Commercial Loans Blog

Financing of Land Leases

Posted by George Blackburne on Tue, Apr 18, 2017

Land Lease.jpgWhat is a land lease?  A land lease happens when a land owner refuses to part with title to a piece of ground, but he is willing to lease out the use of the land for a very long period of time. Typically the land is unimproved, and the land lessee - the guy leasing the property - proceeds to construct a new building on the property.

Land leases can have any term, but two common lease terms are 49 years and 99 years.  Land leases are also called ground leases.

Example:  Once upon a time, 60-year-old Tom Grumpy owned a wonderul, three-acre parcel located on the corner of Premier Boulevard and Affluent Way.  Every day 5,000 luxury sedans and SUV's drove by this corner.  Every developer in town wanted to buy this land and develop a high-end strip center, with shops like Gucci and Prada.  Old man Grumpy rejected every offer.  "The property is not for sale.  I am saving it for my grandchildren."

Enter Susie Raptor, a clever girl.  She approaches Tom Grumpy and proposes the following:  "Tom, I agree with you.  You should not sell this incredible piece of land.  It is only going to increase in value over time.  Instead, you should lease it to me for 99 years at $10,000 per month.  You can use the cash flow to supplement your retirement income, help out your kids, and to pay for college for your grandkids."  Tom agrees.  Once Happy Tom signs the lease, Susie brings in her architect and her engineer to draw up plans.  Eventually Miss Raptor (she drives a lizard-green convertible) brings the project to a local bank, who finances the construction of a gorgeous retail center.

 

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When the construction loan matures, Susie obtains a $12 million takeout loan from a conduit.  You will recall that a takeout loan is just a garden-variety permanent loan that pays off a construction loan.  When the conduit underwrites the takeout loan, it treats the land lease payment as just one more required operating expense.

When a commercial lender underwrites a commercial loan against the land lessee's interest in a commercial property sitting on leased ground, the lender will insist on an amortization schedule that full-amortizes the loan over a term 10 years shorter than the remaining term of the ground lease.  Huh?

Example:  Let's suppose that a convenience store sits on leased ground, and the land lease expires in 32 years.  Now ordinarily a bank will amortize its loan over 25 years.  However, ten years earlier than the 32 years remaining on the land lease is just 22 years.  Therefore the bank will amortize its loan over just 22 years.

Example:  Let's suppose that a 99-year land lease was written 45 years ago.  There is now 54 years remaining on the land lease.  Fifty-four years less ten years equals 44 years.  Does this mean that some bank will amortize its permanent loan over a whopping 44 years?  Yes?  Yes?  Nice try.  Ha-ha!  The longest amortization schedule that most banks will ever use is 25 years for a commercial building.  Unfortunately this building was constructed 54 years ago.  This is an old-old building.  Because of the age of the building (its wearing out), the bank will probably insist on an amortization schedule of just 20 years.

 

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"Hey, George, what happens to the $7 million building on the land when the ground lease expires?" Answer:  It reverts back to the land lessor.  The land lessor is the guy who owns the land now and whose father or grandfather (usually) originally leased out the land.

"But George, what if the apartment building adjoins Central Park in New York City?  What if the building is worth $100 million.  At the expiration of the ground lease, both the land and the building still reverts back to the land lessor.

Can the land owner get a loan against his leased fee interest?  A leased fee interest is ownership of land (and building) that is leased out to someone else.  To answer the question about whether the land lessor can get a commercial loan, the answer is yes, in about a nanosecond.  In real life we don't see many of these commercial loan requests.  The families that own the land underneath huge commercial buildings are typically richer than Crassus (often because their grandfather refused to sell the land).

 

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Is it possible to get a land lease longer than 99 years.  The answer is no.  If a party leases land for longer than 99 years; say, 110 years; the land lessor is deemed to have sold the property to the land lessee.  It is against public policy to have real estate tied up for too many generations.

Obviously a perfect ground-lease deal is one with a very long remaining term and with a very small land lease payment.

Do you need a commercial loan against a property sitting on leased land?  This is an ideal time to use C-Loans.com.  Enter your commercial loan as if it was a garden variety first mortgage request; however, in the Special Issues section, be sure to write, "The subject property sits on leased ground.  The remaining term of the land lease is 48 years, and the monthly land lease payments are $5,820 per month."

 

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Want to finally learn commercial real estate finance?  You can succeed as a financier with just a high school education, if (1) you have a pleasant, sales-type personaility, and (2) your English skills are excellent; and (3) you learn your material thoroughly.  Remember, when you are selling commercial mortgage financing, you are working with the wealthiest, most upper-crusty class of investors.  You can't fake it.

 

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My courses are dirt cheap.  Buy them.  Inhale them.  I was thrilled to receive the following testimonial this month:

"I don’t know if you remember me but about 6 months ago I sent you a Thank You for selling me your VHS tape course back in 2003 when I first got into lending business. You and I both had no grey hair back then.  Here we are 15 years later and I am one of the most successful commercial, out of the box, hard money lenders in South Florida. You didn’t know it but I watched your VHS tape at least 10 times (obviously now DVD's) and you were my mentor back then. I still use your broker agreement."  -- Ron  Holy mackerel, Ron.  Thanks!

 

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Be sure to note that Ron is now a successful hard money lender, not just a broker!  Those of you with brains will - sooner or later - finally grasp the secret of commercial mortgage finance:  It's the loan servicing income, silly.  My own hard money shop's servicing portfolio just passed $50 million this month.  That's s coool $1 million per year in loan servcing income - $ 83,333 per month, every month, whether we close a new loan that month or not.

Servicing loans?  I can't service loans, why... why... I'm left-handed!  Quit being a weenie.  My lovely bride and I serviced our first 20 loans or so, out of our house, using payment books.  Heck, if you want, you can hire a sub-servicing company to service your performing deals for around $10 per $30 per month.  The idea is to charge $600 per month for servicing a hard money loan and then service it at a cost of just $30 per month.  Comprende?

 

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The best deal is to buy both programs at the same time for just $849, plus ($30?) shipping and handling.

 

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Do you need a purchase money lender who will actually go to 75% loan-to-value?  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?  Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.?

Our hot, new product is a blanket loan against a portfolio of rental homes.  Rental homes?  Yup, as long as there are at least five homes or units, we consider this to be a commercial loan.  We even offer a partial release clause.  This loan is ideal for speculators.

 

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Get free training in commercial real estate finance.  I try to blog twice a week, and its always training.  I use these articles to train my sons (and hopefully soon my daughter).  

 

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Topics: land leases

Commercial Construction Loans That Are Dead on Arrival - Napkin Test

Posted by George Blackburne on Sat, Mar 25, 2017

Construction loan.jpgHow can you tell if a commercial construction loan request is dead on arrival?  The most common reason why a bank will reject a commercial construction loan is because the developer has not contributed enough equity.  Quick aside:  Ninety-nine percent of all commercial construction loans are made by banks.  What constitutes equity?  I recently wrote an excellent article on equity for development projects.

 

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Here is a quick napkin test that will tell you whether or not you should waste your time working on a construction loan request.  Compute the Loan-to-Cost Ratio by simply dividing the Construction Loan Request by the Total Cost of the project.  The Loan-to-Cost Ratio must be 75% or less in the post-Great-Recession market.  Put another way, the developer must pay for at least 25% of the Total Cost.

 

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Because I've been doing this for 37 years, I can compute a Loan-to-Cost Ratio in less than one minute; but maybe a quick review will be helpful for you. The Loan-to-Cost Ratio ("LTC") is defined as the Construction Loan amount divided by the Total Cost of the project (all multiplied by 100%).

Loan-to-Cost Ratio = Construction Loan / Total Cost

Historically banks were satisfied if the Loan-to-Cost Ratio was 80% or less.  In other words, banks were satisfied if the developer was paying 20% of the Total Cost.  That 20% of the Total Cost represented his equity or, in the parlance of commercial mortgage finance, his skin in the game.  Unfortunately after the huge losses suffered by banks in commercial construction lending during the Great Recession, most small banks today limit their loan-to-cost ratios to just 65% to 72%.

The big banks, when making the really large commercial construction loans ($20 million+), limit their loan-to-value ratios to just 55% to 60%.  Fifty-five percent???  Yup.  Ouch!  How can a developer come up with 45% of the Total Cost?  There is a type of equity called gap equity, that takes a developer from 55% LTC up to 80% LTC.  I hope to blog on the subject soon.

 

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Now in order to compute your Loan-to-Cost Ratio, you will need to know the Total Cost. Total Cost is defined as the sum of the land cost, the hard costs, the soft costs, and the contingency reserve (5% of hard and soft costs).

Total Cost = Land Cost + Hard Costs + Soft Costs + Contingency Reserve

Most developers underestimate their Soft Costs.  The Soft Costs include such things as architectural fees, engineering fees, report fees (environmental impact reports, appraisals, toxic reports, geological reports, surveys, etc.), governmental fees (plan check fees, inspection report fees, sewer hook-up fees, etc.), bonding fees, title commitment fees, attorneys fees, loan fees, mortgage broker fees, and the interest reserve.  Everyone underestimates the interest reserve.   Soft costs usually range from 40% to 55% of hard costs.  If you don't trust the developer's soft costs, use at least 40% of the hard costs for soft costs.

The Contingency Reserve should be 5% of hard and soft costs.  Why not 5% of the Land Cost as well?  Most developers already know the exact cost of the land.  There is unlikely to be a cost overrun on the land.

 

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Are you a wealthy developer or investor?  The sister company of C-Loans, Inc. is Blackburne & Sons Realty Capital Corporation.  We have been selling 8% to 12% first mortgage investments to wealthy private investors for 37 years.  We currently have around 1,500 private investors, and we are servicing a portfolio of over $50 million.  Due to a recent law change (JOBS Act), Blackburne & Sons can now accept investments from accredited investors (gotta be accredited) as small as $10,000 in each loan from anywhere in the country, not just California.

This is a family firm.  I'm George III, the founder and the dad.  I am a licensed attorney in both California and Indiana.  My sons, George IV (Ohio State) and Tom (Purdue), are both Eagle Scouts, as am I.  Cisca and I have been married for 34 years.  (My staff have nominated poor Cisca for sainthood.  Ha-ha!)  My point is that we are steady-eddie folks.

You should sit on our investor mailing list for a couple of years and then someday try us with a tiny investment (as small as $5,000 in your first deal) in one of our loans.  We are not a fund!  Hard money mortgage funds tend to (85% of the time) fold up with ugly consequences during bad recessions.  In contrast, if you invest with us you will actually own, say, 7%, of the first mortgage.  But you must be an accredited investor!

 

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You need a commercial real estate loan, and you have diligently been doing your research.  Is it finally time to actually apply for that commercial loan?

 

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For just $79.95 you can buy a recently updated list of over 2,500 commercial lenders.  If money is tight, you can buy a Regional List (750+), for the region that contains the property in question, for just $39.95.

 

Buy a List of 2,500 Commercial Lenders

 

Many commercial mortgage brokers are excellent salesmen, but they starve because they make a dozen preventable mistakes every single day.  This 5-hour course in the Practice of Commercial Mortgage Brokerage contains more than 60 practical lessons in commercial mortgage brokerage.  I consider it to be the crown jewel in my training series, the best of my life's work.  It is the only course I sell that comes with a 100% satisfaction guarantee.

 

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Do you need a business loan secured by accounts receivable, inventory, or equipment.  Do you need a lease to acquire some piece of equipment?

 

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We have a superb multifamily program with "A" quality rates for deals with a tiny black hair on them.

 

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Blackburne & Sons, my own hard money shop, offers bridge loans for just 1 point.

 

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Every commercial mortgage broker should use a fee agreement on every commercial loan.  Our agreement is quite short, and it is fair to both the borrower and the mortgage broker.  You commercial mortgage brokers will kick yourself when you lose a $20,000 fee.

 

Fee Agreement and Fee Collection Course. Just $199.

 

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Do you own a real estate or mortgage website?  By simply putting a "Commercial Loans" link to C-Loans.com on your web site, your web site can work day and night to generate referral fee income.  We once paid $21,250 to a guy named Alan Dunn.  Somebody came to his website, saw a "Commercial Financing" link, clicked on it, came to C-Loans.com, and then applied for $17 million loan.  Alan was asleep at the time!  (We actually have no way of knowing that, but Alan certainly could have been asleep, and it makes for a great story.  Ha-ha!

 

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Have you tried our latest commercial mortgage portal?  CommercialMortgage.com has four times more lenders than C-Loans.com, and it is far easier to enter a deal.

 

3,159 Different Lenders    CommercialMortgage.com

 

Is it finally time to actually learn the profession that you practice?  Just sayin'...

 

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Did you learn something today?  Get two free training lessons in commercial real estate finance every week.

 

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Topics: commercial construction loans

Difference Between an Investment Bank and a Commercial Bank

Posted by George Blackburne on Wed, Mar 1, 2017

Bank Building.jpgThis training article will teach you the difference between a commercial bank and an investment bank.  We will also discuss merchant banks.

Recently C-Loans.com introduced a pretty cool offer.  If you give us the contact information of just one loan officer at a bank making commercial real estate loans, we will give you a free list of 750 commercial lenders.  Heck of a deal.  But guess what?  Some rookie commercial mortgage brokers have been inserting their own names in place of a bank loan officer.  Huh?

There are two issues here.  First of all, unless you have your own money to lend, and unless you service these loans, you are not a lender.  Life companies get money to loan from insurance premiums.  Banks, credit union unions, savings banks, and hard money mortgage pools get their dough to lend by accepting deposits.  It seems simple, but people often forget that in order to be a lender, you actually need to have money to lend; otherwise, you're just a broker.  Secondly, a commercial bank is an institution that accepts deposits and whose deposits are insured against loss by the FDIC.  Hellooo?  Unless your deposits are insured by the FDIC, you are not a commercial bank.

 

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Okay, so what is an investment bank?  Historically an investment bank was an institution that took companies public.  In other words, an investment banker, like Barings Brother (established in 1782), sells a company's stock to the public and maintains a market in the stock.  Maintaining a market in a stock means matching buyers and sellers, and in a sudden panic (e.g., Napoleon conquers Northern Italy), buying some shares itself to prevent a total rout in the stock price.

Investment banks aso sell bonds for large corporations and various governmental entities, like the Federal government, states, counties and large municipalities.  For example, suppose you're CIT Financial (a huge business lender), and you are bullish on the economy.  You want to borrow $1 billion from the public at, say, 3%, and lend it out to middle market companies at 7.5%.  By the way, a middle market company is a firm with annual revenues of between $50 million and $1 billion.  CIT Financial might retain Morgan Stanley, an investment bank, to issue and sell its bonds.

Examples of investment banks include Goldman Sachs, Morgan Stanley, Barings Brothers (bankrupt and dissolved), Lehman Brothers (bankrupt and dissolved), Credit Suisse, Merrill Lynch (now owned by Bank of America), Deutsche Bank, and Nomura.  In its simplest terms, you can think of an investment bank as a stock broker.

 

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Okay, then what is a commercial bank?  First of all, the word "commercial" merely means "business". The garden-variety banks that you see on the main thoroughfare going through your town are called commercial banks, to distinguish them from investment banks and merchant banks.  A commercial bank is a company that accepts deposits and uses those deposits to make loans to companies and consumers.  These deposits can take the form of a checking account, a savings account, or a certificate of deposit (C.D.).  These deposits and C.D.'s, up to $250,000 per depositor, are insured against loss by the Federal Deposit Insurance (FDIC).

The name of every commercial bank contains the word, "Bank", 99% of the time at the end of the their name; e.g., Oak Bank or Granite Bank.  It is highly illegal for any other type of company to include the word, "Bank" or "Bancshares", anywhere in their name.  A lot of commercial mortgage brokers make this mistake, and they end up getting hit with a serious fine.

Now what is a merchant bank?  A merchant bank is a financial institution that provides capital to companies in the form of share ownership instead of loans.  The reason why a merchant bank wants to buys shares instead of making loans is because the types of deals that a merchant bank invests in are incredibly risky.  For example, in the late 1700's and early 1800's, a merchant bank might provide 100% of the cost to finance a trading ship to take British goods to India and trade them for Indian gold, Chinese silks, etc.  The merchant bank might expect to make 500% on its investment. Modernly a mechant bank might invest in a late-stage round of venture capital funding.

But here's the truth of it:  There are very few, honest-to-goodness, merchant bankers.  I would not fall off my chair if there were fewer than 200 legitimate merchant bankers in the entire country.  If you ever meet a guy at a mortgage conference, and he claims to be a merchant banker, there is a 90% chance that he is either a big blowhard (who has no clue what a real merchant bank is) or he is an outright con man.  If you ever meet a "lender" boasting that he is a merchant banker, there is a 99% chance that he is an advance fee scammer.  I once wrote an excellent article on how to spot advance fee scammers.

You need a commercial real estate loan, and you have diligently been doing your research.  Is it finally time to actually apply for that commercial loan?

 

Submit My Commercial Loan  Application Right Now!

 

For just $79.95 you can buy a recently updated list of over 2,500 commercial lenders.  If money is tight, you can buy a Regional List (750+), for the region that contains the property in question, for just $39.95.

 

Buy a List of 2,500 Commercial Lenders

 

Many commercial mortgage brokers are excellent salesmen, but they starve because they make a dozen preventable mistakes every single day.  This 5-hour course in the Practice of Commercial Mortgage Brokerage contains more than 60 practical lessons in commercial mortgage brokerage.  I consider it to be the crown jewel in my training series, the best of my life's work.  It is the only course I sell that comes with a 100% satisfaction gurantee.  

 

Commercial Mortgage Brokers Tired of Being Poor?

 

Do you need a business loan secured by accounts receivable, inventory, or equipment.  Do you need a lease to aquire some piece of equipment?

 

Business Loans Not Secured By   Real Estate - Unsecured or Secured 

 

We have a superb multifamily program with "A" quality rates for deals with a tiny black hair on them.

 

Apply For an  Apartment Loan

 

Blackburne & Sons, my own hard money shop, offers bridge loans for just 1 point.

 

Submit Your Bridge Loan  to Blackburne & Sons

 

Every commercial mortgage broker should use a fee agreement on every commercial loan.  Our agreement is quite short, and it is fair to both the borrower and the mortgage broker.  You commercial mortgage brokers will kick yourself when you lose a $20,000 fee.

 

Fee Agreement and Fee Collection Course. Just $199.

 

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Do you own a real estate or mortgage website?  By simply putting a "Commercial Loans" link to C-Loans.com on your web site, your web site can work day and night to generate referral fee income.  We once paid $21,250 to a guy named Alan Dunn.  Somebody came to his website, saw a "Commercial Financing" link, clicked on it, came to C-Loans.com, and then applied for $17 million loan.  Alan was asleep at the time!  (We actually have no way of knowing that, but Alan certainly could have been asleep, and it makes for a great story.  Ha-ha!)

 

Earn a $21,250 Referral Fee  In Your Sleep

 

Have you tried our latest commercial mortgage portal?  CommercialMortgage.com has four times more lenders than C-Loans.com, and it is far easier to enter a deal.

 

3,159 Different Lenders    CommercialMortgage.com

 

Is it finally time to actually learn the profession that you practice?  Just sayin'...

 

Commercial mortgage training

 

Did you learn something today?  Get two free training lessons in commercial real estate finance every week.

 

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Topics: Commercial bank

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.

 

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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.

 

Bankers Only:  Get   Free SBA Loan Leads

 

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.

 

Apply For an  Apartment Loan

 

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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.

 

Buy a List of 2,500 Commercial Lenders

 

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.

 

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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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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.

 

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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.

 

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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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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.

 

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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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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.

 

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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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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.

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Topics: tombstone