Commercial Loans Blog

The Most Important Lesson in All of Commercial Real Estate Finance

Posted by George Blackburne on Mon, Aug 20, 2012

On December 21, 2024, old man Blackburne was fatally struck by a car while crossing the street with his beloved family.  Fortunately, only the old man was hit.  George didn’t die instantly.  He died of internal bleeding about four minutes after the collision.

Arguably it was a blessing.  As his wife of 42 years held his hand, he had time to remind her of his undying love.  To his three children, he told them each that they had made him very proud.  And as the light started to dim in his eyes, he passed on one final lesson to his sons:

“And please always remember, sons, the most important lesson in all of commercial mortgage finance.  It’s a critical lesson that I wish I had understood much earlier in my career.  Commercial lenders close loans for their friends.

 

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That’s it?  Those were George’s final words?  What could possibly be so important about those simple seven words?

By the way, its just 2012 right now, so I still have another twelve years before I get hit by that car.  I just needed a way to dramatize this lesson so that you would remember it.

We start from the basic proposition that every commercial real estate loan ever made had at least a few black hairs.  Maybe the property had some vacancies.  Maybe the borrower’s net worth was not larger than the loan amount.  Maybe the property was a little older.  There are a thousand potential flaws to a commercial real estate loan, and every deal has at least a few of them.

Will the commercial lender fixate on the one or two negatives on your deal or will he recognize the two-dozen other pluses?  The answer lies with your loan officer and with Loan Committee.  Do they like you?  If so, your deal has a chance.

Commercial lending is also an advocacy process.  Loan Committee’s job is to say, “No” to every deal.  Their job is to point out the flaws in your commercial loan package.  Your loan officer is like the public defender in a criminal trial.  His job is to convince Loan Committee that your commercial loan request should be approved.  It’s his job to point out all of the strengths on the deal and to refuse to take “No” as an answer.

So will your loan officer fight hard for you in Loan Committee?  Well… does he like you?

But how do you make the loan officer at the bank like you?

  1. If you are personable and the lender is local, try to deliver your commercial loan package in person.  Sit down and get to know your commercial loan officer.  Chat him up.  Schmooze him.

  2. Make a big fuss over the receptionist or the commercial loan department secretary.   Bring her flowers or candy.  Joke or flirt with her over the phone.  Compliment her in an interesting way.  “Hey Julie, I really like your new necklace.”   You want her saying, “Mr. Wilson, that nice Mr. Blackburne is on the phone,” rather than, “Hey, boss, that jerk Blackburne is holding for you.”  (I was soooo arrogant in my early years as a commercial mortgage broker, and I was often rude to the receptionist.  Dumb-dumb-dumb.)

  3. Make sure your commercial loan package is nicely organized and understandable before you submit it.  Lenders appreciate a well-organized package.

  4. Take your loan officer out to lunch.  Everybody loves a free lunch.

  5. Take your loan officer out for drinks after work.

  6. Play golf with your loan officer.  Golf is a great way to develop a relationship with a lender.  (BTW, it is now October of 2016, and I am updating this article.  I just came back from the 2016 Western States CREF Conference, where I arrived a day early to play in the golf tournament.  I made two wonderful contacts at the golf outing, both of whom only make the HUGE loans.)

  7. If your loan officer is local, invite him to a ball game or a barbeque at your house.  Even if he has to decline, he will appreciate the invitation.

  8. If your loan officer is located far away, arrange in advance to meet him at a commercial real estate finance trade show.  Meet for drinks or golf there.  (The Big Boys - the really big lenders like Key Bank or Holiday Fenoglio and Fowler - rent small meeting rooms or cabanas around the pool at big conferences to hold private meetings all day long with their best brokers.)

  9. The great Dale Carnegie, author of Making Friends and Influencing People, tells the story about how he learned that the 12-year-old son of an important sales prospect collected foreign stamps.  When Dale Carnegie received an envelope from Africa with an unusual stamp a few weeks later, he rushed it over to his sales prospect.  The man was immensely grateful, and Mr. Carnegie eventually made that sale.  My point here is to look for ways to show kindness and thoughtfulness to your bank loan officers.  If you want to have friends, be a friend.

  10. Invest a little money in your schmoozing of bankers.  Commercial real estate loan officers may move from Bank of America to Wells Fargo Bank, but they seldom leave commercial real estate lending completely.  Your investment in most cases will pay off handsomely.

As a mortgage broker, a good argument can be made that the most significant contribution that you add to a deal is your relationship with your best lenders.

If you learn nothing else from this course, at least tattoo the following words to your forehead:  Commercial lenders close loans for their friends.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

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Topics: Most important lesson

The Funny Language That We Commercial Loan Guys Use

Posted by George Blackburne on Thu, Aug 9, 2012

My sons were reading a newsletter issued by a commercial mortgage banking firm that is a correspondent for a number of life companies.  Confused, they asked me what the following sentence meant:

"Although non-recourse options are more the exception than the rule, they are quoting low LIBOR +250 terms on an interest only basis down to a break-even going-in coverage."

Back in the old days (the 1970's and earlier) it took a computer the size of a small bedroom about 7 minutes to figure out the monthly payments on a fully-amortized loan.  Obviously loan officers could not carry around a 2-ton computer.  They therefore used "loan constants".

You will recall that a "loan constant" is the monthly payment on an imaginary loan of $1,000 at a particular interest rate and amortization.  For example, the monthly payment on a loan of $1,000 at 4.5% interest and fully-amortized over 25 years is $5.56/month.  In other words, if you borrow $1,000 at 4.5% interest and pay back $5.56 every month for 25 years the loan will be paid in full.

The office manager at the mortgage company would announce to all of its loan officers that Freddie Mac had just raised its interest rate from 4.375% to 4.5%.  The new loan constant was therefore $5.56.  If a borrower was borrowing $200,000 rather than just $1,000; the loan officer would simply multiply $5.56 (the monthly payment on a $1,000 loan) by 200 to get the monthly payment on a $200,000 loan at 4.5% interest and fully-amortized over 25 years.

Modernly, when commercial loan officers talk about "loan constants", they are doing so to tell the reader what interest rate and amortization they used when they computed their debt service coverage ratio.  For example, a loan officer might say, "The debt service coverage ratio is 1.42 based on a 4.5%, 25-year constant."  The constant matters a lot.  That same property might only have a 1.02 debt service coverage ratio using a 6.75%, 20-year constant.  A debt service coverage ratio of just 1.02 is not good enough for most commercial lenders.

What if the proposed commercial loan is an interest-only loan?  The monthly interest-only payment on a loan of $1,000 at 4.5% is $3.75 per month.  So if a loan officer is talking with his boss about an interest-only bridge loan, he might say, "Boss, the debt service coverage ratio on this deal is 1.57 based on a 4.5% interest-only constant."  

So the sentence, "Although non-recourse options are more the exception than the rule, they are quoting low LIBOR +250 terms on an interest only basis down to a break-even going-in coverage," means in English that this commercial lender is making commercial loans at one-month LIBOR (just 0.25% today) plus 2.50%, which works out to a 2.75% interest rate, with the rate being readjusted monthly.  The loan has interest-only payments, and the lender is only requiring a 1.0 debt service coverage ratio (break-even cash flow) based on a 2.75% interest-only constant.  The borrower would also probably have to personally guarantee the loan.

Phew!  There were a lot of moving parts in that one little sentence.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

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Topics: Commercial finance-ese

Take Your Commercial Loan to a Different Loan Officer

Posted by George Blackburne on Mon, Aug 6, 2012

Many times in my career I have a closed a commercial real estate loan with the very same bank that had previously turned it down.  In fact, this happens all of the time.

We start from the basic reality that all commercial real estate loans have at least one black hair.   There is no such thing as a perfect commercial real estate loan.

Now whenever you call a banker, you’re supposed to ask him the following key question first:  “Bob, I have a commercial loan I’d like to run by you.  Did I catch you at a good time?  If not, I can easily call you back later.”

Let’s suppose you’re a dummy and you failed to ask Bob of ABC Bank that crucial question.  The banker was in fact extremely busy.  He was in no mood to listen to your description of a new commercial loan.  Irritated, he listened very impatiently until he heard about the very first black hair on your deal (remember, all commercial real estate loans have black hairs).  Then he immediately turned your commercial loan down.

Okay, now what?  Do you give up on ABC Bank?  Absolutely not!  Simply call a different commercial loan officer at ABC Bank, ideally one in a different branch.  And this time, don’t be a dummy.  Ask him first if this is a good time to discuss a commercial loan.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

Submit Your Loan to 750 CommercialLender

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Topics: different loan officers