Commercial Loans Blog

Why Small Commercial Loans Are So Much Easier to Close

Posted by George Blackburne on Thu, Jan 26, 2012

Small commercial loans are infinitely easier to close than large commercial loans.  By “small commercial loans”, I mean commercial loans of less than $2 million.

Why are small commercial loans so much easier to close?

  1. Small commercial loans do not have to be absolutely perfect.  The loan amount is small, so any loss on the deal is also likely to be small.  In contrast, if a bank is contemplating making a $4 million commercial real estate loan, that loan better be almost perfect.  After all, if a loan of that size goes bad, somebody’s head is going to roll.  And let’s face it, you and I are mortgage brokers.  Borrowers with perfect deals seldom come to us.

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  2. There are far more banks and hard money lenders competing to make small commercial loans than there are competing to make huge commercial loans.  Only a small percentage of commercial real estate lenders feel comfortable making such large loans.  Therefore, there are far more lenders who might potentially make your small commercial loan than your large commercial loan.

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  3. Normally only one or two executives have to sign off on commercial real estate loans smaller than $2 million.  Therefore there is a less of a chance that of one them will have a pet peeve about this kind of property, this town, or this particular borrower.  With a full Loan Committee of eight executives reviewing your large deal, the chances of successfully running the gauntlet of pet peeves is much lower.

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  4. If you are a mortgage broker, you will find the typical small commercial borrower is far less sophisticated and far more appreciative of your help.  The owner of a small commercial property is likely to be a busy business owner, whose time is better spent running his own business, rather than shopping his commercial loan to 200 banks.

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  5. The guys who own the really large commercial properties are professional investors.  All they do in life is manage, lease, and finance commercial properties, so they often already have a dozen direct lenders in their back pocket.  They don’t need you … unless their deal is a complete stinker.

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  6. The loan officers who work for the really large commercial lenders can be very cliquish.  If you, as a relative newbie commercial mortgage broker, try to bring them a loan, they’ll often just shoot you down.  But if one of the good ‘ole boys brings them the exact same deal, they’ll close it for him.  The loan officers who work on small commercial loans are usually much more friendly and helpful.

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  7. If you stick to small commercial loans, there will be less competition from veteran commercial mortgage brokers.  You are probably taking this course because your commercial mortgage brokerage business is struggling.  The old veterans are probably much better at this stuff than you.  They will outsell you almost every time because they sound so much more knowledgeable.  The good news is that these old veterans will seldom work on small commercial loans anymore.  Therefore, it will be far easier for you, the newbie commercial mortgage broker, to win the borrower’s business.

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  8. The moral of the story, therefore, is that if your commercial mortgage business is not making any money, stop working on commercial loans larger than $2 million.

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Topics: small commercial loans

How to Spot Commercial Loan Fraud

Posted by George Blackburne on Fri, Jan 13, 2012

commercial loan fraudAs the operators of C-Loans.com - the most popular of the commercial mortgage portals - we constantly have to be on guard against advance fee scammers.  Therefore, last night I was teaching my son, Tom, how to spot these crooks.

There are other ways to spot advance fee scammers, but you'll know right away that a guy is just an advance fee scammer if he uses one of the following three phrases:

  1. "We are merchant bankers."  Hogwash!  Use of the phrase, "merchant banker", is a dead giveaway that the guy is an advance fee scammer.  There are probably fewer than 400 true merchant bankers in the whole world.  Merchant banks are typically a subsidiary of a commercial bank (fancy word for a garden variety bank) or an insurance company.  If a bank or a life insurance company is making money hand-over-fist, the holding company will sometimes open a tiny subsidiary to invest the profits into go-go investments, like high-yield bridge loans, mezzanine loans, preferred equity, and direct equity investments into operating companies and real estate development deals.  Folks, there are probably fewer than 400 true merchant bankers in the whole world.  And mere mortals, like you and me, don't ever get to talk to these guys.  So if the guy on the other end of the line is claiming that he is a merchant banker, he's a liar and a fraud.  Run away!

  2. "We make international loans."  In your dreams!  Every country in the world wants to protect its small local banks against huge foreign competitors, like Bank of America, Credit Suisse, and Deutsche Bank.  Therefore every country imposes a 30% withholding tax on all interest earned by foreign lenders.  Even if a bank could earn 10% lending in Mexico, for example, it would only get to keep 7%.  Folks, that's a deal killer.  There are no true international commercial real estate lenders.  Anyone who claims to make international loans is either some idiot rookie mortgage broker or an advance fee scammer.

  3. "We represent a number of hedge funds."  What a load of manure!  I challenge any of you mortgage brokers out there to prove to me that you have actually ever closed a commercial real estate loan through a hedge fund.  Remember, offshore hedge funds can't make commercial loans directly without running afoul of the 30% withholding tax described above.  They can buy existing loans, but they cannot make new ones.  In theory domestic (American) hedge funds could make commercial real estate loans, but they lack the licensing and the expertise.  They do not originate commercial real estate loans.  If some clown is claiming that he represents hedge funds, he is a liar and very likely a con man out to steal your advance fee.

So the next time you run into someone who boasts that he is a merchant banker, he makes international commercial real estate loans, or he represents a hedge fund, you can chuckle to yourself and walk away quickly.

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Topics: advance fee scammers

Construction Loans to Finish Partially Completed Construction

Posted by George Blackburne on Wed, Jan 4, 2012

I recently received a well-written email newsletter from a hard money lender that will make construction loans to complete partially-constructed commercial buildings.  The loan officer did building under constructiona brilliant job in describing the issues and difficulties facing a lender that wants to fund the completion of construction of a partially completed building.

Here is what he wrote:

We Do Partially Complete Construction
 
One of the most difficult loans to place for brokers is a loan on a partially complete structure. Traditional lenders avoid this property type because of the many complications involved. These complications have largely to do with the possibility of a mechanics lien from an unpaid contractor or contractors. As you may or may not know, a mechanics lien takes precedent on the property’s title, even over a first position lender. Having another entity in front of a lender is a nightmare scenario and it’s a situation they avoid at all cost. Fortunately we have the experience to deal with this and we’re comfortable lending on most partially complete properties.
 
The bulk of the work to underwrite such a loan is to contact the contractors on the project to determine the status of monies owed to them. It’s critical that we know every contractor who worked on the project, if they are owed a balance on their work and when the work was completed (contractors have a limited time to file a lien against a property and sometimes forget to do so in the time allowed). We also need to verify by inspection that the claimed work has been completed. If it has, we can include funds to pay the contractor in the construction budget going forward or obtain a lien waiver from the contractor who may be willing to wait to get paid.
 
All of this requires a great deal of legwork. It also requires that your borrower have the information on hand to provide to us (and that it’s complete and organized). A list of all the contractors who worked on the job (including sub-contractors) would be on the checklist we would send you. If you can provide that information, we can offer you a potential way to fund a class of loans few other brokers can.

If you have a commercial loan request to finish a partially completed construction project, and you would like to contact this lender (it is NOT Blackburne & Sons), please email me, George Blackburne III, at george@blackburne.com , and I'll arrange an introduction.  Please type, "Partially Completed Construction" in the subject line.  I charge a 50 bps (a half-point) fee, if the deal closes, for hooking you up with this lender.

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Topics: Partially Complete Construction