Commercial Loans Blog

Your Commercial Loan Needs More Sizzle!

Posted by George Blackburne on Tue, Feb 21, 2017

Sizzling Steak-1.jpg"Don't sell the steak, sell the sizzle." -- Elmer Wheeler,  America's Greatest Salesman

One of the more prolific and successful commercial mortgage brokers in the entire country just entered a commercial loan into C-Loans.com.  In the Property Description section, he wrote the description below.  I was so impressed with his work that I just had to blog about it.  I have highlighted his  sizzle in red.  Is there any question why he is so successful?

"Nice building with a day care... This City of X daycare facility is a full-service daycare center. Licensed capacity is for 100 children, with an additional 25 for after-school care. This modern day state-of-the art facility has a strong customer base with a well-respected and recognized name. This is a great facility with over X sq. ft. located on a beautiful 1.04-acre piece of property composing of 6 fully-furnished classrooms, commercial kitchen, laundry room, employee break room, child sized dining room and terrific divided outside playgrounds. Premier childcare services children up to age 12 with an excellent child-to-teacher ratio..."

 

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"This facility is located in a rapidly growing county. X County is the heart of west (state) and forms the western boundary of metropolitan (a major MSA). It is easily accessed by Interstate X, US Highways X1, X2, and eight state highways. The county offers visitors and residents alike 495 square miles of beauty, recreation and history. The daycare facility itself is located at the demographic and economic center of downtown City X and is readily visible from the city's main thoroughfare.  Commercial land in this area is becoming scarce, and as the daycare facility is located within close proximity to the downtown square, hospital, numerous medical offices, university and other services."

 

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Oh my goodness, I'm drooling over that good broker's write-up.  Somebody please pass me the steak sauce.  When you enter a loan into C-Loans.com, does your Property Description section enjoy this kind of sizzle?  There's a lesson to be learned here, folks.

Forty new banks have joined C-Loans.com in the past 8 weeks.  It feels like the start of a chariot race.  These banks are signing up without being solicted.  These bankers are ravenous.  It feels like 2005 all over again.

 

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Have you checked out CommercialMortgage.com yet?  It offers four times more lenders than C-Loans.com, and it is much easier to enter a deal.

 

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Topics: Sizzle

The Commercial Loan Executive Summary

Posted by George Blackburne on Mon, Feb 20, 2017

Executive Loan Summary.jpgThis article should help both complete newbies and near-experts in commercial mortgage finance.  I will teach you newbies how to prepare a basic commercial loan Executive Loan Summary.  I will teach you old pro's how to lay out an Executive Loan Summary for a construction mezzanine loan request.  That's just about the most sophisticated loan in our entire industry.  Bottom line:  Prepare to learn a ton.  Even better, I will give you some free exemplars that you can download to your own desktop for future use.

The first item in any commercial loan package should be the the Executive Loan Summary.  Following the Executive Loan Summary should be a picture page that contains a description of the property (with lots of sizzle) and several attractive color pictures taken on a sunny day (or an Architect's Rendering if this is a construction loan).  Next comes the Pro Forma Operating Statement and then the Schedule of Leases or Rent Roll.

The easiest way to teach you how to prepare an Executive Loan Summary is to give you an exemplar.  Please open this basic commercial loan Executive Loan Summary right now.  If you download it to your desktop, you can easily edit it using Word on your next commercial loan.

Please note that this Word document was written using a Courier font.  Courier is a proportional font, and when you use a proportional font, all of your columns will line up nicely.

 

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Commercial construction loan Executive Loan Summaries are a little more involved because they include a construction cost breakdown and the Loan-to-Cost Ratio.  In construction lending, the Loan-to-Cost Ratio is far more important than the Loan-to-Value Ratio.  Please note in the Cost Breakdown we always include a Contingency Reserve equal to 5% of Hard Costs and Soft Costs.  Please click here to view a Construction Loan Executive Loan Summary.

 

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Finally we come to the Executive Loan Summary for a construction mezzanine loan.  By the way, a construction mezzanine loan is simply a mezzanine loan used in conjunction with a construction loan.  A construction mezzanine loan might take the capital stack up from a 60% LTC construction loan up to 80% LTC.  Confused?  Just think of a construction mezzanine loan as a second mortgage behind a construction loan.

Are you ready to stop fiddle-faddling and to just go get your commercial loan?

 

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When I write these blog articles, I try hard to use simple, layman's English and slang.  I also try to use lots of examples.  Are you ready to finally learn commercial real estate finance?

 

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Topics: Executive Loan Summary

How To Package a Mezzanine Loan, Preferred Equity, or JV Request

Posted by George Blackburne on Wed, Feb 8, 2017

Mezzanine loans.pngLong before a mezzanine lender or equity provider will issue a term sheet, the sponsor first has to attract the lender's interest.  By the way, the sponsor is the investor-owner of a standing commercial property or the developer of a proposed commercial real estate development project.

So how do we attract a lender's interest?  Answer:  We prepare an Executive Summary Package on the deal.  The Executive Summary Package is a sort of mini-package, and it should contain only the following items in the exact order described below:

  1. Executive Loan Summary that states the size of the request; the type of request (mezzanine loan, preferred equity, or venture equity); the details on the existing first mortgage / proposed construction loan (lender name, loan amount, interest rate, monthly payments - if any, and maturity date); a-one paragraph description of the existing property or the proposed development; the value of the project either now or upon completion; the loan-to-value ratio of the first mortgage / construction loan; the combined loan-to-value ratio, including either the mezzanine loan, the preferred equity request, or the venture equity request; the debt service coverage ratio (with and without the proposed junior financing); the current value of the land; the amount owing on the land; the hard costs; the soft costs, including the loan points, construction period interest, and closing costs; the contingency reserve (5% of hard and soft costs); the total cost; the combined loan-to-cost ratio; a paragraph called Special Issues that addresses why the land that was purchased for $1MM is now worth $2MM (assemblage or change of zoning or the construction of a nearby highway or Wal-Mart); and lastly a borrower's section, the name of the borrower and the name of the guarantors, including the annual income, the net worth, and the percentage of ownership of each.

  2. Color Architect's Rendering.  Behind the rendering you might include some current street photo's and an aerial view.

  3. Pro Forma Operating Statement, including a reserve for vacancy and collection loss of exactly 5%, professional property management fees of at least 4% to 6% of effective gross income, and reserves for replacement of at least 2% of effective gross income.  New multifamily projects should not have an operating expense ratio of less than 36% of effective gross income; otherwise, the lender will disregard your pro forma and use 40% of effective gross income for expenses.  Don't forget to include any laundry income, vending income, and/or parking income.  The following training artilce will help you to prepare the Pro Forma Operating Statement.
  4. Cost Breakdown, including the current value of the land, hard costs, soft costs, and a contingency reserve of exactly 5% of hard and soft costs (but not 5% of the land costs).

  5. Curriculum Vitae (CV) on the developers.  If the developers lack building and/or development experience, a CV on the General Contractor, Architect, and/or Engineer will help.

 

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If attracted to the deal, the lender will immediately ask for financial statements and tax returns on the developers.  

"But George, why not include the financial statements and tax returns right from the start?"

We need to keep the Executive Summary Package very thin at the start.  Remember, all we are doing here is teasing the lender, getting his attention and interest.  If a developer or broker tries to submit a complete package, the lender will never read it.  We have to do this in steps.

 

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Topics: Packaging a Mezzanine Loan

Understanding Venture Equity

Posted by George Blackburne on Tue, Feb 7, 2017

Apartment rendering.jpgI have been requested to help raise about $5.5 million in venture equity for a multifamily development project.  This endeavor will give us a good example of structured finance.  Structured finance in commercial real estate finance consists of (1) mezzanine financing; (2) preferred equity; or (3) venture equity.

A construction mezzanine loan is merely a mezzanine loan that is junior to a construction loan and which takes the capital stack from about 60% to 65% loan-to-cost up to around 75% to 80% loan-to-cost.  Since the principals on my multifamily development project can only contribute about 10% of the total cost of the project, they are unlikely to qualify for a construction mezzanine loan.  Remember, my developers need a lender or an investor to take the capital stack up to 90% of cost.

 

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Preferred equity is a little more sophisticated than mezzanine financing, and it is usually used when the first mortgage loan documents say, "Don't you dare put a mezzanine loan behind our first mortgage; otherwise, we'll accelerate your loan (declare the whole loan due and payable), hit you with a defeasance prepayment penalty equal to about 23% of the loan amount - ouch, and then also unleash a springing personal guarantee, making our formerly non-recourse loan (the debtor can just walk away) into a recourse loan (if you try to walk away, we'll cut off precious body parts).  I'll blog more on preferred equity later this month.

While preferred equity investors (its not really a loan) do have a little more appetite for risk, they are still unlikely to invest higher than 80% in the capital stack.  Preferred equity will therefore not solve my developers' problem.  My clients simply don't have enough equity (skin) in their development deal.

Okay, the third type of structured financing is venture equity.  Venture equity is slightly different than a joint venture partnership.  A joint venture partnership normally comes from some huge financial institution, a company like Met Life or All State Life.  The life company puts up 100% of the total cost of the project in return for a preferred return (they get paid first) of, say, 7%, plus 50% of the profits.  Joint venture partnerships are typically B.I.G. projects - think office towers or regional malls which cost $75 million or more to develop.

 

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Here is a rule about joint ventures that will serve you well.  If your developer couldn't fund the entire $75 million project out of his own pockets, he will never qualify for a joint venture.  Huh?Remember that old saying about banks only being willing lend to you money when you don't need it?  Well, the really huge lenders will only joint venture with a developer who is rich enough to fund the whole project himself.  Mortals like you and I will never feed our families by closing a joint venture deal.

Venture equity, on the other hand, comes from smaller institutions, such as hedge funds (the sponsor publicly advertises for accredited investors), opportunity funds (a bunch of filthy rich guys throw some money in a pot), or REIT's.  Venture equity deals are much smaller, typically $10 million to $40 million.  Venture equity does NOT cover 100% of the total cost!  Venture equity typically only covers 70% to 90% of the total equity required by the construction lender.  The developer has to contribute the rest.

Venture equity is also very expensive.  Venture equity investors typically expect returns north of 20%.  Most venture equity firms were crushed during the Great Recession; but greed has finally brought them out of their shells.  It is once again possible to find venture equity.

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Do you need a commercial lender who will actually lend up to 75% LTV? 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? Do you need a lender who will allow a negative cash flow?

 

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Mortgage brokers, how many huge loan fees have you lost because the borrower cheated you or lied to you?  As my dad used to say about horseback riding, "If you ain't been thrown, you haven't ridden' very much."

 

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Topics: Venture equity