Commercial Loans Blog

A More Merciful Hard Money Loan

Posted by George Blackburne on Wed, Jun 29, 2011

Our hard money commercial mortgage company, Blackburne & Sons, has continuously been in the market to make new commercial mortgage loans for more than 25 straight years.  In other words, we're always in the mood to make commercial loans.  This is not just some advertising plug.  I have an important point to make in just a moment, and my point will be made in red.  It will surprise you.

In contrast to the "always ready" hard money brokers, a great many banks are constantly in and out of the commercial mortgage market every few years.  For two years a bank might be hot-to-trot to make commercial real estate loans.  Then, for the next three years, the bank might turn down all but the most perfect commercial mortgage loans (about as common as unicorns).  It's fair to say that 99% of the banks in the country today are only making commercial real estate loans to unicorns asking for perfect commercial loans.

So why are hard money brokers always in the market to make commercial real estate loans?  Hard money brokers are just market-makers.  They just have to lower the loan-to-value ratio and raise the rate until they reach a point where some private investor will invest in the loan. 

For example, let's suppose the stock market is tumbling 500 points a day.  Unemployed Americans are marching in the streets, and the demonstrations are becoming more and more violent every day.  Already dozens of cars have been burned, and the police have been forced to fire over the heads of the protestors in order to quell the violence and vandalism.  (I actually foresee this for America within two to three years.)

Now suppose a retired real estate investor owns a very nice office building in one of the more desirable areas of town.  He owns it free and clear.  Suddenly the retired investor gets nervous.  He wants to have more cash in hand, so he applies to a hard money broker for a quick commercial loan.  At the first the broker offers his private investors a loan of 70% loan-to-value at 12%.  No one invests in the mortgage loan.  The investors are too frightened to invest in a first mortgage.  The true unemployment rate is over 20%, and there is far too much violence in the streets.

Therefore, the broker might cut the loan to 60% loan-to-value and re-offer the loan at 14%.  If there are still no takers, he might eventually cut the commercial loan all of the way down to 45% LTV and offer the loan at a whopping 18% interest.  Finally, the investors will probably start buying, and the loan will finally sell out.  You could say that the loan has finally cleared the market.  The hard money broker finally found that combination of low loan-to-value ratio and high yield that would prove irresistable to wealthy mortgage investors.

Therefore, for most modern and desirable commercial properties, there is some combination of loan-to-value ratio and yield that will allow a hard money mortgage broker to arrange a commercial loan.

Ah, but here's the rub!  Here is the whole point of this article.  Sometimes, because private mortgage investors are nervous, the interest rate on a hard money commercial loan has to be so high that the borrower cannot afford the monthly payments!  And everyone loses if a hard money mortgage broker is ever forced to foreclose.

This is why Blackburne & Sons has recently developed the participation mortgage.  A participation mortgage has a very low interest rate - say, 7.9% in a market where most hard money investors are demanding a yield of at least 14%.  The missing yield is recaptured as an income kicker and and an equity kicker.  In other words, the hard money mortgage investor takes a piece of any future increases in the property's gross monthly income and in the property's fair market value.  In effect, the current owner of a commercial property gives up future income and appreciation, in return for a much lower monthly payment today.

 

Click me

Topics: Hard money loan payments

Participation Mortgages, Income Kickers and Equity Kickers

Posted by George Blackburne on Thu, Jun 16, 2011

Blackburne & Sons is rolling out a revolutionary new product for Medium Commercial Buildingcommercial loans called a participation mortgage.  Rather than make a new hard money commercial mortgage at 13.9%, we might now make the same loan at just 7.9%.  The loan, however, would have an income kicker and an equity kicker.

An income kicker is a share of any increase in the gross monthly income of the property.  For example, let’s suppose the gross scheduled income at the time the loan was originated was $10,000 per month.  If the gross monthly income goes to $16,000; then Blackburne & Sons would take a percentage of that $6,000 per month increase.  The typical income kicker would be between 15% and 50%.

An equity kicker is a share of any increase in the value of the property.  For example, let’s suppose a commercial building is worth $1 million at the time we originate a loan.  The borrower renovates the property and then leases it out.  Suddenly the property is worth $1.8 million.  Blackburne & Sons would take a certain percentage of that $800,000 increase in the value of the property, but only when the property eventually sells or our loan is either refinanced or paid off.  A typical equity kicker would be between 15% and 50%.

Why not just make the loan at 13.9% and forget all of this nonsense about income kickers and equity kickers?  The problem is that the monthly payments on a $1 million loan at 13.9% will break the financial back of many borrowers.  Hard money investors want their big yields, so it’s simply not possible to make a hard money loan at 7.9%, absent some sort of additional financial incentive, like these two kickers.

Click me

Click me

Click me

Topics: Participation Mortgage

Why Commercial Construction Loans Are So Difficult to Get

Posted by George Blackburne on Sun, Jun 12, 2011

Very few commercial construction loans are being made these commercial constructiondays.  I always figured that it was because the banks were just too darned scared to make new commercial construction loans.  After all, commercial real estate has fallen by 40%, and many commercial banks have suffered immense losses on commercial construction lending.

But not every company in America is losing money.  There are a great many companies tied to agriculture here in the Midwest that are making money hand over fist.  Why aren't they expanding their manufacturing facilities?

A developer buddy explained the problem to me.  A great many companies have enough dough to cover 20% of the construction cost of their new buildings.  Since these companies are also making money, the bank even tentatively approves their commercial construction loan - subject to the appraisal and other third party reports.

The vast majority of new commercial construction loan applications are falling out at the appraisal stage.  Many, if not most, commercial real estate appraisals are coming in at less than 75% of the actual construction cost. 

In order to be financially feasible, a new project should be worth 15% to 20% more than the cost of construction.  That difference is the developer's profit.

The Profit Ratio is the anticipated profit divided by the total cost to build the new building.  Bankers typically require this ratio to be at least 15% to 20%.  If the potential profit is too small, the developer will have little incentive to complete the project if he runs into any sort of cost overrun.  The last thing a bank needs is another half-completed project.

Modernly, not only are banks finding that the deals have no profit in them, but - even worse - the projects are worth, upon completion,  less than 75% of their construction cost.  Not surprisingly, you will see very few commercial construction loans getting funded.

There are still a few commercial banks willing to make new commercial construction loans.  You can submit your commercial loan to 750 hungry commercial lenders using C-Loans.com.

 

Click me

 

Click me

Topics: commercial construction loans