Commercial Loans Blog

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.

 

Apply For a Commercial Loan to Blackburne & Sons

 

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.

 

Business Loans Not Secured By   Real Estate - Unsecured or Secured 

 

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.

 

Free Directory of Two Thousand Commercial Real Estate Lenders

 

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.

 

Ask George a Commercial Loan Question

 

 

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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.

 

Submit Your Loan to 750 CommercialLender

 

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 Two Thousand 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?

 

Apply For a Commercial Loan to Blackburne & Sons

 

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

 

Fee Agreement and Fee Collection Course. Just $199.

 

 

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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3,159 Different Lenders    CommercialMortgage.com

 

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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Topics: tombstone

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.

Want to train your staff in commercial real estate finance?

 

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Are you just browsing the internet right now?  If so, you may enjoy these freebies.

 

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Be on the lookout for a bank making commercial real estate loans.  We'll trade you the contents of just one banker's buisness card for a free directory of 2,000 commercial real estate lenders.

 

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Have you tried our latest commercial mortgage portal?  CommercialMortgage.com has four times as many lenders as C-Loans.com.

 

3,159 Different Lenders    CommercialMortgage.com

 

Want to learn commercial real estate finance (CREF) for free?  When you subscribe to this blog, you'll enjoy two free training lessons in CREF every week.

 

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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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Have you tried out our brand new commercial mortgage portal?  It features 3,159 commercial lenders, four times more than C-Loans.com.

 

3,159 Different Lenders    CommercialMortgage.com

 

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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.

 

Free Commercial Loan Placement Kit

 

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.

Do you need a commercial loan right now?  Are you strong financially - bankable or maybe even stronger?  If so, you should submit your commercial loan to our 750 hungry commercial lenders using C-Loans.com.  Our four-minute mini-app is accepted by all 750 of our lenders.  And C-Loans is free!

 

Submit Your Loan to 750 CommercialLender

 

We recently released a competing commercial mortgage portal - also free - that enjoys four times as many commercial lenders as C-Loans.

 

3,159 Different Lenders    CommercialMortgage.com

 

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.

 

Apply For a Commercial Loan to Blackburne & Sons

 

You can learn the practice of commercial real estate finance in one long weekend.

 

Commercial mortgage training

 

We'll trade you the contents of one banker's business card for a free directory of 2,000 commercial real estate lenders.

 

Free Directory of Two Thousand Commercial Real Estate Lenders

 

Do you need a business loan that is not secured by real estate?

 

Business Loans Not Secured By   Real Estate - Unsecured or Secured 

 

Want to learn commercial real estate finance for free?  We'll send you two free training lessons every week for free.

 

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Topics: locking your rate

Commercial Loans and the Gross Rent Multiplier

Posted by George Blackburne on Wed, Nov 16, 2016

GRM.pngMany investors, when valuing similar apartment buildings in a similar area, use the Gross Rent Multiplier.  The Gross Rent Multiplier is defined as the Market Value divided by the Gross (Annual) Rents of an apartment building.

Put another way, you can roughly value an apartment building by multiplying the Gross (Annual) Rents by the correct Gross Rent Multiplier.  For example, let's suppose the Gross Rents of an apartment building are $100,000; and apartment buildings in that area are selling at a Gross Rent Multiplier of 9.  Then $100,000 time 9 equals a Market Value of $900,000.

 

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Let's look at this valuation method algebraically and then at how you can compute the appropriate Gross Rent Multiplier yourself.  And guys, please don't zone out on me here just because we are using some 7th grade algebra.  Twelve-year-old's get A's in Introduction to Algebra!  (Heck, some pre-schools in New York City are probably already teaching algebra.  I'm kidding, right?)

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

Example:  What is the Gross Rent Multiplier for apartments in southwestern San Jose, California?  After looking at an old listing, you see that a particular 63-unit apartment building had a Gross Annual Rent of $1,512,000.  You also discover that the building eventually sold for $16,632,000.  At what Gross Rent Multiplier ("GRM") did this 63-unit apartment building sell?

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

GRM = $16,632,000 / $1,512,000

GRM = 11.0

After looking at several other apartment buildings, you discover that an inferior apartment building sold at a GRM of 10.5 and a superior building sold at a GRM of 11.5.  You conclude that the GRM of this area of San Jose is approximately 11.0.

Example:  You are told by experienced commercial brokers in the area that small apartment buildings in Palo Alto, California (home of Stanford University) are selling at Gross Rent Multipliers of 12.  You are informed that a six-plex in a nice area of Palo Alto has a Gross Annual Rent of $252,000.  What is this six-plex worth?

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

Multiplying both sides of the equation by Gross Annual Rents gives you -

Market Value of the Apartment Building = Gross Annual Rents x GRM

Market Value of the Apartment Building = $252,000 x 12

Market Value of the Apartment Building = $3,024,000

Confused?  Just multiply the Gross Rents by the appropriate GRM to get the Market Value of the apartment building.  Local commercial brokers will tell you the appropriate GRM for any area.

 

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What triggered today's lesson on the Gross Rent Multiplier was a seminar put on by a major apartment lender.  Their rate sheets talk about a super-low interest rate for Tier I apartment buildings, a low rate for Tier II apartment buildings, and a higher rate (and lower LTV) on Tier III apartments.  But, geesch, how does one know whether an apartment building is a Tier I, II, or III property?

They gave some very helpful guidelines using GRM's:

Tier I Apartments:

Buildings selling at a GRM of 10, 11, or higher.  

In my examples above I used apartment buildings in Silicon Valley, California, arguably the most desirable real estate in the world.  Cap rates of 11 and 12 are almost unheard of in any other areas, outside of Long Island, New York, Washington, D.C., and the best areas of Chicago.  Most apartment buildings in the real world will sell today at GRM's of 6 to 8.

Tier II Apartments:

Buildings selling at a GRM of 7, 8, and 9.  

Tier III Apartments:

Buildings selling at a GRM of 4, 5, and 6.

The lesson to be learned here is that the nicer the building and the more desirable the area, the higher the Gross Rent Multiplier.

Have you visited our latest commercial real estate loan portal?  It is far-far easier and faster than C-Loans.com and it offers four times more commercial lenders:

 

3,159 Different Lenders    CommercialMortgage.com

 

When should use C-Loans.com?  The advantage of C-Loans is that you can create a simple commercial loan application form in just four minutes and then submit it to 750 different commercial lenders.  The hungriest commercial lenders are also usually found on C-Loans.com.  Both of our portals are free to borrowers and brokers.

 

Submit Your Loan to 750 CommercialLender

 

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? Is your client's company losing money? Is your borrower a foreign national?

 

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On the entire planet, there may not be a better deal.  We'll trade you the contents of the business card of just one banker making commercial loans for a free directory of 2,000 commercial lenders.

 

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Topics: Gross Rent Multiplier

How To Quote a Commercial Loan

Posted by George Blackburne on Sun, Nov 6, 2016

Self storage.jpgFor those of you just getting started in commercial mortgage brokerage, this is a particularly important training article; however, even those of you who are very experienced in brokering commercial loans may find some useful nuggets.

The scenario:  You get a lead call for a commercial loan.  The borrower needs a $1.2 million refinance on his self storage facilty in Provo, Utah.  The borrower is on the phone right now, and he wants a loan quote.  What interest rate do you quote him?  If he likes your quote, he may want to get started right away.  What documents do you ask for?  As the mad bomber asked Keanu Reeves in the thrillerSpeed, "Pop quiz, Hotshot, what do you do (quote)?"

 

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This is a small commercial loan, one that is unlikely to be made by some big national lender.  You're located in Sacramento, California, and you have no idea to which commercial lender you will eventually take this deal, but you do know that the best lender for the deal will probably be located near Provo, Utah.  After all, banks greatly prefer to lend close to one of their branches.

 

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  1. Here's the good news.  Most banks across the country charge roughly the same interest rate on commercial loans.  They are almost always within 0.25% to 0.50% of each other.  Therefore you don't need to know precisely what some bank in Provo, Utah is going to charge.  You just need to know what a Sacramento bank would likely charge on a $1.2 million permanent loan on a self storage facility close to Sacramento.  In practice, the two different banks - even though they are one thousand miles away - will charge almost exactly the same thing.

  2. Okay, but what would a Sacramento bank charge for a commercial loan on a property in Sacramento?  This one is simple:  Simply go to the Current Commercial Mortgage Rates page on CommercialMortgageRates.co.  (Note, this is a dot-co, not a dot-com.  The owner of the dot-com version wanted thousands of dollars for the domain.)  I update these rates weekly, so they are very current.  STOP!  Before you step away for coffee or you go to the bathroom, please be sure to bookmark this page.  Please do not read further until you have done this.

  3. "Okay, George, I see from the rate sheet what interest rate I should quote, but how many points should I quote?"  Commercial banks typically charge only one point on commercial loans, so you, as a commercial loan broker, will need to add your loan brokerage commission on top.  Here is a training article I have written about the size of a reasonable loan brokerage commission.

  4. What amortization should you quote?  A twenty-five year amortization is to commercial mortgage finance what a thirty-year amortization is to residential mortgage finance.  The vast majority of all commercial loans have a 25-year amortization.  If a commercial property is older than 40 years old, the bank may even insist on a 20-year amortization.  After all, a commercial property does not have an unlimited lifespan.  A thirty-year amortization, however, is common for multi-family properties.

  5. What about the term of the loan?  Most banks would greatly prefer to write their commercial loans with a term of just five years, but if they are pushed, most banks will agree to a ten-year term.  Certainly most commercial borrowers will insist on a loan term of at least ten years.  Commercial real estate loans with terms longer than ten years are only possible on SBA loans and USDA loans - government guaranteed commercial loans which are eligible to be re-sold by the bank in the secondary market.  Remember, most conventional commercial real estate loans are portfolio loans.  In other words, the bank is stuck with that commercial loan for the entire ten years.

  6. Will the interest rate be fixed or adjustable?  Almost all commercial loans these days are fixed rate loans.  (In two years, when the inflation rate and interest rates start to climb, this may change.)  You are NOT going to get a straight, ten-year, fixed rate commercial loan from a bank.  The loan will most likely be fixed for the first five years.  Then it will readjust just once at the beginning of year six "to a market rate." Then the typical bank commercial loan will be fixed for the remaining five years.  What will be the index and the spread over the index?  This may shock you, but most bank promissory notes are silent on the subject.  The bank will typically use language like, "Whatever rate the bank is currently quoting on similar commercial loans."  Don't worry about it.  I have never had a borrower raise the issue.

  7. What about a prepayment penalty?  Most banks have a modest prepayment penalty on their portfolio commercial loans.  The one you will most often see - and the prepayment penalty that you should quote is - 5% in year 1, 4% in year 2%, 3% in year 3, 2% in year four, and 1% in year 5.  There will typically be a three-month window after the rate readjusts one time at the beginning of year 6, during which window the loan may be paid off without penalty.

  8. What about assumability?  Bank commercial loans are NOT assumable and must be paid off when the property is sold.

You now know how to quote a commercial loan.  Voila!

 

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Okay, the borrower is interested, and he wants to know what documents that he should send you.

  1. Now an idiot would ask his borrower to send him a long laundry list of items, and that idiot loan officer, if he is on commission, would surely starve.  Borrowers don't enjoy fetching huge piles of documents.  They will look for any excuse not to gather it right away.  In the meantime, some  competing commercial mortgage company is likely to quote the borrower 2% interest, fixed for fifty years, with a negative two points, and 150% loan-to-value.  The competing quote is obviously BS, but guess which loan officer is going to get the borrower's loan application?  

  2. Here is a rule that I pound into the heads of my loan officers, "The loan officer who asks for the least number of documents wins the deal."

  3. Perhaps the best way to ask for documents is as follows, "Please send me whatever package you can send me right away, as long as it includes:  (1) a Rent Roll or Schedule of Leases; (2) last year's actual operating expenses; and (3) color photo's on the property."

  4. The idea is to get the borrower moving in your direction.  He's at rest at the moment, and the Law of Inertia says that a body at rest tends to stay at rest.  If you can get him to send you the tiniest of packages, he becomes a body in motion, and a body in motion tends to stay in motion.

  5. Once you get the income and expense numbers, you can whip up a quick Pro Forma Operating Statement.  At today's low interest rates, just about every commercial loan cash flows very adequately, so then you can call the borrower back and ask for the next round of documents.  "Great news, Mr. Borrower!  I crunched the numbers on your deal, and the numbers worked out well.  Now all I need is an old financial statement and two years' tax returns."

  6. Remember this important rule, "The commercial loan officer who receives the borrower's tax returns first wins the loan."  But wait, George, shouldn't I then ask for tax returns right away?  No!  Borrowers dread standing in front of a copy machine for 20 minutes and making copies.  They need the postitive reinforcement of you crunching the numbers first to get fired up enough to copy their tax returns.

  7. Armed with the cash flow numbers and the borrower's financial statement and tax returns, you now have enough of a package to start submitting your deal to lenders.  That will be the subject of a future training article.

Got a commercial loan sitting on your desk right now?  Do you need some commercial lenders for your deal?  You will love our brand new commercial mortgage portal, CommercialMortgage.com.  It is much faster and easier than C-Loans.com, and the new site works great on your cell phone.  This new portal also has four times more commercial lenders.

 

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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?  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?

 

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Topics: Quoting Commercial Loans

Banks Make Commercial Loans on These Properties

Posted by George Blackburne on Fri, Oct 28, 2016

Bank-1.jpgIn preparation on my big upcoming training article entitled, "How to Quote a Commercial Loan," you need to know what types of commercial property that banks will finance.  We can all guess that a commercial bank is unlikely to finance a gentlemen's club or a cannabis dispensary, but what about a used car lot or a bowling alley?

Here's the thing about banks.  Banks are portfolio lenders.  Portfolio lenders make portfolio loans.  A portfolio loan is loan that the lender has no intention of ever selling off.  The bank will hold the loan until maturity.  As a result, the bank is free to use common sense and special expertise in underwriting the deal.  It doesn't need to underwrite the loan or structure the payments in any standard way.

 

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For example, suppose a successful young doctor wants to buy a medical office condo, but the deal does not cash flow at any higher than 52% loan-to-value.  This is common in office condo's because they sell for very high prices per square foot.  A commercial bank making a portfolio loan is free to make a 75% LTV loan on such a purchase because the M.D. might be making $600,000 per year.  The bank is free to use global income.  

Global income is a way of underwriting a commercial loan where the bank looks not at just the rental income the property is capable of generating, but the bank also considers the borrower's outside income, like his employment income or his investment income.

Here is an example of a bank making a portfolio loan based on its special expertise.  Suppose the owner of the bank is from New York City, where many apartments have been turned into co-op's.  Few lenders anywhere in the country will finance co-op's, but a commercial bank with special expertise is free to do so.

The second thing to understand about banks is that they will finance almost any type of income producing property - including bars, restaurants, used car lots, and bowling alleys - as long as the borrower is making lots of money and keeps a big horde of cash in the bank.  The bank most likely to finance a successful restaurant will either be the borrower's own bank or a nearby bank wishing to steal the banking business of this wildly successful restaurant owner.  Other than these two situations, business properties are seldom financed by banks.

So what is a business property?  A business property is one that is specialized and management intensive, where the property's ability to produce income depends on the owner being there every day to operate the business.  In the event of a foreclosure, it would be very expensive for the bank to hire any sort of management company to run the property.  Examples of business properties include, small unflagged motels, RV parks, campgrounds, miniature golf courses, and bowling alleys.

 

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Keeping in mind that banks are portfolio lenders and will even finance business properties, as long as the operator is making lots of money and keeps a big horde of cash at the bank, below is a list of the property types that a commercial bank will finance.

BANKS WILL FINANCE THESE COMMERCIAL PROPERTIES 

Auto dealerships / Used car lots - If VERY successful
Agricultural or Ranch Properties - If the bank has special expertise in underwriting them
Assisted Living Facilities
Apartment Buildings
Auto Repair
Bowling Alleys - If VERY successful
Bed & Breakfast Inns - They cash flow very poorly
Congregate Care Facilities
Convalescent Hospitals
Commercial or Retail Buildings
Churches - Only filthy rich ones in superb neighborhoods
Cooperatives - Requires special expertise
Golf Courses - Tough to place.  Most are losing money hand over foot.
Hotels & Motels - Must be either flagged or making tons of money.
Industrial Condo - They cash flow very poorly
Industrial Buildings
Land - Purchase money deals for experienced developers greatly preferred.
Marinas - Must enjoy good occupancy and a good cash flow
Mobile Home Parks
Movie Theater - Better be making good money
Mixed Use Property - Apartments over retail or commercial very acceptable
Office or Commercial Condo's - They cash flow very poorly
Office Building
Parking Garage - Needs to be making reliable money
Restaurants - Needs to pay lots of taxes and the owner must keep lots of cash.
Residential Condo Subdivisions - Bankers lost their tails in 2008.  Better be perfect.
Residential Subdivisions - Bankers lost their tails in 2008.  Better be perfect.
Self Storage - Ideally they should be gated
Shopping Centers / Strip Centers (Mini-Malls)
Skilled Nursing Facilities
Special Use Property - If VERY succesful and owner has TONS of cash

BANKS WILL NOT FINANCE

Adult Bookstores
Casinos
Churches - Unless filthy rich in Beverly Hills
Gas Stations - Unless VERY new and VERY successful
Gentlemen's Clubs
Residential Care Homes - Houses used for old folks

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Topics: Banks

Commercial Loans, Rental Rolls, and Schedules of Leases

Posted by George Blackburne on Mon, Oct 24, 2016

In a few days I am going to write an important blog article that will teach you How to Quote a Commercial Loan.  In that article I will need to refer to Rent Rolls and Schedules of Leases.  This training article will teach you the meaning of those two terms.

It is surprising, but when the typical commercial lender underwrites a commercial real estate loan, he will allow the borrower to use this year's scheduled rents and last year's actual expenses.  This is a surprisingly aggressive position.  Commercial lenders might easiy have underwritten their loans based on last year's actual income and last year's actual expenses.  Using this year's scheduled rents helps the borrower to qualify for a larger loan because this year's scheduled rents are usually higher than last year's actual receipts.

 

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In order to compute this year's scheduled rents, the lender will ask for a Rent Roll if the property is an apartment building, a self storage facility, or a mobile home park.  A Rent Roll is just a list of the tenants by unit number and the amount of each tenant's monthly rent.

 

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If the property is an apartment building, the Rent Roll will also contain the number of bedrooms and bathrooms in each unit and sometimes the square footage of the unit.  Apartment units are sometimes called doors.  "The property is a multifamily project with 138 doors."  If the property is a mobile home park, the Rent Roll will list whether the home on the pad is a single-wide, double-wide, or triple-wide.

 

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If the property is a self storage facility, the Rent Roll will always contain the square footage of the unit.  By the way, mobile home park units are called pads.  After all, the tenant usually owns the mobile home.  The landlord only provides the pad upon which the mobile home sits.  [Hotels units are sometimes called keys.  "The subject property is a hotel with 86 keys."  Hotel units used to be called rooms until hotels started to build units with suites, each of which have multiple rooms.]

On any Rent Roll, it is very important that the Rent Roll contain the name of the tenant in the unit.  This is critical because a good appraiser will perform two or three audit checks of the Rent Roll.  "Good afternoon, Mrs. Rodriquez, my name is John Jones, and I am doing an appraisal of the property for Key Bank.  My Rent Roll here shows that you pay $750 per month in rent for this unit.  Is this correct?  It's not???  You pay only $600 per month??? Hmmmm."  Unfortunately, mortgage fraud like this is fairly common in commercial real estate finance.

 

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Most other types of commercial property - like office buildings, retail buildings, strip centers, shopping centers, malls, power centers, lifestyle centers, industrial buildings, and industrial centers - will have longer term tenants.  To determine the current annual rental income, the typical commercial lender will ask for a Schedule of Leases.

A Schedule of Leases is a summary of the tenants in a commerial building that contains the (1) unit number or letter; (2) the name of the tenant; (3) the square footage of the unit; (4) the amount of the monthly rent; (5) the lease expiration date (and sometimes the starting date of the tenancy); and (6) any rent contribution paid by the tenant.

Important Tip:

The mortgage broker who gets his loan client the largest loan amount usually gets the deal, even though a competing lender's loan might be 0.25% or 0.50% lower.  To get the largest loan amount, be certain to include the market rent of any vacant units.  For example, let's suppose a 50-unit apartment building enjoys 18 2 bedroom-2 bath units rented at $1,500 per month and two 2-bedroom-2 bath units rented at $1,600 per month.  If a third 2 bedroom-2 bath unit is vacant on the rent roll, be sure to list that vacant unit as if rented at $1,600 per month, rather than $1,500 per month.

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?

 

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Topics: Rent roll