Commercial Loans Blog

Your Commercial Loan Needs More Sizzle!

Posted by George Blackburne on Tue, Feb 21, 2017

Sizzling Steak-1.jpg"Don't sell the steak, sell the sizzle." -- Elmer Wheeler,  America's Greatest Salesman

One of the more prolific and successful commercial mortgage brokers in the entire country just entered a commercial loan into C-Loans.com.  In the Property Description section, he wrote the description below.  I was so impressed with his work that I just had to blog about it.  I have highlighted his  sizzle in red.  Is there any question why he is so successful?

"Nice building with a day care... This City of X daycare facility is a full-service daycare center. Licensed capacity is for 100 children, with an additional 25 for after-school care. This modern day state-of-the art facility has a strong customer base with a well-respected and recognized name. This is a great facility with over X sq. ft. located on a beautiful 1.04-acre piece of property composing of 6 fully-furnished classrooms, commercial kitchen, laundry room, employee break room, child sized dining room and terrific divided outside playgrounds. Premier childcare services children up to age 12 with an excellent child-to-teacher ratio..."

 

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"This facility is located in a rapidly growing county. X County is the heart of west (state) and forms the western boundary of metropolitan (a major MSA). It is easily accessed by Interstate X, US Highways X1, X2, and eight state highways. The county offers visitors and residents alike 495 square miles of beauty, recreation and history. The daycare facility itself is located at the demographic and economic center of downtown City X and is readily visible from the city's main thoroughfare.  Commercial land in this area is becoming scarce, and as the daycare facility is located within close proximity to the downtown square, hospital, numerous medical offices, university and other services."

 

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Oh my goodness, I'm drooling over that good broker's write-up.  Somebody please pass me the steak sauce.  When you enter a loan into C-Loans.com, does your Property Description section enjoy this kind of sizzle?  There's a lesson to be learned here, folks.

Forty new banks have joined C-Loans.com in the past 8 weeks.  It feels like the start of a chariot race.  These banks are signing up without being solicted.  These bankers are ravenous.  It feels like 2005 all over again.

 

Submit My Commercial Loan  Application Right Now!

 

Have you checked out CommercialMortgage.com yet?  It offers four times more lenders than C-Loans.com, and it is much easier to enter a deal.

 

3,159 Different Lenders    CommercialMortgage.com

 

If you are a banker, and you make SBA loans, we will give you 200 free leads.

 

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We just spent $30,000 and three months updating The Blackburne List, our nationwide list of 2,500 commercial lenders.  If money is tight, you can just buy the region (Western, Central or Eastern) that includes your property for only $39.95.  Each region has at least 750 commercial lenders.

 

Buy a List of 2,500 Commercial Lenders

 

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Do you know a banker who makes commercial real estate loans?  You can parlay that one banker into a Regional Blackburne List (750+ commercial lenders).

 

Free Directory of 750+  Commercial Real Estate Lenders

 

Do you want free training in commercial real estate finance?  I write two training articles every week teaching commercial lending and brokerage.

 

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Topics: Sizzle

The Commercial Loan Executive Summary

Posted by George Blackburne on Mon, Feb 20, 2017

Executive Loan Summary.jpgThis article should help both complete newbies and near-experts in commercial mortgage finance.  I will teach you newbies how to prepare a basic commercial loan Executive Loan Summary.  I will teach you old pro's how to lay out an Executive Loan Summary for a construction mezzanine loan request.  That's just about the most sophisticated loan in our entire industry.  Bottom line:  Prepare to learn a ton.  Even better, I will give you some free exemplars that you can download to your own desktop for future use.

The first item in any commercial loan package should be the the Executive Loan Summary.  Following the Executive Loan Summary should be a picture page that contains a description of the property (with lots of sizzle) and several attractive color pictures taken on a sunny day (or an Architect's Rendering if this is a construction loan).  Next comes the Pro Forma Operating Statement and then the Schedule of Leases or Rent Roll.

The easiest way to teach you how to prepare an Executive Loan Summary is to give you an exemplar.  Please open this basic commercial loan Executive Loan Summary right now.  If you download it to your desktop, you can easily edit it using Word on your next commercial loan.

Please note that this Word document was written using a Courier font.  Courier is a proportional font, and when you use a proportional font, all of your columns will line up nicely.

 

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Commercial construction loan Executive Loan Summaries are a little more involved because they include a construction cost breakdown and the Loan-to-Cost Ratio.  In construction lending, the Loan-to-Cost Ratio is far more important than the Loan-to-Value Ratio.  Please note in the Cost Breakdown we always include a Contingency Reserve equal to 5% of Hard Costs and Soft Costs.  Please click here to view a Construction Loan Executive Loan Summary.

 

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Finally we come to the Executive Loan Summary for a construction mezzanine loan.  By the way, a construction mezzanine loan is simply a mezzanine loan used in conjunction with a construction loan.  A construction mezzanine loan might take the capital stack up from a 60% LTC construction loan up to 80% LTC.  Confused?  Just think of a construction mezzanine loan as a second mortgage behind a construction loan.

Are you ready to stop fiddle-faddling and to just go get your commercial loan?

 

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When I write these blog articles, I try hard to use simple, layman's English and slang.  I also try to use lots of examples.  Are you ready to finally learn commercial real estate finance?

 

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In recent weeks C-Loans.com has added a number of nationwide apartment lenders with very attractive rates.

 

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My staff and I just spent almost $30,000 and three months building a fresh new Blackburne List of 2,500 Commercial Real Estate Lenders.  You can buy this entire list for just $79.95 or your particular region (750+ commercial lenders) for just $39.95.

 

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Have you checked out CommercialMortgage.com, our latest free commercial mortgage portal with 3,159 lenders?  This new portal has four times as many lenders as C-Loans.com.

 

3,159 Different Lenders    CommercialMortgage.com

 

Does your client need a business loan not secured by real estate, such as an equipment loan, lease, inventory loan, or accounts receivable loan?

 

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Want to learn commercial real estate finance for free?  I write two training articles in commercial real estate finance every week.

 

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Topics: Executive Loan Summary

How To Package a Mezzanine Loan, Preferred Equity, or JV Request

Posted by George Blackburne on Wed, Feb 8, 2017

Mezzanine loans.pngLong before a mezzanine lender or equity provider will issue a term sheet, the sponsor first has to attract the lender's interest.  By the way, the sponsor is the investor-owner of a standing commercial property or the developer of a proposed commercial real estate development project.

So how do we attract a lender's interest?  Answer:  We prepare an Executive Summary Package on the deal.  The Executive Summary Package is a sort of mini-package, and it should contain only the following items in the exact order described below:

  1. Executive Loan Summary that states the size of the request; the type of request (mezzanine loan, preferred equity, or venture equity); the details on the existing first mortgage / proposed construction loan (lender name, loan amount, interest rate, monthly payments - if any, and maturity date); a-one paragraph description of the existing property or the proposed development; the value of the project either now or upon completion; the loan-to-value ratio of the first mortgage / construction loan; the combined loan-to-value ratio, including either the mezzanine loan, the preferred equity request, or the venture equity request; the debt service coverage ratio (with and without the proposed junior financing); the current value of the land; the amount owing on the land; the hard costs; the soft costs, including the loan points, construction period interest, and closing costs; the contingency reserve (5% of hard and soft costs); the total cost; the combined loan-to-cost ratio; a paragraph called Special Issues that addresses why the land that was purchased for $1MM is now worth $2MM (assemblage or change of zoning or the construction of a nearby highway or Wal-Mart); and lastly a borrower's section, the name of the borrower and the name of the guarantors, including the annual income, the net worth, and the percentage of ownership of each.

  2. Color Architect's Rendering.  Behind the rendering you might include some current street photo's and an aerial view.

  3. Pro Forma Operating Statement, including a reserve for vacancy and collection loss of exactly 5%, professional property management fees of at least 4% to 6% of effective gross income, and reserves for replacement of at least 2% of effective gross income.  New multifamily projects should not have an operating expense ratio of less than 36% of effective gross income; otherwise, the lender will disregard your pro forma and use 40% of effective gross income for expenses.  Don't forget to include any laundry income, vending income, and/or parking income.  The following training artilce will help you to prepare the Pro Forma Operating Statement.
  4. Cost Breakdown, including the current value of the land, hard costs, soft costs, and a contingency reserve of exactly 5% of hard and soft costs (but not 5% of the land costs).

  5. Curriculum Vitae (CV) on the developers.  If the developers lack building and/or development experience, a CV on the General Contractor, Architect, and/or Engineer will help.

 

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If attracted to the deal, the lender will immediately ask for financial statements and tax returns on the developers.  

"But George, why not include the financial statements and tax returns right from the start?"

We need to keep the Executive Summary Package very thin at the start.  Remember, all we are doing here is teasing the lender, getting his attention and interest.  If a developer or broker tries to submit a complete package, the lender will never read it.  We have to do this in steps.

 

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Topics: Packaging a Mezzanine Loan

Understanding Venture Equity

Posted by George Blackburne on Tue, Feb 7, 2017

Apartment rendering.jpgI have been requested to help raise about $5.5 million in venture equity for a multifamily development project.  This endeavor will give us a good example of structured finance.  Structured finance in commercial real estate finance consists of (1) mezzanine financing; (2) preferred equity; or (3) venture equity.

A construction mezzanine loan is merely a mezzanine loan that is junior to a construction loan and which takes the capital stack from about 60% to 65% loan-to-cost up to around 75% to 80% loan-to-cost.  Since the principals on my multifamily development project can only contribute about 10% of the total cost of the project, they are unlikely to qualify for a construction mezzanine loan.  Remember, my developers need a lender or an investor to take the capital stack up to 90% of cost.

 

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Preferred equity is a little more sophisticated than mezzanine financing, and it is usually used when the first mortgage loan documents say, "Don't you dare put a mezzanine loan behind our first mortgage; otherwise, we'll accelerate your loan (declare the whole loan due and payable), hit you with a defeasance prepayment penalty equal to about 23% of the loan amount - ouch, and then also unleash a springing personal guarantee, making our formerly non-recourse loan (the debtor can just walk away) into a recourse loan (if you try to walk away, we'll cut off precious body parts).  I'll blog more on preferred equity later this month.

While preferred equity investors (its not really a loan) do have a little more appetite for risk, they are still unlikely to invest higher than 80% in the capital stack.  Preferred equity will therefore not solve my developers' problem.  My clients simply don't have enough equity (skin) in their development deal.

Okay, the third type of structured financing is venture equity.  Venture equity is slightly different than a joint venture partnership.  A joint venture partnership normally comes from some huge financial institution, a company like Met Life or All State Life.  The life company puts up 100% of the total cost of the project in return for a preferred return (they get paid first) of, say, 7%, plus 50% of the profits.  Joint venture partnerships are typically B.I.G. projects - think office towers or regional malls which cost $75 million or more to develop.

 

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Here is a rule about joint ventures that will serve you well.  If your developer couldn't fund the entire $75 million project out of his own pockets, he will never qualify for a joint venture.  Huh?Remember that old saying about banks only being willing lend to you money when you don't need it?  Well, the really huge lenders will only joint venture with a developer who is rich enough to fund the whole project himself.  Mortals like you and I will never feed our families by closing a joint venture deal.

Venture equity, on the other hand, comes from smaller institutions, such as hedge funds (the sponsor publicly advertises for accredited investors), opportunity funds (a bunch of filthy rich guys throw some money in a pot), or REIT's.  Venture equity deals are much smaller, typically $10 million to $40 million.  Venture equity does NOT cover 100% of the total cost!  Venture equity typically only covers 70% to 90% of the total equity required by the construction lender.  The developer has to contribute the rest.

Venture equity is also very expensive.  Venture equity investors typically expect returns north of 20%.  Most venture equity firms were crushed during the Great Recession; but greed has finally brought them out of their shells.  It is once again possible to find venture equity.

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Do you need a commercial lender who will actually lend up to 75% LTV? Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow?

 

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Have you checked out CommercialMortgage.com yet?  It is far simpler than C-Loans.com, and it enjoys four times more lenders.

 

3,159 Different Lenders    CommercialMortgage.com

 

Need a business loan not secured by real estate?

 

Business Loans Not Secured By   Real Estate - Unsecured or Secured 

 

You can buy the complete Blackburne List of 2,000 Commercial Lenders for just $39.95.

 

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Mortgage brokers, how many huge loan fees have you lost because the borrower cheated you or lied to you?  As my dad used to say about horseback riding, "If you ain't been thrown, you haven't ridden' very much."

 

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I am always looking for subjects upon which to blog.  Got a commercial real estate finance question?

 

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Get free training in commercial real estate finance.  I started out writing these training articles to teach my fine two sons the profession of commercial real estate finance.  I had some health problems at the time, and I was afraid I was going to croak.  Fortunately the doctors fixed me; but these blog articles ended up being a great way to meet fellow professionals in this industry.

 

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Topics: Venture equity

Commercial Lenders Who Do Not Require Income Verification

Posted by George Blackburne on Wed, Jan 11, 2017

Best Customer.jpgA reader asked George a commercial loan question, "Do you have access to commercial lenders who do not require income verification?"

First let's agree on some terminology.  A commercial loan to a borrower who cannot, or will not, provide the documentation needed to verify his income is called a stated income commercial loan.  The borrower will always be required to "state" on his commercial loan application a certain amount of income.  He will just not be required to provide the documents to verify that income.

Not all stated income commercial loans, also known as liar loans, are absurdly risky loans.  We here at Blackburne & Sons see a lot of commercial loan requests from restaurateurs.  They will often drive nice cars, have good credit, and owe little on their credit cards and homes.  But their tax returns will show their restaurant only earning $20,000 per year.  What's going on?  They are probably running most of their household expenses through their restaurant, and they are not reporting to the IRS much of the cash that they receive from diners.

 

Apply To Six Nonprime  Commercial Lenders

 

Okay, let's get back to the question at hand.  Do stated income commercial lenders still exist?

The answer is yes!  Unfortunately stated income commercial loans are relatively more expensive than they used to be.  Prior to the Great Recession, you could get a stated income commercial loan, if your credit score was high enough, at an interest rate that was just 3% higher than a best-rate commercial loan.  Today a stated income commercial loan will cost you 4% to 6% more than a best-rate commercial loan.

A best-rate commercial loan is a commercial loan on a 95%-occupied, standard type of commercial property to a borrower with good credit and a sizable income that is verifiable.  By standard commercial property type I mean one of the four major food groups - multifamily, office, retail, or industrial.

 

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Prior to the Great Recession, a new group of commercial lenders emerged that I call the Wall Street Non-Prime Lenders.  These commercial lenders serve those borrowers who are not quite bankable (maybe they allowed their cash reserves to decline too low before they applied to the bank) but who are far too clean and strong for a hard money commercial lender.

All commercial lenders need to get their dough from somewhere*.  Banks get their dough from deposits.  Life companies get their dough from insurance premiums.  Most hard money lenders today operate a pool.  These Wall Street Non-Prime Lenders get their dough by putting, say, $200 million worth of non-prime commercial loans into some pass-through trust and then selling bonds backed by these loans.  This process is called securitization.  

*  Mortgage brokers, listen very carefully to the answer when some new, so-called lender answers your question, "Where does your dough come from?"  These crooks and blowhards will often bust themselves by saying something lame like, "We represent several investors."  Run!

Let's not get caught up in the details.  Suffice it to say that Wall Street Non-Prime Lenders are more expensive than banks but cheaper than hard money lenders.  Now sometimes a borrower cannot qualify at the bank because his financial records are a mess or his accountant is in the hospital; but if you look at his bank statements, this business owner is clearly making money.  One Major Wall Street Non-Prime Lender has developed a unique formula whereby they will assume that 35% of the borrower's bank statement deposits are net profit.  This clever lender is listed on C-Loans.com, and you can apply to him by clicking the red button below.

 

Submit Your Loan to 750 CommercialLender

 

Now I have a third type of stated income lender - the hard money commercial lender.  There are 150 hard money commercial lenders listed on C-Loans.com, and you can submit the same short mini-app to all 150 of them in just four minutes, six lenders at a time.  Just click the red button above.

The fourth and final type of stated income commercial loan is what I jokingly call the Ax Murderer Lender; i.e., he will still lend to you if you are an ax murderer.  Blackburne & Sons is an example of an Ax Murderer Lender.  Really?

 

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During the Great Recession Blackburne & Sons made a number of commercial loans to companies that had lost $1 million or more in the prior calendar year.  I think of these financially staggering companies as ax murderers.  But here's the thing:  Many of these companies had been in business for 20, 30 or even 50 years.  Their bank of corporate knowledge in their industry was immense.  And they often owned their factory buildings free and clear.  They had paid off their buildings during their good years.  During the Great Recession, Blackburne & Sons ended up making ten or so first mortgages based solely on the equity in the property.  I am pleased to report that almost all of them paid, albeit slow at times.

 

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Do you need a business loan that will not be secured by real estate?  Examples include accounts receivable loans, inventory loans, equipment loans, leases, lines of credit, etc.

 

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If you run across a banker who makes commercial loans, you can parlay that banker lead into a free directory of 2,000 commercial lenders.

 

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Got a commercial loan question?  Rodney asked me this question this morning, and I wrote a blog article in response before the end of the day.

 

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Are you ready to learn the profession of commercial real estate finance?

 

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Hey mortgage broker, how many times are you going to be shafted out of a large loan fee?  You need an economically enforceable fee agreement.  My one-hour video training class explains why economically enforceability is just as important.  Includes a sample fee agreement.  For just $199, this is a no-brainer.  Heck, for just $199, this is a bona fide Darwin Award test.  Ha-ha!  Why don't we ever see those Darwin Awards anymore?

 

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Topics: stated income loans

We Just Added an "Ask George a Commercial Loan Question" Feature to C-Loans.com

Posted by George Blackburne on Sat, Jan 7, 2017

Questions.jpgLets suppose you're working on a commercial loan, and the lender has used a term with which you are unfamiliar or confused.  You can now ask me a question about commercial real estate finance, and I'll try to answer it that same night in a blog article.

Here are some examples of questions you might ask:

 

  1. What is a flagged hotel?
  2. What does CMBS mean?  Who are these lenders?  What kind of commercial loans do they make?

  3. What is this new CREF term, "Debt Yield Ratio?"  Is it the same as the Debt Service Coverage Ratio?

  4. Why is the net worth of the borrower so important to a commercial lender?

  5. What is the highest loan-to-value ratio that I can get on a commercial real estate loan?
So as the say on the game shows, "Come on down!" and ask me a commercial loan question.

 

Ask George a Commercial Loan Question

 

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Let's suppose you're just surfing the web, and you don't need a commercial loan at this exact moment.

 

Free Commercial Loan Placement Kit

 

Every time you enter a different commercial loan into C-Loans.com, you will see a different set of lenders.  Let's suppose you once asked C-Loans.com for a $7 million construction loan on a dog kennel in Nome, Alaska, and you were disappointed with the small selection of potential commercial lenders.  Just remember, every commercial loan request will produce a different list of suggested commercial lenders.  The truth is that very few commercial lenders today are looking for huge loans on dog kennels in Alaska.

 

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Do you need even more potential commercial lenders for your deal?  Be sure to try out our newest commercial mortgage portal, CommercialMortgage.com.  

 

3,159 Different Lenders    CommercialMortgage.com

 

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Do you have a real estate web page?  How would you like to earn huge referral fees in your sleep?

 

Earn a $21,250 Referral Fee  In Your Sleep

 

We here at C-Loans, Inc. are always interested in meeting new commercial lenders.  If you meet a banker who is making commercial loans, we'll trade you the contents of one business card for a free directory of 2,000 commercial real estate lenders.

 

Free Directory of 750+  Commercial Real Estate Lenders

 

Are you ready to finally learn commercial real estate finance.  In one weekend (on video) I can teach you the entire practice of commercial mortgage finance.  There are a number of graduates of my 9-hour video training course who are now making more than their buddies who graduated from top colleges.

 

Commercial mortgage training

 

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Do you need a commercial lender who will actually make a commercial loan of 75% loan-to-value, and not just boast of it?  Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow?

 

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Are you already a practicing commercial loan broker?  How many large commercial loan fees have you lost because your current fee agreement stinks?

 

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Topics: Ask George

C-Loans Adds a New Tombstone Feature

Posted by George Blackburne on Fri, Dec 23, 2016

Tombstone.gifTo understand our new feature, you need to understand tombstones.  A tombstone is an annoucement of the successful closing of some financial deal, like taking a company public or closing some large loan or bond issue.  Historically tombstones were placed in financial publications, like the Wall Street Journal, the Financial Times, or the New York Times.

The announcements were rectangonal in shape and oriented in a portrait mode.  They literally looked liked tombstones.  The content was always very dry.  "Goldman Sachs is pleased to announce the secondary offering sale of 2,000,000 shares of Chrysler Motors at $100 per share for a total equity raise of $200,000,000.  Morgan Stanley and Credit Suisse participated in the offering."

The Securities Exchange Commission ("SEC") for many years forbade the public advertisement of securities offerings.  Therefore tombstones were therefore always backwards-looking.  They announced the closing of some securities offerings.  Since the deal was already closed, and any reader of the tombstone could no longer buy a piece of the offering, a tombstone was not considered an advertisement.

 

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So why would an investment banker, like Goldman Sachs in my example above, pay the Wall Street Journal $10,000 or more to publish a tombstone for a deal that was already closed?  The advertisment was not going to bring in new investors for the offering because the offering had already closed.  The offering was already fully-subscribed; i.e., sold out.  Answer:  The tombstone told other motor companies, like GM and Ford, that Goldman Sachs stood ready to raise a secondary offering for them as well.  It also told other investors to call Goldman Sachs if they had investment dough burning a hole in their pockets.

Modernly commercial real estate lenders publish their tombstones online on their home pages, in their newsletters to their clients and brokers, and in the online version of trade magazines, like the National Real Estate Investor or Globe Street.  It is always smart to study every commercial loan tombstone that you can find because by studying what commercial loans a lender has already closed, you will know what kind of new commercial loans that the lender is seeking.  In other words, be sure to read tombstones!  :-)

 

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C-Loans.com has just added a new tombstone feature on our home page.  Ten seconds after arriving on our home page, a series of rotating tombstones will appear.  The one you will see today is for a commercial loan closed by Alicia Gandy, our top producer who we call our Loan Goddess.  You will notice that the tombstone brags about a $650,000 closing of a permanent loan on a strip center in Tulsa, Oklahoma.

 

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If you click on the link that reads, "More Info and a Mini-App", you will be taken to a page that tells you more about this particular lender, in this case Blackburne & Sons Realty Capital Corporation.  You'll see the lender's preferences in terms of loan sizes, loan types, property types, and lending area.  You can also apply directly to this hungry commercial lender by filling out the mini-app.

Are you a commercial mortgage broker?  If so, you will be cheated out of countless loan fees.  When you have suffered enough...

 

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Do you have an "A quality" deal that deserves to be funded by a bank, life company, or conduit?

 

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Are you finally ready to learn commercial real estate finance (CREF)?  You can learn this entire profession in one long weeked, and most states have no licensing requirement to broker commercial loans.

 

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Have you checked out our latst commercial mortgage portal?  CommercialMortgage.com is far easier than C-Loans.com, and it enjoys four times as many lenders.

 

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Be on the lookout for bankers making commercial loans.  We'll trade you contents of one business card for a free directory of 2,000 commercial real estate lenders.

 

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Does the TILA-RESPA Rule Apply to Commercial Loans?  You'll Be Surprised.

Posted by George Blackburne on Mon, Dec 19, 2016

TILA.jpgTILA and RESPA are Federal laws designed to give borrowers advance disclosure of the costs of the loans for which they are applying.  Under the new Dodd-Frank regulations, the TILA-RESPA Rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two just forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.

The question today is whether the Loan Estimate and the Closing Disclosure must be provided on a commercial loan?  The answer is not as clear cut as one might think.  Under certain circumstances, both TILA and RESPA apply to loans secured by commercial real estate, and the two new disclosure statements must be provided.

 

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We have spoken to our California counsel regarding the use of funds on a commercial loan, and the issue turns on whether or not the funds will be primarily used for personal, family, or household purposes or whether the funds will be used a business, commercial, or agricultural purpose.  If the funds will be used for a business purpose, then the TILA-RESPA rule do not apply.  

As a lender, our attorney advised us to request a use of funds letter and to verify that the primary use of funds being received for the loan is going to be used for business purpose. He wrote:

Both the Federal Truth in Lending Act and the Real Estate Settlement Procedures Act specifically exempt business purpose loans (see below for exemption language):

RESPA: 12 CFR 1024.5 Coverage of RESPA

  1. Applicability. RESPA applies to federally related mortgage loans.
  2. Exemptions.
  3. Business Purpose Loans. An extension of credit primarily for a business, commercial, or agricultural purpose, as defined by 12 CFR 1026.3(a)(1) of Regulation Z. Persons may rely on Regulation Z in determining whether the exemption applies.

 

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TILA: 12 CFR 1026.3 Exempt transactions.

The following transactions are not subject to this part:

Business, commercial, agricultural, or organization credit.

  1. An extension of credit primarily for a business, commercial or agricultural purpose.

With regard to closed-end credit applications received by your commercial department which will be secured by real property (including commercial or industrial property or vacant land), the transaction is subject to TILA disclosures if the primary purpose of the loan is consumer (personal, family, household) (12 CFR 1026.19 (e)).  Hellooooo?  Are you paying attention here?  TILA applies, even though the collateral might be an an office building!!!

It will not be subject to RESPA because RESPA applies to ‘federally related mortgage loans’ which are defined as loans secured by a first or subordinate lien on residential real property upon which there is a structure or structures designed principally for occupancy by 1 to 4 families (including individual condo or coop units) or there is or will be located a manufactured home.

The essential question is: What is the purpose of the loan? We respectfully recommend:

At time of application, request the applicant to prepare and deliver to you a handwritten, signed and dated letter which outlines the loan request and how the loan proceeds will be applied. Do not provide a preprinted form for this purpose; the letter should be the applicant’s statement of the loan purpose.

Review the letter to determine if the primary purpose of the loan is for consumer purposes or business purposes. When calculating primary purpose, calculate based on the funds received by the borrower. For example, if the loan amount is $100,000 and the loan fees are $10,000, the direct benefit to the borrower is $90,000. Calculate primary purpose on the $90,000.

If the loan is for a consumer purpose, deliver the appropriate disclosures.

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Topics: TILA

Ugliest Property Pictures in the History of the Commercial Loan Business

Posted by George Blackburne on Mon, Dec 5, 2016

Ugly-1.jpgThis is going to be a very short training article because the Chinese were right.  A picture is worth a thousand words.  Today a mortgage broker submitted the attached picture on his C-Loans.com commercial loan application.

Guys, I have often compared C-Loans.com to a speed dating site.  Like a speed dating event, we allow you to present your commercial loan to scores and scores of lenders in just minutes.  The idea is to catch the right lender lender at the right time with the right commercial loan.

But guys, if you show up for a speed dating event with a dirty shirt, uncombed hair, unbrushed teeth, and smelling like the bottom of a Marine's dirty laundry bag... well, you can't blame the dating service for not finding you the love of your life.

 

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The moral of the story.  Wait until you can take your property pictures on a sunny day!

 

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Topics: commercial loan pictures

Can I Lock My Rate On a Commercial Loan?

Posted by George Blackburne on Mon, Nov 28, 2016

Lock in rate.jpgInterest rates on commercial real estate loans are definitely going up.  A reasonable commercial mortgage borrower might want to apply now, rather than wait, especially if he has a balloon payment coming due.

The problem is, however, is that most commercial real estate loans take several months to process.  The problem is not with the lender.  It's the commercial property appraisal.  Income property appraisers seem to take forever.

You can obtain a commercial loan faster than that, but most bridge lenders only offer short-term commercial loans, and the interest rate on bridge loans is usually much higher than on permanent loans.  It makes little sense to accept an interest rate that is 4% higher, just to close your commercial loan 45 days sooner.

 

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By the way, a permanent loan is just a garden-variety first mortgage on a commercial property, with a term of at least five years and with some amortization.  Twenty-five years is the the typical amortization for permanent loans.

 

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"Put your head back on your shoulders right now, young man,
and don't ever let me catch you taking it off again!" -- Mama

Soooo?  What's the answer.  Can I lock my rate on a commercial loan?

No.  I have met 5,000+ commercial lenders in my 36-year career in commercial real estate finance (CREF), and I have never met a commercial lender which will allow you to lock your interest rate while your commercial loan is in processing.  Sorry.  Now that being said, there are around 10,000 commercial real estate lenders in America.  I suppose there may be one or two which will allow you to pay a fee to lock your rate; but they are as rare and as hidden as the abominable snowman.  That's the bad news.

The good news is that very early in a commercial loan application process, most commercial lenders will issue a term sheet, which is also sometimes known as a loan proposal, proposal letter, or conditional commitment letter.  A term sheet is not a legally binding commitment to make a commercial loan.  It is merely a letter from a commercial lender expressing a bona fide interest in making the loan and a good faith estimate of the eventual terms.

 

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Commercial lenders issue term sheets because appraisals, title commitments, and sometimes toxic reports, are very expensive.  Few borrowers would ever agree to pay for these third party reports, absent something in writing from the lender that is at least morally binding the lender to make the loan.

Continuing with our description of the good news, if a commercial lender issues a term sheet, and the third party reports come back satisfactory, the issuing commercial lender will almost always honor the interest rate on the term sheet, even if market interest rates have increased.  Remember, the commercial lender is not legally obligated to do so.  It's just the custom and practice in the industry.

There are a few exceptions.  Conduits, also known as CMBS lenders, sell their huge commercial loans to securitization pools.  They simply must close their commercial loans at an interest rate attractive to the securitization industry.  Therefore if the bond makets get roiled by some external event, for example, a military coup in Turkey, and investors flee from commercial mortgage-backed securities in favor of less-risky U.S. Treasuries, your CMBS lender may have to re-price your loan; i.e., raise the interest rate.

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Is your client's company losing money? Is your borrower a foreign national?  Do you need a non-recourse loan?  Do you need a commercial loan with no prepayment penalty?  Is your client's commercial property partially vacant?  Do all of your commercial leases run out in the next 18 months?  Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.?  Do you need a lender who will allow the seller to carry back a second mortgage?  Does your client have a balloon payment coming due on his commercial property?  Has your bank offered him a discounted pay-off?  Does your borrower have less-than-stellar credit?  Blackburne & Sons is a private money lender, and we are much looser in our underwriting.

 

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