Commercial Loans Blog

Can I Lock My Rate On a Commercial Loan?

Posted by George Blackburne on Mon, Nov 28, 2016

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

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

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

 

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

 

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

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

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

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

 

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

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

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

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!

 

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

 

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

 

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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.

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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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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

Need a loan on an unpopular property type?

 

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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.

 

3,159 Different Lenders    CommercialMortgage.com

 

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.

 

Rent Roll.jpg

 

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.

 

Conception.jpg

 

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?

 

Apply For a Commercial Loan to Blackburne & Sons

 

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Topics: Rent roll

How To Screen Large Commercial Loans

Posted by George Blackburne on Thu, Oct 6, 2016

Large_commercial_building.jpgThis is the second most important training article about commercial real estate finance ("CREF") that I have ever written.  My most important CREF training blog article can be found here.

Most new commercial mortgage brokers start out arranging small balance commercial real estate loans.  These are the commercial loans of less than $5 million ($5MM).

Banks are by far the most active lenders for small balance commercial loans.  Unfortunately most bankers take the position that if a borrower has to hire a mortgage broker to help him get a commercial loan, that deal is proably a stinker.  After all, there are over 6,000 commercial banks in America.  Why couldn't the borrower find a bank on his own?  Why didn't the borrower's own bank make him the loan?  How many banks have already looked at this deal and turned it down?

A great many bankers are therefore highly prejudiced against commercial loans brought to them by commercial mortgage brokers.  Unfortunately this harsh environment is where most newbie commercial mortgage brokers must learn their trade.

By the way, it is the rare trade show that I attend where I am not greeted warmly and appreciatively greeted by at least one or two graduates of my nine-hour training course, How to Broker Commercial Loans.  When I first started out in commercial real estate finance 36 years ago, nobody taught this stuff!  It was all a closely guarded secret.

 

Commercial mortgage training

 

Okay, so bankers are distrustful of small balance commercial loans brought to them by commercial mortgage brokers.  Got it.  But what about the Big Boys, the commercial lenders who make the major loans, the commercial loans larger than $5MM?  By the way, in my last few blog articles I have been referring to the really large commercial loans - the deals larger than $5MM - as large balance commercial loans.  That is not really the best term.  They are more often called major loans by the lenders themselves.

Two weeks ago my oldest son, George IV, and I flew to Las Vegas to attend the Western States Commercial Real Estate Finance Conference, the biggest trade show of the year for the CREF industry.  At the show, John Hancock Life Insurance Company had a booth soliciting the really large commercial loans - in this case $10MM+.  George IV and I approached the loan officer, coincidentally named John, to pitch our wonderful new web site, CommercialMortgage.com.

 

3,159 Different Lenders    CommercialMortgage.com

 

After my 90-second pitch, John politely but unapologetically said, "No."  By the way, John Hancock was just about the only lender to say no to us at the conference.  CommercialMortgage.com was a smash hit.

"I'm an old man, George," continued John.  "I don't want to work that hard screening out deals.  My best brokers know what I want.  When one of my best brokers calls me, I know that there is a 50-50 chance that I am going to close a loan if I take that call."  Bam!!  An amazing epiphany hit me upside the head like a can of V8.

 

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Commercial lenders making major loans actually WANT a good commercial mortgage banker involved in the deal in order to screen the deals.  They don't want to field the countless calls from direct borrowers.  They actually want a middle man, a good commercial mortgage banker to screen their deals.  (George IV and Tom, my sons, this is huuuuge!  Confused?  I write this blog mainly to teach my two great sons the family business, and you get to benefit by reading this invaluable training for free!  Make sure you subscribe!)

 

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By the way, when a commercial mortgage broker starts regularly closing major commercial loans - deals over $5 million - he becomes, in the parlance of the industry - a commercial mortgage banker, even though his company doesn't actually service (collects the payments) on the loans he originates.

The vast majority of the major loans originated in the country are, in fact, actually originated by life company correspondents who come across deals not suitable for their stable of life companies.  You will recall that a life insurance company correspondent is a mortgage company that is the exclusive representative for a life insurance company in a particular region of the country and who collects the payments every month for their life company clients.  This is why the lenders making major commercial loans often call their best brokers commercial mortgage bankers, even when the moniker is slightly inaccurate.

 

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So how do you screen a major commercial loan?  In most cases, the large commercial loans that you will be screening will be either construction loans or bridge loans.  Large permanent loans are pretty straight forward.  Pop quiz:  Define a permanent loan.  A permanent loan is a garden-variety first mortgage on a commercial property that has at least some amoritzation (25-years is the most common amortization for commercial loans) and a term of at least five years.

When screening a construction loan or a bridge loan, there are four important questions for which you will need answers:

  1. What is the net worth of the borrower?  Remember, according to the Net-Worth-to-Loan-Size Ratio, the net worth of the borrower should be at least at least as large as the loan amount.  In other words, the net-worth-to-loan-size ratio should be at least 1.0.  If the two developers have a combined net worth of just $3 million, and they are trying to get an $8 million construction loan or bridge loan, they are smoking too much of that loco weed.

  2. What experience does the borrower have owning, managing, renovating, and/or building commercial projects of this size?  The answer to this question will be found in the borrower's curriculum vitae ("CV"), which is a fancy term for the borrower's ownership, management, renovation, and/or building experience resume.

  3. The single most important question is how much equity (skin) will the borrower have in the deal?  At an absolute minimum, the borrower will need to be able to cover at least 20% of the total cost of the project, and on the larger deals, 30% is far more likely.  The Total Project Cost includes land/acquisition costs, hard costs, soft costs (including loan points and an interest reserve), and a contingency reserve of 5% of hard and soft costs.

  4. If the loan being sought is a bridge loan, what is the borrower's exit strategy?  The exit strategy is how the borrower intends to pay off a bridge loan, which is of vital importance to any short term lender.  Remember, a bridge lender's yield plummets when a bridge loan goes past maturity.  Will the borrower refinance the property with a permanent lender when the property is stabilized (when every unit is leased at market rates)?  The mere sale of the property is probably the weakest exit strategy that a borrower can propose.

Hey guys, keep looking for the contents of the business card of any commercial banker making commercial real estate loans.  You can trade the contents of that one business card for a free directory of 2,000 commercial real estate lenders.  We have one idiot who stays up every night trying to scrape the contents of our wonderful new commercial loan portal, CommercialMortgage.com.  He is trying to get our list of commercial lenders.  Hellooooo, Mr. Dodd Frank (the name he uses when he scapes our site for hours), you can get the same list by giving us the just one good banker!  Silly.

 

Free Directory of Two Thousand Commercial Real Estate Lenders

 

Guys, if you have not taken a free ride on our wonderful new commercial loan portal, CommercialMortgage.com, you are missing out on a treat.  Feel free to enter an imaginary loan just for your test drive.  C-Loans.com only has about 750 participating commercial lenders.  CommercialMortgage.com has 3,159+ commercial lenders, and there is no overlap!!!

 

3,159 Different Lenders    CommercialMortgage.com

 

"C'mon, George, you're not a complete idiot.  CommercialMortgage.com gives mortgage brokers a great list of commercial mortgage lenders who will compete against C-Loans.com.  WTFudge are you doing?"

The truth:  Every day two salesmen for C-Loans.com contact banks to invite them to join C-Loans.com.  The grumpy, sleepy old guys who really don't care that much about originating many new commercial loans we add to CommercialMortgage.com.  Need to actually close a commercial loan?  Submit your commercial real estate loan request through C-Loans.com.

 

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Do you have a commercial real estate web site?  If so, be sure to add a link (or the smarter move is to add 30+ links) back to C-Loans.com to your home and interior pages.  We have boasted for years of paying that one big referral fee of $21,250 to Alun Dunn.  But now there is another web site owner - a regular guy just like you - who referred five years ago a single hot commercial loan broker to C-Loans.com and who just earned his 9th referral fee.  He earned all of these referral fees from from that one hot commercial loan broker who found us from his site, and these referral fees have now totalled almost $19,000!  Guys, in truth, this is a true no-brainer.

 

Earn a $21,250 Referral Fee  In Your Sleep

 

 

Topics: Screening

Referral Fees on Commercial Loans

Posted by George Blackburne on Fri, Sep 23, 2016

Referral_Fees-1.jpgAnyone who owns a web site that is related to real estate or which provides services to high net worth individuals (accountants, attorneys, insurance salesmen, financial planners, etc.) should pay close attention to this article.  It is perfectly legal for a commercial mortgage company to pay referral fees for commercial loans, and the recipient does not need to be licensed in any way.  Remember, I am an attorney.  Still doubt me?

"But George, I thought that referral fees were illegal?"

A little history will help.  Many decades ago real estate agents used to steer their home loan clients to particular lenders and to particular settlement companies (escrow companies, title companies, closing attorneys, etc.) in exchange for hefty kickbacks from from those companies.  The home loan lenders then would then charge these unsuspecting borrowers extra points or a higher interest rate.  The title companies would also charge these innocent, trusting folks extra high fees.

Finally in 1974 the Federal government stepped in and passed RESPA, which stands for the Real Estate Settlement Procedures Act, which made it illegal for a residential lender or a settlement provider to pay anything of value for a referral.  The power of the Federal government, however, is not unlimited.  For example, the Federal government could not order the citizens of any state to wear only white shirts and black shirts.

 

3,159 Different Lenders    CommercialMortgage.com

 

Therefore RESPA only applies to transactions involving a federally-related mortgage loan, which includes most loans secured by a lien (first or subordinate position) on residential property. Residential property includes only one-to-four family dwellings; which, translated into English, means single family homes, condo's, duplexes, triplexes and fourplexes.  Mortgage loans, by definition, includes home purchase loans, refinances, lender approved assumptions, property improvement loans, equity lines of credit, and reverse mortgages.

But note: RESPA only applies to 1-4 family loans.  It does not apply to commercial property.

Now most states do not require a license to broker commercial real estate loans; but even those states that do require a license still allow commercial mortgage companies to pay referral fees, as long as the referral source is not quoting rates and terms and is not playing document fetcher.  It's fine to pay a referral fee for the name and telephone number of a prospective commercial borrower; however, the referral source cannot be running around playing unlicensed mortgage broker. 

 

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Now that we have the legality issue settled, let me tell you a real life story.  By the way, a real life story told to a sales prospect is called a verbal proof story; so let me tell you a verbal proof story about referral fees.

About six years ago, a guy named Wayne owned some sort of real estate web site.  For all I know, Wayne could only have owned a tiny residential real estate brokerage in some small town in the boonies.  Or heck, he could have been a really smart financial planner.  Anyway, Wayne put a link on his website that read, Commercial Loans, and he pointed it to C-Loans.com.  He didn't even tell us about the link.  He didn't need to tell us.  He just did it.

Well, six year ago a very productive mortgage broker named Mario visited Wayne's website.  Mario saw the Commercial Loans link, clicked on it, discovered C-Loans.com, and then entered a commercial loan.  The deal closed!

C-Loans, Inc. then went into its database of loan applciations, found the original digital application on this closed loan, saw printed at the bottom a link to Little Wayne's Bayou Tackle Shop and Real Estate Brokerage, looked up who owned the site, called Wayne, and then gave him the good news!  Wayne was paid an unexpected referral fee of 12.5 basis points, probably around $1,500.

Important note:  On deals larger than $5MM, our referral fee is slightly less (8.33 bps.) because we only earn 25 bps. ourselves. A basis point is 1/100th of one percent.  Therefore a half-point would be 50 bps.

 

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But the story gets even better!  Mario turned out to be a hot agent, and he has already closed a total of 8 deals on C-Loans.  C-Loans pays its referral sources (hyperlink partners) on every subsequent closing as well, until the C-Loans user changes his email address.  After that it becomes economically infeasible for us to track the deals.

So far we have paid Cajun Wayne on 8 closings for a total of $17,798.75!  And the reason this came up is because Super Mario is poised to close his 9th deal for Wayne, a $935,000 commercial loan where Cajun Wayne will earn another $1,168.75 referral fee.  That will be a total of $18,967.50 - all for spending just ten minutes six years ago to put a link to C-Loans.com on his website.

But watch out for the Hyperlink Police!  If you put more than one link to C-Loans.com on your website, ten heavily-armed SWAT guys might kick down your door in the middle of night, drag you out of bed, hogtie you, tickle your wife, and then shoot your dog with a squirt gun!

Helloooo? I'm kidding here.  Do you want to make a little bit of referral fee money or a lot?  We once paid a guy named Alan Dunn a referral fee of $21,250 for the referral of a $17 million land development loan.  

I therefore urge you to put three links to C-Loans on every page on your website.  I would make a Commercial Loans tab at the top, a Commercial Mortgages navigation link along the left side, and a Commercial Mortgage Rates link at the bottom as a footer.  And not just on your home page.  Do it on your interior pages as well.

And remember, you do not have to notify us that you have created these links.  C-Loans.com is programmed to automatically capture the referring URL (website address) and to print it at the bottom on the application.

 

Earn a $21,250 Referral Fee  In Your Sleep

 

"But George, how do I know that you won't cheat me?"

Blackburne & Sons manages about $51 million in hard money commercial first mortgages for about 1,500 elderly investors.  On any given day, we might have $2 million or more sitting in our loan servicing trust acccounts.  We are audited every quarter, and we have been in business for over 36 years.

Do you regularly email a newsletter to your clients?  It is possible - and super smart - to put a similar link in your newsletter; but in this case you will need a special partnership code.  To get this partnership code, please call or email Mick Carlson at 574-855-6292.

 

Apply For a Commercial Loan to Blackburne & Sons

 

Got a AAA-quality deal that deserves to be financed by a life company, conduit, or commercial bank?

 

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Continue to be on the lookout for the contact information of any banker making commercial real estate loans.  We'll trade you the contents of just one business card for a free directory of 2,000 commercial lenders.

 

Free Directory of Two Thousand Commercial Real Estate Lenders

 

The ninth largest bank in the world joined C-Loans.com this month.  Their minimum loan is $20 million!  OMGoodness.  Why did they join?  They want to use their ability to fund these huge loans as an entre to meet super-high-net-worth individuals, so they can sell them other services, like wealth management and trust servcies.

Hmmm.  Anybody remember me saying, "There is no easier way to meet high net worth investors than to be a commercial mortgage broker?"  Maybe I've said it TWENTY times.  Sorry.  I got excited.  But every commercial-investment property brokerage should have a one-man desk that arranges commercial financing, in order to meet TONS of filthy rich investors.

 

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Topics: referral fees

Back From the Big Commercial Loan Conference

Posted by George Blackburne on Sun, Sep 18, 2016

CREF_Conference.jpgMy oldest son, George IV, and I have recently returned from the biggest commercial loan conference of the year, the California Mortgage Banker's Association 19th Annual Western States Commercial Real Estate Finance ("CREF") Conference held every year in Las Vegas.  Among the Big Boys, this conference is known as the Western States CREF Conference.

If you are ever going to attend this conference, I urge you to come a day early and play in the annual golf outing.  This golf outing has always proved immensely productive for Blackburne & Sons and C-Loans.com.  This year a commercial mortgage fund making huge bridge loans ($5MM minimum) and a bank making some of the largest commercial construction loans in the country ($15MM minimum) both joined as a result of the friendships we developed playing golf together.  To me, that golf outing alone makes up one-third of the benefit of attending the entire conference.  If you are a decent golfer, this event is a must.  (Tom, my son, let's work on your golf game this year.  You'll accompany me next year to the Western States, and we'll play in this outing in different foursomes.)

 

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The second most important event is the big cocktail party held the night before the opening session of the conference.  The drinks are free, and the conversations are much like speed dating.  Commercial lenders come with business cards, and they are in the mood to meet top-notch commercial loan brokers.  Interesting note:  The Great Recession killed off 85% of the commercial lenders on C-Loans.com.  We therefore had a big meeting at the office and kicked around ideas about how to find the hungriest commercial lenders in the country.  The lovely Angelica Gardner, our Executive Vice President (to you Star Trek fans, my Number 1), made the point, "The hungriest commercial lenders go to trade shows."  She was spot on!  Well done, Angelica.  At the cocktail party, banks and other commercial lenders joined C-Loans in droves.

Are you a highly successful commercial loan agent?  Are you extremely ambitious?  If so, you simply must attend the Western States Conference every year, and if you are a decent golfer, you simply must play in this golf outing.  The conference isn't cheap.  This year the Western States was held at the Wynn.  George and I each had one glass of house wine.  The bill?  $42 before tip.  Ouch!  So while the Western States is open to the public, in real life only the "Big Boys" attend - the top bankers and the most successful commercial loan brokers, the guys who regularly close loans of $5MM to $20MM.

It is important just to be seen at the Western States Conference.  It's almost like joining a fraternity that includes the most important bankers in commercial real estate finance.  "Hey Bob, this is Steve Henderson.  We met last year at the Western States.  I've got a deal I'd like to run by you.  Did I catch you at a good time?"  "Of course, Steve.  Good to hear from you," says the super-important commercial loan officer for the largest bank in America."  (Without the reminder about the Western States, such a heavyweight commercial loan officer would normally rush to kill your deal and get you off the phone).  "What have you got?"

By the way, did you catch my use of the polite inquiry, "Did I catch you at a good time?"  Those may be some of the most important and most magical words that you will ever learn in commercial real estate finance.  If a commercial real estate loan officer is busy, I guarantee you that he will quickly find a reason to kill your commercial loan, just to get you off the phone; and folks, God has never invented a commercial loan that didn't have at least one or two black hairs (flaws).

 

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Now we have all been to mortgage conferences with thirty or so booths on the floor of a large convention room, where hungry lenders and service providers (appraisal companies, title companies, etc.) hawk their products.  The Western States Conference certainly had this.

But then there were the ritsy-looking private meeting rooms - complete with ice cold drinks and fresh fruit - set off to the side of the big convention floor where the top commercial loan officers for the biggest banks and the biggest life insurance companies in country meet only with invited guests.  The entrance to each one of these fancy meeting rooms is usually jealously guarded by an older ice queen, who clearly let's you know that you are not on the carefully-timed schedule.

George IV and I were invited to such a meeting, but this big fund lender had a cabana, instead of a meeting room.  Cabana?  What on earth is a cabana?  I learned at the show that a cabana is a very plush tent off to the side of the hotel swimming pool.  It took George and I an hour to find the right cabana, and it ended up being around the pool for the Encore Hotel and Casino, the sister property to the Wynn Hotel and Casino.  The temperature was 100 degrees, and we were both wearing dark blue wool suits, so after walking around and around each pool, we were sweating like pigs.  That being said, the Wynn is an expensive hotel, where only the very rich and the most successful people congregate.  The ladies around the pool didn't exactly hurt my eyes.  Hey, I'm just sayin'.

The launch of our new commercial mortgage portal, CommercialMortgage.com, was a smash hit.  It is a stunningly beautiful site, and I have to say that the site opened a lot of doors for us.  A full 80% of the lenders we invited to join C-Loans.com ended up joining as commercial lenders.  We were pleasantly suprised when quite a few large balance lenders - lenders whose minimum commercial loan was $5 million or higher - chose to join C-Loans at the show.  One of these commercial lenders had a minimum loan size of $20 million!  If you happen to need a very large commercial loan...

 

3,159 Different Lenders    CommercialMortgage.com

 

Over my past few blog articles, I have been beating the drum for you commercial brokers (salesmen of commercial-investment real estate) to open a small commercial loan brokerage desk in your commercial real estate offices.  I have told you guys repeatedly that there is no easier to meet high net worth individuals than to be a commercial loan broker.  Sound familiar?

Well, remember that big bank that joined C-Loans at the show whose minimum loan size was $20 million?  Do you know why they said they were joining?  They wanted to use their ability to make these enormous commercial real estate loans as an entre to meeting the wealthiest investors in the country!  Helloooo?  Did I call it or what?  :-)

 

Commercial mortgage training

 

 

Topics: Western States Conference

Huge Development in Commercial Mortgage-Backed Securities

Posted by George Blackburne on Wed, Aug 24, 2016

Securitization.pngToday you are going to learn a ton about the securitization of commercial mortgages.  Then I will explain this huge new development in the CMBS industry.  CMBS stands for commercial mortgage-backed securities.

A mortgage-backed security is a bond secured by a portfolio of mortgages.  These could be residential mortgages or commercial mortgages, but usually not both.  Back in the crazy days leading up to the 2008 crash, there were some asset-backed securities that were backed by a mixed collection of car loans, credit card paper, aircraft loans, scratch-and-dent residential loans, and subprime commercial loans.

A scratch-and-dent loan is one that is flawed and has been kicked out of the pool of loans that some sponsor has assembled.  Perhaps the debt ratio was too high.  Perhaps the home lacked a proper foundation.  Back in the day, Bayview Financial used to place some of its subprime commercial loans into such mixed collateral portfolios to raise the average yield and to lower the average loan-to-value ratio.  I once blogged that I thought Bayview's old commercial loans were actually quite good loans.

 

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A bond is just a garden variety promissory note whereby some borrower promises to pay back some money to some investor.  "I, Wells Fargo Bank Commercial Trust #2015-3, promise to pay the little old widow, Francine Investor, the sum of $5 million at 4.25% interest and with monthly payments of $27,086 per month..."  Bonds are typically issued by companies or trusts, as opposed to by individuals.  In this example, the bond was issued by a trust managed by Wells Fargo Bank.

Now in this example, Francine Investor's bond is backed by a portfolio of commercial mortgages.  The typical CMBS portfolio contains $1 billion to $2 billion in commercial first mortgages.  Francine might have invested $100,000 - along with a ton of other investors - into this $2 billion bond.  The trustee of the trust - in this case Wells Fargo Bank - services the 200 or so commercial mortgages in the trust.  If any of the borrowers default, the bank has strict instructions to foreclose on behalf of Francine and the other investors.

But not all investors are created equal.  Some might be little old ladies with almost no tolerance of risk.  Others might be well heeled college endowments, who can afford to take some risk.  Yale University's endowment fund is said to be as rich as Croesus.  Others investors might be go-go investors, like the filthy rich owner of a life insurance company who we will call Billy Life, who love to take big risks for the chance of earning 20%.

 

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Now the big bank or the big mortgage company bringing the offering to the market (peddling the mortgage-backed bonds) is known as the sponsor.  Sponsors securitize these commercial mortgages for a reason; i.e., to make a profit.  The sponsors have learned that they can take a 4.25% average portfolio yield and sell slices of the yield off to different groups of risk-takers and still have a big chunk of the yield still left over for themselves.  These various slices of the yield are called tranches.  

Let's continue with our example to make this tranche concept more clear.  Now Francine Investor, the widow, depends on her bond payment to buy groceries, so she cannot afford any risk.  Therefore Francine, along with other widows like her, cuts a deal with the Sponsor that goes like this:  "Even though the average yield on this CMBS portfolio is 4.25%, I'll accept just 2.75%; but in return for this lower yield, I want to be the first investor paid.  In other words, I get my full 2.75% yield before any riskier investors get a dime."  Francine is the buyer of the AAA-rated tranche.

Now Yale University's endowment fund can afford to take a little bit of risk.  Yale cuts a deal with the sponsor that might go like this, "I will accept just 3.40%, and I agree to the second tranche to be paid.  In other words, Francine and her fellow widows get paid first.  Only if there is interest income left over does Yale get a penny."  We'll call this the BBB-rated tranche, which is still considered investment grade.

Billy Life, the life company owner and gambler, might cut a deal with the sponsor as follows:  "I want a 20% yield, and I'll agree to be the last one paid."  We'll call Billy Life the B-piece buyer.  Securities rated lower than BBB are not considered to be investment grade.  They are very risky.   How can the sponsor afford to pay Billy 20% when its only earning 4.25%?  Answer:  Billy's piece might only be $300 million on a $2 billion offering, and don't forget that the Sponsor is earning an interest rate spread on everyone else's investment.  The sponsor is picking up the difference between 4.25% and 2.75% on Francine's tranche, and it is picking up the difference between 4.25% and 3.40% on Yale's investment. A 1.5% spread on $1.2 billion (the AAA-rated tranche) is a lot of money.

In real life, there may be a dozen different tranches on a $2 billion CMBS offering.  We are finally done with my explanation of the securitization process.

Now let me describe what happened during the Great Recession.  Francine emerged as a genius.  Despite commercial real estate plunging 45%, the holders of Francine's tranche got paid in full - 100% of principal and interest.  Yale lost all of its interest income and took a 20% haircut off of its principal.  And Billy Life?  He got nada.

Lots and lots of elderly investors and pension plans took huge losses.  One of the many reasons was because the originators of commercial mortgages were sticking deals of 80% to 82% loan-to-value into the securitization trust!  Some of these loans were interest-only for the first three years, and others depended on projected rent increases in order to service the loan.  These loans were absurdly risky.

Congress therefore, in the Dodd-Frank Act, changed the rules.  No longer could originators throw risky loans into these pools and then walk away, risk-free and counting their dough.  Beginning in late-2016, CMBS sponsors now have to retain 5% of the mortgage portfolios.  This cast a scary cloud over the CMBS industry, and originations plummeted.  I was therefore thrilled to see the following announcement from Wells Fargo Bank.

"Wells Fargo teamed up with Bank of America and Morgan Stanley to lead the first US Risk Retention compliant conduit transaction (WFCM 2016-BNK1). The new regulations, which do not formally go into effect until December 24, 2016, will require issuers to retain a 5% economic interest in new CMBS transactions."

The good news?  With Wells Fargo Bank, Bank of America, and Morgan Stanley keeping some serious skin the game, this new CMBS offering sold like hotcakes this month and at lower than expected yields.

Have you checked out the brand new CommercialMortgage.com yet?  Here's the best way to understand this competing portal to C-Loans.com.  We have a guy who calls banks every day and invites them to join C-Loans.com.  Those that say no, we add to CommercialMortgage.com.  Because most  bankers are old fuddy-duddies, many more banks say no than yes.  CommercialMortgage.com is therefore packed with four times more lenders than C-Loans.com.

 

3,159 Different Lenders    CommercialMortgage.com

 

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.? 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?

 

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Got a squeeky-clean commercial loan request that deserves to be funded by a life company, conduit, or bank?

 

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Topics: Securitization

Peer-to-Peer Lending, Crowd-Funding, and Commercial Loans

Posted by George Blackburne on Sat, Aug 20, 2016

Crowdfunding.jpgToday we are going to talk about peer-to-peer lending, crowd-funding, FinTech, and shadow banking. Then I will explain why you should care.

Peer-to-peer lending is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. It is sometimes abbreviated P2P lending. The important thing to understand about peer-to-peer lending is that there is no bank involved. A single private investor is lending money directly to a private borrower.

Crowd-funding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.

The difference between peer-to-peer lending and crowd-funding is that P2P lending typically involves small loan amounts ($5,000 to $50,000), and just one investor lends the entire loan amount. Crowd-funding can sometimes involve much larger amounts, where lots of different investors chip in a little bit to make the loan or the equity investment.

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In the doctor’s office, two patients are talking. "You know, I had an appendectomy last month, and the doctor left a sponge in me by mistake." "A sponge!" exclaims the other. "Does it hurt much?" "No, there’s no pain at all," says the first, "but boy, do I ever get thirsty!"

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FinTech is short for financial technology. FinTech is a line of business based on using software to provide financial services. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software. Peer-to-peer lenders and crowd-funding companies are all examples of FinTech companies.

My own commercial mortgage portal, C-Loans.com, is an example of a FinTech company. This week I launched a new commercial mortgage portal, different from C-Loans.com,  called CommercialMortgage.com. It’s a handsome site and very easy to use.  You should check it out.

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It’s almost football season. Here are some famous and funny quotes:

"Gentlemen, it is better to have died a small boy than to fumble the football." -- John Heisman

"A school without football is in danger of deteriorating into a medieval study hall." -- Frank Leahy / Notre Dame

"I don't expect to win enough games to be put on NCAA probation. I just want to win enough to warrant an investigation." -- Bob Devaney / Nebraska

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Google defines shadow banking as follows: A shadow banking system refers to the financial intermediaries involved in facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight.

When Blackburne & Sons arranges a hard money loan, we are creating credit without banking oversight. (There is plenty of state oversight. Geesch.) When LendingClub.com arranges a $25,000 start-up loan to a recent immigrant wishing to buy and equip a truck to serve lumpia and other fast food at a worksite, this is another example of shadow banking. In a moment I will explain why you should care about peer-to-peer lending, crowd-funding, FinTech, and the shadow banking system.

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"Football is not a contact sport, it is a collision sport. Dancing is a contact sport." -- Duffy Daugherty / Michigan State

After USC lost 51-0 to Notre Dame, his post-game message to his team was, "All those who need showers, take them." -- John McKay / USC

Ohio State's Urban Meyer on one of his players: "He doesn't know the meaning of the word fear. In fact, I just saw his grades, and he doesn't know the meaning of a lot of words.”

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Here’s why you should care about the explosive growth of the shadow banking system: When an economy overheats and inflation begins to soar out of control, the Fed has a number of tools to cool down the banking system. It can raise the reserve requirement. “Hey, you bankers out there, we’re worried about too much credit being created. As of right now, you all have to increase your reserve account at the Fed. This means you will have less dough to lend.”

The Fed can also engage in open market operations, selling off some its enormous hoard ($4.5 trillion?) of government bonds, corporate bonds, and mortgage-backed securities. Investors have to take money out their banks to buy these securities, thereby reducing the liquidity in the system and cooling off the creation of new bank loans. Lastly, the Fed can raise interest rates, thereby making loans less attractive to borrowers.

 

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“Okay, so our fire truck is all set to douse any hyper-inflationary fire, right?” Uh, what about the shadow banking system – those P2P lenders, crowd-funders, and hard money lenders? In 2012, Chinese monetary authorities tried to cool down their economy by raising the reserve requirement and interest rates. The move didn’t work so well. Chinese property speculators just went around the banks and took out private loans to buy their tower apartment units.

My point is this: If inflation were to ever take off again, which is far-far from certain to happen in our lifetimes, inflation could quickly get away from the Fed. Speculators could simply go around the banks using FinTech and keep borrowing. For example, as the owner of Blackburne & Sons, I don’t give a hoot if the Fed raises the reserve requirement for banks. It just means more sweet loans for Blackburne & Sons to make. I have no idea what the exact number is, and I am just pulling a number out of my tush, but I wouldn’t fall off my chair in surprise if global investors didn’t have as much as $75 trillion dollars sitting around under-invested.

 

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The reason I wrote about this subject today is because my instincts are screaming at me to syndicate the purchase of more prime, multi-tenant industrial buildings in California gateway cities – and to buy that property with all cash. No debt. Zip-zilch-zero. Nada.

(I originally wrote this piece as my monthly Investor Letter.)  With zero debt, we are protected either way. If deflation rules the roost, and we only earn 4.5% to 5.0% after operating and organizational expenses (the most likely scenario), we are still earning far more than what CD are yielding. On the other hand, if inflation takes off and/or industrial rents sky rocket, we would be sitting in clover.

It will be interesting to see how the markets react when the Fed finally raises interest rates. The investment world could easily interpret such an action as a sign that the U.S. economy is now completely healed. They could go rushing to buy commercial-investment real estate using today’s low mortgage rates. I’m just sayin’.

 

3,159 Different Lenders    CommercialMortgage.com  

 

 

Topics: Peer-to-Peer Lending