Commercial Loans Blog

Commercial Loans, Salesmanship, and Inertia

Posted by George Blackburne on Wed, Aug 23, 2017

Trantrum.jpgIf you are in the commercial loan business, be sure to carefully study this article.  If not, enjoy my funny pictures and move on with your day.  Today's blog article is just a specialized sales training lesson for commercial loan brokers.

Yesterday one of my commercial loan officers responded to an email commercial loan inquiry by sending an email in response.  An email?  An email?  I threw an enormous hissy fit.  See my picture above.   As a commercial loan officer (or broker), you are never going to make a sale by email.  Never.  Ever.  Not once.  Nada.  Zip.  Zero.  Zilch.  You've got to pick up the telephone and make a call.  Never try to solicit a commercial loan package by email.  Instead, you need to get on the phone and sell.

 

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Why?  The documentation requirements for a typical commercial loan are pretty lengthy, so no borrower is going to assemble a thick commercial loan package without verbal assurances from his commercial loan officer that the black hairs sprouting out of his deal are not deal-killers.  Please re-read this last sentence.

 

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A black hair is a flaw in the deal.  Examples of black hairs include vacancies in the building, a major lease that is close to expiration, a divorce and bankruptcy of the borrower six years ago, or a net worth less than the size of the loan.  A comprehensive list of possible black hairs would stretch for hundreds of yards.

"George, I understand that some commercial loans have black hairs, but what if the subject deal doesn't have a black hair?"

Every commercial loan ever written had a least two or three black hairs.  No commercial loan request is ever perfect.  The art of underwriting commercial loans is not the elimination of those deals with flaws, but rather the wise judgment of which black hairs are irrelevant.

 

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Your borrower knows that his deal has flaws.  Before he will go to all of the work to compile a commercial loan package for you, he needs to hear your cultured, confident voice reassuring him that his particular black hairs are not deal-killers.  This is why merely sending an email will almost never fetch you a commercial loan package.  Lesson point:  Call-call-call.

 

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We all remember the old joke about how two bulls trot to the top of a hill and look down over a herd of gorgeous, fertile cows.  The young bull turns to the old bull and says, "Hey, Pops, let's run down and kiss one of those cows."  To which the older, wiser bull replies, "Son, let's walk down and kiss them all."  Yeah-yeah, you've heard that joke a thousand times before; but that joke has a very important moral for commercial loan originators.

The newbie commercial loan officer - the young bull - figures that since he cannot close his commercial loan until he gets a complete package, he might as well ask for every document right away.  "Hey, the sooner the borrower starts working on all of these documents, the sooner he can close his loan, right?"

 

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 Hmmm..., let's look at just some of the documents required in a complete, bank-quality commercial loan package:

  1. Updated Personal Financial Statement (2 hours of work)
  2. 2016 Personal Tax Return (35 pages to copy)
  3. 2015 Personal Tax Return (35 pages to copy)
  4. Actual Income and Expense Statement For the Past 12 Months (one hour to prepare)
  5. Schedule of Leases (one to two hours to prepare)
  6. Copies of all Leases (100+ pages to copy)
  7. Updated Financial Statement on the Borrowers Business (two weeks for accountant to prepare)
  8. 2016 Tax Return on the Borrower's Business (45 pages to copy)
  9. 2015 Tax Return on the Borrower's Business (45 pages to copy)
  10. Updated Financial Statementon the LLC that owns the Property (one hour to prepare)

And so on...   

You can bet the farm that the borrower is going to procrastninate; and as the borrower is procrastinating, he will receive 37 competing commercial loan offers.  The foolish young bull failed to "get the loan off the street."

 

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The young bull was a flipping idiot for requesting all of those documents in one shot.  The work load is impossibly intimidating.  No borrower, after just speaking with a commercial loan agent one time, is going to prepare such a huge commercial loan package.  In my joke, the young bull gets kissed once.  The newbie commercial loan officer won't even receive a single package if he requests a complete package.  Not one!  What an flipping idiot!  I have often told my sons, "The commercial loan agent who initially asks for the least number of documents usually gets the deal."

 

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Okay, so how should a wise, old bull ask for a commercial loan package?  "The deal sounds good, Mr. Borrower.  Please send me a package.  Here's my email address..."

Notice that the wise, old bull did NOT give the borrower an extensive laundry list of documents to gather.  Instead, he just asked for an amorphous (without a clear definition) "package".  He never actually defines the documents that go into a "package".  If the borrower tries to pin him down as to what documents should be in the package, the wise, old bull will flip the question around, "What documents can you immediately send me?"

 

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In school we all studied the concept of inertia.  A body at rest tends to stay at rest.  A body in motion tends to stay in motion.  Here the body is the loan package.  It's much easier to get a small boulder rolling than a large one, so let's ask for the smallest loan package (boulder) possible.  Let's get this loan package rolling in our direction, even if the speed of the roll is slow, because a body in motion tends to stay in motion.

Once the borrower chooses you to receive his package, he is usually very loathe to start all over with some competitor.  Let me make this VERY important point again in a different way.  Once a borrower starts starts sending documents (that small, emorphous "package"), to Loan Officer A, he almost never stops and starts sending his documents to Loan Officer B.  Yeah, a few borrowers are "whores", but for the most part, borrowers choose just one commercial loan officer.  Note to self:  Be that guy who first gets the package.

 

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The other day I caught one of my loan officers asking for the borrower's tax returns right out of the box.  It was the first thing he requested.  My head exploded.  WTFudge???  Why didn't he just ask for the broomstick of the Wicked Witch of the West too?  Only ask for tax returns after the borrower has already submitted his original package, and you have been able to reassure him that all is well.  By then the borrower has an investment of time in using you as his commercial loan agent.

Do you need a high-LTV commercial loan?  My hard money shop, Blackburne & Sons, will gladly lend up to 75% LTV on standard commercial properties of less than 35 years of age.  Will your bank only lend you 68% LTV on your apartment building, office building, retail center, or industrial building?  We'll give you the extra dollars you need.

 

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Are you pretty wealthy?  You surely have dough set aside for your retirement in your IRA and in your pension plan.  You may also have monies that you're saving for your kid's college.  You could be earning 8% to 12% in first mortgages.  This is our 37th year in business.  I'm an Eagle Scout, and so are my two sons.  Come camp on our accredited investor list and look at six or so first mortgage offerings every month.  Feel free to just watch for years.  No one will ever call you to sell you a $20,000 first mortgage investment.  We sell exclusively by email.  Since 1980.

 

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Topics: Salesmanship

Commercial Loans Are Moot If North Korea Wins the War

Posted by George Blackburne on Mon, Aug 14, 2017

EMP.jpgAccording to one expert, the U.S. could easily lose a war with North Korea.  If the war broke out, you and your family would most likely be fatalities, even if you lived 100 miles from the nearest big city.  This is not sensationalism. I am deadly serious.  Sometime in the next two weeks the U.S. stock market may wake up to this danger and fall off a cliff.  Here is how - according to an expert so respected that he was recently asked to testify before a Congressional hearing - the U.S. could lose a war against North Korea:

Unbeknownst to most Americans, North Korea already possesses at least two satellites that orbit directly over North America. Conceivably, those satellites could already be carrying nuclear warheads and re-entry shielding, allowing North Korea to “drop” nukes into the atmosphere over North America. By detonating those nukes at altitude (perhaps 150 – 500 miles high), an electromagnetic pulse (EMP) attack would be initiated that could take down the entire national power grid.  A grid down scenario could kill 90% of the American people in the aftermath of a broken society.  (I recently wondered why North Korea was so busy launching satellites.)

 

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On May 8th, the House Homeland Security Subcommittee on Infrastructure conducted a hearing entitled, “Electromagnetic Pulse (EMP): Threat to Critical Infrastructure.”  Testifying at the hearing was Dr. Peter Pry, a member of the Congressional EMP Commission and executive director of the Task Force on National and Homeland Security, told the Subcommittee that the issue is urgent because an EMP event could wipe out nine-tenths of the nation’s population through starvation, disease, and societal collapse.

In an op-ed to The Hill, Dr. Pry recently wrote:

North Korea has nuclear-armed missiles and satellites potentially capable of electromagnetic pulse (EMP) attack. EMP is considered by many the most politically acceptable use of a nuclear weapon, because the high-altitude detonation (above 30 kilometers) produces no blast, thermal, or radioactive fallout effects harmful to people.

 

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EMP itself is harmless to people, destroying only electronics. But by destroying electric grids and other life-sustaining critical infrastructures, the indirect effects of EMP can kill far more people in the long-run than nuclear blasting a city.

In this scenario, North Korea makes an EMP attack on Japan and South Korea to achieve its three most important foreign policy goals: reunification with South Korea, revenge upon Japan for World War II, and recognition of North Korea as a world power.

 

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Revenge against Tokyo is a convenient rationale for someday attacking Japan. War against Japan will be necessary for the North to conquer South Korea, as Japan is an indispensable staging area for U.S. and allied forces defending South Korea.

North Korea's dictator, Kim Jong Un, is the scion of three generations of totalitarian rule, a megalomaniac and ruthless murderer described by state media as a demigod having supernatural powers.

 

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Kim’s strategy is to sever U.S. security guarantees to South Korea and Japan by raising the stakes too high—raising the specter of nuclear war—and through "nuclear diplomacy" to cow the U.S. and its allies into submission. 

In this scenario, North Korea detonates a nuclear weapon at 96 kilometers HOB (height of burst) over Tokyo. The EMP field extends from the Japanese capital to a radius of 1,080 kilometers, covering all of Japan's major home islands. 

Virtually all of Japan's major military bases and seaports are covered by the EMP field, rendering them inoperable. Traffic control towers and systems are damaged and blacked-out stopping air and rail traffic. Highways are jammed with stalled vehicles. Communications systems are damaged or destroyed or in blackout.

 

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Worse, Japan's population of 126 million people is at risk because suddenly there is no running water or food coming into the cities. EMP induced industrial accidents are happening everywhere. Gas pipelines are exploding and turning into firestorms in towns and cities. Refineries and chemical plants are exploding, releasing toxic clouds and poisonous spills. Tokyo knows from the experience of Fukushima that as the nationwide blackout becomes protracted, within days Japan's nuclear reactors will exhaust their emergency power supplies and begin exploding, contaminating the home islands with radioactivity. 

As a consequence of the EMP attack, Japan's critical infrastructures are paralyzed and incapable of transporting U.S. forces to aid South Korea. Indeed, with Japan's survival at risk, Tokyo would probably oppose any effort to help South Korea by U.S. forces staging from Japan, fearing another North Korean EMP attack. 

 

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The EMP field also covers the eastern half of South Korea, including the vital seaport of Busan (the key to South Korea's survival and U.S. victory in the last Korean War). All the eastern coastal seaports, and all military bases and airfields in the eastern half of South Korea (nearest Japan) are under the EMP field. 

The EMP field does not extend to North Korea.

Left uncovered by the EMP field are the western half of South Korea, including Seoul, the capital, and the major highway systems radiating around and from Seoul southward—the best invasion routes. Stalled traffic from the EMP will not be blocking Seoul or the highways.

 

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U.S. and South Korean forces covering the Demilitarized Zone (DMZ) will not be covered by the EMP field. The EMP field, in their immediate rear area, will cause cascading failures of the electric grid throughout the DMZ and the entirety of South Korea. 

Thus, even those U.S. and South Korean forces not covered by the EMP field will be in a paralyzing protracted blackout that will cripple or deny allied forces communications, transportation, food and water, supplies and reinforcements from South Korean bases or from overseas.

 

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The EMP attack creates conditions for North Korea's conquest of South Korea that are ideal.

North Korean armor and infantry pours across the DMZ, thrusting through and around Seoul and down the coastal highways, flanking U.S. and allied forces paralyzed by EMP and unable to maneuver.

U.S. nuclear missiles and bombers start blasting North Korea’s nuclear forces and underground bunkers where the Dear Leader may be hiding. Now Kim Jong Un knows he has miscalculated. The U.S. is no paper tiger.

 

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In a final act of vengeance, Kim detonates the super-EMP warhead in his KMS-4 satellite, blacking out the United States. 

Airliners crash. Communications and transportation stop. Natural gas pipelines explode, causing firestorms in cities. In seven days, 100 U.S. nuclear reactors go Fukushima. In a year, most Americans are dead from starvation.

The United States, Japan, South Korea, and North Korea are in ruins.

Russia and China are the winners.

Dr. Pry ends with this admonition:  "Mr. President, harden the U.S. electrical grid to defend against an EMP attack, and shoot down those North Korean satellites!"

 

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Commercial Loan Resets

Posted by George Blackburne on Mon, Aug 7, 2017

Rates.jpgWhen you get an adjustable rate home loan, the Promissory Note is always very, very precise about any interest rate readjustments.  For example, "Every six months the Rate will readjust to 3.57% over the weekly average yield on 12-month constant maturity Treasuries."

When most banks write a 10-year, fixed rate commercial loan, there is almost always a provision that calls for one rate readjustment or "reset" at the end of five years.  The rate is then fixed for the next five years.  This is as close as you're likely to ever get to a 10-year, fixed rate commercial loan on an office building or industrial building.

 

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What has always amazed me is that the language surrounding the rate readjustment is often very loosey-goosey.  Instead of saying that the rate will adjust to so many basis points over some index, the language will effectively look like this:  "At the end of five years, the loan will readjust to whatever rate the bank is charging on similar loans at that time."

Really?  That loosey-goosey?  Yup.  Often these fixed rate commercial loans from banks are larger than $2 million, but no one seems to care that the borrower is completely at the mercy of the bank.    Legally the bank could raise the rate from 5.5% to 7.5%, even though other banks are quoting just 6.0% at the time.  Later I will explain why this is not really an issue.

 

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A rate reset is more than just a rate readjustment.  The amortization of the loan is also accelerated.  For example, the typical bank permanent loan on an office building is a fixed rate, ten-year loan with a rate reset at the end of year five.  Most bank permanent loans start out with a 25-year amortization, but when the monthly payments are re-computed at the rate reset, we are five years into the loan.  Therefore the remaining loan balance is reamortized over just 20 years (although it is still all due and payable at the end the the next five-year period) at that time.

 

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So why don't commercial borrowers freak out over the loosey-goosey language of the rate reset?  For some reason commercial bankers don't believe in capitalism.  They don't believe in charging whatever interest rate the market will bear.  Bankers think it is a sin to charge a higher interest rate than the bank down the street.  

As a result, banks across the country almost always charge about the same interest rate for commercial real estate loans.  Remember, a banker would consider himself a sinner if he charged a higher interest rate than his competitor, as if he was some sort of filthy capitalist.

 

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Now you might find a 0.25% to 0.50% difference between banks on commercial real estate loans, but you will almost never see one bank quoting 5.5% and another bank 7.5%.

 

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Okay, let's review what you've learned today:

1.  Rate readjustments are called resets in commercial mortgage-ese.

2.  Most commercial loans have a 25-year amortization.

3.  Ten years is usually the longest term available on a fixed rate, commercial loan.

 

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4.  The rate will reset at the end of year five to whatever rate the bank is then charging.

5.  The interest rate reset language is usually surprisingly loosey goosey.

6.  Banks around the country charge almost same the same rate on commercial loans.

 

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7.  Banks do not charge whatever the market will bear.  Capitalism is bad.

8.  It is a sin for a banker to charge a higher interest rate than a bank down the street.

9.  Therefore borrowers rarely get hit with an above-market rate increase at the reset.

 

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Are you an accredited investor?  Please focus on this for a moment.  You have money set aside for your retirement.  You have more dough set aside for your kids' college educations.  The stock market is booming right now, and I personally think that it will continue to boom; but its danegerous to have all of your eggs in just one investment basket.

You really need to consider investing in first mortgages.  Private money (hard money) first mortgages from Blackburne & Sons are yielding 8% to 12% today - although I urge you in the strongest terms to stick with our less-risky, lower-yielding ones.  Make no mistake:  You can easily lose most or all of your investment in first mortgages.  Investing in first mortgages involves substantial risk, and this blog article is not intended to be a solicitation to invest in our securities.  Such an solictation will always be accompanied by a Private Placement Memorandum.  We're just talking about the concept - the idea - of hard money first mortgage investments today.

 

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I am about to surprise you.  Blackburne & Sons has been in the hard money business for thirty-seven years now.  Are we the oldest surviving hard money shop?  Not quite.  I am an attorney, licensed in both California and Indiana.  To some this may sound corny, but my two sons and I are cadet graduates of Culver Military Academy (Honor System), and all three of us are Eagle Scouts.  Okay, maybe a little corny.  Ha-ha!

If you click on the maroon button below, no one is ever going to call you and try to sell you first mortgages.  We sell exclusively by email, and once you start nibbling on our offerings, you will probably miss out on your first few deals because you waited too long.  We have well over 1,000 (1,500?) private investors in our various loans.  My point is not that we are wonderful.  My point is that no one is ever going to call you to hard-sell an investment.  Please feel free to camp out on our investor email list for five years before you make your first investment move.  We're like Christmas tree farmers, planting a half-decade ahead.

You can invest with incredibly small amounts - $5,000 - but you absolutely, positively must be an accredited investor - a $1 million net worth exclusive of your personal residence.  First mortgage investing is HUGE in California, but the new JOBS Act makes it possible for accredited investors residing outside of the State of California to now invest with us.  Do this - and then just watch our investments for a few years.

 

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Topics: Commercial Loan Resets

Commercial Loans and Core Assets

Posted by George Blackburne on Wed, Aug 2, 2017

4 Food Groups.jpgInvestopedia defines a core asset as follows:  A core asset is an essential, important or valuable property of a business without which a company cannot carry on with its profit-making activities. A business would dissolve without its core assets, and companies that sell off core assets are usually liquidating and on the verge of bankruptcy.

In the context of super-wealthy real estate investors, I would argue that the term has a slightly different meaning.  When the wealthy speak of their core real estate assets, they are usually speaking about their multifamily, office, retail and industrial properties.  These four major commercial property types are known in commercial real estate finance as the four basic food groups.

 

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A wealthy investor's core assets are typically under-leveraged; often less than 45% loan-to-value.  Have you ever been frustrated when a life company refused to loan higher than 55% loan-to-value?  Have you ever asked yourself, "Who on Earth could be satisfied with a loan of only 55%?"  Well, its these supper-wealthy investors who intentionally keep their core assets under-leveraged.

 

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Lastly, core assets are usually very attractive properties in their class.  For example, if the the core asset is an office building, it will be one of the most attractive and best-located office buildings in town.  The thing about a core asset is that the property is usually so desirable that it will remain leased, even in a bad recession.

 

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I was in New York City twenty years ago, trying to place a $25 million commercial construction loan, when I found myself walking in front of Jackie Onassis' (JFK's widow) apartment building, directly across from Central Park.  It was a stunningly beautiful and desirable location.

 

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As rich as Jackie O was - she inherited the Onassis shipping fortune - did you know that she did NOT own the building or even the $50 million apartment in which she resided?  She was forced to just lease it for a very long time (thirty years?) from the SUPER-wealthy family that owned the building.  When people talk about old money, the family that owned this incredibly valuable building were probably really-really old money.  

I would not fall off my chair in surprise if this primest-of-prime buildings was owned by the descendants of the famous Rothchild banking family.  The Rothschild family is a wealthy family descending from Mayer Amschel Rothschild, a court Jew in the Free City of Frankfurt, who established his banking business in the 1760s.  Unlike most previous court Jews, Rothschild managed to bequeath his wealth and established an international banking family through his five sons, who established themselves in London, Paris, Frankfurt, Vienna, and Naples.

 

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Guys, each one of these five Rothchild sons went on to grow their banks to be one of the very largest in each country.  They made the equivalent of tens of billions of dollars by financing wars between each other; e.g., one brother in Paris might loan Napoleon enough dough to wage war against England, which borrowed money from N.M. Rothchild & Sons in London.  What a racket!  Ha-ha.  Jeff Bezos, Bill Gates, and Warren Buffet are poor peasants compared to the very secretive Rothchild family.  And yes, the Rothchild family, if they actually owned it, would surely have considered Jackie's building a core asset

 

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So I was walking in front of Jackie's building when a epiphany hit me:  There are some pieces of commercial real estate that are so desirable that they will stay leased, even in the most severe of recessions.  The rich always have money, and they simply want this quality space.  In my own mind - and I teach this concept to my sons and staff - I consider properties like this to be top 40% properties.  The wise investor will strive to invest in top 40% properties.

 

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One final thought about core assets:  The wealthy do not churn core assets.  Core assets are keepers.  Think of the Rothchild family and Jackie O's apartment building.  If the Rothchild's actually  do own that building, they might have bought that building when it was built 60 years ago.  Even if Jackie O tried to buy it at 20% over its appraised value, I could easily see the trustee of the Rothchild Trust saying, "Thank you, Madam, for your very generous offer, but this building is one of our core assets."

 

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Stay close to the Blackburne family.  Blackburne & Sons Realty Capital Corporation (est. 1980) stayed in the market making commercial real estate loans every day of the Great Recession.

 

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Cisca, my  lovely bride of 34 years, and I recently moved from Northern Indiana to Indianapolis.  Our daughter, Jordi, just graduated from Culver Girls Academy, so we were free to leave our home near the campus of the prestigious Culver Military Academy to be closer to my son, Tom, and our granddaughter.  If you get a chance, be sure to click on that Culver link above.  You'll quickly see why Cisca and I lived in the cornfields of Indiana for 18 years to send our kids to this very special academy.  Jordi recently rode in President Trump's Innaugural Parade.  George IV and Tom rode in George W. Bush's Innaugural Parade, and I rode in Nixon's Parade in 1971.

 

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It's wonderful to work alongside my son, Tom, here in Indy.  Anyway, I write this blog to teach my two sons the business of commercial real estate finance (CREF).  It's my legacy to them, so I try to teach them "good stuff" at least twice a week.  By subscribing to this blog, you get to enjoy that same training for free.

 

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Topics: core assets