Commercial Loans and Fun Blog

Let's suppose that you hear that Rick Savoy is working as a commercial real estate loan officer at Mason Bank, and he is closing a lot of commercial loans.  The problem is that you don't know his email address, and he seems a little weird about giving it out to some new commercial mortgage broker.  Bankers tend to hate unsolicited email and hence his reluctance.

The first thing you should do is to Google his bank.  You would search for "Mason Bank".  Banks are very, very good at hiding their commercial real estate loan officers so they never make commercial loans (pretty stupid, huh?).  Therefore you almost certainly will NOT find Steve the Wonder Loan Officer listed on their website.

Sombody help me!

But what you will find is the URL of the bank.  Maybe the URL of the bank is MasonBankTexas.  For the sake of simplicity, we'll assume the URL is just MasonBank.com.  By the way, I just made up the name of Mason Bank for purposes of writing this commercial loan training lesson, but there actually is a Mason Bank in Texas.  Ha-ha! 

Really, sombody help me!

Then, in order to find his actual email address address, simply send him an email with a subject line:  Three Quick Questions About Your Commercial Loans.  Then you address your email to -

rsavoy@masonbank.com

or

rick.savoy@masonbank.com

There seems to be a convention in banking to use either the first letter of his first name, followed by his last name OR the first name dot last name.  Ninety-five percent of the time one of these two email addresses will work.  You send your email to both email addresses, and the one that does not bounce is his real email address.  Voila!

Well, this isn't actually awful.

I keep reminding you guys that you need to reach out to every banker within 15 miles of your office and start soliciting him for his turndowns.  Remember, the first place that most borrowers call when looking for a commercial loan is their own bank.  And since most bankers are sleepy fellows, the typical commercial real estate loan officer working for a bank turns down five to ten commercial loan requests every week.  The loan is too small, too big, too far away, or the wrong type of property.  You want those turndowns!

 The baby is clearly digging it.

Don't just get one commercial loan officer per bank.  Get three, four, or five of them.  After all, EACH commercial loan officer turns down five to ten commercial loan applications per month.

If the email address works, ask for his minimum and maximum commercial loans, lending area, and whether or not he makes SBA loans.  Always remember that virtually all 6,799 commercial banks in America make the same kind of commwercial loans at pretty much the same interest rate.  Bankers are herd animals.  Moooo.  My kingdom for a capitalistic banker!

Everybody needs to spoon a little.

This brings up another point.  If commercial loan officer Suzie Smith summarily turns down your commercial loan request, don't give up on that bank - especially if the bank is located close to the subject property.  Try presenting your commercial loan to John Jones at the same bank.  Remember, banks are far more likely to approve a commercial loan if the property is located close to one of their branches.

But this is just plain wrong.

Once upon a time, Steve Coach owned a large bus line company, Coach's Coaches.  His company owned 1,200 semi-luxury coaches that they hired out for various tours and sporting events.  Business was good for many years, but a series of unfortunate decisions left the bus line deeply in debt and with only 300 buses fit for use.  Steve had no choice but to put his 30-year-old company into Chapter 11 Bankruptcy.

His creditors consisted of a $1,000,000 first mortgage on his bus storage and repair facility from his bank, a $6,000,000 equipment loan on his 1,200 buses, and another $2 million in various payables, including a seriously-delinquent fuel bill of $800,000.  No fuel company in the area would even sell him fuel, except of a cash basis.

Everyone knows that when a personal property lender, the lender who loaned on the buses, executes on his collateral, he will be lucky to get forty cents on the dollar.  By the way, a real estate lender forecloses on its collateral.  A personal property lender executes on its collateral; i.e., seizes the collateral, advertises its sale, and then liquidates it.

When a lender sells a property, it is called liquidating; i.e., turning an illiquid asset into liquid money.  One final review of my terminology:  Real estate is land and everything that is (permanently) attached to the land.  Every other asset that is not land is personal property.

The interesting thing about Coach's Coaches, however, is that there is a huge demand for the company's buses.  Sports teams and travel agencies are calling every day, desperate for a company to rent them a bus and driver.  Steve's main problem is that unfortunately 900 of his buses need essential repairs before they can be used, but Steve just doesn't have the dough to fix them.  His local bank, which has the first mortgage on his special use facility, and the specialty finance company that has a chattel mortgage on all of Steve's buses don't dispute this essential fact.  If Steve had $2 million to repair his buses and regain his trade credit, he could soon bring current, and eventually pay off, all of his creditors.

By the way, personal property is also called chattel, just like men think of their wives as chattel.  (Just kidding, ladies!!!  Ouch-ouch-ouch!  Ha-ha.)  In the old days, a security lien on chattel was called a Chattel Mortgage.  We don't use these terms anymore.  We use such newer terms and documents as Security Agreements and Financing Statements; but sometimes its easier just to think of just real estate mortgages and chattel mortgages.

Therefore Steve's attorney submits a Chapter 11 Plan of Reorganization to the bankruptcy court that calls for $2 million in additional financing from a new debtor-in-possession (DIP) lender so that Steve can fix his buses and regain his good trade credit; i.e., pay his delinquent fuel and engine parts bills.  Under the plan, the local bank will subordinate its first mortgage and the specialty finance company will subordinate its first chattel mortgage on the coaches as collateral for the new DIP financing. 

Why is a commercial loan to a debtor in bankruptcy called debtor-in-possession financing?  When a borrower or company is hopeless in debt, the bankruptcy is called a Chapter 7 bankruptcy.  Title to the assets (temporary ownership) is transferred to a trustee, who marshals the assets (gathers them all together) and then sells them off to pay the creditors.  In 90% of the cases, the unsecured creditors get completely wiped out.

Some debtors, however, are NOT hopelessly in debt.  Their companies can be saved, if only they are given a little time to reorganize their assets.  In cases like this, the debtor files a Chapter 11 reorganization bankruptcy.  In a Chapter 11 bankruptcy, title to the assets is NOT transferred to some trustee to sell.  Instead, title to the assets remains in the name of the debtor.  He remains in physical possession of the assets.  He is called a debtor-in-possession.  Hence the term, debtor-in-possession (DIP) financing.

In this case, the story ended well for all concerned.  Steve repaired his trucks and paid off his $2 million DIP loan from Blackburne & Sons within two years.  He eventually brought his bank first mortgage and his bus loan current, and he is still operating today.

I keep telling you guys that the real money in commercial mortgage finance is in loan servicing fees.  Blackburne & Sons is up to almost $90,000 per month for servicing just 200 hard money loans.  The easiest way to become a loan servicer is to become a hard money lender.  Raising money is sooo easy these days.

First of all, let's get our terminology correct.  A commercial broker is NOT a commercial loan broker.  A commercial broker is a commercial real estate broker - a guy who helps investors buy, sell, and lease out commercial properties.  You see their signs on commercial buildings all over town.

A second thing is that, by custom, sales agents working for commercial real estate brokers call themselves "commercial brokers", even though they are not brokers themselves and the brokerage license is held by their boss.  It's just the custom and practice in the industry.

Now, in a recent blog article, I wrote that commercial loan brokers should advertise heavily to bankers for their turndowns.  In fact, I said that sixty percent of the contacts on a commercial mortgage broker's mailing list should be bankers.  Why?  Because the first place that most borrowers call when seeking a new commercial loan is their own bank.  Since the typical commercial estate loan officer working for a bank is a sleepy, fifty-year-old guy on salary - a guy who often has little appetite to make more commercial loans - the typical bank loan officer turns down a TON of commercial loan applicants.  The loan is too big, too small, too far away, or the wrong type of property.

By the way, if you should meet a banker making commercial loans, be sure to do a swap with me and get a fee commercial mortgage marketing course or a free list of 750 commercial lenders.  And guys, this is an Honor System swap, so please don't cheat.  The banker has to work for a FDIC-insured bank or a NCUSIF-insured credit union.  A bunch of uneducated guys have inserted their own names, when they are just commercial loan agents.  Grrrrr.  C'mon, guys, its an Honor System. Honesty applies to people of all colors and creeds.

Are you an ambitious, new commercial mortgage broker with a hunger to learn?  Get me seven legitimate bankers, and I'll send you your choice of my nine-hour commercial mortgage brokerage course, my course on becoming a hard money broker, or my wonderful practice course for commercial mortgage brokers with with one to three years of experience.  This is a special deal for the first five guys only.  Please send your lists to george@blackburne.com.

Okay, now back to commercial brokers.  The typical commercial broker has as his clients thirty or more commercial real estate investors.  Many of these investors own multiple commercial properties.  The good news for commercial loan brokers is that most commercial loans have a balloon coming due every five to ten years.  This means that the typical commercial broker will have several investor clients in need of a commercial refinance every year.  If you cultivate a relationship with this commercial broker, he should be good for several loans every year.  Feel free to pay your commercial brokers a referral fee.  Referral fees on commercial loans are perfectly legal.

Now we have finally reached the biggest point of today's training article.  Most successful commercial brokers own commercial property themselves.  When you market to them for their referrals, they will sometimes need a commercial loan of their own.  It's a two-for-one special.

My hard money commercial mortgage company, Blackburne & Sons, was considering a nice hard money commercial loan on a cannabis growing facility in Washington State, where properly licensed facilities are now legally allow to grow it and sell pot for recreational use.

But a big problem has arisen.  Every title company in the state is now refusing to issue title insurance, for fear of running afoul of Federal law, which prohibits the sale and use of marijuana.  If we can't get title insurance, we can't make the loan.

What makes me belly-laugh is that, while I doing research for this short article, I ran across a product now being sold on Amazon.com.  It's a one-plant, discrete growing vessel for pot.  It's a mere $109, and its eligible for free, two-day shipping if you belong to Amazon Prime.  Ha-ha!  In defense of Amazon, one could grow parsley in your closet with this device.

If any of you guys have a solution to my problem, please write to me at george@blackburne.com. 

Have you ever gone snow skiing and rented for your family a gorgeous ski chalet near the slopes for a week?  What about the beach or the shore of some big, beautiful lake?  Did you ever rent a big, gorgeous home on the water for a week?

Often these ski chalets and waterfront homes are of fairly new construction, and they were built with five, six, and sometimes even seven bedrooms.  These giant homes are perfect for extended families, say, three brothers, their wives, and their children.  This is not just a happy coincidence.  These homes were built exactly for this use - to be rented out on a weekly basis to extended families.

Sometimes these gorgeous vacation mansions are owned by a single, filthy-rich guy.  I don't even know the guy, but I hate him.  I'm so jealous.  Ha-ha!

Many times, however, these vacation mansions are owned by four to ten families in a concept known as fractional ownership.  Each family will own, say, a one-eighth of the mansion, giving them the right to six or seven weeks of the year in which to live in the property.

In real life, the family owning one-eighth of the property will usually only stay in the property for one or two weeks per year.  The rest of the unused weeks owned by the eight families will all be rented out to vacationing families, typically a week at a time.

Essentially these vacation mansions will be run as hotel units - rented out and cleaned weekly by a management company originally selected by the developer-sponsor of the of the fractional vacation mansions.  The developer-sponsor will often develop a half-dozen to a dozen similar properties nearby, giving him enough fractional ownership units to sell to justify a decent-sized marketing budget, much like a large timeshare project.  In plain English, there may be ten of these beautiful vacation mansions right next to each other, all managed by the same management company.

Now do you remember that filthy-rich guy that I hated?  He owned this entire vacation mansion by himself, so he would have no problem getting the property financed as a second home or as a rental home.  Remember, home loan rates are always much lower than commercial loan rates, so he wants this property characterized by his lender as a home, not as a commercial property.  He wants a garden-variety conventional home loan, NOT a commercial loan.

But to those eight families who own their vacation mansion as fractional ownership units, financing may prove to be problematic.  First of all, each of them does not own the entire property by himself.  Unless all eight families miraculously agreed that they wanted to finance the property, they would never be able to get a conventional loan.  And who wants to guaranty a $1.8 million loan when he only owns 1/8th of the property???  The other owners could easily walk away in a financial pinch.

Secondly, the property is essentially a tiny hotel, with tenants coming and going every week.  Such a property would be viewed as a nightmare by most banks considering the property as a commercial loan.  Yikes!

Is it therefore possible to even get a loan on a fractional ownership unit?  Blackburne & Sons, my own private money lending company, will make a 15-year fully-amortized commercial loan on fractional ownership interests.  Our loans have no prepayment penalty.  We have done several such loans, and they have performed well.

Are you ready for a commercial loan right now?  You can't close your deal until you actually apply for it.

I started out writing these commercial real estate finance training (CREF) articles to train my sons and my staff in the business.  Now over 5,200 commercial real estate professionals follow this blog.  And why not?  It's free training in commercial real estate finance, and I try to write two articles per week.

Before I get into how to meet bankers, let me first explain why you want to meet bankers.

The first thing that most borrowers do to get a commercial loan is to call the commercial real estate loan officer working at their own bank.  Underwriting a commercial real estate loan is fairly sophisticated, so the profile of a typical bank commercial loan officer is a sleepy, white male between 48 and 60-years-old.  Unfortunately this guy (or lady) is not usually on commission.  As a result, a great many of these mature, salaried, commercial loan officers really don't care if they make another commercial real estate loan or not.

I think that its a mistake that banks don't give their commercial loan officers more of a financial incentive to close commercial loans. Just about every bank in America would benefit from a few more good, commercial real estate loans in its portfolio. After all, commercial real estate loans are among the most profitable loans that a bank can make. But I've said it before, "Banks are lousy capitalists."

So why do you want to meet bankers? If you are commercial real estate investor, and you are thrifty by nature, you may not want to pay some commercial mortgage broker a one-point fee to find you a bank willing to make you a commercial loan. You will want your own Rolodex of six to ten bankers located close to your income property. Remember, you can't just rely on your own bank.

Bankers are notoriously moody and unpredictable when it comes to commercial real estate lending. One moment they love self storage loans, and the next moment, usually after a big loss, they wouldn't touch a self storage loan with a ten-foot pole. One moment the bank is as tight as a drum, and the next moment the bank will make a commercial loan on a so-so property to a recent bankrupt, all because the bank got a big commercial loan payoff, and they are flush with cash. As an income property investor, you need multiple (6-10) bankers to whom to offer your deal.

If you are a commercial mortgage broker, you want bank turn-downs. Bankers get first crack at most commercial real estate loans, and they turn down the vast majority of their commercial loan applicants. Remember, the typical bank loan officer is not on commission, so he has little incentive to say yes. Bankers are therefore the absolute, very best source of referrals. If your mailing list (email or snail mail) does not consist of 60% bankers, you have some work to do.

Now before I explain how to find bankers, let me give you a quick refresher on where to find bankers.  A bank is three-times more likely to approve a commercial loan if the property is located close to one of its branches.  This lesson alone is worth the price of today's admission.  A bank is three-time more likely to approve a commercial loan if the property is located close to one of its branches.

Therefore you want to meet all of the bankers located close to your commercial mortgage brokerage office or close to your income property.  Its easy to find nearby bankers.  Simply go to maps.google.com.  In the upper-left-hand corner, you will type in the address of your office or your commercial property.  Lastly, click on the "Nearby" icon and then type, "banks."  Voila!  You have just identitified every bank located close to your office or the commercial property that you are trying to finance.  Good stuff, huh?

Now, finally, we will explain how to find bankers.  Simply call up the nearby bank branch that you identified using Google.  Be sure to ask the receptionist for a loan officer who handles commercial real estate loans.  If you just ask for a commercial loan officer, you might get the wrong guy.  Normally there will be one commercial real estate loan officer, usually working out of a different branch, who handles all of the commercial real estate loan requests for five or six branches.

Once you reach the guy, make sure that the first words out of your mouth are the following, "Hi, Bob.  My name is John Smith, a commercial mortgage broker (or a commercial real estate investor).  Did I catch you at a good time?"  Those eight words are the keys to the kingdom.

Unless you have a specific deal to present, you really only need to know a few things:

1.  Minumum loan?

2. Maximum loan?

3. Lending area?

4.  Do you make SBA loans or USDA loans?

Why don't you need to know any more?  Because banks all quote pretty much the same commercial loan.

Perhaps the most important thing to retrieve from a new banker is his email address.  Bankers can sometimes be freaky-deaky about giving out their email address because they get a ton of unsolicited email.  The way I like to handle it - at the very end - is to ask, "If I have a commercial loan that I want to show to you, to what email address should I send it?"  That seems to work for me.  Asking the question at the end seems to imply that the entire seven-minute phone call will have been wasted if the banker doesn't give up his email address.

Did you learn something today?  This is how I teach.  I use a ton of humor, and I try to weave in lots of verbal proof stories - real life stories that prove a point.  I strongly encourage you to order this course about how to become a commercial mortgage broker.  Trever Cole Commercial - who just closed their 50th loan for C-Loans, Inc. this month - uses this video course to train all of their new commercial loan officers.

Nobody ever listens to me, but the real money in commercial real estate finance is in loan servicing fees. My little eleven-person commercial hard money firm now brings in over $83,000 per month, whether we close any new loans that month or not. When Cisca and I were first married, we dreamt of the day when our loan servicing income would exceed $2,000 per month. Then our mortgage and utilities would always be paid. Today this number is $83,333 per month. The real money in commercial real estate finance is in loan servicing fees.

This is your best deal.

When we physically shop these days, there are apparently two different ways to shop for physical goods that you can take home immediately, as opposed to waiting for Amazon Prime to deliver them.  The first way to physically shop is that you can go to some big box store, walk the acres of concrete flooring, and buy your stuff quite cheaply.  

But there is now an alternate way to shop, where perhaps you pay a little more, but the whole outing becomes an enjoyable and stimulating experience.  This is called experience-based retail.  I stole the following paragraph from an interesting article on the subject:

"A customer’s shopping experience is affected by a myriad of factors, but we would place the greatest emphasis on a retailer’s ability to offer unique products and deliver a high level of customer service. Apple’s stylish devices are sold by knowledgeable staff able to help customers navigate sometimes complicated electronics, and their numbers ensure that service is rapid. Sales staff at lululemon athletica offer personalized and attentive service to consumers of the store’s versatile athletic apparel, while the friendly and eccentric staff of Trader Joe’s keep check-out lines flowing and add as much character to the aisles as the grocer’s self branded offerings. Upscale department stores like Nordstrom’s and Bloomingdales offer free personal shopping services to all consumers, and fellow mall tenant Lush, a seller of organically produced cosmetics, offers private events and makeup consultations."

Millennials actually spend materially more money on "shopping experiences" than they do on plain 'ole shopping.  For Millennials, the experience-to-stuff ratio (yes, there actually is such a ratio!) is 1.14.  For Baby Boomers and Generation Y, that ratio is closer to just 1.0.

Experience-based retailers can be found in malls and lifestyle centers, and in terms of retail success, such retail centers are far more successful these days than retailers in strip centers or power centers.  Do you remember what a lifestyle center is?  Think of a lifestyle center as a mall for fat people who are too lazy to walk an enclosed mall.  Ha-ha!  You can drive right up to each store.  Most lifestyle centers also enjoy several popular restaurants that add importantly to the experience.

I used the term "power center" above.  A power center is a huge shopping center consisting of six to twelve big box retail stores.  Examples of big box retailers include Abercrombie & Fitch, Barnes & Noble, Bed Bath & Beyond, Best Buy, Costco, Dicks Sporting Goods, Dollar Tree, GAP, Home Depot, JC Penney, Kohls, Lowes, Macys, Michaels, Nordstrom, Office Depot, Office Max, Old Navy, 
Rite Aid, Saks Fifth Avenue, Sears, Staples, Target, Trader Joes, Walgreens, and Wal-Mart.

Don't forget, however, that power centers are not doing nearly as well as the experience-based retailers found in malls and lifestyle centers.  As I was compiling the above list of big box retailers, I had to delete one-third of the names because the companies had already gone bankrupt.   

Now if you own a shopping center, you definitely want more experience-based retailers in your center.  Experience-based retailers bring in far more money per square foot than normal retailers, so such stores can afford a higher rent.  In addition, they are less likely to go bankrupt, like so many of the big box retailers (think: Toys R Us.).  

"The attractiveness of malls and lifestyle centers is further compounded by their defensive positioning against e-commerce. The experienced based nature of the goods and services their tenants offer are extremely difficult to replicate online, and thus their competitive advantages over other brick-and-mortar retailers transfer to online retailers as well. Dining establishments lack online competition and live entertainment by its very nature cannot be replicated digitally, nor can the ability to meld shopping, dining, and entertainment into a series of cohesive and related experiences."

Today we learned about experience-based retail, lifestyle centers, and power centers.  I write these training articles to train my sons and my staff in commercial real estate finance.  By subscribing to this blog, you can effectively audit these training classes for free.