Commercial Loans Blog

What Is a Standby Takeout Commitment?

Posted by George Blackburne on Wed, Jul 29, 2015

Under_construction-1A standby takeout commitment is defined as a letter promising to deliver a takeout loan upon the proper completion of a commercial building.  The terms of a standby takeout commitment are typically horrible - a very high interest rate, a big slug of points - just for issuing the letter, and another big slug of points if the loan ever funds.  In truth, a standby loan is never expected to actually fund.

Whaaat?   Why on earth would a developer want to pay a big slug of points for a mere letter promising to deliver an absolutely terrible loan?  The reason why is because some construction lender is requiring a forward takeout commitment as a condition to funding its construction loan.  A standy takeout commitment satisfies this requirement, and even though a standy takeout commitment letter is very expensive, it can often prove to be the key financial ingredient to finally getting the building built.  I am going to give you an example in a moment that will make this whole issue clear.

 

Bruce_Jenner

 

"Gee, George, I am only half following you.  What is a takeout loan again?"  A takeout loan is just a permanent loan used to pay off a construction loan.  You can use a permanent loan for lots of purposes.  You can use a permanent loan to buy a commercial building.  You can use a permanent loan to refinance your existing commercial property to pull out some equity.  Who knows?  You might want to pull out some  cash to take your new girlfriend, Lola La Boom Boom, to Las Vegas.  Or you can use a permanent loan to pay off the construction loan that you took out to build your new building.  When you use the loan proceeds to pay off a construction loan, this special kind of permanent loan is called a takeout loan.  Understand?

So do the loan documents actually say, "Takeout Loan"?  Naw.  The documents look exactly the same as any other permanent loan.  There is a Promissory Note and a Mortgage.  Takeout loans look like any other garden variety permanent loans.  Hang in there guys.  Don't nod off on me.  An example is coming up that will bring everything together.

"Gee, George, I hope you don't think I'm stupid, but what's a permanent loan again?"  A permanent loan is defined as a first mortgage on a commercial property, where there is a little bit of amortization (typically 20 or 25 years) and a term of at least five years.  In plain English, a permanent loan is just a garden-variety commercial first mortgage, typically from a bank, a conduit, or a life company.

"Okay, George, I'm trying really hard to understand, but you keep using these big words, like forward takeout commitment."  A forward takeout commitment is just a letter promising to deliver a takeout loan in the future.  A commitment is just a letter.  Forward takeout commitments are typically issued by life companies, and they usually have great terms.  The developer actually plans to ask the life company to fund the loan.  That being said, a standy takeout commitment is a form of forward takeout commitment.

 

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An example will hopefully make all of these fancy terms clear.  Once upon a time there was a developer named Doug.  Doug wanted to build a multi-tenant industrial building on spec; i.e., without any pre-leasing.   Doug was convinced that manufacturing in the U.S. was poised to go nuts and rents would go through the roof.  If only he could bring a new industrial center online in less than one year, he could capture the ballistic demand for newer industrial space in his gateway city.

Doug goes to the bank and sits down with his construction lender.  The conservative banker is not as bullish as Doug, and he tells Doug that the only way his construction loan will ever get approved is if Doug gets a forward takeout commitment from a bankable lender.  A bankable lender is a commercial real estate lending company with a net worth large enough to stand behind their promise to fund a loan in the future.

Doug tracks down several life companies who are issuing forward takeout commitments, and he submits his takeout commitment request.  All of them turn him down.  "Doug, we just don't believe that industrial rents are going to soar from $3.60 per SF to $5.50 per SF within 12 months.  We just don't believe it."  By the way, commercial rents are customarily denominated on a per-year basis.  Therefore $3.60 per SF means $0.30 per SF per month. 

Doug keeps looking for a forward takeout commitment and eventually stumbles upon a bankable lender issuing standby takeout commitments.  The terms are onerous.  The lender wants two points just for the standby takeout commitment letter.  If the standby loan ever funds, there is also an exit fee of one more point.  Lastly, in a market where banks are making permanent loans at just 3.75%, the interest rate on the standby loan is a whopping 8%.

By the way, an exit fee is a fee owed when a loan pays off - regardless of whether you pay the loan off early, late, or exactly at maturity.  It's like a prepayment penalty that you just can't escape.

Everyone tells Doug that he is nuts to pay for such a horrible standby takeout commitment, but when Doug sits down with his construction lender, the banker informs him that the letter will work.  His spec construction loan funds, the industrial building gets built, industrial rents indeed do skyrocket as industrial vacancies in gateway cities fall below 2%, and Doug ends up with a ten-year lease from a near-credit tenant lessee.  Once the lease is signed and this strong tenant moves in, Doug immediately sells the building to a REIT for almost twice what it cost him to build it.  Everyone admits that Doug is a genius.

By the way, a credit tenant lease is a long-term lease to an investment grade company - a company with a credit rating from Standard and Poor's of BBB or better.  A REIT is a real estate investment trust, sort of like a mutual fund that buys and operates commercial buildings.

The reason I am blogging on this subject is that I actually saw a standby takeout commitment today.  I haven't seen a standby takeout commitment for at least 12 years.  Most commercial construction lenders simply wrote uncovered or open-ended construction loans during the early 2000's (2000 - 2007).  An uncovered construction loan and an open-ended construction loan are the same thing.  The terms simply mean a commercial construction loan made with no forward takeout commitment in place.  The construction lender is betting that the developer will be able to find a takeout loan on his own, once the building is built and leased.  For most of the past 15 years, this has been a reasonable bet.

Do you need a commercial construction loan?  Simply enter the deal into C-Loans.com.  Our 750 participating banks are ravenous for commercial construction loan requests right now.  This is why I have been blogging on the subject of commercial construction loans so much recently.

 

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Topics: Standby Takeout Commitments

How To Close a Commercial Construction Loan

Posted by George Blackburne on Sun, Jul 12, 2015

ConstructionYou are going to love me after this training article.  It's the best one I have ever written, and whether you are a developer or a commercial loan broker, this training is going to make you a ton of money.

Now is a terrific time to originate or obtain a commercial construction loan.  Its particularly easy right now to close deals for the reasons I will outline below.

In this blog article I will teach you exactly how to close a commercial construction loan.  I have assumed that you are complete rookie.  All you have to do is follow the precise steps enumerated below today's funny picture.

But first let me explain why it is so easy to close commercial construction loans right now.  First of all, there has been very little commercial construction for the last nine years.  The world needs new commercial buildings.  

In addition, banks are loaded to the gills with cash right now (almost $3 trillion in excess reserves at the Fed), and commercial construction loans are extremely profitable for the bank.  The bank earns its entire loan fee upfront, but it doesn't have to disburse most of it's loan proceeds for many months.  This supercharges the bank's yield.  Construction loans are also short term.  Banks love-love-love short term loans.

Bottom line:  In a healthy economic climate like today's, banks prefer construction loans to almost all other loan products.

For commercial loan brokers, commercial construction loans are large, therefore so are the loan fees.  And in particular right now, very few commercial loan brokers even know how to originate commercial construction loans.  Most of the experienced commercial loan brokers were either driven out of the business or retired during the Great Recession.  Commercial mortgage brokers:  You have very little competition.

Bottom line:  Commercial construction loans are not that hard for a commercial loan broker to originate.  Just follow the easy steps outlined below.

 

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But how do you close a commercial construction loan?  Its easy.  Just follow these steps:

  1. Start with a local bank.  Construction loans require progress inspections, so the lender needs to be located nearby.  You can find many hungry commercial construction lenders by using C-Loans.com, and C-Loans is free!

  2. Choose your local bank by size.  Small banks (less than $1 billion in assets) make small commercial loans (less than $2 million).  Regional banks ($1B to $10B in assets) make medium-sized loans ($2MM to $8 million).  Money center banks (more than $10B in assets) make the commercial construction loans larger $8 million.

  3. Gather a loan package:  Initially you will need the details on the land purchase - purchase price of the land, down payment, balance owing, value of the land today, and if the borrower claims that the land is worth more than the purchase price, a very convincing explanation of why this is so (the developer assembled three contiguous parcels over several years or he got the land re-zoned or Wal-Mart moved right next door).  You will need a construction cost breakdown, sales projections if this is a "for sale" property or a pro forma operating statement if this will be a rental property, a curriculum vitae or CV (building experience resume) on the developers, a financial statement on each of the developers, photo's of the land, and ideally an architect's rendering.  It's the rare project over $5 million that ever gets financed without an architect's rendering.

  4. Run the deal by prospective lenders over the phone, keeping the identity of the developer and the exact location of the property close to your vest initially.  The first words out of your mouth should be, "Hello, Mr. Banker.  My name is John Jones with Jones Mortgage, and I'd like to run a deal by you.  Did I catch you at a good time?  If not, I'll be happy to call back later."

  5. Some bankers are aggressive.  Some bankers are so"sleepy" as to make it almost a crime for them to collect a salary.  If one bank loan officer blows you off the phone, be sure to call back the next day and speak with a different loan officer at the same bank.  I have closed scores of loans in my time where Loan Officer A at Bank of the Neighborhood turned me down, but Loan Officer B at Bank of the 'Hood later said yes; but wait a day or two before you call the same bank back.

  6. Once your borrower has sent you his initial package (the borrower needs to prove he is serious about this loan by putting in some sweat-effort), and once you have an interested lender lined up, its now time to ask your borrower to sign a Non-Circumvention Agreement.  Unless the developer intended to find out the name of your lender and then go behind your back, he should have no problem signing a short agreement protecting the mortgage broker.

  7. Now its time to prepare your loan package.  Prepare an Executive Loan Summary, attach your pictures and the short stack of documents described above, and save it as a PDF.  Don't know how to create a PDF?  If you enter the loan into C-Loans.com and submit the deal to six commercial construction lenders, you can then - right as you leave C-Loans - press the Create a PDF button and save the PDF we create for you to your desktop.  One click.  Easy-peasy.

  8. Submit your PDF to your interested lender by email.  He will not open it.  Whaaat?  You'll see.  He'll have some BS excuse (the dog ate Hillary's emails), but the truth is that bankers are incredibly... sleepy.  How about that for tact?

  9. Therefore it is essential that you call your banker to confirm receipt of the package.  "Hi, Mr. Banker, John Jones here.  All I'm doing today is calling to confirm receipt of the package.  You did get it, right?  Oh, your email was down, but its up again now?  Great.  You'll read the package tonight?  Wonderful.  I really wasn't calling to bug you (yeah, right... and I'll love you in the morning).  I should call you tomorrow morning?  You got it!"

  10. Don't worry if the banker nit-picks your deal and turns it down.  No problemo.  He is probably just lazy, or his bank has enough commercial construction loans right now.  If a banker really wants to make loans, a few black hairs is NOT going to put him off.

  11. The secret to successful commercial loan placement is to just keep presenting the deal to different bank loan officers (they can even be at the same bank - see above) until you find one in the mood to lend.

  12. Once the lender comes back and shows some serious interest, from there on its merely a matter of fetching and shuttling documents.

  13. At some point in time the banker should issue a term sheet (also known as a conditional commitment letter or loan proposal), which outlines the likely terms of the proposed commercial construction loan and asks for a deposit of $3,000 to $8,000 for third party reports (appraisal, toxic report, title commitment, etc.).

  14. Although a term sheet is NOT binding on the lender, in real life a term sheet means that you are almost certainly going to get the loan.  As long as the third party reports come back okay, you're golden.

  15. That's it.  Easy-peasy.

 

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Do you need a lender who will actually lend at 75% LTV, rather than just boast about it?  Do you need a lender who will allow a negative cash flow?  Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months?

 

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Topics: commercial construction loans

Commercial Loans and Credit Rationing

Posted by George Blackburne on Mon, Jul 6, 2015

RationingSo many borrowers are going to need a commercial loan over the next two years to refinance a balloon payment that at some point bankers and conduit commercial loan officers may refuse to accept new loan applications.  It won't be the first time in history.

We start from the general proposition that most commercial loans have a balloon payment every five, seven or ten years.  Wow.  Stop for a moment and think about that.  Just about every owner of a commercial-investment property will have to refinance his property every five to ten years.  As a commercial loan originator, I find this greatly reassuring.  It means that even during recessions there will still be some commercial loans that need to be closed, so we can earn loan fees and eat.

By the way, a commercial-investment property is a property that can be easily leased out, be turned over to a management company, and serve as a passive investment, much like a bond.  Examples of commercial-investment properties include multifamily properties, office buildings, row and free standing commercial buildings, strip centers, shopping centers, industrial buildings, and some of the nicer mobile home parks.

Many of the other types of commercial properties are more like businesses, like hotels and motels, self storage facilities, owner-occupied restaurants, and older trailer parks.  These latter properties are too management intensive to be deemed a commercial-investment property.  The guys who buy and run them are not passive investors, but rather business owners.  It is interesting to note that many owner-operated business properties qualify for SBA loans, and if they are financed using the SBA 7(a) program, they have no balloon payments.

 

Soccer

 

By the way, Brazil, the English women just did MUCH better than yours in the World Cup, and they almost made it the finals.  So there!  Neener-neener-neener.

Okay, back to the subject of rationing commercial mortgage money.  In 2005, 2006, and 2007 commercial real estate lenders made a ton of commercial loans.   Ten years later those commercial loans - totaling hundreds of billions of dollars - are now coming due.

To complicate the matter, the commercial loan origination profession has shrunk by at least 50% since the heyday.  There is an actual shortage of trained conduit and bank commercial real estate loan officers.  When Busy Season starts in late August of this year, the phones are going to ring off the hook, and there will not be enough trained commercial loan officers to field all of the calls.

Now to my third point.  The best commercial real estate lenders cream the market.  It's not like residential mortgage finance, where if a deal meets a lender's minimum requirements, it gets approved.  No.  Commercial mortgage finance is more like high school.  The quarterback dates the head cheerleader.  The star running back dates the second prettiest girl, and so on.  The life companies - because they have the lowest interest rates - take the absolute most desirable commercial loans.  Typically life companies finance the huge trophy deals, like the biggest lifestyle centers or the newest, tallest, shiniest office towers in the city.

 

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By the way, a lifestyle center is a huge shopping center where the shoppers can drive right up to the store of their choice.  Do you know why indoor malls suddenly fell out of favor?  This is probably tactless of me to say, but so many Americans are now so overweight that its hard for them to walk the length of some huge indoor mall.  At a lifestyle center, shoppers can drive right up to Target, pop in, pop out, and then drive away.

Okay, back to commercial lenders cherry-picking and how it compares to dating in high school.  After the life companies choose the largest, shiniest commercial loans, the conduits get to pick over the deals.  They typically take the more bread-and-butter commercial loans over $5 million.  The banks, S&L's (not many left), and credit unions choose a huge percentage of the rest.  Next comes the nonprime commercial lenders and finally the hard money lenders.

Now here is what is going to happen.  We are not going to be issued ration cards.  We are not going to have to stand in long bread lines.  However, as the lenders at the top of the food chain get inundated with commercial loan applications, they are going to get very, very picky.  Surprisingly strong borrowers with attractive commercial properties are going to get pushed down the food chain to lenders with less desirable rates and terms.  Put another way, an average-looking guy like me might actually get to date the 6th cutest cheerleader.  (Okay, she's probably not that desperate, but maybe I might get to date one of the cuter pom-pom girls).

Although it is not strictly rationing, the nation's cheapest commercial lenders are only going to be able to handle a limited amount of business.  Even if a lender had an unlimited amount of commercial mortgage money - like a conduit - the limiting factor is going to be a limited amount of trained staff to handle the commercial loan demand tsunami.

"Okay, George, so what's a boy or girl to do?"

  1. If you are a commercial real estate investor, if you have a balloon payment coming due in the next three years, and if you don't have some horrible prepayment penalty, apply for your refinance immediately.

  2. If you are a commercial mortgage broker, you better go out of your way to build a personal relationship with your bank and conduit loan officers.  Take your banker to lunch.  Invite him over for a football game and/or a barbeque.  Take him and his wife out to dinner.  Your favorite commercial s loan officer is going to get extremely busy during the tsunami.  You better be a good friend if you expect him to process one more commercial loan.  He is going to be exhausted.

  3. And always remember that imaginary story I wrote about getting hit by a bus.  As I lay on the pavement bleeding out, I told my two wonderful sons, "Sons, always remember the most important lesson in all of commercial real estate finance.  Commercial lenders close loans for their friends!"

 

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If you should meet a banker who makes commercial loans, don't forget that you can parlay the contents of that one business card into a free directory of 2,000 commercial real estate lenders.

 

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If you have a commercial real estate loan request on a standing commercial property (sorry, but we don't make construction loans), you would be very, very wise to submit it to Blackburne & Sons.  We'll issue a Loan Approval Letter for free.  You can then use that "commitment letter" to troll for a cheaper loan from a bank.  Just like girls are attracted to boys with a pretty girl on their arm, so too are bankers attracted to commercial loans that other lenders have already approved.

 

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Got a commercial loan larger than $2 million (or otherwise unsuitable for Blackburne & Sons)?  Remember, C-Loans.com is free!

 

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You can now submit business loans - loans like inventory loans, equipment loans, accounts receivable financing, equipment leases, and secured lines of credit - through C-Loans.

 

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Click on the red button immediately below and then forward the page to any bankers you know who make commercial loans.  If the banker signs up to join C-Loans as a lender, we'll give you a free training course of your choice, as well as $250 every time he closes a loan for us..

 

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Topics: Credit Rationing