Commercial Loans Blog

What is a Subordination, Non-Disturbance and Attornment Agreement?

Posted by George Blackburne on Thu, May 24, 2018

Rent-a-car facilitySuppose ABC Rent-a-Car wants to build a commercial building on a specific, high-traffic-count lot in the City.  ABC Rent-a-Car offers to buy the land from the property owner, but the commercial property owner wants to leave this valuable commercial lot to his grandchildren and great-grandchildren. He refuses to sell.

The commercial property owner, however, is willing to lease the land to ABC Rent-a-Car on a long term basis.  ABC Rent-a-Car tries to negotiate a lease of the land for 99 years, the longest term allowed by law.

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When private investors invest in 7% to 12% first mortgages originated by Blackburne & Sons (est. 1980), they do NOT invest in a hard money mortgage fund.  Hard money mortgage funds have a lot in common with Ponzi schemes.  They rely on the fee income from new loan originations to keep the office open.  Did you know that over 90% of all hard money mortgage funds failed during the Great Recession?  Instead, a private investor with Blackburne & Sons can invest as little as $10,000 in a first mortgage personally chosen by him.  He gets to be the underwriter.  Remember, folks, we have been "crowd-funding" commercial first mortgages for almost 40 years.

 

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Interesting note:  Had the commercial property owner unwisely leased the land to the car rental company for 100 years, the courts would have ruled that this lease was in fact an installment sale! Title to the property would pass to the car rental company.  The maximum term of a land lease is 99 years.

The old man, however, refuses to lease the bare commercial land for longer than 75 years, which the car rental company decides is sufficient.  The parties execute a land lease for 75 years at an amount that pays the old man a return of about 8% annually on the value of the land, with a cost of living escalator every five years.  This would be a very typical deal.

 

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The rental car company, however, insists on a land lease clause requiring any future lender to sign a Subordination, Non-Disturbance and Attornment Agreement.  After all, it's only fair. The rental car company is going to spend $2,000,000 constructing a building on the property at the rental car company's own expense.

What a deal!  The property owner gets $100,000 a year triple-net rent on his land lease AND when the lease expires, both the land and the building revert back to his heirs. (I recently ran across a wealthy family trust that has the land lease on an entire city block on Michigan Avenue - the hottest shopping strip - in Chicago.  The land lessees built skyscrapers all along that block, and these skyscapers are poised to revert back to the grandchildren of the trust settlor after 99 years.  Holy Smackeral!  We're talking about a billion dollars worth of buildings!)

 

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Okay, let's scroll forward about ten years.  Suddenly the old man is in need of some dough.  Maybe he just got a young, new wife.  He takes his land lease to the bank and pledges it to the bank for a $900,000 loan.  When the bank pulls a title commitment (preliminary report), they find out that ABC Rent-a-Car has recorded their land lease against the title.  The bank contacts the attorney for the rental car company and says, "Hey, we want to record our mortgage against the property, and we have to be in first position.  We please need for you to subordinate your land lease to our mortgage."

Counsel for the car rental company then responds, "Okay, we'll agree to subordinate, as long as you sign our Subordination, Non-Disturbance and Attornment Agreement."  The attorneys exchange documents and cut a deal.  The new first mortgage is recorded, and the car rental company subordinates it's land lease.

 

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The old man's young, new wife - Lola La Boom-Boom - ends up being a spendthrift and drives him into bankruptcy.  The bank forecloses on the property, which is now improved with a gleaming, modern automotive center.  The REO property manager for the bank contacts ABC Rent-a-Car and tells them, "Hey, our foreclosure just cut off your lease. You were paying only $100,000 per year for this beautiful facility, but the fair market rent for the property is now at least $200,000 per year. You'll have to start paying us $200,000 per year if you want to continue to rent the property."

"Not so fast, Bucko," replies the attorney for the car rental company.  Please check the Subordination, Non-Disturbance and Attornment Agreement that your bank executed.  Under the terms of that agreement, your bank promised not to disturb our existing lease if you foreclosed. Now that you have completed the foreclosure, we certainly agree to attorn.  Attornment is a word from feudal times that means acknowledging a new lord.  In this case, the rental car company acknowledges that all future rent is owned to the new landlord, in this case the bank.

 

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Topics: Attornment agreements

Commercial Loans and Holding Title as a Limited Liability Company

Posted by George Blackburne on Sun, May 20, 2018

roof holeA majority of all commercial properties today are owned by limited liability companies (LLC's).  The reason why goes back to a bizarre personal injury action in the 1970's.

About 40 years ago, a thief was climbing on the roof of a commercial building in New York City.  He was trying to break into the store to steal stuff, and he had no business being on the roof.  The roof was near the end of its useful life, and the thief fell through the roof and severely injured himself.

 

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A lot of you guys are accredited investors, and you have been on our mailing list for over a decade (or three).  Pay attention here.  You can invest in our 7% to 12% first trust deeds with as little as $10,000.  We were crowd-funding first mortgages long before the term was ever invented.  Our private investors survived (admittedly a little banged up) three different commercial real estate crashes of 45%.  In our 38 years in business, Blackburne & Sons has seen over 2,000 (4,000?) commercial banks and S&L's go bust.  You are NOT earning 9% on the bond portion of your retirement.  Why not?

At least - it costs you nothing - get on our first mortgage investments email list.  No one will EVER call you to sell you a first mortgage.  When you finally decide to invest, you will be frustrated by how quickly our deals sell out.  The typical deal sells out in two hours.  Wake up.  You are missing a pretty attractive class of investment.

 

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The thief must have had unbelievable audacity because he actually sued the owner of the commercial building for negligence for failing to maintain the roof.  To the shock of commercial property owners everywhere, this miserable thief won his lawsuit and was awarded over a million dollars in damages by the brain-dead jury.

The property owner held title to the building personally, and he was personally wiped out when the judgment debtor took virtually everything the store owner owned.

 

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From that moment on, commercial property owners across the country desperately sought a way to insulate themselves from liability.  They could not hold title as a regular "C-corp" because they would be taxed twice - once as a corporation and another time when the owners drew out their profits as dividends.  Limited liability companies had not yet been invented.

The solution was the subchapter-S corporation.  A subchapter-S corporation can only be used for new business ventures, and there is a limit of 35 shareholders.  You can therefore never take a subchapter-S corporation public.

 

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The big advantage of the subchapter-S corporation, however, was that it was not taxed twice.  The net income of a subchapter-S corporation passes directly through to the owners of the corporation without taxation.  The shareholders only pay taxes once on the profits, as they are added to their personal income on their 1040's.

As a result, for about 15 years, title to a great many commercial properties was held by a subchapter-S corporation.

 

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The first state to enact a law authorizing limited liability companies was Wyoming in 1977.  The form did not become immediately popular, in part because of uncertainties in tax treatment by the Internal Revenue Service.  After an IRS ruling in 1988 that Wyoming LLCs could be taxed as partnerships, other states began enacting LLC statues.  By 1996, all 50 states had LLC statutes.

Modernly, subchapter-S corporations have been almost entirely replaced by limited liability companies (LLC's).  LLC's are taxed just like subchapter-S corporations; i.e., only once.  Unlike subchapter-S corporations, LLC's do not have to be new ventures, and ownership is not limited to 35 shareholders.

 

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Although LLCs and corporations both possess a lot of the same features, the basic terminology commonly associated with each type of legal entity is slightly different.  When an LLC is formed, it is said to be "organized", not "incorporated".  Its founding document is therefore known as its "Articles of Organization", instead of its "Articles of Incorporation". 

Internal operations of an LLC are further governed by its "Operating Agreement", rather than its "Bylaws".  The owner of beneficial rights in an LLC is known as a "Member," rather than a "Shareholder".  Additionally, ownership in an LLC is represented by a "Membership Interest", rather than represented by "shares of stock".  Similarly, when issued in physical rather than electronic form, a document evidencing ownership rights in an LLC is called a "Membership Certificate", rather than a "stock certificate".

 

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Most American courts have held that LLC members are subject to the same common law alter ego piercing theories as corporate shareholders.  In other words, there are times when the acts of of the LLC are so horrific (intentionally polluting a stream with a cancer-causing pollutant) that an injured party can go after the personal assets of the members.

However, it is more difficult to pierce the LLC veil, compared to the corporate veil, because LLCs do not have many formalities (annual meetings, corporate resolutions, etc.) to maintain.  In our example of the thief above, he would probably have been unable to go after the personal assets of the retail building owner - unless perhaps the building owner set up a spring gun to impale trespassers.  As long as the LLC and the members do not commingle funds, it is difficult to pierce the LLC veil.

 

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Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism.  The charging order (an order of the court instructing the LLC to pay a judgment creditor of a Member) limits the creditor of a debtor-partner or a debtor-member to the debtor's share of distributions, without conferring on the creditor any voting or management rights.

Its no wonder why most commercial property owners choose to hold title to the property as a limited liability company, as opposed to personally, corporately, or as a subchapter-S corporation.

 

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Topics: Limited liability companies

The SBA 7a Program Versus the USDA Business and Industry Loan Program

Posted by George Blackburne on Sat, May 19, 2018

Rural BuildingThe USDA Business and Industry Loan Program is quite similar to the SBA 7a Loan Program.  When would a borrower apply for a USDA B&I loan, rather than an SBA 7a loan?  What's the difference?

Some of the lowest wage rates and the highest unemployment rates in America can be found in rural areas.  USDA Business and Industry Loan program was therefore developed to help foster employment in rural areas, defined as communities of less than 50,000 people.   The Federal government is therefore trying to encourage companies to build factories in these underdeveloped small towns and rural areas.

 

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"Okay, but the SBA 7a loan program should work as well as the USDA Business and Industry loan program in rural areas.  Why a different program?"

There are, in fact, some material differences.  For example, a company does NOT have to be a small business in order to qualify for a USDA B&I loan. The company could have 10,000 employees and still qualify.

 

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Secondly, the property does not have to 51% owner-occupied in order to to qualify for a USDA loan. Suppose a company wanted to move into a large, vacant industrial building; but they only intended to occupy 25% of the space.  They would still qualify for a USDA B&I loan.

In fact, investors can even qualify for a USDA B&I loan, even if they intend to lease out 100% of the space to others!

 

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Example:

Charlie Charger, a former football star for the Smalltown Seminoles, has just developed a coating that increases the efficiency of solar panels.  Still madly in love with his wife (a former Seminole cheerleader) and the proud father of three children, Charlie wants to develop a chemical plant right in Smalltown.  He wants to give good jobs to his friends and neighbors.

Charlie goes to Isaac Investor, the richest man in town, seeking financial help.  Isaac declines to provide venture capital, but he agrees to build an industrial plant for Charger Coatings, LLC, and then lease it to the new chemical venture at a less-than-market rate for the first three years.  Isaac could qualify for a $10 million USDA Business and Industry loan to build the plant, even though he is just an investor and even though Isaac intends to initially lease 75% of the space to outside tenants.

 

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Non-profit organizations do not qualify for an SBA loan.  In contrast, the USDA will guarantee commercial loans to non-profit organizations.

While an SBA 7a commercial loan can be used to refinance existing debt, there must be a 20% reduction in the debt service.  In plain English, this means that the new SBA 7a loan has to reduce the borrower's loan payments by 20%.  In contrast, USDA Business and Industry Loans can also be used to refinance existing debt, but there is no requirement of a 20% reduction in debt service.

 

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Lastly, the USDA will regularly guarantee commercial loans up to $10 million, as opposed to just $5 million for the SBA 7a loan program.  On a case-by-case basis, the USDA will guarantee commercial loans as large as $25 million.

 

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There is something very important to appreciate when seeking either an SBA loan or a USDA loan.  Neither the Small Business Administration nor the U.S. Department of Agriculture actually makes commercial loans.  Instead, they merely guarantee a portion of the loans.  Please note the emphasis on the word, "portion".  

This means that there is a portion of these commercial loans that is not guaranteed.  Some bank has its tail flapping in the breeze, ready to get shot it off, if the loan goes bad.  Therefore some banks may be willing to take the risk, but others will not.  This is a HUGE point.

 

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Apply To 93 Different USDA Lenders Six At a Time Until One Says Yes  

 

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This means that seven SBA lenders could turn your deal down, only to have the eighth SBA lender (or USDA lender) approve your deal.  C-Loans.com is therefore perfect for applying for either an SBA or USDA loan.  You enter the deal once into C-Loans (about four minutes worth of work), and then you submit it to SBA lender (or USDA lender) after SBA lender until you find a lender willing to do the deal.

 

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Topics: USDA loans versus SBA loans

How To Sell Commercial Loans in the Midwest

Posted by George Blackburne on Thu, May 17, 2018

IndyFew commercial banks, based on the East coast or the West coast, realize the strength of the economy in the Midwest.  "Cookin' with gas" is an understatement.  This article will give you some ammunition when trying to convince some nationwide commercial lender to approve your Midwest commercial loan.

Even though Blackburne & Sons Realty Capital Corporation is a Sacramento-based private money commercial lender, my wife and I personally live in Indianapolis, in order to be close to our son, Tom, and our granddaughter.  If you drive around Indianapolis - or almost anywhere in the Midwest - you will be stunned by the number of Help Wanted signs.  A full forty percent of businesses here are displaying such signs.

 

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Every week I play golf in a league with a bunch of business owners and top level executives.  They all tell the same story.  They can't hire enough workers.  Most have a  cash incentive program to encourage their existing workers to recruit their buddies.  Some are even accepting ex-cons and workers with known drug problems.  The problem is so acute that the President of Zentis, a German  fruit canner, was flying out last week "to solve the problem."  Good luck with that, Herr Zentis.

During the Great Recession, President Obama visited Elkhart, Indiana, the home of the nations RV industry.  Berkshire Hathaway owns Forest River in Elkhart, the second largest RV manufacturer in the country.  At its nadir (low point), unemployment in Elkhart was something like 23%, just about the highest rate in the country.  Today Elkhart County has over 20,000 unfilled jobs.

 

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A recent (four months ago) government report revealed that if everyone in the Midwest who wanted a job, had a job, employers would still be short a whopping 40,000 workers!!!  Wow.

Last month a read a fascinating story in the Washington Post about how a resort town in the Poconos sent recruiters to hard-hit Puerto Rico, after the hurricane, to try to recruit workers to help operate their playhouses, museums, and restaurants.  Local grocery stores were asked to stock plantains and coconut milk.  Nightclubs were asked to play Latin dance music, like the merengue, in order to make the Puerto Rican workers feel welcome and happy.

 

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We used to call the Great Lakes industrial cities the Rust Belt.  Today the U.S. employs more industrial workers than at any time in history.  The most recent survey of Purchasing Managers for Industrial Companies stands today at highest level of optimism in history.  In history, folks!

Blackburne & Sons most preferred commercial loan product - our sweet spot - is:

Small Commercial Loans in the Heartland.  

 

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We love-love-love multifamily loans, commercial loans, and industrial building loans of less than $1 million in small town America.  We are doing a TON of commercial loans in Michigan, Ohio, Indiana, and Illinois.

And remember, Blackburne & Sons makes permanent loans, not just bridge loans.  You will recall that a permanent loan is a first mortgage on a standing property, with a term of at least five years and at least some amortization.  Most banks use a 25-year amortization and a five or ten year term.  Blackburne & Sons uses a 30-year amortization, and our permanent loans have a term of 15 years.

 

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Our loans have no prepayment penalty, so they work well as bridge loans too.  On an annual percentage rate (APR) basis, our loans are far cheaper than any other private money competitor.

 

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Commercial Loans, Trades, and a Bazillion Bankers

Posted by George Blackburne on Mon, May 7, 2018

Screen Shot 2018-05-05 at 8.52.48 PMC-Loans, Inc. has quietly been adding 20 to 30 new banks to CommercialMortgage.com every week. Every week, folks!  That's over 100 new commercial real estate lenders every month.  How have we been finding these banks?  We trade for them.

For example, let's suppose a borrower tells his mortgage broker that his existing private money lender will subordinate to a new loan, and the trusting mortgage broker spends 20 hours finding a  lender willing to make the commercial loan.  When it comes time to close, the poor mortgage broker finds out that the existing private lender absolutely refuses to subordinate, and the thoughtless borrower hadn't even asked him for his willingness.  The borrower just says to the mortgage broker, "Too bad, so sad.  You'll have to make it up on the next guy."

 

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When the mortgage broker goes to sue the scum-bucket borrower, he finds out that his attorney wants a $25,000 retainer, and he estimates that his legal fees through trial will be another $20,000.  The poor mortgage broker's loan fee was only $12,000.  He can't afford to sue this horrible borrower.

Now if the mortgage broker had used my battle-tested fee agreement, he could sue the borrower in arbitration, in the mortgage broker's home town, and not even employ an attorney.  In arbitration, you simply meet in some attorney's conference room, sit around a conference table, and tell your story -  much like Small Claims Court.  You do NOT need to hire an attorney if you are the plaintiff in arbitration.  A total rookie can easily handle his own case.  And from the time you file your Demand For Arbitration, you will be able to drag this low-life borrower before an arbitrator in less than 60 days.

 

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Now when you buy my nine-hour video training course, "How to Broker Commercial Loans," for $549, you get this fee agreement and 90-minutes of video training on fee collection as part of the course.

Or you can buy this Fee Collection Course and Fee Agreement separately for just $199.  In your entire career as a commercial mortgage broker, you will never make a better investment.

But what if you are a starving mortgage broker?  Well, then go out and find a banker that is in the market making commercial loans and trade me that one banker for my Fee Agreement.

 

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I have probably successfully litigated more commercial mortgage broker fee collection cases than any attorney in America, probably several times over.  When you call me asking for help some day on a huge fee collection case (I don't take cases, but I'll coach you a little), I predict I won't be able to help you because some "expert" (your attorney) had you make this one little change to my agreement.  Argghhh!  Invariably that little language change totally screws the poor mortgage broker out of victory.  Do not change even one word.  Don't say I didn't warn you.

I offer trades like this based on The Honor System.  You could easily slip me nonsense information and still get your free fee agreement.  Therefore please be sure that you are giving me a bona fide commercial banker.  Go to the guy's web site and make sure it says, "So-and-So Bank" and contains the FDIC-insured deposits symbol.  You should never find yourself entering your own name.  Thanks.

 

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Now the point of this lesson is to tell you guys that CommercialMortgage.com is exploding in size.  Our list of hungry commercial lenders just keeps growing and growing.  When someone trades me a banker, I immediately add them to CommercialMortgage.com.  And we are doing tons of trades.

You can trade us one banker for a regional list of over 750 bankers (and other commercial lenders), and if you trade us three bankers, you can obtain the entire Blackburne List of Commercial Lenders.

 

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You can also trade one banker for the PowerPoint presentation to my wonderful course, How To Market for Commercial Loans.  You also just can buy this online course for $199.

 

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I wouldn't fall off my chair in surprise if 5% of all of the practicing commercial mortgage brokers in the country got their start by watching my popular nine-hour video course, How To Broker Commercial Loans.  It is a very popular course.  The course includes marketing, underwriting, packaging, placement, and fee collection.  

 

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But not everyone can afford the $549 cost.  If you are a starving mortgage broker, you can get your hands on this wonderful course by just providing me with a list of ten bankers making commercial loans.

 

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There has never been an easier time to become a hard money mortgage broker.  The reason why you want to become a hard money lender is that you get to service your own loans.  Folks, if you are not working daily to develop your own loan servicing rights, get out of the business.  Let me say this again.  Never want to service loans?  Get out of the commercial loan business.  You'll never survive the next recession.  The real money in the mortgage business is in loan servicing fees.

And geez, guys, loan servicing is no big deal.  You can hire a sub-servicing company to service your loans for just $30 per loan per month.  Charge your investors $1,000 per month and pay them $30.  My own loan servicing fees are over $1 million per year, whether I close a new loan that entire year or not.  Careful, now.  I still have to pay salaries out of that, but its easier to survive recessions when you know you're going to get $80,000 on the first of each month.  I sell a four-hour video course, How To Find Your Own Private Mortgage Investors, that helps you to get started.

 

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But not everyone can afford the $549 cost.  Trade me just ten bankers, and I'll send you the course.    Most guys, when they start building up a list of ten bankers to trade me, find that its easy to keep going and give me 20 bankers.  This way they get both courses.

Now on to my final point.  You should be calling bankers every day anyway.  The typical commercial banker turns down a half-dozen commercial loan applications every week.  You want those turndowns!!  If I was surviving on a shoestring, I would send a funny joke by snail mail to each banker on my list every ten days, and I would include three business cards.

 

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Topics: Bazzillion Bankers