Commercial Loans Blog

Commercial Real Estate Loans Are The Kiss of Death for Banks

Posted by George Blackburne on Thu, Oct 28, 2010

The More Commercial Mortgages a Bank Has in Its Portfolio, the Higher Its Chances of Being Closed By the Feds

I read today a terrifying statistic about commercial real estate loans. Of the 100 commercial banks with the highest percentage of commercial real estate loans in their portfolios, 42 of them have already failed. In the eyes of the regulators, commercial real estate exposure has become a frighteningly accurate predictor of bank health.

No wonder its so hard to get a commercial loan from a bank these days!

Foreclosed building

So what should a borrower or a commercial mortgage broker do?  He will probably have to submit his commercial loan request to scores and scores of banks before finding a commercial lender willing to make the loan.

The easiest way to submit a single commercial loan application to scores of banks is to use C-Loans.com. C-Loans is a commercial mortgage portal with 750 participating commercial lenders. The user simply completes a four-minute mini-app and then asks the system to display suitable commercial lenders.

He then puts a check mark next to six banks and presses, "Submit." Within minutes bankers will be calling him or emailing him offers.  And C-Loans.com is free!

Topics: commercial real estate loan, commercial loan, commercial mortgage rates, commercial loan rates, commercial mortgage, commercial foreclosure

Hard Money Agricultural Loans

Posted by George Blackburne on Wed, Oct 20, 2010

Blackburne & Sons Makes Private Money Loans on Farms, Farmland, and Cropland

Let's suppose you own farmland, and you need to borrow some money. Perhaps you need to pay some delinquent real estate taxes or buy seed and fertilizer for this year's planting.

Normally you could just apply to a Farmer Mac mortgage company to refinance your property; however, what would happen if you were late paying your mortgage a couple of times last year? What if your tax returns did not show that you made enough money last year to make the new mortgage payments? In this case, you would not qualify for a loan from Farmer Mac.

Blackburne & Sons is a private money lender that specializes in making loans on cropland, even if the borrower's credit is poor or showed a loss last year on their tax returns.

To apply, please call Warren More at 916-338-3232 or email him at wmore@blackburne.com

Topics: agricultural loan, cropland loan, farmland loan, farm loan, farm financing, farmland financing, farm land loan

Debt Yield Ratio

Posted by George Blackburne on Wed, Oct 6, 2010

This New Financial Ratio Has Replaced the Debt Service Coverage Ratio

For over 50 years commercial real estate lenders determined the maximum size of their commercial mortgage loans using the debt service coverage ratio. For example, a commercial lender might insist that the Net Operating Income (NOI) of the property be at least 125% of the proposed annual debt service (loan payments).

But then, in the mid-2000's, a problem started to develop. Bonds investors were ravenous for commercial mortgage-backed securities, driving yields way down. As a result, commercial property owners could regularly obtain long-term, fixed rate conduit loans in the range of 6% to 6.75%.

At the same time, dozens of conduits were locked in a bitter battle to win conduit loan business. Each promised to advance more dollars than the other. Loan-to-value ratio's crept up from 70% to 75% and then to 80% and then up to 82%! Commercial property investors could achieve a historically huge amount of leverage, while locking in a long-term, fixed-rate loan at a very attractive rate.

Not surprisingly, the demand for standard commercial real estate (the four basic food groups - multifamily, office, retail, industrial) soared. Cap rates plummeted, and prices bubbled-up to sky-high levels.

office buildingWhen the bubble popped, conduit lenders found that many of their loans were significantly upside down. The borrowers owed far more than the properties were worth.The lenders swore to never let this happen again. The CMBS industry therefore adopted a new financial ratio - the Debt Yield Ratio - to determine the maximum size of their commercial real estate loans.

The Debt Yield Ratio is defined as the Net Operating Income (NOI) divided by the first mortgage debt (loan) amount, times 100%. For example, let's say that a commercial property has a NOI of $437,000 per year, and some conduit lender has been asked to make a new first mortgage loan in the amount of $6,000,000. Four-hundred thirty-seven thousand dollars divided by $6,000,000 is .073. Multiplied by 100% produces a Debt Yield Ratio of 7.3%. What this means is that the conduit lender would enjoy a 7.3% cash-on-cash return on its money if it foreclosed on the commercial property on Day One.

Please notice that this ratio does not even look at the cap rate used to value the property. It does not consider the interest rate on the commercial lender's loan, nor does it factor in the amortization of the lender's loan; e.g., 20 years versus 25 years. The only factor that the Debt Yield Ratio considers is how large of a loan the commercial lender is advancing compared to the property's NOI. This is intentional. Commercial lenders and CMBS investors want to make sure that low interest rates, low caps rates, and high leverage never again push real estate valuations to sky-high levels.

So what is an acceptable Debt Yield Ratio? Ten percent - this is the lowest number that most conduit lenders are using to determine the maximum size of their advances. In our example above, the subject commercial property generated a NOI of $437,000. Four-hundred thirty-seven dollars divided by 0.10 (10% expressed as a decimal) would suggest a maximum loan amount of $4,370,000.

Typically a Debt Yield Ratio of 10% produces a loan-to-value ratio between 63% and 70%, the maximum level of leverage that the current CMBS B-piece buyers are requiring.

It is the money center banks and investment banks originating fixed-rate, conduit-style commercial loans that are using the new Debt Yield Ratio. Commercial banks, lending for their own portfolio, and most other commercial lenders have not yet adopted the Debt Yield Ratio.

You will notice in my definition of the Debt Yield Ratio that I used as the "debt" just the first mortgage debt. The reason why I threw in the words first mortgage is because more and more new conduit deals involve a mezzanine loan at the time of origination. The existence of a sizable mezzanine loan behind the first mortgage does NOT affect the size of the conduit's new first mortgage, at least as far as this ratio is concerned.

Will conduit's ever accept a Debt Yield ratio of less than 10.0%? Yes, if the property is very attractive, and it is located in a primary market, like Washington, DC; New York; Boston; or Los Angeles - an area where cap rates are exceedingly low (4.5% to 5%) - a conduit lender might consider a Debt Yield as low as 9.0%.


Need a commercial mortgage loan right now? You can apply to 750 commercial lenders - including several dozen conduit lenders - in just four minutes using C-Loans.com And C-Loans is free!

Topics: commercial loan, commercial mortgage rates, commercial lender, commercial mortgage, CMBS loan, conduit loan

Commercial Mortgage-Backed Securities 2.0

Posted by George Blackburne on Tue, Oct 5, 2010

Conduit Lending is Back!

Before the sub-prime meltdown in late 2007, conduit lenders made about 53% of all commercial loans nationwide by dollar volume. Conduits offered commercial mortgage loans at extremely low, fixed rates - rates almost as low as those offered by life companies. More importantly, conduits would make commercial loans on average quality commercial properties located in secondary locations, like the central business districts of Rust Belt cities.

CMBS lenders (conduit lenders) would also regularly make loans up to 75% loan-to-value ... and sometimes even higher. This turned out to be the straw that broke the camel's back. When the sub-prime crisis ignited in 2007, nervous investors dumped commercial mortgage-backed securities at huge discounts. Their concerns proved to be justified as commercial real estate plummeted by 40%.

For the past three years, conduit lending dropped to practically nothing.It was as if the entire industry was nuked off the face of the planet.

I am pleased to announce that conduit lending is back! Major banks with CMBS loan departments are now making conduit loans again. These are long-term (10 year), fixed rate loans in the noise range of 5.25% to 5.5%. The typical loan is between 65% and 70% loan-to-value. Most of these banks are holding these conduit-style loans in portfolio, but with a serious eye towards securitization.

Several CMBS pools have already gone to market. The bonds sold quite well. These were small pools, however. The pools were around $600 million to $700 million. Prior to the crash in 2007, some CMBS offerings were close to $1.5 billion in size.

The sale of commercial mortgage-backed securities depends on the appetite of the B-piece buyers, the go-go guys who buy the riskiest bonds in an offering - those that are unrated. In the 2007 downturn, a great many of the B-piece buyers were completely wiped out. Therefore it was surprising to see a fairly strong market for B-pieces develop early this year.

Of course, CMBS loan today are much more conservative. The loan-to-value ratios for CMBS loans have fallen from 75% to 80% all the way down to 60% to 70%. This makes the B-piece much more attractive.

How can commercial property owners get by with a conduit loan of just 62% LTV based on today's already-depressed commercial property values? Many new conduit loans are being written with mezzanine loans at the time of origination, taking the combined loan-to-value ratio up to 75% to 78%.

Banks and conduits throughout the nation are on a hiring binge. A number of the major banks already have a fairly sizable pipeline of deals.


Need a conduit loan right now?  You can submit your deal to scores of hungry CMBS lenders in just four minutes using C-Loans.com.


Topics: CMBS loan, conduit loan, CMBS lender

Preparing for Commercial Debt Maturities

Posted by George Blackburne on Sun, Oct 3, 2010

Could Banks See Loses in Commercial Real Estate as Large as They Suffered in Residential Real Estate?

Have you ever noticed how hard it is to find information about commercial real estate and what is to come in the future? Since late 2007, early 2008 newspapers, magazines and finance websites have had a plethora of information about the future of residential real estate, but it seems as if the future of commercial real estate is a topic many avoid.

Working in the commercial lending industry, we are faced with all types of questions from brokers, investors, buyers and owners. Many want to know what it is we are seeing in the commercial real estate lending market and what we expect to see in the future. In my experience, finding any definitive answer is difficult, but when you are in an environment where you work with these individuals and you are working to provide commercial mortgages, it becomes apparent that something is happening.

Over the last few years, we have seen delinquencies rise and fall, we have seen investors become much more cautious with their investments, we have seen deals come to us where the lender is requiring payoff, but the property value is too low to provide a loan which sufficiently pays off the bank. What we are experiencing the most however is that many banks are calling their loans and getting out of the commercial mortgage business.

On February 14, 2010 during a drive from Sacramento to San Francisco, I came across a talk radio show discussing the future of Commercial Real Estate. The guest was Tony Wood, author of the “Commercial Real Estate Tsunami, A Survivor’s Guide for Lenders, Owners, Buyers and Brokers.” I was hooked immediately. Everything out of Mr. Wood’s mouth rang true and I finally found what I was looking for…how to prepare for the future.

I listened the entire segment and learned that the book would not be available until May, but I could pre-order the book immediately. The day I received it, I read it cover to cover. I keep it at my desk to use as a reference and I also use it to provide examples when placed in similar situations. This book has given me insight on how to prepare for what is coming.

As you know, we are currently in a very weak economy, to make matters worse, “All indications are that the trillion-plus dollars of commercial real estate loan maturities between 2010 through 2013 combined with the commercial real estate markets being battered by the economic collapse we are currently experiencing will result in conditions the marketplace has never seen before” (Tsunami). It is believed that the coming losses will be historic and that this will have a devastating impact on lenders who are not prepared.

This means being prepared in all aspects of commercial real estate finance which include foreclosures, REO properties, property management, loan modifications, lending expectations and of course, investor concerns. There are ways to prepare for what is coming, but the time to do so is now.

The book provides congressional testimony from the Real Estate Round Table, The National Association of Realtors and the Federal Reserve from July of 2009. It is an interesting read which details the future problems in commercial real estate. It shows that many are aware of what is coming, but are not quite sure how to handle it. The book is one of a kind, in which it offers solutions and ways to prepare for the impact debt maturities will have on our economy.

For lenders, it will be important to pay attention to borrowers. We have so many new loan requests coming to us reporting that they have to pay off their loan in the next 30 to 60 days. Some of these borrowers have great credit, great pay histories and financials, yet their banks are requiring them to payoff their loan. This is causing many of them to default and results in losses to the bank. Many banks are accepting short pays on these loans just to get them off the books. The problem is that the banks aren’t listening to the borrower. Instead of working out an amicable solution, some banks are throwing these good credit customers out the door and creating the losses for themselves. Of course, not all loans are workable, the lender has to really listen to the borrower, review their financials and complete a thorough assessment to see if there is a possible workout including maturity extensions and loan modifications

Owners will also have many battles to fight, even if they are not in a position where they have to refinance. With vacancy rates increasing and rental rates decreasing, it will be important to maintain your building occupancy. Pride of ownership will be a huge factor as well as property maintenance. The tenant is king in these situations and if you want to keep your tenants then you need to be sure they are happy with their surroundings, because the guy down the street is offering months of free rent and lower lease rates. Some are even throwing in large contributions to tenant improvements, can you compete? Owners who will soon be facing a refinance need to get started now. There is no time to wait because if you are not ahead of the game, you will be shocked when you find out the bank is not willing to give you the loan to value you were hoping for.

Buyers need to be sure they are paying attention to the market and not just buying what they think will be a great deal. There are hidden dangers in buying an REO property that if a buyer did not thoroughly research the local market, they could end up with a cash eating property. Due diligence has never been more important, why did the previous owner fail? Is there something wrong with the property? If you’re buying a distressed asset, the lender typically does not know the history, do you? It will be important to do your homework.

Commercial Real Estate Brokers are already having a tough time trying to sell and lease properties. The property owners are pushing them to sell, the buyers want to buy properties for pennies. Now is the time for brokers to start to think outside the box. Look for ways to save through property tax appeals and lease restructuring. Plan ahead and create a recover plan. If you haven’t created one before you have losses, you won’t have the time to pull yourself out. Plan ahead and be ready for more losses and how to recover from them.

While I have only touched on a few ideas from this book, there are many ways to prepare for the “Tsunami”. Even though I feel prepared, I still have many questions. Lucky for me, on Wednesday October 6, I have the opportunity to meet Mr. Wood and I plan to ask him personally.

We have all seen the devastation and immense losses resulting from the crash of residential real estate… are you prepared for the upcoming losses to commercial real estate? If not, it is time to get started.


This blog article was written by Angelica Gardner, the Senior Vice President of Blackburne & Sons Realty Capital Corporation, a $50 million commercial hard money lender based in Sacramento, California. The views expressed are her own.  She can be reached at 916-338-3232.

Topics: commercial lending