Commercial Loans Blog

One Hundred Submissions to Close a Single Commercial Loan

Posted by George Blackburne on Mon, Aug 24, 2009

It Has Never Has It Been Harder to Close a Commercial Loan

A buddy of mine recently sent me an interesting email that says it all about placing commercial loans today.

George,

... The markets have been turned upside down. There is a real disconnect today with what the borrowers want and think they can get and what they can realistically can get from the lending community.

We just funded a $6.5 million loan for a self-storage project at a 6.95% rate for ten years. The borrower wanted a NON-recourse loan. While there were several hundred lenders in that market for that product 18 months ago, today there are none. The exception, the life companies, are at 55% LTV. Our deal was 61% LTV without 12 months of stabilized income. The life companies would not even take a hard look at the deal. The borrower was VERY well qualified, with lots of cash and a great financial statement.

We went to over 120 lenders who would make a loan on this property type in So Cal and found only ONE who would do the deal. The deal closed, and the lender has now eliminated self-storage as a product they will lend on.

Borrowers in most cases are still not realistic about what they will accept vs. the market. There is no 100% financing. The borrower must have 25% to 35% equity in the deals today. For refi's the borrower must have a DSCR of at least !.25:1, and even Fannie Mae wants 1.20:1 for apartments. And FNMA has a new requirement that they want you to own at least four multi-family projects, or have owned that total (in the past), if they are to consider you for a loan ...

R. H. Adams

This mortgage broker had to submit his commercial loan to 120 different commercial lenders before finding the one commercial lender who would do the deal. He didn't quit. To his credit, he pushed on and on until he found a home for the deal. You will probably have to do the same with your own commercial loans.

I have often said, "Sometimes placing a commercial loan is as difficult as finding a wife for your best friend. You can set him up with a lovely girl that is the right age, the right size, the right level of beauty, and the right religion ... and still there is just no chemistry or fireworks. All you can do is keep setting your friend up with new ladies. It becomes a numbers game."

So if you are trying to place a commercial loan with a bank or a life insurance company today, you may have to submit your commercial loan to 50 to 100 commercial lenders ... until you find just the right chemistry.

Topics: commercial loan, commercial mortgage lenders, commercial mortgage rates, commercial lender, commercial mortgage

Hypothecation of a Commmercial Loan Receivable

Posted by George Blackburne on Sat, Aug 1, 2009

A Hypothecation is a Loan Against a Commercial Loan

Suppose a wealthy commercial real estate investor owns a commercial building free and clear. A potential buyer makes a good offer on the commercial building, subject to obtaining a new commercial mortgage loan at 7% from his bank for 75% of the purchase price. The wealthy commercial property owner accepts the offer.

Unfortunately the commercial lending world is in turmoil right now. Banks are afraid to make new commercial loans for more than around 62% loan-to-value. The bank turns down our borrower's 75% LTV commercial loan application, and the deal looks like it is going to fall apart.

Then the commercial real estate broker has an idea. He convinces the wealthy owner to carry back a commercial loan for 75% of the purchase price at 7% interest. After all, the wealthy investor owns the commercial building free and clear. The buyer puts down 25% of the purchase price in cash, and the deal closes.

Now let's scroll forward four years. The stock market has tanked, and the wealthy investor is not so wealthy anymore. He has lost 70% of his stock investments, and now he desperately needs cash to fix up an empty office building that he owns.

He takes his $750,000 first mortgage note that he owns to a number of commercial mortgage companies that specialize in discounting commercial notes. (By the way, if you ever want to sell a commercial note at a discount, please call me, George Blackburne, at 574-360-2486.)

Because his commercial loan has a 27-year remaining term and the note rate is only 7%, he learns that he will have to discount it by close to 28 points in order to sell it. He would have to give up over $200,000 if he tried to sell his note at a discount; and he really only needs the money for about 18 months. He is going to use the money to pay for the tenant improvements on his vacant office building. Once the new tenants move in, he'll be able to easily refinance the building and pull out lots of dough.

The investor therefore calls his clever commercial real estate broker, and the broker tells him to just hypothecate his first mortgage note. A hypothecation is a loan secured by a mortgage receivable. It's a loan secured by a loan.  In this case, the investor will be pledging his $750,000 first mortgage note as security for a new hypothecation loan of $500,000.

The advantage of hypothecation loan, compared to selling a mortgage receivable at a discount, is that the investor won't have to discount his perfectly performing first mortgage note by over $200,000. He'll just pay a modest 3 point loan fee on the new, smaller $500,000 loan. The interest rate on the hypothecation, typically around 12%, is admittedly higher than what a bank would charge for a new commercial loan, but banks are not really lending right now. In addition, our investor really only needs to borrow the money for about 18 months, until his new tenants move into his vacant office building and he refinances the building. It's far better to pay 12% on $500,000 for 18 months than to suffer a $200,000+ discount if he tries to sell his commercial loan.

If you own a commercial first mortgage note that you would like to either hypothecate or sell, please call me, George Blackburne, at 574-360-2486.

Topics: discounted note, hypothecation, hypothecation loan