farmers, ranchers, and producers and harvesters of aquatic products under 613.3000 of FCA regulations. It would not apply to loans for farm property construction and land development purposes.
With one exception, we intend our proposed agricultural land exclusion to have the same scope as the agricultural land exclusion of the FBRAs. The FBRAs definition of agricultural land has the same meaning as farmland in their Call Report forms and instructions.17 They define farmland as all land known to be used or usable for agricultural purposes, such as crop and livestock production. Farmland includes grazing or pastureland, whether tillable or not and whether wooded or not. Loans for farm property construction and land development purposes are not loans on farmland, and therefore such loans do not fall within the agricultural land exclusion.
16 See supra footnote 11. Additionally, certain multifamily residential property may meet the other credit needs financing available to eligible borrowers as authorized by sections 1.11a1 and 2.4a1 of the Act and referenced in 613.3000.
17 See Federal Financial Institutions Examination Council FFIEC 031 and FFIEC 041Instructions for Preparation of Consolidated Reports of Condition and Income.

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Unlike the FBRAs, we propose to expressly include within the agricultural land exclusion real estate that is an integral part of an aquatic operation.
As the FBRAs did in their final rule, loans for land development purposes and farm property construction would not be eligible in this proposed rule for the agricultural land exclusion from the HVCRE exposure definition. Loans made for land development purposes would include loans made to finance property improvements, such as laying sewers or water pipes preparatory to erecting new structures. Loans made for farm property construction would include loans made to finance the onsite construction of industrial, commercial, residential, or farm buildings. For the purposes of this exclusion, construction includes not only construction of new structures, but also additions or alterations to existing structures and the demolition of existing structures to make way for new structures.
3. Loans on Existing Income Producing Properties That Qualify as Permanent Financings As in the FBRA rule, we propose to exclude from the definition of HVCRE
exposure credit facilities that finance the acquisition or refinance of existing income-producing real property secured by a mortgage on such property, so long as the cash flow generated by the real property covers the debt service and expenses of the property in accordance with the System institutions underwriting criteria for permanent loans. We also propose to exclude credit facilities financing improvements to existing income-producing real property secured by a mortgage on such property.
Examiners may review the reasonableness of a System institutions underwriting criteria for permanent loans through the regular examination process to ensure the real estate lending policies are consistent with safe and sound banking practices.
We believe this income-producing property exclusion would address certain concerns expressed in comment letters from FCAs 2014 proposed HVCRE definition regarding agribusiness and rural utility loans.
System institutions commented they did not believe the definition of HVCRE was intended to include agribusiness or rural project financing transactions to build processing and marketing facilities or rural infrastructure. Under this proposal, these types of loans could qualify for the income-producing property exclusion if the cash flow being generated by the real property is
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sufficient to support the debt service and expenses of the real property in accordance with the System institutions underwriting criteria for permanent loans.
Agribusiness and rural project loans that are not secured by existing incomeproducing real property would not fall under this exclusion. Such loans often pose a greater credit risk than permanent loans. We believe it is appropriate to classify these loans as HVCRE exposures and impose a 150
percent risk-weight given their increased risk compared to other commercial real estate exposures unless the loan satisfies one of the other exclusions. However, as discussed in section 5Reclassification as a Non-HVCRE Exposure section below, a System institution would be allowed to reclassify these HVCRE
exposures as a non-HVCRE exposure if two conditions are met:
Substantial completion of the development or construction on the real property has occurred; and the cash flow generated by the property covers the debt service and expenses on the property in accordance with the System institutions loan underwriting standards for permanent financings.
4. Certain Commercial Real Property Projects As in the FBRA rule, we propose to exclude from the definition of HVCRE
exposure credit facilities for certain commercial real property projects that are underwritten in a safe and sound manner in accordance with proposed loan-to-value LTV limits and where the borrower has contributed a specified amount of capital to the project. A
commercial real property project loan generally is used to acquire, develop, construct, improve, or refinance real property, and the primary source of repayment is dependent on the sale of the real property or the revenues from third-party rent or lease payments.
Commercial real property project loans do not include ordinary business loans and lines of credit in which real property is taken as collateral. As it relates to the System, we believe this exclusion is most relevant to agribusiness processing and marketing entities and farm-related businesses and rural project loans.
In order to qualify for this exclusion, a credit facility that finances a commercial real property project would be required to meet four distinct criteria.
First, the LTV ratio would have to be less than or equal to the applicable maximum set forth in proposed Appendix A. Second, the borrower
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