Commercial Loans Blog

Repricing of Commercial Loans

Posted by George Blackburne on Wed, Mar 30, 2016

Price_change.jpgRepricing is defined as an increase in the interest rate of a commercial real estate loan after a term sheet has been agreed upon and after the third party reports have been completed.  Conduits are the commercial lenders most likely to reprice a commercial loan.

Some commercial mortgage lenders insist on fixed rate loans.  Other commercial lenders greatly prefer adjustable rate mortgages, when they can convince a borrower to take one.

Why would a commercial lender ever want to make a fixed rate loan?  Some lenders - like life insurance companies and pension plans - need to know exactly what they will earn in interest income over the next ten years.  The reason why is because life companies and pensions trusts need to make sure that they will have the dough to pay their death claims or retirement benefits.  These big companies employ actuaries (maths geeks with sharp pencils), who can tell them pretty accurately how many people will die or retire in a given year.

Conduits are specialized commercial lenders (or special departments inside of money center banks, like JP Morgan Chase, the largest conduit originator) that originate large, plain-vanilla commercial real estate loans destined for securitization.  By plain vanilla,  I mean permanent loans on the four major food groups - multifamily, office, retail, and industrial.  You will recall that a permanent loan is just a first mortgage on a commercial property with a term of at least five years and with at least some amortization (usually over 25 years).

 

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You will also recall that a term sheet in commercial mortgage finance is a written expression of interest in making a loan and a good faith estimate of the eventual terms.  Term sheets are also known as loan proposals, good faith letters, or conditional commitment letters.

Now term sheets are legally worthless.  They are NOT commitment letters.  They are NOT binding on the lender.  That being said, once a commercial lender has issued a term sheet at a particular interest rate, the lender is almost always loathe to change the interest rate, as long as the commercial mortgage borrower has fully-cooperated and not dragged his heels.  I think this level of honor among commercial real estate lenders is a credit to our industry.

Ocassionally even honest and well-intentioned commercial lenders have to reprice their commercial loans.  Conduit lenders make their dough when they sell their fixed-rate permanent loans to a securitization trust at a premium.  A premium is when an investor buys a fixed rate bond (or mortgage) for more than the face value.

Example:  Morgan Stanley Capital Markets originates a $20 million conduit loan on a lifestyle center in Pittsburg - surprisingly one of the most successful cities in America.  By the way, a lifestyle center is a new type of large shopping center where lazy Americans can drive right up to the door of the store they want to visit, rather than needing to hike 300 yards down the center of an enclosed mall.  Assuming this new conduit loan is properly priced, Morgan Stanley might be able to sell this $20 million new commercial loan to the securitization trust for $21 million.  That extra $1 million is the 5-point premium earned by Morgan Stanley for originating the loan. Be careful:  I have no idea of the size of the premiums that conduits typically earn on deals.  I am just trying to help you understand the concept of a premium.

 

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Okay, we are finally getting to the point of today's training lesson.  You will recall that we said that repricing is defined as an increase in the interest rate of a commercial real estate loan after a term sheet has been agreed upon and after the third party reports have been completed.  We also said that conduits are the commercial lenders most likely to reprice a commercial loan.

Recently the CMBS industry (the conduit loan industry) has been in turmoil.  When China suddenly devalued the yuan by 5% about six months ago, the credit markets got spooked.  Stock and bond markets worldwide began to make wild swings.  Volatility became the new buzz word in the field of finance.

This put the conduit industry between a rock and a hard place.  Remember, conduit loans are fixed rate loans because that's what the CMBS bond buyers (life insurance companies and pension plans) want.  But what happens to a small conduit when it prices a new loan at 4.4%, a rate that would ordinarilly produce a 5-point premium, only to discover at the closing 90 days later that the the loan needs to be written at 4.90%?!  That 5-point anticipated premium disappears!  To make matters worse, the conduit might even have to discount the loan (sell it at a loss).  Yikes!

Well, do you remember when I said that that terms sheets are NOT binding on the lender?  You guessed it.  That 4.4% conduit loan is going to be repriced to 4.90%.

Right now there is a lot of repricing going on.  I should go into the business of selling Tums to conduit owners.  I would sell a lot of them right now.

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Topics: Repricing

Commercial Loans, Primary Locations, and Secondary Locations

Posted by George Blackburne on Wed, Mar 23, 2016

Great_location.jpgLocation is far-far more important to commercial real estate lenders than home loan lenders.  In home loan lending, a borrower merely has to meet the lender's minimum requirements.  Once the borrower satisfies a home loan lender's minimum requirements (loan-to-value ratio, debt ratio, downpayment size, credit score, etc.), the home loan lender approves the deal.  The borrower doesn't get a better interest rate because the property is located in Beverly Hills, as opposed to a dangerous area on the South side of Chicago - home of bad, bad Leroy Brown.

In contrast to minimum requirements, commercial real estate lenders are cherry-pickers.  They  take the most attractive deals available until they have satiated their hunger for commercial mortgage investments.  An example of a high school dance will help to make this concept easier to grasp.

Okay, its the high school dance, and its a mixer.  Everyone arrives without a date.  The girls flock to one side of the gym, and the boys flock to the other.  Rocky Hupson, the handsome quarterback and captain of the football team (playing the role of MetLife in our metaphor), walks over and asks the beautiful Head Cheerleader to dance.  The commercial mortgage rates offered by MetLife, the nation's largest life insurer, are the lowest in the country.  MetLife can pretty much have any commercial loan it wants.

Then Bradley Pitt, the fiercely handsome star running back (playing the role of Prudential Life Insurance Company in our example) asks the second prettiest girl to dance.  And so on through the rest of the 180 life insurance companies.

 

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Life insurance companies always have the lowest interest rates on commercial loans, so they are at the top of the CREF food chain.  They cherrypick the safest deals until they have used up their yearly allocations for commercial mortgage investments.  And that's a lot of dough.  Even though there are only about 180 life companies, they fund the really large commercial loans - deals of $5 million to $500 million.  Altogether life companies fund about 23% of all commercial loans - by dollar volume.

While we're on the subject of yearly allocations, its possible to bring an absolutely perfect commercial loan to a life company late in the year, only to find out that the life company has already used up its yearly allocation of commercial mortgage investments.  Your loan will have to wait until January of the next year to fund!

Okay, now back to the school dance.  Then Matlock Damon, the star middle linebacker (representing JP Morgan's conduit lending division) looks over the lovely ladies.  All of the cheerleaders have already been selected, but there are some lovely, athletic ladies from the girls' track team, so Matlock selects one of them.  Then the remaining 37 players on defense (representing the 38 major conduits) whirl in and charm the lovely ladies.

And so on through (3) the commercial banks; (4) the credit unions; (5) the non-prime lenders; and finally (6) the private / hard money money lenders.  Commercial lending is a pecking order, where commercial lenders, when its their turn, choose the most attractive commercial loans still available, until their demand for commercial loans has been satisfied.

Now we can finally get to the point of today's training lesson:  As the most handome and dashing man at the high school dance, life companies will only make their huge commercial loans on commercial properties located in terrific locations.  These locations are what is known as primary locations.

A primary location, in terms of commercial real estate finance, is one of the most desireable locations in a gateway city in terms of traffic count, accessibility, safety, and affluence of the neighborhood.  In other words, a lot of Lexus'es, Mercedes, and BMW's need to be driving by.  You will rarely find a life company lending in a city of less than 500,000 residents.

A gateway city is defined as a large, generally safe, metropolitan area, featuring at least one major universities and a socially vibrant city center, that is a beehive for commerce, immigration, and job creation. The typical gateway city enjoys a pro football franchise and/or a pro basketball franchise and an MSA containing at least 1,000,000 residents.  

 

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Conduits, on the other hand, will regularly make commercial loans on properties located in secondary locations.  A secondary location is defined as a middle-class, less-commercially-active area in a large city or an affluent, vibrant, and desireable area in a smaller city.  A secondary location is typically a nicer-than-average location, but it is just not an incredible location.  Is there a lot of brass and glass around?  If not, you're not in a primary location.

Example:  The most affluent and desireable location in Fargo, North Dakota - where all the physicians and attorneys congregate to do business - would be considered a secondary location.

"Gee, George, this is all very subjective."  Yup.  That being said, when you find yourself in a primary location in a major city, you'll definitely know it.  

“I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description (of "hard-core pornography")… But I know it when I see it…” -- Supreme Court Justice Potter Stewart

Here's a good layman's test:  You'll know you are standing in a primary location when you suddenly feel very, very poor.  Ha-ha!

All other locations in commercial real estate finance are know as tertiary locations.

Keep looking for the business card of any banker making commercial real estate loans.  We'll trade you the contents of that one business card for a free directory of 2,000 commercial real estate lenders.

 

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Topics: primary location

Commercial Loans on Broken Condo's

Posted by George Blackburne on Sat, Mar 19, 2016

Broken_condo.jpgDuring the real estate crash of 2008, there were a ton of broken condo's in Florida.  Developers would start new residential condo projects in 2007, and by mid-2008, the residential real estate market had completely collapsed.  The developer would build a 100-unit condo project, but he would only sell 35 of them.  The rest of them, usually several years later, would eventually be rented out as apartments.  Voila!  You have a broken condo.

The construction lender, almost always a commercial bank, is usually is forced to foreclose and ends up owning the 65 unsold rental units.  Typically the foreclosing bank will offer the 65 rental units for sale as a bulk sale.  Why a bulk sale?  Why not sell off the condo's individually?  Wouldn't the bank recover a lot more by selling off the apartment units individually?  After all, individuals condo's fetch far more (1.4x) per square foot than apartments.

In a few more paragraphs, I'll explain why.  For now, however, suffice it to say that all 65 units will almost always be sold off in bulk.  Your commercial-investment property client wants to buy these 65 rental units because they are almost brand new, and they were built with far more amenities than most apartment buildings.  The object today is to finance this broken condo.

For the reasons I will outline further below, few banks will finance broken condo's.  There are around 5,400 commercial banks in the U.S., and probably fewer than a 300 of them will touch a broken condo.  But some banks will indeed finance broken condo's.

Most banks which will finance the purchase of a broken condo will only do so if the borrower is acquiring a majority of the condo units.  This is important to the bank because the bank needs to  control the homeowners' association (HOA); otherwise the HOA might pass a rule detrimental to the bank, such as no For Sale signs on the property.  If your buyer is acquiring less than half of the condo units, you'll need to apply to a private money lender, like Blackburne & Sons.  We here at Blackburne & Sons absolutely love-love-love to finance broken condo's.

 

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The best way to get a commercial loan from a bank on a broken condo is by using C-Loans.com. When you enter your commercial loan into C-Loans, you should apply for a standard first mortgage on an apartment building (please remember that - as an apartment building).  In the Special Issues section, be sure to write that, "This is a broken condo project.  My client is buying ____ units out of a total of ____ units."

 

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If you don't have any takers for your particular project, be sure to write to me personally.  In the Subject line, please type:  "Need Help With a Broken Condo."

 

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Okay, now let's go back and see why so many commercial lenders are freaked out about making commercial loans on broken condo's.  When a foreclosing construction lender takes title to a large number of unsold condominium units, it typically acquires the Special Declarant Rights and thereby become a successor Declarant.  Huh?  What on earth is a Declarant?

The Declarant is the person or entity that creates the original governing documents for the association. The Declarant is generally the developer of the project and usually reserves certain rights and powers to himself related to the sale of units in the project, extra voting rights, etc.

Okay, I kind of understand... But what are these Declarant's Rights that the developer is so desperate to reserve?

The Declarant's Rights are found within an association’s declaration. Here are some typical rights reserved by the declarant:

  1. Promotion: This allows the declarant to maintain model homes, a sales office within an existing building or unit, construct a temporary building for housing of a sales office and erect advertising or signage promoting the project and the sale of units;

  2. Construction: This allows the declarant to make alterations, additions or improvements to the property that it deems necessary or advisable for the project. This often includes landscaping and the storage of construction equipment and materials upon the property, without the payment of any fee;

  3. Easement and dedication: Easement rights allow the declarant to provide access to the property to any governmental authority, public or other utilities serving any lot or unit. Dedication rights allow the declarant to dedicate or transfer portions of an association’s common area to a county, municipality or other governmental authority that has jurisdiction over the property;

  4. Architectural control: This allows the declarant to formulate and bind all of the owners to certain standards governing the appearance of units/homes and the community as a whole;

  5. Amendment: In addition to possessing the authority to add property to the development, declarants typically have the unilateral ability to amend an association’s governing documents. In addition, any amendments the membership wishes to pass are also typically required to be approved by the declarant. If the declarant does not agree and its approval is needed, an amendment to the association’s governing documents will fail;

  6. Assessment payment exemption: Most declarations include an assessment payment exemption for the declarant. Often the obligation to pay assessments for a particular unit or lot does not commence until the declarant sells to a third party;

  7. Assignment: The right to assign allows the declarant to transfer to a third party all or some of the rights granted in the declaration.

Source: http://www.keaycostello.com/collections/declarants-rights/

 

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Okay, George, I now pretty much understand what a Declarant is and why he wants to retain his Declarant's Rights.  But why does a commercial lender give a hoot?

Let's suppose your bank finances a condo development, and the bank is forced to foreclose on a project that is not complete.  The pool hasn't been dug, and the garages are not completed.  As a successor Declarant, the lender is usually subject to all liabilities and obligations imposed by law on the developer, including unpaid assessments for the foreclosed units.

As a successor Declarant and a dealer (you sell more than 4 units per year), the lender is responsible for delivering a public offering statement (POS) to purchasers and is liable for any "omission of material fact there from if the lender had actual knowledge of the misrepresentation or omission or, in the exercise of reasonable care, should have known of the misrepresentation or omission."  In addition, as a successor Declarant and Dealer, the lender will be liable for breach of the implied warranties of quality with regard to those units sold by the lender and the undivided interest in the common elements attributable to those units. These warranty claims typically involve defective building envelopes and can cost millions of dollars and take years to resolve.

 Yikes.  I'm just a banker, not a builder.  I don't want to warrant that anything is free of defect.

The lender can avoid substantially all of these liabilities obligations by recording an instrument declaring its intention to hold the Special Declarant Rights solely for transfer to another person as part of a bulk sale of the remaining units to that person.  This option does not allow the lender to recover the higher revenues that may be available by individually selling the units.

Now you know why the bank will insist on a bulk sale.

Attention Brokers:  It is our hope that you will avail yourselves of C-Loans.com again and again; but first I just need you to register on C-Loans.  This does NOT mean clicking on one of the blue buttons and getting a freebie.  This means completed Step One of Six on C-Loans.  Basically you're just filling in your name and contact information.  We want you in a sprint start, so that you can immediately start entering your commercial loan request when you come across a live deal.

Therefore we are going to bribe you.  We will give you a free copy of my famous Commercial Mortgage Underwriting Manual.  But please, be fair.  We're giving you a $199 freebie.  Use your real email address!  Recently a bunch of folks have been using email addresses other than their main email address.  Basically they are giving me an email address for Junk Email.  

C'mon, guys, you and I only make dough when we close loans together, and I need to remind you from time to time-to-time that:

  1. Blackburne & Sons makes loans on broken condo's;

  2. We finance nudie bars and strip centers with X-rated book stores;

  3. We will sometimes make non-recourse loans; and

  4. We will allow the seller to carry back a second mortgage behind us.

  5. Etc.

So please be sure to use your real email address  I promise you'll find our joke-filled newsletters entertaining.

 

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Topics: broken condo

New Commercial Mortgage Rates Website

Posted by George Blackburne on Thu, Mar 10, 2016

Okay, suppose you're a commercial broker (you list and sell commercial-investment properties).  An investor client calls you up and asks, "I like that strip center that you showed me yesterday, and I'm crunching some numbers.  What are commercial mortgage rates today?"

C-Loans, Inc. has just built a very helpful new website at CommercialMortgageRates.co.  (Please note that we chose not to pay the extra $20,000 for the dot-com extension.  The extension is dot-co.)  The entire site is devoted to commercial mortgage rates.

The page that you want is this one:  Table of Current Commercial Mortgage Rates.  I update these commercial loan rates on a regular basis, and right now we are in a period of faily stable interest rates.  These rates will always be - if not precisely spot on -  very close to the commercial loan rate that you or your client will pay.

 

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You may find this suprising, but the commercial loan rates of most commercial banks are usually within 25 basis points of each other.   You will seldom find Bank A quoting 4.75% and Bank B quoting 6.0%.  A basis point is just a fancy way of saying 1/100th of one percent.  Therefore 25 basis points is 25/100th's of one percent - or one-quarter of a percent (1/4%).  

I recommend that you bookmark this particular table right now.

But you're not done.  This helpful table only shows you the current commercial loan rates in the market.  It doesn't tell you anything about the expected amortization of your new commercial loan, the term, or the prepayment penalty.  Here is what you should quote your client:

Multifamily Loans:

Fixed rate, thirty-years fully-amortized, rate readjusted to market every 5 years, and a prepayment penalty of 3-2-1.  In layman's language, 3-2-1 means 3% in year one, 2% in year two, and 1% in year three.  The loan is open in years four and five.  This prepayment penalty pattern repeats every five years.  Open is just a fancy way of saying no prepayment penalty.

Commercial Loans:

Fixed rate, twenty-five years amortized, due in ten years, rate readjusted to market at the beginning of year 6, and a prepayment penalty of 3-2-1.  In layman's language, 3-2-1 means 3% in year one, 2% in year two, and 1% in year three.  The loan is open in years four and five.  Open is just a fancy way of saying no prepayment penalty.  This prepayment penalty pattern repeats in year six.

Conclusion:

You no longer have to track hundreds of commercial lenders to find the best commercial loan rate for your client.  You've learned that most commercial real estate lenders have commercial loan rates that are within one-quarter of a percent of each other.  All you need to do is bookmark this Table of Current Commercial Mortgage Rates.

 

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"I am shocked - shocked I tell you - to learn that there is gambling going on in this establishment."  - Louie the loveable French police captain in from the classic movie, Casablanca.  I am shocked -  shocked I tell you - to learn that ten commercial mortgage brokers got shafted today out of a commercial loan fee larger than $10,000."  Next to my Practice course, this is the course that you simply must take.  I got so sick of being screwed out of loan fees that I went to law school at age 35, with two kids in diapers, graduated with honors, passed the Bar on my first attempt, and then never practiced law.  I make more money in the mortgage business.

 

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Topics: commercial mortgage rates

Commercial Loans and the Lessons From April

Posted by George Blackburne on Wed, Mar 9, 2016

Hate.jpgEvery year commercial mortgage loan demand plunges by 75% in April.  Our office phones stop ringing, and the place feels like a morgue.  This happens every year, without fail.

There are some important lessons to be learned from this, even if you are not in the commercial mortgage business:

  1. Arrange for a line of credit in advance.  It is absolutely true that banks only want to lend you money when you don't need it.  If you actually need the money, the banks will sense your fear, and they won't lend it to you.  The smart businessman therefore applies for a loan when he doesn't need the money.  For example, commercial mortgage brokers usually make a lot of money between September 15th and November 15th.  It's our busy season, just like Christmas is the busy season for retailers.  One day in mid-October, when our business checking account was bulging with money, I asked our corporate officers to sit down with our banker and explain that April and early May are typically very slow periods.  We successfully negotiated a line of credit, which is renewed every year.  Because we did NOT need the money at the time of the application, and because we applied for this loan far in advance of our need, the banker was impressed with our planning and anxious to loan us dough.  So lesson one is:  Apply for your business loan when your accounts are flush with cash and far in advance of your needs.  Never let your banker smell fear.

  2. Those of you who have visited C-Loans.com have no doubt played around with the blue buttons on our home page.  You probably downloaded our free commercial loan placement kit or one of our other free gifts.  In order to get these freebies, you filled out a little lead form, where we captured your contact information.  We then solicted you to allow us to make you a loan, or if the deal was not a fit for us, we at least added you to our newsletter list.  The web page that described the irresistible freebie is called a landing page.  Please take a moment and look at this landing page.  You will notice that it contains both the irresistible offer and the lead capture form.  Lesson two:  Your own website must also contain landing pages so that you can capture new leads and new contacts every day.  We use the software of a wonderful company named Hubspot.com to create these landing pages and to serve up the freebies.

  3. Once you have captured hundreds and hundreds of contacts, you are ready for April.  There are a number of ways to generate commercial mortgage leads - Google ads, website ads, the Yellow Pages, magazine ads, TV advertising (poor idea), direct mail, newspaper ads, etc.  The best way by far, in my opinion, is list advertising.  I've enjoyed some success in business, and the single biggest reason is because once I meet someone, I always add him to my newsletter lists.  I do NOT advertise to strangers, but once I have met someone in the legitimate course of business, I stay in touch with them for decades.  Okay, April is coming.  What do you do?  The HUGE advantage of list advertising is that you can increase the frequency of your newsletters during slow periods.  For example, I normally advertise to my mortgage broker buddies every three weeks.  During slow periods, like April, I increase that frequency to once every ten days.  If I am really-really dying in the desert, I can even increase the frequency to once a week.  When you list advertise, you have that kind of control.

 

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 Don't you wish that you made three times more money as a commercial mortgage broker?  When I go to trade shows, mortgage brokers often walk up to me, pump my my hand, and thank me for my wonderful nine-hour training course, How To Broker Commercial Loans.  But my best work is my new Practice Course, a course that is designed to take a struggling commercial mortgage broker and make him nicely profitable.  It's not one, single awe-inspiring trick, but rather 63 smart business practice tips, each of which is designed to make the broker 3% to 5% more effective.

 

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Been screwed out of an $18,000 commercial loan brokerage fee yet?  Of course you have!  It happens to all of us.  Stop being a victim.

 

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The moment you register on C-Loans.com, I'll send you a free $199 commercial mortgage underwriting manual.

 

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If you run across the business card of a banker making commercial loans, I'll trade you a free directory of 2,000 commercial real estate lenders.  We solicit these guys to refer their turndowns to C-Loans.com.

 

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Topics: Lessons