Commercial Loans Blog

Commercial Loans and Rent Roll Fraud

Posted by George Blackburne on Wed, Jul 11, 2018

Winning-1When I grow up, I want to be Robert Ringer.  Mr. Ringer was the  best-selling author of several business books.  I last saw Robert Ringer in Playboy magazine, where he was sitting in a hot tub at a party at the Playboy Mansion with two gorgeous, topless Bunnies.  It was lucky that I just happened to notice the picture because normally I only look at Playboy for the articles.  Ha-ha!

Every business person - especially investors - should read Robert Ringer's first #1 best-selling business book, Winning Through Intimidation.  If President Trump ever died and made me King, I would require that every commercial-mortgage-broker trainee read Ringer's book first, even before he started learning anything about underwriting commercial loans.

 

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The book teaches you that the world is full of snakes.  In fact, Mr. Ringer once wrote that there are only three types of people in business:  (1) The type who will screw you; (2) The type who tell you in advance that they are going to screw you and then who will screw you; and (3) The type who will swear to high heaven that they are not going to screw you and then who will screw you.

So why am I confessing my sins (Playboy and lust) today?  The answer is that Robert Ringer happened to be a hard money broker who specialized in making commercial loans on apartments!  His book was read by hundreds of thousands of lawyers, accountants, salesmen, and widget manufacturers, and it became a #1 business bestseller.  The really awesome twist is that all of his examples of people in business doing dastardly acts were from his real-life experiences in the hard money commercial loan business.  Talk about relevant, huh?

 

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One of the dastardly acts that Ringer wrote about was Rent Roll Fraud.  You will recall that a Rent Roll is a long list, by unit number or letter, of all of the units in an apartment building, as well as the configuration (bedrooms and baths), the tenant's name, and the rent currently being paid by the tenant.  Sometimes a Rent Roll will even include the square footage of the unit.

Rent Roll Fraud occurs when the owner of an apartment building applies for a commercial loan or lists his apartment building for sale.  Either the owner or his broker submits to the commercial lender a Rent Roll with dummy numbers.  Even a small increase in the Rent Roll can make a big difference in the valuation of the apartment building or the size of the commercial loan for which the borrower qualifies.

 

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Robert Ringer learned about Rent Roll Fraud from painful experience.  Dastardly borrowers?  You betcha.  He learned to knock on a few doors and to audit the Rent Roll.  "Hello, Mr. Smith.  My name is Robert Ringer, and I am doing an appraisal of the property.  Would you mind please telling me what you pay in rent?  Just $1,200 per month?  The Rent Roll says $2,000.  Hmmm."  "Mrs. Rodriquez, how many bedrooms and baths do you have?  Just two bedrooms and two baths?  That's strange.  The Rent Roll says you should have three bedrooms and two baths.  Hmmm."  [To himself:  "This entire Rent Roll may be fraudulent.  I better audit a half-dozen more units to confirm my suspicions."]

The reason why I am writing to you today about Rent Roll Fraud is because I got a call today from a reporter from the Wall Street Journal.  He is writing a piece about a big criminal case involving mortgage fraud in the upstate New York area.  According to the indictment, tens of millions of dollars in commercial loans on multifamily projects were fraudulently obtained, in part using fraudulent Rent Rolls.  These defendants allegedly went as far as placing doormats and shoes in front of vacant units.  They are also accused of placing radios in empty units and leaving the radios on in order to create the illusion of occupancy.  Yikes!

 

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The Wall Street Journal's reporter found me while researching Estoppel Agreements in connection with commercial leases.  He found my blog article on estoppels.  Pop quiz.  What is an Estoppel Agreement or Estoppel Certificate (same thing)?  An Estoppel Certificate from a tenant is a statement admitting the rent, the maturity date of the lease, the size of the unit, the fact that the tenant has NOT prepaid his rent, and that the owner has performed all of his obligations in connection with the lease.  

When a tenant has a signed an Estoppel Certificate, he is estopped (fancy word for stopped) from later claiming, after a lender has foreclosed on his commercial loan, that the rent is $2,000 per month less than that listed on the Schedule of Leases.  A Schedule of Leases is the commercial-industrial equivalent of a Rent Roll.  A Schedule of Leases lists the units by address, the square footage, the name of the tenant, the monthly rent, and who (landlord or tenant) pays which expenses.

 

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Here's a story that will raise the hair on the back of your neck.  Blackburne & Sons, my private money commercial mortgage company, foreclosed on a row commercial building in the foothills of California.  After we had taken possession of the property, we notified the tenant to send all future rent payments to us.  At that point, the tenant notified us that he didn't have to make any more rent payments.  In exchange for an 80% discount from the guy losing the property in foreclosure (I am shocked, shocked I tell you, that there exists snakes in business), the tenant had prepaid his rent for the next five years!  Can you now see why Estoppel Certificates demand that the tenant disclose any prepaid rent?  In this case, the tenant had made this rent prepayment after we had recorded our loan, so his claim to prepaid rent was cut off by our foreclosure.  Phew!

 

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Here's another issue in connection with Estoppel Agreements.  A lender makes a commercial loan on an office building, and after the lender forecloses, the tenant tells him that he doesn't owe any rent until the landlord builds out the tenant improvements that the former owner had promised.  These tenant improvements could cost 18 months worth of rent.  This is why an Estoppel Certificate asks the tenant to admit that the landlord has performed all of his conditions precedent (the landlord has already completed everything that the landlord has promised to do prior) to payment by the tenant.

 

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Its pretty obvious why commercial lenders, before making a commercial loan on a multifamily property, can't get an estoppel certificate from every apartment tenant.  The paperwork would be impossibly enormous, and 90% of the tenants would have no clue as to how to fill out the Estoppel Certificate.  Therefore commercial lenders have to rely on the appraiser to do an audit of some of the apartment units on the Rent Roll.

To my own staff, let's please try to ask our multifamily appraisers in writing to audit 5% to 10% of the units on the Rent Roll before completing the appraisal.  Thanks!

 

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Topics: Rent Roll Fraud

Commercial Loans and Reserves For Vacancy and Collection Loss

Posted by George Blackburne on Sun, Jul 8, 2018

VacancyNationwide the vacancy rate for office space is 16.7%, plus or minus fifty basis points.  Remember, a basis point or bip is 1/100th of one percent.  Therefore fifty bps. (called 50 bips) is equal to one-half of one percent.

You are applying for a commercial loan, so you begin preparing a Pro Forma Operating Statement - an operating budget for the next twelve months.  Your property is an average office building in the downtown area of an average U.S. city.  Do you use as your Reserve for Vacancy and Collection Loss the national or city-wide average of 16.7%?  Or do you use 5%?  This is the subject of today's commercial real estate finance (CREF) training lesson.

 

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A good argument can be made that office building investors in the U.S. are lousy capitalists.  How could they allow 16.7% of their space to sit vacant?  Capitalism says that they should lower their rent in order to attract enough tenants to fill their buildings.  It makes good sense to lower their rent from $25 per square foot to $22 per square foot if they can fill the whopping 16.7% vacancy.

Let's do the math.  C'mon, guys, this is fifth grade math.  Stay awake.  Let's assume that the office building has 100,000 net leasable square feet.  If 83.3% of the space is leased at $25 per square foot, the office building generates $2,082,500 in gross rent.  If all 100,000 sf was leased at $22 per square foot, the office building would generate $2,200,000 in gross rent.  The owner picks up extra $117,500 by lowering his rent!

 

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This brings up an important training point.  Above I talked about rents of $25 or $22 per square foot.  It is the customary in commercial real estate to talk about rental rates in annual terms.  Therefore $25 per square foot works out to $2.08 per square foot per month.  If you are renting 2,000 square feet for your property management company, you would be paying $4,160 per month in rent (2,000 sf. times $2.08 per square foot per month).

So why aren't office building owners better capitalists?  For one reason, the higher the occupancy rate, the higher the operating expenses, such as common area heating, cooling, electricity, and wear and tear on the common areas.

 

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There is another reason why office building owners don't lower their asking rents in order to fill their building.  Suppose you own a mortgage company in the building, and you sign a lease at $25 per square foot.  Then the owner starts advertising identical space for just $22 per square foot.  Are you going to be a happy camper?  Is your higher rental rate going to eat at you like an ulcer?  And what is going to happen when your lease comes up for renewal?

But the most important reason why office building owners won't reduce their rents enough is that the lower asking rents will lower the value of their office buildings.

[Commercial mortgage brokers:  You are making exactly 63 bonehead mistakes running your commercial mortgage brokerage.  Bonehead mistakes.  Sixty-three of  them.  I can fix you.]

 

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How could increasing an office building's gross income possibly decrease the property's value?  It has to do with the Pro Forma Operating Statement that will be prepared by the real estate broker representing the owner.  When the selling broker prepares his Pro Forma Operating Statement, he will employ a concept called stabilized rent.

In theory, stabilized rent should represent the rental rate that would allow the entire building to find tenants.  In real life, stabilized rent, as used by selling brokers, is the actual rent of any currently rented space, plus the possible rent that could be received if all of the vacant space was rented at the highest rental rate that the owner has ever received for any of his space.

 

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Stabilized rent is an important concept, so please let me go over it one more time.  The real estate broker or commercial mortgage broker is preparing a Pro Forma Operating Statement in preparation of either selling the property or refinancing it.  He has prepared a Schedule of Leases that shows the existing tenants.  But what does he do about the vacant units?

If he is one of my students, and he has read my blog article about getting the largest possible commercial loan (it received the most Linked-In likes I've received in two years), he uses the market rent of any vacant unit.  But what is the market rent of this vacant office space?  In truth, its $22 per square foot; but some idiot owner of a commercial mortgage company once paid $25 per square foot (sorry, but that was you).  So the real estate broker uses $25 per square foot for the vacant space.

[Mortgage brokers:  If you are not working every day towards building a loan servicing portfolio... get the hell out of the business!  The only way to survive the next regular real estate crash is to fall back on your loan servicing income.  The easiest way to build a servicing portfolio is to become as hard money lender.  I service a $55 million portfolio at 1.9% annually.  That's $87,000 every month, whether I close a new loan or not.]

 

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But what about commercial lenders?  What if you are applying for a commercial loan?  Are commercial lenders stupid enough to fall this stabilized rent concept.  Why yes... yes they are.  Ladies, please cover your ears.  Why do dogs lick themselves?  Because they can.  Translation:  In real life, almost all commercial lenders will allow you to get away with this stabilized rent nonsense.

So the question I posed at the beginning of this training article was this:  Should you use 16.7% as the Reserve for Vacancy and Collection Loss when you are preparing a pro forma operating statement on an average office building in an average big city?  No!  You should use stabilized rent and a 5% Reserve for Vacancy and Collection Loss.  Why?  Because you can.

 

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Topics: Commercial loan vacancy

Commercial Loans and Rate Locks

Posted by George Blackburne on Fri, Jul 6, 2018

market collapseInterest rates on commercial permanent loans have increased sharply since the end of the Great Recession in 2009.  At one point - about three years ago when the yields on ten-year bonds in Germany and Switzerland went negative - fixed interest rates on commercial loans to prime borrowers reached as low as 3.75%.  Today even very good borrowers are likely to pay 5.6% to 6.0% for the same commercial loan from a regional bank.  Small town banks are quoting rates as high as 6.25%.

We are clearly in an era of increasing interest rates.  It sure would be great if you could lock your rate when while your commercial loan is in process.

 

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Now if you are buying a house, its possible to get the lender to lock his interest rate for 30 days or so.  The reason why residential lenders can do this is that they buy huge fixed-rate forward-commitments from Fannie Mae or Freddie Mac.  The same is NOT true for commercial loans.  As a general rule, commercial real estate lenders do NOT lock their interest rates.

If you had a commercial loan in process with a bank, and the bond market suddenly collapsed; i.e., interest rate spiked sharply higher, the bank would not be legally obligated to fund your loan at the interest rate originally quoted.

 

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Example:

Big Pebble Bank is processing a $700,000 commercial loan on an office building on Main Street in Big Pebble, New Mexico.  The bank has quoted 5.75%, 1 point, twenty-five years amortized, ten years due, with a rate readjustment at the beginning of year 6, and a 3% prepayment penalty for the first 4.5 years.

Suddenly China, angry over the trade war, sells all of its $2T in Treasury bonds in a single day.  The bond market collapses, and interest rates spike sharply upwards.  (When interest rates spike upwards, the price of existing bonds crash.  This is why the first picture above shows a down arrow.)  By the way, a permanent loan is merely a garden-variety first mortgage on a standing commercial property with a term of at least five years and at least some amortization.  Twenty-five years is the most common amortization for bank commercial loans.

 

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Example Continued:

After China dumped its bonds, the current rate for commercial permanent loans from Big Pebble Bank increased to 7%.   Will Big Pebble Bank honor its original quote of 5.75%?  Probably not.  The jump in interest rates is just too big.  Rather than candidly saying, "Interest rates have jumped upwards, so we can no longer make your loan at 5.75%," they will probably find some goofy qualitative reason to turn the deal down, like the bricks on the building are red or the property is on the left-hand side of the street.  A quantitative reason might be that the deal no longer produced a 1.25 debt service coverage ratio at the higher 7% rate.

Now the example above was an extreme one.  What would happen if interest rates merely drifted 0.25% higher during the 65 days that it took Big Pebble Bank to process the commercial loan?  Will the bank likely honor its original quote?

 

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Probably.  While a term sheet is not legally binding on the bank, most banks will hold their quoted rate if the rate change is not terribly dramatic.  You will recall that a term sheet (or loan proposal or conditional commitment letter) is merely an expression of interest in making a commercial loan and a good faith estimate of the eventual terms.  A term sheet is not legally binding on the lender, but it does have some moral influence.

You will recall that a conduit is a commercial mortgage company that specializes in originating commercial loans destined for re-sale into the CMBS market.  CMBS stands for commercial mortgage-backed securities.  CMBS loans are large commercial loans, typically $5 million or more, secured by the Four Basic Food Groups - multifamily, office, retail, and industrial.

 

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Conduit lenders will NOT lock their interest rates.  Your rate will float with the credit markets while your huge commercial loan is in process.  That being said, most conduits will usually hold true to their margins or spreads.  Let me explain.

Conduit loans are priced at some margin or spread, say, 225 bps. (2.25%) over ten year Treasuries or ten-year swap spreads.  A basis point or bip is 1/100th of 1%.  Therefore 25 bps. is equal to one-quarter of 1%.  Fifty basis points is one-half of one percent.

 

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What is this ten-year swap spread thingee?  A swap occurs when a lender assumes the risk of rates going up by swapping his adjustable rate bond for a fixed rate bond.  Remember, if you own a fixed rate bond - say a ten-year Treasury bond at 2.5% - and interest rates increase so that new ten-year Treasuries start yielding 3.5%, then your 2.5% bond will fall painfully in value.  

Since the guy swapping his adjustable rate bond for a fixed rate bond is taking a risk, he will normally demand some sort of sweetener to do the deal.  That sweetener is known as a swap spread, and it it expressed as an interest rate.  Today, ten-year swap spreads and ten-year Treasury bonds (also known as the long bond), are about the same value.

 

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Conduits today are pricing their big commercial loans using the higher of either ten-year swap spreads or ten-year Treasuries.  For example, a conduit might issue a term sheet today for a $7.2 million ten-year permanent loan on a shopping center in Los Angeles.  They might price the commercial loan at 225 bps. over ten-year swap spreads.  The 225 basis points, in this example, is the conduit's margin.

Above we mentioned that conduits will NOT lock their interest rate during the 75-day processing period of one of these huge commercial loans.  Most conduits, however, WILL hold true to their proposed margin or spread under most circumstances.  It's kind of a moral thing.  Conduits are not legally obligated to lock in their margins; but unless there is absolute chaos in the market, they will usually not change it.

 

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Occasionally, however, the credit markets will plunge into chaos; and the appetite of bond buyers (pension trusts, insurance companies, family offices, etc.) to buy bonds backed by commercial mortgages will disappear.  For example, suppose English jets sought out and destroyed a Russian destroyer in retaliation for a second poisoning attack on English soil.

When this happens, conduits have little choice but to keep increasing their interest rates until CMBS bond buyers return to the market.  "Dude, we're sorry to do this, but with the chaos in the marketplace, we are going to have to re-price your loan."  In other words, the conduit will only make the big $7.2 million loan if the borrower agrees to an increase in the conduit's margin or spread to 325 bps.

 

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Guys, below you will see some trade offers, where I give you a chance to trade a commercial real estate loan officer worker for a BANK for either a free Regional copy of The Blackburne List, a free commercial mortgage marketing course, or a free copy of my famous fee agreement.  Heavens, guys, you know what a banker is, right?  A banker (NOT a mortgage banker!) works in a big building with a fifty-ton vault, several ATM machines, and FDIC insurance signs all over the walls and counters.  C'mon, guys.  This trade is based on the Honor System.  YOU are NOT a banker.  Please click to view my new Hall of Shame.

 

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A mortgage broker named Nathan traded me ten bankers two weeks ago for my popular nine-hour video training course, How To Broker Commercial Loans.   He was so pleased with the course that he came back today and traded me another ten bankers for my four-hour video training course, How To Find Your Own Private Mortgage Investors.

 

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Do you have a real estate related web site?  You can add a link to C-Loans.com in minutes.  Our software automatically captures the URL from which our commercial mortgage borrowers come.  When a deal closes, we go back to the owner of the website and pay him a referral fee.  We once paid Alan Dunn of Spydercube a referral fee of $21,250 for merely putting a link to C-Loans.com on his website.  He was even sleeping when the referral came over!  Can you imagine that call, "Alan, we've got some good news for you..."  If it were me, I could splash links all over my web pages, maybe three per page.  "Commercial Loans."  "Need a Commercial Loan?"  "Commercial Financing."  Just point these links to C-Loans.com, and you're done.

 

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Topics: locking your rate

How To Get the Largest Possible Commercial Loan

Posted by George Blackburne on Mon, Jul 2, 2018

Interest RatesI often tell the following story to my commercial loan brokerage trainees.  Goliath Bank offers a $2 million commercial loan to the borrower at 5.75%, 1 point, 25 years amortized, ten years due, with a rate readjustment at the beginning of year 6.  The prepayment penalty is 3% in years one through five.  Caution:  While the above quote accurately reflects today's market for bank commercial loans, rates are definitely going up.

 

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A mortgage broker, competing against Goliath Bank, brings in a quote of $2,150,000 at 6.25% interest and two points.  The broker is making one point.

Guess which commercial loan quote the borrower will most likely chose?  Nine times out of ten, the borrower will choose the 6.25% offer, even with a one-point higher fee, because the broker is getting him more dollars.  With most commercial mortgage borrowers, it all about max cash.  They want as large of a commercial loan as possible, as long as the interest rate is not too much higher.

 

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So how did this experienced commercial mortgage broker get a larger loan for his borrower?  The key to getting the largest possible commercial loan is to pay attention to the TOP LINE of the Pro Forma Operating Statement.

When you look at a Pro Forma Operating Statement - a projected budget for the property for the next twelve months - the very top line is typically listed as the Gross Potential Income.  This line item represents the amount of rent that the property could generate if every single unit was rented.

 

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When submitting a Pro Forma Operating Statement to a commercial lender, many borrowers and commercial mortgage brokers repeatedly make the same mistakes:

(1)  They fail to show the market rent of any vacant units.  They will submit an apartment Rent Roll showing 58 units occupied, with the actual rent next to the number of the apartment; but they will leave the rent showing as zero for the two vacant units.  By the way, a Rent Roll is a list of the rentable units / spaces by number or letter, the name of the tenant, the size of the unit, and the current rent.

 

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(2)  If the borrower fails to show the market rent of vacant units, the lender will often just take the Total Rent from the bottom of the Rent Roll and multiply it by twelve in order to compute the Gross Potential Income.  If this happens, the borrower is screwed.  He might lose ten to fifteen percent off the size of the loan that the commercial lender might have offered.

 

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(3)  Another common mistake is to fail to show the onsite manger's unit at market rent.  Borrowers to often cut $500 to $1,000 off the manager's rent as compensation for his work.(4)  The reason why your Gross Potential Income line item must appear as large as possible, especially when applying for an apartment loan, is because many lenders will simply grab the Gross Potential Income and lop off 35% for Operating Expenses.  The lender will often totally disregard your projected expenses.

 

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(4)  Let's go back to the Onsite Property Manger.  If the borrower had wisely shown the manager's unit at market rent and had deducted $1,000 per month down below in the "Property Management - Onsite" line item, then the lender wouldn't even have deducted the $12,000 per year ($1,000 per month) from the Gross Potential Income.  He would simply have ignored this line item expense in favor of using a 35% Operating Expense Ratio.  Wow, huh?  This is huuuuge.

 

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(5)  When choosing the market rent of a vacant unit, be sure to use the highest rent that you have ever achieved for a unit of that size.  Let's suppose you have six identical units.  Five of the units are rented at $2,000 per month, and one is rented at $2,200 per month.  If a seventh unit is vacant, be sure to show the market rent as $2,200.

 

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If you want to obtain the largest possible commercial or apartment loan, pay particular attention to the top line of the Pro Forma Operating Statement - the Gross Potential Income.

 

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Topics: Maximizing Your Commercial Loan

Five Commercial Loan Ratios

Posted by George Blackburne on Mon, Jun 25, 2018

office buildingWhen a commercial lender underwrites a commercial loan, he will use five financial ratios - (1) the loan-to-value ratio, (2) the debt service coverage ratio, (3) the operating expense ratio, (4) the debt yield ratio, and (5) the debt ratio.  We will discuss these five ratios in more detail below.

1.  Loan-to-Value Ratio

The Loan-to-Value Ratio is the requested loan amount divided by the value of the property.  The value of the commercial property is usually established by an appraisal performed by a Certified General Appraiser or a M.A.I. appraiser.  If, however, the purchase price of the commercial property is lower than the appraised value, almost all commercial lenders will use the lower of the purchase price or appraised value in the loan-to-value ratio calculation.

 

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Below are some typical maximum permissible loan-to-value ratios for commercial loans:

Multifamily - 75% to 80% LTV maximum
Office Buildings, Retail and Industrial Properties - 70% to 75% LTV maximum
Self Storage - 65% to 70% LTV maximum
Hospitality - 60% to 65% LTV maximum

If the capital stack includes both a first mortgage and a second mortgage/mezzanine loan, some lenders will compute a Combined Loan-to-Value Ratio, which obviously uses the sum of the first mortgage and the second mortgage/mezzanine loan in the numerator.

 

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2.  Debt Service Coverage Ratio

When making commercial loans, most commercial lenders insist that the net income generated by the property not only equal the proposed mortgage payment, but actually exceeds the proposed payment by at least 25%.

The Debt Service Coverage Ratio is defined as the Net Operating Income divided by the Debt Service, all multiplied by 100%.  Debt Service is merely a fancy way of saying the annual principal and interest payment on the proposed loan.

 

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Please note that this calculation is performed on an annual basis.  You can actually squeeze out a few extra dollars in the loan amount if the calculation is done on a monthly basis using monthly payments.  Sorry, Charlie.  Nice try.  This calculation has to be performed on an annual basis.

What about taxes and insurance?  Do you add these line items to the annual debt service (loan) payment before calculating the debt service coverage ratio?  No!  The taxes, insurance, and required reserves are already line items in the Pro Forma Operating Statement (projected budget for the next 12 months).  If you then added these costs to the debt service, you would be double-counting these costs.

 

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Here are some typical minimum permissible debt service coverage ratios:

Multifamily - 1.20 to 1.25 debt service coverage ratio minimum
Office Buildings, Retail and Industrial Properties - 1.25 debt service coverage ratio minimum
Self Storage - 1.25 to 1.35 debt service coverage ratio minimum
Hospitality - 1.35 to 1.45 debt service coverage ratio minimum

 

3.  Operating Expense Ratio

Just about every commercial loan borrower wants to borrow as much money against his commercial property as he can.  In the debt service coverage ratio calculation, the higher the net operating income, the higher the debt service coverage ratio and the more dollars that the commercial lender will lend.  Therefore the borrower will want to show his operating expenses as low as possible, and a lender making commercial loans needs to be on his guard against a borrower supplying fraudulently low operating expense numbers.

 

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Example:

Bad-Bad Leroy Brown owns an apartment building in Chicago, where heating expenses are a major cost.  When the commercial lender underwriting his commercial loan asks for his 2017 actual operating expenses, Bad-Bad Leroy supplies the actual numbers, but he cuts his annual heating cost from $61,765 to just $22,098.  Bad, Leroy, bad!  :-)

The Operating Expense Ratio is defined as the Total Operating Expenses divided by the Effective Gross Income of the property, all times 100%.  The Effective Gross Income is the Total Income minus a Reserve for Vacancy and Collection Loss (usually 5% of Total Income).  If the operating expense ratio is too low, it is likely that the borrower is supplying fraudulent expense numbers.

 

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Below are the minimum acceptable operating expense ratios used by most commercial lenders:

Multifamily - 35% to 40% minimum
Office Buildings, Retail and Industrial - Varies based on the leases (NNN versus full service)
Self Storage - 25% to 35% minimum
Hospitality - 45% to 50% minimum 

 

4.  Debt Yield Ratio

The Debt Yield Ratio is a brand new ratio that was developed after the Great Recession in response to the huge losses suffered by CMBS bond buyers in commercial loans.  In the years leading up to the Great Recession, interest rates were falling, which allowed the buyers of major commercial properties to obtain larger and larger commercial loans in terms of the loan-to-value ratio.  As buyers were able to obtain extremely high leverage, they bid up the prices of major commercial properties to sky-high levels.

 

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To make matters worse, conduits - the originators of commercial loans destined for securitization - started making commercial loans that were interest-only for the first two or three years.  This allowed buyers of major commercial properties to reach insane loan-to-value's of 80% to even 83%!  This further drove up the price of major commercial properties.

When the Great Recession hit, major commercial properties fell by as much as 45% and CMBS bond buyers got slaughtered.  As a result, the CMBS market completely dried up.  An entire industry essentially disappeared.

 

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Five years later, in order to convince CMBS bond buyers to return to the market, the Wall Street guys developed the Debt Yield Ratio.  The Debt Yield Ratio is defined as the Net Operating Income divided by the Loan Amount, all times 100%.  This Debt Yield Ratio was not allowed to be less than some number on commercial loans destined for the CMBS market.  When the Debt Yield Ratio was first developed in 2012, that minimum acceptable debt yield ratio was 10.0%.  Since then this number has come down slightly.

Please note that the debt yield ratio has nothing to do with cap rates, interest rates, or even amortization schedules (interest-only versus a 25-year amortization).  It is a cold, heartless ratio, and conduits continue to use it on all CMBS loans.

Please note that (just about) only CMBS lenders (conduits) use the Debt Yield Ratio!

 

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Below are some typical minimum acceptable debt yield ratios:

Multifamily - 8.0% to 9%
Office Buildings, Retail and Industrial - 8.75% to 9.5%
Self Storage - 9.5% to 10%
Hospitality - 10%

 

5.  Debt Ratio

The Debt Ratio is a residential lending ratio with which you probably battled when you first tried to buy a house.  You will recall that Fannie Mae would not allow your new mortgage payment to exceed 25% of your gross income or, when combined with your other debt obligation payments, exceed 33% (38%?) of your gross income.

 

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Now in real life, 95% of all commercial lenders will NOT look at your personal debt ratios when underwriting a commercial loan.  As long as you have good credit and your net worth is at least as large of your requested commercial loan amount, commercial lenders seldom bother with personal debt ratios.

However, there is a class of commercial lender, known as a Non-Prime Commercial Lender, which may allow a negative cash flow on a commercial loan, as long as your personal debt ratios can handle the negative cash flow.

 

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Conclusion

Commercial lenders typically use the lowest loan amount allowed by these ratios.

Example:

The CMBS lending division of Morgan Stanley is underwriting a $7 million commercial loan request on an office building in Washington, D.C.  The highest loan-to-value ratio that the CMBS market will permit is 75%, and according to this ratio, the borrower could qualify for $7.1 million commercial loan.  The maximum loan size permitted by the debt service coverage ratio is $6.95 million.  The largest permissible loan at a 9% debt yield ratio is $6.6 million.  The maximum CMBS loan that Morgan Stanley will allow is $6.6 million - the most conservative result of these three ratios.

 

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Topics: commercial loan underwriting ratios

Commercial Loan Licensing Scheme

Posted by George Blackburne on Mon, Jun 18, 2018

Strip CenterYou're a commercial real estate broker.  Your best Idaho client owns a commercial property in Louisiana, and he has a $700,000 balloon payment coming due on it.  He wants you - the guy who handles all of his commercial real estate matters - to find a commercial lender willing to make a commercial loan on this Louisiana strip center.  Basically he wants you to play mortgage broker.

Are you allowed to work as a commercial mortgage broker in Louisiana?  Do you need a Louisiana mortgage broker's license?  Hmmm.

 

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You do a little magic on Google and locate the Louisiana mortgage licensing statutes.  The statute in question reads roughly as follows:  "In order to broker mortgage loans in Louisiana, the broker must have a Louisiana mortgage broker's license."  Well, that settles that.  Dang!  Your good client is gonna be ticked, and you could have used a quick and easy $7,000 commission - one point on a $700,000 new commercial loan.

But wait!  If you order now...  On a hunch, you look up the definition of a "mortgage loan" in the Louisiana statutes.  The statute reads roughly as follows, "A mortgage loan is a loan on a one-to-four family dwelling."  In other words, a "mortgage loan" is loan on a house, duplex, triplex, or four-plex.   The property that you are trying to finance is a strip center.  The Louisiana mortgage licensing statute does not apply.  You can broker commercial loans there all day long there without any licensing concerns, even though you reside in Idaho.  Hooray!

 

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This licensing scheme is very common across the United States.  The mortgage loan licensing statutes will require a mortgage broker's license to broker "mortgage loans", but then a "mortgage loan" in that state is defined as a loan on a one-to-four family dwelling.

You may have noticed that I used the word, "scheme", above.  When most people think of the word, "scheme", they think of something evil, like a scheme to defraud or a scheme to embezzle.  In the law, however, scheme means a large-scale systematic plan or arrangement for attaining some particular object or putting a particular idea into effect.  An example would be a clever marketing scheme.

 

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Back to whether most states require a mortgage broker's license to broker commercial loans, the answer is, "No!"  More than forty states have no licensing requirement at all to broker commercial loans.

Many of the remaining states are unlikely to get their panties in a bunch if you broker only the occasional commercial loan in their state.  For example, if the Idaho commercial real estate broker above happened to have another Idaho client who owned a property in Nevada, the State of Nevada is unlikely unloose the hounds of hell on him for brokering one or two loans per year in Nevada, even though Nevada is one of the few states that does require a license to broker commercial loans.  Now if the Idaho commercial real estate broker started sending out fliers to borrowers in Nevada, the State would likely consider the broker to be in violation of the law.

 

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Several paragraphs ago I used the expression, "clever marketing scheme".  I believe that every commercial real estate office (realty sales office) should have a commercial mortgage brokerage desk.  Why?  There is no easier way to meet accredited investors than to be in the commercial mortgage business.  Almost every borrower you meet is accredited.  After all, poor people don't own office buildings and shopping centers.

Just look at my own organization.  Between C-Loans.com, CommercialMortgage.com, and Blackburne & Sons Realty Capital Corporation (private money permanent loans in the Heartland), we meet a half-dozen new accredited investors every day.  We then eventually take many of these private clients and convert them into trust deed investors.  It makes sense.  Just about all wealthy real estate investors have cash set aside in their IRA's pension plans, college savings plans, and personal savings that are ideal for investing in 9% commercial first trust deeds.

 

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As a realty sales broker, you could sell commercial real estate to your own set of accredited commercial mortgage borrowers.  You've gotta start your own commercial mortgage brokerage desk in your office.  It's easy to do.  Start by ordering my famous nine-hour video course, How To Broker Commercial Loans.

 

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Those of you who are not now practicing commercial mortgage brokers, as they say in the cop shows, "We're done here."  But those of you who are mortgage brokers, we need to have a serious conversation.  Please continue on.

 

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Let's suppose you run across a do-able commercial real estate loan request.  Do you try to broker the deal to a bank that you know, or do you enter the deal into C-Loans.com?  The smart answer is that you do both!

First of all, you get prizes if you enter a bona fide commercial loan into C-Loans.com. You get to choose TWO of the following:  (1) Free regional copy of The Blackburne List containing more than 750 commercial lenders; (2) Free Commercial Mortgage Underwriting Manual (sells for $199); (3) Free commercial mortgage marketing course (the PDF to our $199 audio course); or (4) Free copy of my commercial mortgage broker fee agreement.  Contact Tom Blackburne at 574-210-6686 after you have submitted your deal to six banks to get your prizes.

 

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You get your choice of two of the above, just for entering that commercial loan into C-Loans.com.  And you can still submit the deal as well to your favorite bank.  Our banks will simply compete against your bank.

"But George, I am afraid that someone will steal my lead if I post it on C-Loans."  Then simply disguise the street address and borrower's name with the words, "To be disclosed later."

 

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We still have not gotten to the most important reason for entering your commercial loan into C-Loans.com.  You might actually close the deal!  Oh my gosh, if you can close two commercial loans using C-Loans, your income will skyrocket because we will let you start buying our commercial leads, even if you are otherwise unqualified.

We sell our commercial leads for only $1 to $9 apiece, plus 37.5 bps. when the deal closes.  Its a helluva deal.  The only bad news is that we now require that you have a credit score of at least 700 and a net worth of over $700,00 in order to buy our leads.  Too many dishonest and/or poor mortgage brokers were not notifying and paying us when they closed our deals.  By the way, our own income skyrocketed within three months of imposing these tougher lead-buying standards.

 

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Les Agisim, a mortgage broker not much different from you, has closed 51 commercial loans for C-Loans.  Jason Bengert has closed more than 40 loans for C-Loans, and so has Rick Gnafakis.  Paul Elis of PMB Capital is another big closer and a member of the Over-40 Closings Club.

Do you know why they are closing so many deals?  They started out as lead buyers, and after 5 closings we listed them on C-Loans as a Proven Broker.  Now they don't even have to pay upfront for leads.  The leads arrive daily in their inboxes.  (Advice:  If given a choice between submitting your commercial loan to a sleepy, salaried banker on C-Loans and one of our Proven Brokers, choose the Proven Broker!  They close deals.)

 

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So I have a harsh truth:  If you have a commercial loan and fail to enter it into C-Loans.com, its like failing to buy a $1 million lottery ticket when only ten tickets are being sold.  If you could close just two loans using C-Loans, you could start buying leads.  Then, like Sheldon Sontag, you could get listed on C-Loans.  A half-dozen pre-screened commercial leads would appear magically in your email box every day for the next thirty years.  Most people don't realize that we have already been in business for almost forty years, and my two 30+ year-old sons and our executive staff will carry on after I retire.

 

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All of these wonderful things will happen if you simply start entering all of your commercial loans into C-Loans.com.

 

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Topics: commercial mortgage licensing

Commercial Construction Loans and Raising Equity

Posted by George Blackburne on Sat, Jun 9, 2018

Apartment ConstructionNinety percent of all commercial construction loans that are turned down are rejected because the developer lacked sufficient equity in the deal.  In the parlance of commercial real estate finance, he didn't have enough skin in the game.


Need Equity Dollars?

Are you a real estate developer?  Are you trying to build a project right now?  My name is George Blackburne III, and I'm the attorney that owns both C-Loans.com and CommercialMortgage.com.  I also own Blackburne & Sons, the $50 million hard money commercal mortgage company that I founded almost forty years ago.

If you need help raising equity dollars, I am available for consultation at the rate of $375 per hour, with a minimum of only $100.  I consult three times per week at precisely 1:30 p.m. ET on Mondays, Thursdays, and Fridays.  Please call my son, Tom Blackburne, at 574-210-6686 to set up a consultation


 

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Commercial construction loans can be pretty risky.  You have the risk of cost overruns.  About twenty-five years ago I was financing a deal, and the lumber costs soared by 40% in a single week. You have the risk that the workers will go out on strike.  Labor is getting harder and harder to find these days, and I predict that you will see more and more labor slowdowns, as workers demand higher pay.

You also have the political risk that some government employee could put some last minute kibosh on the project.  Think of that poor developer who discovered that he was excavating into an ancient Indian burial ground; or perhaps the City Council increases the parking requirement at the last moment.  Then there is construction risk.  Imagine a crane falling or dropping an expensive beam.

 

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Then you have marketing risk.  Are the condo's that are you are building going to sell at their projected sales prices?  Is your new office space going to lease at your pro forma rents?  Let's face it, a million thing can, and do, go wrong on commercial construction projects.

As a result, banks are demanding a ton of equity in their construction deals.  During the go-go days before the Dot Com Meltdown, banks were making commercial construction loans of 90% loan-to-cost.  Many got slaughtered when commercial real estate collapsed by 45% after the dot-com stocks melted down.

 

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Eight years later, after the commercial real estate market recovered, banks were making commercial construction loans of 80% loan-to-cost.  Then the Subprime Mortgage Crisis struck, and banks once again got slaughtered in commercial construction lending.

In the wake of the Great Recession, banks regulators really clamped down on commercial construction lending.  Loan-to-cost ratios in excess of 70% were strongly discouraged.  Requiring the developer to contribute 30% of the Total Cost of a development project is a deal killer.  Commercial construction has never recovered to pre-crash levels.

 

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The good news is that a few banks - much less than half the banks - are once again making construction loans up to 80% loan-to-cost.  This still requires that the developer contribute a whopping 20% of the total cost of the project.  The good news is that under the JOBS Act, it is much easier to raise equity dollars these days.

 

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Need Equity Dollars?

Are you a real estate developer?  Are you trying to build a project right now?  My name is George Blackburne III, and I'm the attorney that owns both C-Loans.com and CommercialMortgage.com.  I also own Blackburne & Sons, the $50 million hard money commercal mortgage company that I founded almost forty years ago.

If you need help raising equity dollars, I am available for consultation at the rate of $375 per hour, with a minimum of only $100.  I consult three times per week at precisely 1:30 p.m. ET on Mondays, Thursdays, and Fridays.  Please call my son, Tom Blackburne, at 574-210-6686 to set up a consultation


 

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Commercial Loan Terms - Open, L-Plus, Sized, TI's, and LC's

Posted by George Blackburne on Fri, Jun 1, 2018

LIBORGeorge Smith Partners is a commercial mortgage banking company and life company correspondent that has been in business since the 1940's.  More precisely George Smith and Company was founded way back in the 1940's.  Management bought the company and changed its name slightly in 1992.  The bottom line is that this was already an old-old company when I first founded Blackburne & Sons way back in 1980.

The term, "correspondent", is an often missed term in commercial real estate finance (CREF).  Lots of blowhard mortgage brokers call themselves correspondents of banks, when in truth they are just mortgage brokers with a good working relationship with a few banks.

 

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A correspondent is the exclusive eyes and ears of some commercial lender, almost always a life company, in some region or city.  All loans in the region are routed through this exclusive correspondent.  In other words, if you were to call the life insurance company (called life companies in the lingo of CREF) directly, they would tell you to call Bob Smith of Granite Commercial Lending, their correspondent for, say, Portland, Oregon.  

The most important feature about a correspondent is that a correspondent services the commercial loans that it originates for Whatever Life Insurance Company.  Therefore, I'm sorry, but unless you are servicing the loans for some commercial lender, you are not a correspondent.

 

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Every two weeks I receive a wonderful newsletter from George Smith Partners called, FinFacts.  In this newsletter, the company provides details about recent loan closings.  These closings announcements are also called tombstones, and tombstones are an excellent way to market for commercial loans.

In this week's FinFacts, George Smith uses a number of terms of art (the language of practitioners of commercial real estate finance) that you should know.  For example, in the tombstone of some bridge loan closing, describes the prepayment penalty as follows: "2% for two years and then open thereafter."  Open obviously means free of a prepayment penalty.

 

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The commercial loan was "priced at L + 300".  The "L" stands for LIBOR, the London Interbank Offer Rate.  It is the rate at which European banks lend reserves to each other, and it is roughly comparable to our Federal Funds Rate.  Most commercial loans tied to LIBOR use either the three-month or six-month LIBOR rate.

FinFacts talks a lot about commercial loans being sized.  Sized means the maximum loan amount that the lender would lend, and it is usually the lower of the maximum loan size allowed by the loan-to-value ratio and the maximum loan size allowed by debt service coverage ratio.  If the lender is  a conduit, the lender may also use the debt yield ratio.  The debt yield ratio typically produces the smallest loan size.  In other words, its the toughest ratio to get past.

 

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Many commercial lenders on their commercial loans will insist on a holdback for TI's and LC's.  TI's stand for tenant improvements, which is an allowance given to new tenants to fix up the space to their liking (carpets, walls, bathroom rooms, etc.).

LC's are leasing commissions.  When a sponsor builds or renovates a commercial building, he will usually have to hire a leasing agent to find a tenant for the space.  The leasing commission can be substantial, so it needs to be built into the budget.

 

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The landlord budgets a 4% to 6% commission for the listing agent, which is split with the tenant broker upon completion of the lease.  The split is most often 50/50, but can be as low as 90/10 in favor of the listing agent.

 

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Topics: commercial loan terms

What is a Fusion Deal?  What Does Pari Passu Mean?  What is an A/B Note?

Posted by George Blackburne on Thu, May 31, 2018

fusion dealThese three terms - fusion deals, pari passu, and A/B notes - are all important and common terms in the CMBS industry

You will recall that the term, "CMBS", is short for commercial mortgage-backed securities. CMBS loans are large commercial real estate loans that are originated by banks and conduits according to very strict, published guidelines.  CMBS loans are very large loans - typically larger than $5 million - and they are usually secured by loans on the four basic food groups - multifamily buildings, office buildings, retail buildings, and industrial buildings.

 

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When $2 billion to $3 billion of new CMBS loans can be assembled, the commercial loans are assigned to a trust.  This trust is NOT an operating company.  The trust is not allowed to think.  Instead, the trustee of this trust has to play as dumb as a tree.  Really?  Yup.  The trust can ONLY do what the trust agreement says.

Example:

Suppose Joe Rich owns a shopping center with some excess land.  The shopping center is worth $10 million, and the CMBS loan is $6 million.  Joe Rich contacts the trust company that is servicing his CMBS loan.  "Out of my own pocket, I would like to build a three-unit extension to the shopping center.  The value of the shopping center will increase to $13 million.  The trustee replies, "Sorry, but if you add any buildings, it will constitute a violation of your loan covenants.  We will be forced to accelerate your loan (immediately demand full repayment) and apply a $1.1 million defeasance prepayment penalty."  No way!  Yes way.  The trust is not allowed to think.

 

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The trust then issues bonds (securities), backed by the commercial loans in the trust.  These bonds are then sold by investment bankers, like Goldman Sachs or Morgan Stanley, to investors - like insurance companies, pension plans, and wealthy family trusts.  The banks and conduits, which originated the CMBS loans, get their money back, and the whole process starts all over.

The CMBS industry competes against life insurance companies for the largest and nicest commercial real estate loans in America.  If you pick out any nice skyscraper or huge shopping center in America, you can bet that the property is financed by either a life insurance company or a CMBS loan.

 

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The life insurance companies almost always win. Think of it this way. Jennifer Aniston was a lovely lady, but when Angelina Jolie set her sights on Brad Pitt, well ... Angelina got the man she wanted. It's the same thing in commercial real estate finance.  CMBS loans have terrific terms, but if MetLife wants the loan on a particular power center, well ... MetLife will get the loan.  Fortunately for the CMBS industry, life companies only have a limited appetite.  They simply don't have enough dough to make every large commercial real estate loan in the country.

But wait a minute.  Suppose a 30-year-old office tower in New York City has a $300 million balloon payment coming due.  What if none of the large life companies want to do the deal?  Could the CMBS industry handle a $300 million loan?  After all, the typical CMBS offering is only on the order of $2.5 billion.  That means a single loan could represent more than 10% of the entire CMBS offering.  Yikes!  Then think about an act of terrorism.  Suppose terrorists blew up the building. The investors in that pool of CMBS loans would take an immense loss - far too large to be tolerable.

 

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This is how the investment bankers handle big loans.  Let's use a $70 million loan as our example.  The investment banker (think Morgan Stanley) starts by taking the $70 million loan and splitting it into a $50 million "A-piece" and a $20 million "B-piece".  The A-piece would obviously get paid before the B-piece.  Only the $50 million A-piece would be added to the $2.5 billion CMBS offering, making that one large loan only around 2% of the total offering.  The $20 million B-piece would be sold to a private buyer.  This kind of structure was called an A/B Note.

The problem with the A/B Note structure, however, was two-fold. First, it only worked on loans up to around $100 million.  After that, the A-piece was simply too large to put into a single CMBS offering.  Secondly, the B-piece was often hard or expensive to sell.

 

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Therefore the investment banks came up with the concept of pari passu notes.  Pari passu is Latin for "on equal footing."  Issuers of commercial mortgage-backed securities now often split large loans into a series of smaller notes, each note being equally entitled to a pro rata share of any payments received.  For example, a $200 million loan might be split into 5 pari passu notes of $40 million each, with each note going into a different CMBS offering.

Most CMBS offerings today are fusion deals.  A fusion deal is a CMBS offering with one very large pari passu note - perhaps as high as $120 million - and forty or so smaller deals of $5 million to $20 million.

 

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Hey guys, if you learned something today, would you please give me a Linked In Share.  Linked in likes don't do a lot for me because, while the likes are a generous atta-boy for my hard work, they don't introduce me to new commercial real estate professionals.  Linked In shares, however, get viewed by your followers.  Thanks!!  This article was a hard one.

 

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Commercial Loans, Bankruptcy, and the Stalking Horse Bid

Posted by George Blackburne on Tue, May 29, 2018

Stalking horse

Do You Happen To Need a Stalking Horse Bidder?

Are you in a Chapter 11 Bankruptcy on a nice commercial property that has some genuine equity in it?  If so, please write to me, George Blackburne III (the old man).  In the subject line, please write, "I Need a Stalking Horse Bidder."  In the body of the request, please include the following sentence, "You asked me to remind me of the word, y.o.n.i."  (This is just a memory device for me.)

My private lending company, Blackburne & Sons, has been servicing hard money loans for over 30 years now.  During that time, we have had several hundred borrowers declare Chapter 11 bankruptcy in order to hold off our foreclosure.  The purpose of a Chapter 11 is to give the borrower time to sell off or refinance assets in order to pay our loan.  Such an action - selling off or refinancing property - is called a reorganization.

 

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Very, very few of our borrowers have ever been able to sell off their property once they have filed bankruptcy.  The reason has to do with greed.  As soon as a potential buyer learns that the borrower is in trouble, he thinks to himself, "Why should I pay retail for this property?  I'll just wait for the lender to foreclose, and then I'll buy the property from the lender at a big discount."  Ridiculously low bids are a fact of life in bankruptcy. 

Several years ago I received an email announcing the bankruptcy court-ordered auction of a beautiful office tower in San Francisco.  The flyer said the auction was subject to a $35 million stalking horse bid.  What on earth is a stalking horse bid?

 

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Whenever you hear the term, stalking horse bid, you should immediately think of a Chapter 11 bankruptcy.  Somebody is in bankruptcy.  It reminds of that old joke, "What's the difference between a tornado and a Southern divorce?  Not much because somebody is gonna lose trailer." 

A stalking horse bid is an initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company.  From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid.

 

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This method allows the distressed company to avoid low bids on its assets.  Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company's assets.  In essence, the stalking horse sets the bar so that other bidders can't low-ball the purchase price. 

The term "stalking-horse" originates from a hunter trying to conceal himself behind either a real or fake horse.

 

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Why would a company or person want to make a stalking horse bid?  Its very purpose is to encourage higher bids.  The due diligence alone can be very, very expensive.  Think of the appraisal, the toxic report, the structural engineering report, and the legal fees involved with obtaining an estoppel agreement from all of the tenants. 

The stalking-horse bidder receives benefits for their efforts. They may be paid a fee to cover the cost of their due diligence.  The stalking horse bidder also commonly receives a “reasonable” break-up fee if unsuccessful in the auction.  On very large deals, this break-up fee can be many millions of dollars.  A breakup fee (sometimes called a termination fee) is a penalty set in takeover agreements, to be paid if the target backs out of a deal (usually because it has decided instead to accept a more attractive offer).

 

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The stalking horse bidder may also negotiate the terms of the purchase, and it can some times choose which assets and liabilities they wish to acquire.  Most importantly, the stalking-horse bidder can negotiate bidding options which discourage competitors from bidding. 

Investopedia had a wonderful description of a stalking horse bid:

 

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Valeant Pharmaceuticals International Inc. (NYSE: VRX) placed a stalking-horse bid for certain assets of bankrupt Dendreon. The initial offer was $296 million in cash on January 29, 2015. However, due to other competitive bids, the price increased to $400 million one week later.

At a bankruptcy hearing, the court formally approved Valeant's role as a stalking-horse bidder. The company was entitled to receive a breakup fee and expense reimbursement if its bid was unsuccessful. The court also set a deadline for additional bids. Ultimately, the bankruptcy judge approved the sale to Valeant for $495 million, with a new deal including other assets.

 

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Do You Happen To Need a Stalking Horse Bidder?

Are you in a Chapter 11 Bankruptcy on a nice commercial property that has some genuine equity in it?  If so, please write to me, George Blackburne III (the old man).  In the subject line, please write, "I Need a Stalking Horse Bidder."  In the body of the request, please include the following sentence, "You asked me to remind me of the word, y.o.n.i."  (This is just a memory device for me.)

 

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