Commercial Loans Blog

Can I Lock My Rate On a Commercial Loan?

Posted by George Blackburne on Mon, Nov 28, 2016

Lock in rate.jpgInterest rates on commercial real estate loans are definitely going up.  A reasonable commercial mortgage borrower might want to apply now, rather than wait, especially if he has a balloon payment coming due.

The problem is, however, is that most commercial real estate loans take several months to process.  The problem is not with the lender.  It's the commercial property appraisal.  Income property appraisers seem to take forever.

You can obtain a commercial loan faster than that, but most bridge lenders only offer short-term commercial loans, and the interest rate on bridge loans is usually much higher than on permanent loans.  It makes little sense to accept an interest rate that is 4% higher, just to close your commercial loan 45 days sooner.

 

Free Commercial Loan Placement Kit

 

By the way, a permanent loan is just a garden-variety first mortgage on a commercial property, with a term of at least five years and with some amortization.  Twenty-five years is the the typical amortization for permanent loans.

 

Headless.jpg

 

"Put your head back on your shoulders right now, young man,
and don't ever let me catch you taking it off again!" -- Mama

Soooo?  What's the answer.  Can I lock my rate on a commercial loan?

No.  I have met 5,000+ commercial lenders in my 36-year career in commercial real estate finance (CREF), and I have never met a commercial lender which will allow you to lock your interest rate while your commercial loan is in processing.  Sorry.  Now that being said, there are around 10,000 commercial real estate lenders in America.  I suppose there may be one or two which will allow you to pay a fee to lock your rate; but they are as rare and as hidden as the abominable snowman.  That's the bad news.

The good news is that very early in a commercial loan application process, most commercial lenders will issue a term sheet, which is also sometimes known as a loan proposal, proposal letter, or conditional commitment letter.  A term sheet is not a legally binding commitment to make a commercial loan.  It is merely a letter from a commercial lender expressing a bona fide interest in making the loan and a good faith estimate of the eventual terms.

 

Yoda.jpg

 

Commercial lenders issue term sheets because appraisals, title commitments, and sometimes toxic reports, are very expensive.  Few borrowers would ever agree to pay for these third party reports, absent something in writing from the lender that is at least morally binding the lender to make the loan.

Continuing with our description of the good news, if a commercial lender issues a term sheet, and the third party reports come back satisfactory, the issuing commercial lender will almost always honor the interest rate on the term sheet, even if market interest rates have increased.  Remember, the commercial lender is not legally obligated to do so.  It's just the custom and practice in the industry.

There are a few exceptions.  Conduits, also known as CMBS lenders, sell their huge commercial loans to securitization pools.  They simply must close their commercial loans at an interest rate attractive to the securitization industry.  Therefore if the bond makets get roiled by some external event, for example, a military coup in Turkey, and investors flee from commercial mortgage-backed securities in favor of less-risky U.S. Treasuries, your CMBS lender may have to re-price your loan; i.e., raise the interest rate.

Do you need a commercial loan right now?  Are you strong financially - bankable or maybe even stronger?  If so, you should submit your commercial loan to our 750 hungry commercial lenders using C-Loans.com.  Our four-minute mini-app is accepted by all 750 of our lenders.  And C-Loans is free!

 

Submit Your Loan to 750 CommercialLender

 

We recently released a competing commercial mortgage portal - also free - that enjoys four times as many commercial lenders as C-Loans.

 

Free List of 3,159 Commercial Lenders  Sort By Your Own Criteria

 

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?  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?  Blackburne & Sons is a private money lender, and we are much looser in our underwriting.

 

Apply For a Commercial Loan to Blackburne & Sons

 

You can learn the practice of commercial real estate finance in one long weekend.

 

Commercial mortgage training

 

We'll trade you the contents of one banker's business card for a free directory of 2,000 commercial real estate lenders.

 

Free Directory of 750+  Commercial Real Estate Lenders

 

Do you need a business loan that is not secured by real estate?

 

Business Loans Not Secured By   Real Estate - Unsecured or Secured 

 

Want to learn commercial real estate finance for free?  We'll send you two free training lessons every week for free.

 

Subscribe To Blog

 

Do you have a buddy or co-worker who would benefit from learning commercial real estate finance for free?

 

Forward To a Friend

 

 

Topics: locking your rate

Commercial Loans and the Gross Rent Multiplier

Posted by George Blackburne on Wed, Nov 16, 2016

GRM.pngMany investors, when valuing similar apartment buildings in a similar area, use the Gross Rent Multiplier.  The Gross Rent Multiplier is defined as the Market Value divided by the Gross (Annual) Rents of an apartment building.

Put another way, you can roughly value an apartment building by multiplying the Gross (Annual) Rents by the correct Gross Rent Multiplier.  For example, let's suppose the Gross Rents of an apartment building are $100,000; and apartment buildings in that area are selling at a Gross Rent Multiplier of 9.  Then $100,000 time 9 equals a Market Value of $900,000.

 

Princess.jpg

 

Let's look at this valuation method algebraically and then at how you can compute the appropriate Gross Rent Multiplier yourself.  And guys, please don't zone out on me here just because we are using some 7th grade algebra.  Twelve-year-old's get A's in Introduction to Algebra!  (Heck, some pre-schools in New York City are probably already teaching algebra.  I'm kidding, right?)

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

Example:  What is the Gross Rent Multiplier for apartments in southwestern San Jose, California?  After looking at an old listing, you see that a particular 63-unit apartment building had a Gross Annual Rent of $1,512,000.  You also discover that the building eventually sold for $16,632,000.  At what Gross Rent Multiplier ("GRM") did this 63-unit apartment building sell?

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

GRM = $16,632,000 / $1,512,000

GRM = 11.0

After looking at several other apartment buildings, you discover that an inferior apartment building sold at a GRM of 10.5 and a superior building sold at a GRM of 11.5.  You conclude that the GRM of this area of San Jose is approximately 11.0.

Example:  You are told by experienced commercial brokers in the area that small apartment buildings in Palo Alto, California (home of Stanford University) are selling at Gross Rent Multipliers of 12.  You are informed that a six-plex in a nice area of Palo Alto has a Gross Annual Rent of $252,000.  What is this six-plex worth?

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

Multiplying both sides of the equation by Gross Annual Rents gives you -

Market Value of the Apartment Building = Gross Annual Rents x GRM

Market Value of the Apartment Building = $252,000 x 12

Market Value of the Apartment Building = $3,024,000

Confused?  Just multiply the Gross Rents by the appropriate GRM to get the Market Value of the apartment building.  Local commercial brokers will tell you the appropriate GRM for any area.

 

Pedestrians.jpg

 

What triggered today's lesson on the Gross Rent Multiplier was a seminar put on by a major apartment lender.  Their rate sheets talk about a super-low interest rate for Tier I apartment buildings, a low rate for Tier II apartment buildings, and a higher rate (and lower LTV) on Tier III apartments.  But, geesch, how does one know whether an apartment building is a Tier I, II, or III property?

They gave some very helpful guidelines using GRM's:

Tier I Apartments:

Buildings selling at a GRM of 10, 11, or higher.  

In my examples above I used apartment buildings in Silicon Valley, California, arguably the most desirable real estate in the world.  Cap rates of 11 and 12 are almost unheard of in any other areas, outside of Long Island, New York, Washington, D.C., and the best areas of Chicago.  Most apartment buildings in the real world will sell today at GRM's of 6 to 8.

Tier II Apartments:

Buildings selling at a GRM of 7, 8, and 9.  

Tier III Apartments:

Buildings selling at a GRM of 4, 5, and 6.

The lesson to be learned here is that the nicer the building and the more desirable the area, the higher the Gross Rent Multiplier.

Have you visited our latest commercial real estate loan portal?  It is far-far easier and faster than C-Loans.com and it offers four times more commercial lenders:

 

Free List of 3,159 Commercial Lenders  Sort By Your Own Criteria

 

When should use C-Loans.com?  The advantage of C-Loans is that you can create a simple commercial loan application form in just four minutes and then submit it to 750 different commercial lenders.  The hungriest commercial lenders are also usually found on C-Loans.com.  Both of our portals are free to borrowers and brokers.

 

Submit Your Loan to 750 CommercialLender

 

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? 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?

 

Apply For a Commercial Loan to Blackburne & Sons

 

On the entire planet, there may not be a better deal.  We'll trade you the contents of the business card of just one banker making commercial loans for a free directory of 2,000 commercial lenders.

 

Free Directory of 750+  Commercial Real Estate Lenders

 

Are you just kicking tires today?

 

Free Commercial Loan Placement Kit

 

What is more valuable - a $200,000 degree in liberal arts or a nine-hour video course that will teach you the entire profession of commercial mortgage brokerage?  The course includes marketing, underwriting, packaging, placement, and fee collection - all taught with enthusiasm, humor, and juicy war stories.  When I recorded this course, I was on my game.  In one dedicated weekend, you could emerge as a near-expert in the profession.

 

Commercial mortgage training

 

Did you learn something today?  Want to receive two free training lessons in commercial real estate finance every week?

 

Subscribe To Blog

 

Got a buddy or a co-worker who would benefit from learning commercial real estate finance?

 

Forward To a Friend

 

 

 

Topics: Gross Rent Multiplier

How To Quote a Commercial Loan

Posted by George Blackburne on Sun, Nov 6, 2016

Self storage.jpgFor those of you just getting started in commercial mortgage brokerage, this is a particularly important training article; however, even those of you who are very experienced in brokering commercial loans may find some useful nuggets.

The scenario:  You get a lead call for a commercial loan.  The borrower needs a $1.2 million refinance on his self storage facilty in Provo, Utah.  The borrower is on the phone right now, and he wants a loan quote.  What interest rate do you quote him?  If he likes your quote, he may want to get started right away.  What documents do you ask for?  As the mad bomber asked Keanu Reeves in the thrillerSpeed, "Pop quiz, Hotshot, what do you do (quote)?"

 

Free Commercial Loan Placement Kit

 

This is a small commercial loan, one that is unlikely to be made by some big national lender.  You're located in Sacramento, California, and you have no idea to which commercial lender you will eventually take this deal, but you do know that the best lender for the deal will probably be located near Provo, Utah.  After all, banks greatly prefer to lend close to one of their branches.

 

Halloween.jpg

 

  1. Here's the good news.  Most banks across the country charge roughly the same interest rate on commercial loans.  They are almost always within 0.25% to 0.50% of each other.  Therefore you don't need to know precisely what some bank in Provo, Utah is going to charge.  You just need to know what a Sacramento bank would likely charge on a $1.2 million permanent loan on a self storage facility close to Sacramento.  In practice, the two different banks - even though they are one thousand miles away - will charge almost exactly the same thing.

  2. Okay, but what would a Sacramento bank charge for a commercial loan on a property in Sacramento?  This one is simple:  Simply go to the Current Commercial Mortgage Rates page on CommercialMortgageRates.co.  (Note, this is a dot-co, not a dot-com.  The owner of the dot-com version wanted thousands of dollars for the domain.)  I update these rates weekly, so they are very current.  STOP!  Before you step away for coffee or you go to the bathroom, please be sure to bookmark this page.  Please do not read further until you have done this.

  3. "Okay, George, I see from the rate sheet what interest rate I should quote, but how many points should I quote?"  Commercial banks typically charge only one point on commercial loans, so you, as a commercial loan broker, will need to add your loan brokerage commission on top.  Here is a training article I have written about the size of a reasonable loan brokerage commission.

  4. What amortization should you quote?  A twenty-five year amortization is to commercial mortgage finance what a thirty-year amortization is to residential mortgage finance.  The vast majority of all commercial loans have a 25-year amortization.  If a commercial property is older than 40 years old, the bank may even insist on a 20-year amortization.  After all, a commercial property does not have an unlimited lifespan.  A thirty-year amortization, however, is common for multi-family properties.

  5. What about the term of the loan?  Most banks would greatly prefer to write their commercial loans with a term of just five years, but if they are pushed, most banks will agree to a ten-year term.  Certainly most commercial borrowers will insist on a loan term of at least ten years.  Commercial real estate loans with terms longer than ten years are only possible on SBA loans and USDA loans - government guaranteed commercial loans which are eligible to be re-sold by the bank in the secondary market.  Remember, most conventional commercial real estate loans are portfolio loans.  In other words, the bank is stuck with that commercial loan for the entire ten years.

  6. Will the interest rate be fixed or adjustable?  Almost all commercial loans these days are fixed rate loans.  (In two years, when the inflation rate and interest rates start to climb, this may change.)  You are NOT going to get a straight, ten-year, fixed rate commercial loan from a bank.  The loan will most likely be fixed for the first five years.  Then it will readjust just once at the beginning of year six "to a market rate." Then the typical bank commercial loan will be fixed for the remaining five years.  What will be the index and the spread over the index?  This may shock you, but most bank promissory notes are silent on the subject.  The bank will typically use language like, "Whatever rate the bank is currently quoting on similar commercial loans."  Don't worry about it.  I have never had a borrower raise the issue.

  7. What about a prepayment penalty?  Most banks have a modest prepayment penalty on their portfolio commercial loans.  The one you will most often see - and the prepayment penalty that you should quote is - 5% in year 1, 4% in year 2%, 3% in year 3, 2% in year four, and 1% in year 5.  There will typically be a three-month window after the rate readjusts one time at the beginning of year 6, during which window the loan may be paid off without penalty.

  8. What about assumability?  Bank commercial loans are NOT assumable and must be paid off when the property is sold.

You now know how to quote a commercial loan.  Voila!

 

Grass.png

 

Okay, the borrower is interested, and he wants to know what documents that he should send you.

  1. Now an idiot would ask his borrower to send him a long laundry list of items, and that idiot loan officer, if he is on commission, would surely starve.  Borrowers don't enjoy fetching huge piles of documents.  They will look for any excuse not to gather it right away.  In the meantime, some  competing commercial mortgage company is likely to quote the borrower 2% interest, fixed for fifty years, with a negative two points, and 150% loan-to-value.  The competing quote is obviously BS, but guess which loan officer is going to get the borrower's loan application?  

  2. Here is a rule that I pound into the heads of my loan officers, "The loan officer who asks for the least number of documents wins the deal."

  3. Perhaps the best way to ask for documents is as follows, "Please send me whatever package you can send me right away, as long as it includes:  (1) a Rent Roll or Schedule of Leases; (2) last year's actual operating expenses; and (3) color photo's on the property."

  4. The idea is to get the borrower moving in your direction.  He's at rest at the moment, and the Law of Inertia says that a body at rest tends to stay at rest.  If you can get him to send you the tiniest of packages, he becomes a body in motion, and a body in motion tends to stay in motion.

  5. Once you get the income and expense numbers, you can whip up a quick Pro Forma Operating Statement.  At today's low interest rates, just about every commercial loan cash flows very adequately, so then you can call the borrower back and ask for the next round of documents.  "Great news, Mr. Borrower!  I crunched the numbers on your deal, and the numbers worked out well.  Now all I need is an old financial statement and two years' tax returns."

  6. Remember this important rule, "The commercial loan officer who receives the borrower's tax returns first wins the loan."  But wait, George, shouldn't I then ask for tax returns right away?  No!  Borrowers dread standing in front of a copy machine for 20 minutes and making copies.  They need the postitive reinforcement of you crunching the numbers first to get fired up enough to copy their tax returns.

  7. Armed with the cash flow numbers and the borrower's financial statement and tax returns, you now have enough of a package to start submitting your deal to lenders.  That will be the subject of a future training article.

Got a commercial loan sitting on your desk right now?  Do you need some commercial lenders for your deal?  You will love our brand new commercial mortgage portal, CommercialMortgage.com.  It is much faster and easier than C-Loans.com, and the new site works great on your cell phone.  This new portal also has four times more commercial lenders.

 

Free List of 3,159 Commercial Lenders  Sort By Your Own Criteria

 

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?

 

Apply For a Commercial Loan to Blackburne & Sons

 

How would you like a free directory of 2,000 commercial real estate lenders?

 

Free Directory of 750+  Commercial Real Estate Lenders

 

Want to learn the profession of commercial real estate finance?

 

Commercial mortgage training

 

Want to receive two free training lessons in commercial real estate finance every week?

 

Subscribe To Blog

 

Got a buddy or a co-worker who would benefit from learning commercial real estate finance?

 

Forward To a Friend

 

 

Topics: Quoting Commercial Loans