Comments at a Recent Banking Conference
“Last week, I hosted a meeting of mortgage lenders,” continued last night’s emcee. “They got together all the mortgage lenders in Britain who are still in business. I felt sorry for the guy. All alone…
“Today, a guy goes into a bank and he says… ‘I’d like to talk to you about a loan…’ and the banker says to him, ‘Great…how much can you lend us?’
Interesting Report from National Mortgage News Online
No one can be terribly surprised that the other shoe has finally fallen. According to a June 22nd report from National Mortgage News Online:
Commercial Real Estate Prices Fall 8.6% in April
Commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices decreased 8.6% in April, leaving the index at 25.3% below its level a year ago and 29.5% below the peak in prices measured in October 2007.
According to Moody's, the large negative return for April likely reflects that deals closed during that month were negotiated at the end of 2008 and in the first quarter of 2009, when securities markets and overall sentiment were plunging. "The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real estate markets," says Moody's managing director Nick Levidy.
The South has been the worst performing region over the last year, with an annual decline of more than 20%. Commercial real estate has performed worse in Southern California than in the Western region as a whole. In Southern California, the office market has been the worst performer, with prices dropping 22.2% in the last year.
The Rent Might Not Be What the Borrower is Representing
Suppose you're a commercial lender, and you foreclose on commercial building. The good news is that the building still has a tenant. According to the lease in your commercial loan file, the tenant is obligated to pay $10,000 per month. Hooray.
Now the bad news. The tenant advises you that the lease in your commercial loan file is fraudulent. In order to obtain commercial financing, the borrower submitted a dummy lease. The tenant's signature on the dummy lease was forged. The real rent is only $2,700 per month! Ouch.
Okay, what did the lender do wrong? The commercial lender should have obtained an estoppel agreement from the tenant before making his loan.
What on earth does estoppel mean anyway? Estoppel is a a rule of evidence whereby a person is barred from denying the truth of a fact that has already been settled. To understand this definition, let's take a look at our current situation.
Suppose we had sent an Estoppel Agreement to the tenant that said that the rent was $10,000 per month, the lease was still in force, the lease still had ten years to run, and the landlord had performed all of his required duties under the lease. If the tenant had signed the Estoppel Agreement, agreeing that the lease terms described in the Estoppel Agreement were the actual lease terms, then the tenant would have been bound by the fraudulent lease terms, rather than the terms of the true lease.
The lack of prepaid rent is another item that needs to be addressed in the estoppel agreement. Suppose the tenant recorded his lease, so the lease was senior to the mortgage. Right before the commercial property owner loses the property in foreclosure, the owner approaches the tenant and say, "Say, I'm in a cash crunch. You owe me $100,000 in rent for the rest of the year. I will reduce my rent to just $60,000 if you prepay it now." The tenant would be sorely tempted to accept that offer.
If the commercial lender then foreclosed, the commercial lender would be forced to honor the deal made by the prior owner, even if the former commercial property owner took the $60,000 and spent it on cocaine for his trashy girlfriend.
This is one of the reasons why commercial lenders do not like to be subordinate to recorded commercial leases.
Need a commercial loan? You can apply to hundreds of commercial lenders in just four minutes using C-Loans.com. And C-Loans is free!
Make a PDF of Your Commercial Loan Package and Email It to Scores of Commercial Lenders
If you are a commercial mortgage broker, you just have to use the new PDF-creator software on C-Loans to make your commercial loan packages. It's free!
Just input your commercial loan into C-Loans.com as usual. Go ahead and submit your commercial loan to six commercial lenders.
After you have submitted your commercial loan to six commercial lenders, an option will appear that allows you to create a PDF with just one click. After your commercial loan package has been converted to a PDF, simply save it to your desktop.
Once the commercial loan PDF is on your desktop, you can then create an email addressed to 40 or so commercial lenders and attach the PDF.
You can even attach color photo's to your commercial loan package, making it look very, very professional. And remember, both C-Loans.com and this software are free.
Title to Many Commercial Properties are Held by Subchapter S Corporations
About 25 years ago some thief was climbing on the roof of a commercial building in New York. He was trying to break into the store to steal stuff, and he had no business being on the roof. The roof was near the end of its useful life, and the thief fell through the roof and severely injured himself.
The thief must have had unbelievable audacity because he actually sued the owner of the commercial building for negligence for failing to maintain the roof. To the shock and awe of commercial property owners everywhere, this miserable thief won his lawsuit and was awarded over a million dollars in damages.
The property owner held title to the building personally, and he was personally wiped out when the judgment debtor took virtually everything the poor man owned.
From that moment on, commercial property owners across the country desperately sought a way to insulate themselves from liability. They could not hold title as a regular "C-corp" because they would be taxed twice - once as a corporation and another time when the owners drew out their profits as dividends. Limited liability companies had not yet been invented.
The solution was the subchapter-S corporation. A subchapter-S corporation can only be used for new business ventures, and there is a limit of 35 shareholders. You can therefore never take a subchapter-S corporation public.
The big advantage of the subchapter-S corporation, however, was that it was not taxed twice. The net income of a subchapter-S corporation passes directly through to the owners of the corporation without taxation. The shareholders only pay taxes once on the profits, as they are added to their personal income on their 1040's.
As a result, for about 15 years, title to a great many commercial properties was held by a subchapter-S corporation.
Modernly, subchapter-S corporations have been replaced by limited liability companies (LLC's). LLC's do not have to be new ventures, and ownership is not limited to 35 shareholders.
As a commercial mortgage broker, however, you will still occasionally see subchapter-S corporations. You will need to gather Articles of Incorporation (summary of the key organizational facts - like the name of the corporation, address, etc. - that is filed with the state), the Bylaws (detailed instructions on how to run the corporation), and a Corporate Resolution to Borrow (the minutes of the Board meeting authorizing the president to borrow money on behalf of the corporation).
Need a commercial loan? You can apply to 750 commercial lenders in just found minutes using C-Loans.com. And C-Loans is free.
Includes George's Famous Pooh-Pooh Soup Story
You're a commercial mortgage broker. You've just quoted a commercial real estate loan to a borrower over the phone. The borrower appears interested, and you want to convince the borrower to send his commercial real estate loan application to you, as opposed to a competing mortgage broker or bank.
The key thing to remember is the Theory of Momentum. A body at rest tends to stay at rest. A body in motion tends to stay in motion. A potential commercial real estate borrower is therefore going to want to keep sitting on his hands.
To convince a potential commercial borrower to send his loan package to you, never ask for too many documents at one time.
If you ask for a huge checklist of documents, the borrower will surely procrastinate, during which time he'll speak with a competing commercial lender or mortgage broker, and you'll lose the deal. Instead, ask for just two or three documents at a time. Gather the six-inch-thick stack of required documents slowly over a period of weeks.
"But George, it will take months to close a commercial loan at that pace."
We've all heard the story about the young bull and the old bull standing at the top on the hill and looking down over a herd of beautiful heifers. The young bull turns to the old bull and says, "Hey, Pops, let's run down and kiss one of those cows." The wise old bull replies, "Son, let's walk down and kiss them all."
The point of the story is that if you rush things, your success rate is often much lower. If you ask for a huge checklist of documents, you'll only close one deal in fifty. If you gather the required documents in small, easy waves, you might be able to convince all fifty borrowers to send you a package.
But you have to give the borrower reassurance that his commercial loan application is looking good ... and this leads us to my famous Pooh-Pooh Soup Story:
Have you ever noticed that whenever you order anything to eat at an expensive French restaurant that the snooty waiter always says, "Ah, good choice. The duck a la orange is delicious!" And when you order dessert, "Wonderful choice, sir. The Crepes Suzette are
I've therefore often wondered that if I ever asked for Pooh-Pooh Soup (you guessed it, a log floating is broth ..... eeuuuuu!) whether the French waiter would say, "Ah, the Pooh-Pooh Soup is delicious!"
Now back to our training. We've pointed out that you absolutely need to ask for the documents in five or six waves of three or four easy documents to fetch. But the borrower will need reassurance, before fetching a whole new wave of documents, that at least so far his commercial real estate loan application looks good.
So when you get the first wave of documents - his current schedule of leases (rent roll) and his last year's actual operating expenses - quickly scribble out a pro forma operating statement and do a debt service coverage ratio calculation. Then, assuming the numbers look good, you can tell him, "I've crunched the numbers, and so far your deal looks very do-able!" (The pooh-pooh soup is delicious!) "Now all I need is a financial statement and two years tax returns."
With these documents you can pull a credit report and report back to the borrower, "I've looked at your financial statement, tax returns and credit report, and everything continues to look very favorable!" (The pooh-pooh soup is delicious.") "Now all I need is a copy of the leases and a financial statement and two years' tax returns on the LLC that actually owns the property." And so on, being sure to reassure the borrower that his loan package looks good (the pooh-pooh soup is delicious) after receiving each wave of documents.
So, to summarize, the object of the game is to convert a telephone lead into a loan package. To get your commercial loan borrower finally moving in your direction, you must not ask for a huge checklist of documents. Instead, ask for a very short list of easy documents to gather. After receiving each wave of documents, be sure to tell the borrower that his deal looks great (the pooh-pooh soup is delicious!). It will take you slightly longer to close a commercial loan this way, but you'll close far, far more deals (you'll kiss them all!).
Do you need to place a commercial real estate loan right now? You can submit your commercial deal to 750 different commercial real estate lenders in just four minutes using C-Loans.com. And C-Loans is free!
Perhaps as many as 10% of all of the practicing commercial mortgage brokers in the industry are my former trainees. If you would like to really learn how to broker commercial real estate loans like a pro, please click here.
C-Loans Just Introduced a Free, New Tool to Create PDF's
Let's start from the basic proposition that commercial lenders are picky and unpredictable. A commercial mortgage broker often has to shop his commercial real estate loan package to a dozen different commercial lenders before he finds a good home for the deal.
If you, as a commercial mortgage broker, have to pay Fed Ex charges to a dozen different lenders, your package delivery charges will cut deeply into your profits. In addition, shuttling your commercial loan package between a dozen different lenders will take weeks, during which time your commercial borrower may find a cheaper bank on his own. Wouldn't it be great to be able to submit your commercial loan package by email?
If you create your commercial loan package as a PDF, you can submit your deal instantly to a dozen different commercial lenders across the country by email. The problem is, however, is that you don't have the $350 version of Adobe software to create the PDF's. Even if you did have the software, you really don't know how to use it.
C-Loans.com has just added a feature that will allow you to create a gorgeous PDF presentation of your commercial loan for free. Just come to C-Loans.com and enter your commercial deal as usual. Go ahead and submit your commercial loan to six lenders.
On the departure page you will find a new button that will allow you, with one click, to "Create a PDF". Be sure to save the PDF of your commercial loan package on your desktop. You can then attach this gorgeous PDF to an email to a dozen of your best commercial lenders.
What does one of these PDF commercial loan packages look like? Simply click here to see a sample commercial loan package as a PDF.
Do you need a commercial real estate loan right now? You can submit your commercial real estate loan request to 750 different commercial real estate lenders in just four minutes using C-Loans. And C-Loans is free!
Are you the owner of a commercial property? Do you want to hire George Blackburne personally to place your commercial loan? George charges one point upon closing, regardless of the loan size, to serve as your mortgage broker. Please click here if you would like to contact him directly.
Free Online Demographics Tools Warn You When Your Loan is in a War Zone
Your commercial lender will be pretty sore at you if he spends two hours to drive out to inspect your client's commercial property, only to find out that his life is in danger because the area is a war zone, with hookers and drug dealers on every corner. That's your fault - the commercial mortgage broker - for not warning him in advance.
It's pretty easy these days to determine online whether or not a commercial property is located in a tough area. Just go to City-Data.com and read the free demographic information they provide. The income levels, the education levels, and the crime statistics will all help paint a fairly accurate picture of the neighborhood.
The wise commercial mortgage broker will turn down commercial deals in low-income, high-crime, high-drug-use areas. These loans are almost impossible to place. Instead, he'll use his precious time to work on his marketing and his mailing lists.
Need a commercial real estate loan right now? You can apply to 750 different commercial lenders for free in just four minutes using C-Loans.com.
Where to Invest Your Money for the Next Upturn in Commercial Real Estate
The Urban Land Institute recently asked 700 real estate professionals to name the best (and worst) places to invest in commercial real estate in the coming year. Those surveyed included private developers, real estate brokers and Real Estate Investment Trust (REIT) executives. Their answers also apply to the residential market, since the single-family-home sector typically follows the economy. As wages go up and there are more jobs, more people can buy homes, pushing prices up.
The best cities in which to invest are those that are considered gateways to international investment, have vital downtowns where people can forgo cars, and don't have a glut of condos or office space.
According to this survey, the number one place to invest in commercial real estate right now is Seattle. Seattle is a diversified market, has a good base of business and is becoming a 24-hour city.
Although the city is suffering from the loss of Washington Mutual and the downsizing of Starbucks, Boeing and Microsoft are still relatively strong. Apartment vacancies are low and there aren't too many new buildings going up, meaning the market won't be oversupplied. The same is true in the retail space.
San Francisco comes in second in the survey as the best location to invest in commercial real estate. San Francisco learned from the tech crash of 2001 not to overbuild. There is a reasonable supply of office and apartment space, which should limit vacancies. San Francisco's port is also expected to help the city during the downturn as Americans continue to rely on Asian imports.
Washington, D.C., New York and Los Angeles round out the top five.
The least attractive major city in America to commercial real estate investment is Detroit, Michigan. Detroit has been reliant on the car industry, which is rapidly shrinking. Other businesses are unlikely to fill the void in the next few years, which means the city will be hit hard by further economic struggles.
The second worst city was New Orleans. The city has been losing businesses to Houston, Dallas and Atlanta since Hurricane Katrina hit in 2005.
The other cities at the bottom of the list — Columbus, Ohio, Milwaukee, Wis., and Cleveland — suffer from dying industries and lack of tourist appeal.
Do you need a commercial real estate loan right now? You can apply to 750 different commercial real estate lenders in just four minutes for free using C-Loans.com.
Banks Are the Best Source for Commercial Loan Leads
If you are a commercial loan broker, your number one source for commercial real estate loan leads should be the local banks located close to your office. It's a great time to be trolling in these waters because commercial banks are turning down a lot of commercial real estate loan requests right now.
Start by going to maps.yahoo.com. Input your office address and then ask for a map. Then plot every commercial bank located close to your office. It's easy. In the Find a Business on the Map field, simply type in the word, "bank". Instantly every nearby bank will be plotted on the map.
After locating all of the bank branches close to your office, then drop in on one or two commercial banks every business day. Ask to speak to the loan officer who handles their commercial real estate loans.
Explain to the banker that you would like to provide commercial loan services to any of his customers who the banker has to turn down. Leave the banker a flyer, along with three or four of your business cards.
Follow up the visit with a handwritten thank-you note to the banker on your company stationary and in a hand-written company envelope. The idea here is to get the banker to recognize your logo and company name. Of course, be sure to include several more of your business cards. Make sure these business cards prominently display the words, "Commercial Real Estate Loans".
Then, every ten days, be sure to send the banker something. One time you might send a funny political cartoon, and the next you might send a folksy newsletter with lots of jokes. And, of course, always be sure to include three more of your business cards with every fun communication. Pretty soon the banker will look forward to your snail mail because you always send something fun.
Try to take each of your bankers out to lunch every couple of months. Invite them to play golf with you. If a banker sends you a referral, drop by the next day with a sleeve of golf balls or a gift certificate for a free lunch. Make these guys your friends. Remember, the typical bank loan officer probably turns down a half-dozen commercial loan requests every week. Often there is no real good reason for the turndown, other than the bank simply doesn't like motels loans or the loan is the wrong size (too large or too small).
If you religiously call on one or two bankers every business day, you will quickly develop a terrific flow of commercial real estate loan leads.
Need a commercial real estate loan right now? You can apply to 750 banks with just one simple mini-app in just four minutes using C-Loans.com.