Commercial Loans Blog

Commercial Loans and Money Center Banks

Posted by George Blackburne on Mon, Jan 18, 2016

Money_Center_Bank.jpgWhat is a money center bank?  You've heard me use the term before, as in the statement in my recent blog article about securitized commercial loans, "The money center banks - huge banks like Bank of America, Wells Fargo Bank, J.P. Morgan Chase - and the conduits would originate about $1 billion worth of commercial first mortgages on the four major food groups: multifamily, office, retail, and industrial properties."  But what turns a garden-variety commercial bank into a money center bank?

A money center bank is defined as a very large commercial bank, usually headquartered in a gateway city, which earns a substantial portion of its revenue from transactions with governments, big businesses, and other banks.  A large share of the deposits in money center banks come from foreign investors and foreign companies.  It is this access to foreign capital that gives money center banks an essentially unlimited access to capital.

 

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Most money center banks have either their headquarters or a major footprint in such economic hubs as New York City, Los Angeles, San Francisco, London, Zurich, or Hong Kong.

 

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Examples of money center banks include JP Morgan Chase, Bank of America, Citibank, Wells Fargo, US Bank (a lot of Asian deposits), Bank of New York Mellon, HSBC (London), Deutsche Bank (Frankfurt), and Credit Suisse (Zurich).

What makes money money banks so special - in addition to their access to virtually an unlimited amount of foreign capital - is that they help to sell U.S. Treasuries.  Have you ever wondered why only Lehman Brothers (an investment bank rather than a money center bank) was allowed to fail during the Great Recession?  At one point most of the money center banks and all of the major investment banks (think stock brokers) were technically insolvent.  Why not let them all fail and finally be done with them?  Without the money center banks and the major investment banks, there would be no one left to sell U.S. government bonds!

 

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Okay, as commercial real estate investors and brokers, why do we even care about about money center banks?  Answer:  They are the lenders who have the dough to make the really large commercial construction loans.  If you need to build a residential tower in Brooklyn or a regional distribution center for Amazon.com or Wal-Mart outside of Houston, these are just about the only lenders who are perfectly comfortable making $50+ million loans.

 

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Considering that these banks have an (essentially) unlimited deep pocket and a huge appetite for good loans, you can understand why they greatly prefer BIG loans.  They are not going to be terribly interested in a $400,000 commercial loan to buy a bar in Trenton.

 

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Here is a great piece of advice:  Match the size of your commercial loan to the size of the bank.  Take small commercial loans to small banks and large commercial loans to large banks.

What is a small commercial loan?  Anything less than $2 million is know as a small balance commercial loan.  Take such loans to small banks.  What is a small bank?  Any bank with less than $1 billion in assets.

Take your mid-sized commercial loans to mid-sized commercial banks.  What is a mid-sized commercial loan?  Any commercial loan between $2.1 million and $10 million.  What is a mid-sized bank?  Answer:  Any bank between $1 billion and $10 billion in assets.

Take your large commercial loans to large banks.  What is a large commercial loan?  Any commercial loan larger than $10 million.  What is a large bank?  Any bank with more than $10 billion in assets. 

"That all sounds great, George, but how could I possibly know the asset size of a bank?"

You can quickly find the asset size of any bank in the country using BankFind, a wonderful search engine created by the FDIC.  (Loan Officers for Blackburne & Sons, please click on this link and bookmark BankFind right now.  Then please send me an email that says, "I bookmarked this tool.")

As you go about your business, be sure to hang on to the business card of any banker you meet who makes commercial loans.  You can parlay the contents of that one business card for a list of 2,000 commercial real estate lenders.  We solicit these bankers to refer their turndowns to C-Loans.  Or you can just buy that list for $29.95.

 

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Do you have an "A" quality commercial loan that is simply too squeeky clean for my private money mortgage company?  You can run your commercial loan by 750 different banks with one click using C-Loans.com. And C-Loans is free!

 

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The following scenario plays out all of the time:  

Two commercial mortgage brokers are competing to place a commercial loan for the same borrower.  The borrower wants the best rate possible, but ultimately he needs the money pretty soon to pay off some overdue company bills.  The rookie mortgage broker stubbornly keeps submitting the deal to banks, who keep turning him down for admittedly goofy reasons.  The veteran mortgage broker also has several banks looking at the commercial loan package; but just to be SURE he has some loan for his borrower (remember, this borrower needs money), he also submits the deal to Blackburne & Sons.  After all, Blackburne & Sons doesn't charge a penny to prepare a (conditional) commitment letter.  Sure enough, all of the veteran's banks flake out on him too, but the veteran ends up closing the deal and earning a nice commission because the borrower decides to accept the SURE DEAL on the table from Blackburne & Sons.  You submit your commercial loans by email anyway.  It will take you just three minutes to also submit a duplicate copy to the one commercial lender who is always in the market and always in the mood to make commercial real estate loans.  Blackburne & Sons was in the market every day of the Great Recession.

 

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Did you learn something today?  Am I helping you?  Everybody appreciates atta-boys.  :-)  How about a Google-plus one, a Linked-In share, a Facebook share, or a ReTweet?  Maybe you might even forward this article to one of our buddies in commercial real estate investment or commercial real estate finance.  I sure would appreciate it.  

And thanks for your kind words of support during my heath scare!!  All appears well right now.

 

Topics: Money center banks

The Problem With Securitized Commercial Loans

Posted by George Blackburne on Thu, Jan 7, 2016

Trophy.jpgYears ago the interest rates on commercial loans offered by life insurance companies were much-much-MUCH lower than those offered by any other commercial lender.  By the way, in commercial real estate finance (CREF), life insurance companies are known as life companies.

Man, if you could obtain a commercial loan from a life company, you were sitting in clover.  Your interest rate would be almost 80 basis points (0.80%) lower than a commercial loan from the next best lender.  On a loan of $10 million, that's real money.  The problem, of course, is that only the top 2% of all commercial loans can qualify for a life company loan.  I blogged on this reality recently.

Then, about 15 years ago, Wall Street figured out how to securitize commercial loans.  Here's how the process works.  The money center banks - huge banks like Bank of America, Wells Fargo Bank, J.P. Morgan Chase - and the conduits would originate about $1 billion worth of commercial first mortgages on the four major food groups: multifamily, office, retail, and industrial properties.  These mortgages would then be sold to a trust, and the trust would then issue bonds to the investing public backed by the commercial loans held by the trust.  These bonds were known as commercial mortgage-backed securities (CMBS's).

 

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Now we come to the key step.  These CMBS bonds would then be rated according to risk by one of the rating agencies, like Fitch, Moody's, Standard & Poors, a new rating agency named Kroll Bond Ratings, and Morningstar.  Once rated, many of these CMBS bonds become eligible for purchase by pension trusts.  Yummy.  Pension trusts love-love-love investment grade CMBS bonds, and therefore the yields that the underwriters have to offer in the marketpace to sell these bonds is super-low, often less than 3%.

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Bottom line, when commercial loans are securitized, they can be sold off at really low interest rates.  Hooray!  Now we have a true competitor to the life companies.  Conduits today are offering large commercial loans today (1/7/16) at around 4.125%, only about 25 to 35 basis points higher than the low rates offered by life companies.  More importantly, the loan does not have to be absolutely perfect.  The building can be a little older.  The property could be in a smaller city.  The location doesn't need to be the single best location in the city.  Conduits can make loans in secondary locations.  Not every car driving by has to be a Lexus or a Mercedes.  CMBS lenders (money center banks and conduits) make about 23% in dollar volume of all commercial loans today.

By the way, a conduit is defined as a specialized kind of mortgage company that originates large, plain vanilla commercial mortgages for their eventual sale to a CMBS trust.  The word "conduit" is short for real estate mortgage investment conduit (REMIC).

 

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Now we are finally able to discuss the point of today's training article.  There is a big problem with securitized commercial loans.  Securitized commercial loans include the CMBS loans being made by conduits, the subprime commercial loans made by Bayview Financial in the early 2000's, and the non-prime commercial loans being made by Velocity and Cherrywood today. The good news is that these securitized commercial loans have a very low interest rate and very low monthly payments.

The problem with securitized commercial loans is that they burden the borrower's commercial property for ten years - making the property difficult to sell and economically impossible to refinance.

Here's why: The buyers of commercial mortgage-backed bonds are insistent that these bonds have a fixed interest rate. The reason why is because life insurance companies and defined benefit pension plans need to know exactly what they are going to earn, so they can be sure that they have enough dough to meet their actuarial projections (a certain number of people die or retire every year).

Therefore securitized commercial loans have enormous prepayment penalties (sometimes almost impossible to believe). To make matters worse, they all prohibit junior financing

Let's suppose a borrower accepts a $6.8 million securitized commercial loan on a $10 million building. Six years later, the building is worth $13 million. Did you know that a prospective buyer would have to put $6.2MM (48%) down!  Remember, the seller is not allowed to carry back a second mortgage.  The purchase has to be cash-to-loan.  In other words, the buyer has to put enough money down so that there is only a first mortgage.

The alternative is equally unattractive.  The seller could simply suck it up and pay the prepayment penalty on his existing first mortgage.  But the problem here is that defeasance prepayment penalties are enormous.  In our example here, the seller might have to pay a $1.2 million defeasance prepayment penalty.

Either way - trying to sell a property when the buyer has to put 48% down or making the seller pay a $1.2 million prepayment pealty - yikes!

I would argue that bank commercial loans - or even private money commercial loans with no prepayment penalty - are much better than securitized commercial loans.  The interest rate and monthly payments will admittedly be higher, but at least the seller is not tied to a chair.

 

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Topics: Securitzied commercial loans

Commercial Loans and a Primer on Trusts

Posted by George Blackburne on Sun, Jan 3, 2016

Trust_Agreement.jpgMany commercial loans are made to trusts.  How well do you really understand trusts?  Investopedia defines a trust as follows:  A fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.  [Yawn]  I am falling aslseep here!  C'mon, George, how about a jazzier explanation?

Suppose I am a filthy rich robber baron.  A robber baron is a popular finance expression to describe an unscrupulous American capitalist who acquired his fortune and power by ruthless means. Famous examples of robber barons include J.P. Morgan (banking), Andrew Carnegie (steel), Andrew W. Mellon (banking), and John D. Rockefeller (oil).  These are the guys who broke the heads of union strikers with bats and who used insider information and dirty deals to build their fortunes.

"Behind every great fortune lies a great crime." -- Honore de Balzac

As a filthy rich robber baron, I win the affections of a beautiful wife.  My wife is 25 years younger than me. She is gorgeous and loving; and she bears me three wonderful young children.  I adore her.  Unfortunately my sweet trophy wife is as dumb as a rock, and I worry about what will happen to her and our young kids when I die.  (I am not talking about my own beautiful wife, Cisca, who was once our company's Controller and who is far-far-FAR quicker than me.  I am talking about our imaginary robber baron with the daffy wife.)

 

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Therefore, I, the filthy rich robber baron, go to Ron, my trusted friend of 45 years, and ask him if he will please manage my family's money after I die for the benefit my wife and kids.  He agrees.  In my will I set up a testamentary trust into which I transfer all of my bank accounts, stock accounts, real estate, and ownership of my companies.

In this story, the rich robber baron is the trustor or settlor (same thing) of the trust.  I set up the trust.  Hence the name, "settlor".  My trusted friend, Ron, is the the trustee.  The trustee follows my instructions contained in the trust agreement.  He does this to provide a comfortable living for my lovely widow (who is now dating our handsome chauffeur) and a college education for my kids (the last of whom looks an awful lot like the chauffeur).  My wife and kids are the beneficiaries of the trust.

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Per the trust agreement, Ron invests all of my great wealth into a diversified portfolio of investment grade bonds.  An investment grade bond is defined as a bond rated BBB or better by Standard & Poors.  By the way, a great many (tons and tons of) trust agreements only allow the trustee to invest in investment grade bonds.  This is why a BBB bond rating is so coveted.  These bonds will provide the income for my hapless wife and our three minor children.

In my story, you will recall that I created this trust in my will.  Such a trust is called a testamentary trust, as in "Last Will and Testament".  Now such a trust is obviously irrevocable because - helloooo? - I am dead.  A trust that cannot be changed is known as an irrevocable trust.  

But a settlor or trustor (same thing) does NOT have to be dead to create an irrevocable trust.  A huge benefit of an irrevocable trust is that it provides substantial protection from creditors. Once assets are transferred to the trust, they no longer belong to the settlor; rather, they become the legal property of the trustee to hold for the beneficiaries.

 

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For example:

Let's talk about me, George III (the old man).  I own a commercial hard money mortgage company, and I assemble syndicates of wealthy private investors to make subprime, commercial first mortgage loans.  Back in 2005 I saw the crazy loans that my industry was making, and I greatly feared that a deflationary depression was coming.  I had been warning my investors for a decade that real estate values were poised to take an enormous dive, but the exact timing was unknown.  I even wrote a book about it.  My biggest fear was that my investors would blame me for the Great Recession and sue me.

Now if I had enjoyed great wealth at the time (I didn't), I would have created an irrevocable trust (I didn't) for the benefit of my three wonderful kids that would have been beyond the reach of creditors.  They would have had money for college and a small downpayment on a house.  By the way, my frank and dire warnings, along with my alarming book, probably saved my company.  Blessedly I wasn't blamed.  Almost all of my hard money competitors were sued out of existence.

Now let's have some fun.  Suppose I - I'm back to being the rich robber baron - had woken up in the middle of the night, and I had wanted to grab one of my cigars hidden in the garage.  To my horror, I find my young trophy wife doing the wild thing with my chauffeur in the back seat of my big, black Mercedes.  (Remember, this is just a story.  In real life I drive an immaculate, ten-year-old, white Infiniti.) 

Furious, I divorce my wife and change my will.  At the advice of my attorney, this time I create a living trust.  A living trust, which is also known as intervivos trust, is a trust that can be modified during the lifetime of the settler (trustor).   The beneficiary of this living trust is my curvaceous secretary, with whom I have been having an affair for ten years.  The nice thing about a living trust is that if I ever catch her "kissing" the UPS guy, I can easily change my trust again.

A great many wealthy couples today hold title to their assets in the name of a living trust.  This has the advantage of avoiding probate.  For underwriting purposes, lenders simply ignore the existence of the living trust.  A lender is not going to ask for a copy of a financial statement on the living trust because, in most cases, its the exact same thing as the borrower's personal financial statement.  When the loan is approved, a commercial lender will ask for a copy of the living trust, or an abstract of the living trust, just so he can verify who has the authority to sign on behalf of the trust.  An abstract is just a one-page or two-page summary of the important terms.

I keep telling you guys, be on the lookout for the business card of a banker making commercial loans.  You can parlay that single card into a free list of 2,000 commercial lenders.  We solicit these bankers to refer their turndowns to C-Loans.com.

 

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Are you a commercial loan broker?  If you are pre-registered on C-Loans.com, you are far more likely to enter your next commercial loan into C-Loans.

 

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There has never been a better time to become a commercial mortgage broker.  More commercial loans are ballooning in 2016 than in any year in history.

 

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Do you need a commercial loan right now?  When you use C-Loans.com, you fill out a single, super- short loan application.  You can then submit that one application to hundreds and hundreds of different commercial lenders to find that one lender who is hungry to make you a commercial loan today.

 

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Girls are not attracted to boys who have the word, "Desperate", written across their forehead.  They are, however, VERY attacted to boys with a pretty girl on their arm.  It's the same thing with bankers.  If another bank is chasing you, suddenly the bank is VERY interested in making you a loan.  Why not go into your bank with a commitment letter from Blackburne & Sons already in hand?  We charge absolutely nothing to issue you a loan approval letter, and we'll happily issue it in just 48 hours.  We're big boys.  We know you're shopping us.  We also know that fickle banks leave a lot of commercial borrowers standing at the altar looking stunned.

 

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Topics: Trusts