Commercial Loans Blog

Need Commercial Loans?  Market to Referral Sources, Not the Public!

Posted by George Blackburne on Wed, Oct 31, 2018

Small retail buildingToday's article is targeted at commercial loan brokers, and its about where to market for commercial loans.  Please stop.  Are you a commercial broker?  In other words, do you list and sell commercial real estate?  If so, please hear this before you sign off:  

You should open a commercial mortgage company using that empty desk in the corner!

 

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Why?  Because I own commercial loan company, I market regularly for commercial loans.  The people with whom I speak are commercial property owners.  As a result, I meet a half-dozen wealthy real estate investors every single day.  After all, poor people don't own nice apartment buildings and office buildings.  And once the commercial loan officer working your commercial loan desk meets a high-net-worth client, then your realty brokerage company should and must continually market to that investor to buy your listings and to give you new listings.

The following video is only 42 seconds long, and it shows you how you can make a $21,250 referral fee while your are passed out on the couch, stuffed with turkey, and watching a football game.

 

 

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Okay, now on to the point of today's training article for commercial loan brokers.

Marketing directly to commercial property owners for commercial real estate loans simply does not work.

I have been soliciting commercial real estate  loans for almost forty years.  I can honestly say that I cannot remember ever closing a single commercial loan that came from a flyer, a postcard, a direct mail piece, a (digital or Stone Age) magazine ad or a newspaper ad (back in the day) that was aimed directly at commercial property owners.

 

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Marketing directly to commercial property owners for commercial loans simply does not work.  Pound that concept into your head!  Marketing directly to commercial property owners for commercial loans does not work.

You could spend $10,000 on a direct mail campaign or (digital) magazine ad to commercial property owners.  You'd probably get no more than ten leads, and most likely not a single one of these commercial loan deals will close.

 

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Now I know that this reality is not obvious to the casual observer.  In my lifetime I have probably spent over $200,000 on about 70 marketing campaigns aimed directly at commercial real estate estate investors for commercial loans.  Every one of these campaigns was a complete and total bust.  Zip-zilch-zero.  Nada.

If I had saved and invested that money instead, I would be writing to you today from the beaches of Aruba.  Arghhh.  Over and over again I tried.  What a bonehead I was!  In the end, once I had learned how to build loan servicing income, I turned out very okay; but I just kick myself for taking so long to learn this lesson:  Marketing directly to commercial property owners for commercial loan simply does not work.

 

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The best way to market for commercial loans is to market by email (and occasionally by snail mail) to people who, because of their jobs, are in a good position to refer you commercial mortgage borrowers.  I call these guys referral sources.

The people who, because of their jobs, are in a good position to refer you commercial loans - the best being listed first - include (1) commercial bankers, (2) commercial real estate brokers, (3) property managers, (4) other commercial lenders, (5) CPA's, (6) attorneys, (7) residential mortgage brokers, (8) residential real estate (sales) brokers, and (9) life insurance agents.

 

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Don't put too many property managers, residential real estate brokers, CPA's and attorneys on your snail mailing list because each of these classes of referral sources gets a huge volume of junk mail daily.  Instead, you should only advertise to these four classes of referral sources if they would recognize your name and your company name.  At least then they might open your envelopes.

Residential mortgage brokers are a great source of commercial leads, but never try to become a commercial mortgage wholesaler. You'll only get rejects and deals that are not do-able.  Instead, work with residential mortgage brokers on a name and number referral basis only.

 

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The best referral sources for commercial loan leads are by far commercial bankers and commercial real estate brokers (both leasing and sales specialists).

 

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Topics: commercial loan marketing tips

How To Underwrite Commercial Construction Loans - Fantastic!

Posted by George Blackburne on Wed, Oct 24, 2018

Under construction-1All of my readers should read today's article, including commercial loan brokers, commercial brokers, real estate investors, and developers.

A couple of years ago I wrote a superb article that explains the entire commercial construction loan underwriting process in layman's English.  I teach the reader the five ratio's of commercial construction loan underwriting, including

  1. The Loan-to-Cost Ratio;
  2. The Loan-to-Value Ratio;
  3. The Debt Service Coverage Ratio;
  4. The Profit Ratio; and 
  5. The Net-Worth-to-Loan-Size Ratio

STOP!  Take 42 Seconds to View This Video.

 

Don't panic!  Don't fall asleep!  I make these ratios fun!

 

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The article is written in a playful manner that I promise will have you chuckling.  We follow the story of Bubba, a developer of questionable morals, as he tries to convince his bank to make a construction loan to build an apartment building.

Prepare to learn more from this lesson than from any other training lesson that I have ever written:

https://www.c-loans.com/knowledge-base/underwriting-commercial-construction-loans

 

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Topics: commercial construction loans

What is a Co-GP Equity Provider?

Posted by George Blackburne on Thu, Oct 18, 2018

Commercial Construction LoanWhen a Developer goes to build a new commercial building, the construction lender will require that the Developer contribute 20% to 40% of the Total Cost of the Project.  That contribution takes the form of equity in the land; prepaid costs, such as architectural and engineering fees; and cash added at the close of the loan.

 

 

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Important notes:

  1. Almost all construction loans are made by commercial banks.

  2. Total Cost consists of the Land Cost, the Hard Costs, the Soft Costs, and the Contingency Reserve.


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  3. The Contingency Reserve is around 5% of Hard Costs and Soft Costs.  The Land Cost is NOT included in the computation of the Contingency Reserve because the land cost is already known.  The Developer has either already purchased the land or at least has it in contract.  It is highly unlikely that there is going to be a cost overrun in connection with the land.

  4. The construction lender will require that the Developer spend down his entire equity contribution before the bank advances its first penny out of the construction loan.

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  5. Loan dollars have an interest rate and loan payments.  In contrast, equity dollars have no interest rate or loan payments.  The equity providers get paid from the success of the project.  They are the owners.

  6. Equity is the first loss piece; i.e., it is the equity providers who get clipped first if the project is unsuccessful.

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In the old days, Developers only had to contribute 20% of the Total Cost of the project.  Since the Great Recession, however, more and more banks are requiring that the owner-Developer contribute 30% to 40% of the Total Cost. That is a TON of equity, also known as skin in the game.  Many owner-Developers simply don't have that much equity.

The solution for small to mid-sized development companies is to raise their required equity dollars from accredited investors using the JOBS Act.  It's really not that hard.

 

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If the Total Cost is on the order of $70 million or greater, however, it is infeasible to raise $20 million to $30 million in equity from private, accredited investors.  Developers will therefore search out an institutional Joint Venture partner.

Joint Ventures are structured as Limited Partnerships, where the owner- Developer is the General Partner and the Institutional Fund (think Blackstone) is the limited partner.  The Institutional Fund wants the owner- Developer to guaranty the construction loan so that the owner-Developer is not tempted to simply walk away from the project.

 

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A huge commercial mortgage banker recently published in their newsletter that they have a Co-GP equity provider for multifamily, student housing, senior independent-living, hospitality, industrial, office, medical office, self storage and mixed-use sectors.  The Co-GP is looking to invest between $1 million to $10 million per deal, with an investment period of 2 to 10 years.

Gee, that sounded great, but what on earth is a "Co-GP equity provider?"

My buddy, Bryan Shaffer, at George Smith Partners was kind enough to explain it to me.

 

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"When you do Joint Ventures, the owner-Developer is the GP (general partner) and the Institutional Fund (i.e., Blackstone) is the LP (limited partner).  So if they do a 90/10 Joint Venture (the bank is demanding that the owner-Developer contribute $30 million and Institutional Fund is providing $27 million of that equity contribution), the owner-Developer needs to do bring in 10% of the equity."

"If a $30M equity check (is being required by the bank), the owner-Developer  may not have $3M, so there are co-GP groups that will invest on the owner-Developer (GP) side and provide part of that $3M.  They get part of the promote and are in a deal with a big institutional partner, so it a good spot for some groups.   Overall institutional capital is reserved for the strongest owner-Developers, and usually the co-GP groups want the institutional deals."

 

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I suspect that if you do not know if you are one of the strongest owner-Developers, you probably are not.  In plain English, these Joint Ventures are not for mere mortals.

Another name for a co-GP equity provider is a venture equity provider.

 

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Topics: Co-GP Equity Provider

How to Become a "Best Broker" For a Commercial Lender

Posted by George Blackburne on Tue, Oct 16, 2018

commercial loansCommercial Loan Tidbit:  I learned today that you cannot use an SBA loan to refinance an existing SBA loan.

Most commercial real estate loan officers working for banks have six to ten "best brokers".  Between these best brokers, the typical commercial loan officer closes 60% of his commercial real estate loan production for the entire year.

 

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In other words, the typical commercial loan officer working at a bank with decent interest rates really doesn't care that much about you or your particular commercial loan. You're not one of this best brokers.  You're just a one-off commercial loan broker.  One-off means just a one-time deal.  There is little chance of a continuing relationship and future deals.

My son, George IV, competes against Alicia Gandy, our Loan Goddess, for the title of biggest commercial loan producer in the company.  Alicia wipes the floor with him.  Ha-ha!  How come?

Putting aside the growing consensus that women are simply better, Alicia has about a dozen or so "best brokers" who constantly keep her rockin'. After all, Alicia has been originating commercial loans for Blackburne & Sons and C-Loans, Inc. for over twenty years.  Many of her best brokers have been with her for over a decade, and they know exactly what kind of commercial loans that Blackburne & Sons prefers to originate.

 

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What types of commercial loans does Blackburne & Sons prefer to originate?  Blackburne & Sons specializes in small permanent commercial loans in the heartland of the United States.

We are NOT a bridge lender, although our loans have no prepayment penalty and make superb bridge loans.  We like long-term loans because we make our dough from loan servicing fees.  Helloooo?  How many times have you heard me say that the real money in commercial real estate finance ("CREF") is in loan servicing fees?

 

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Does our preference for commercial loans in the heartland mean that Blackburne & Sons would never make a commercial permanent loan on the coast of California, New York, or Florida?  Of course not!  The problem is that the coastal areas are often very expensive, and our preferred maximum loan is $1 million.

Now you know enough to become a best broker for Blackburne & Sons.  You understand our mindset.  We like small deals with small payments because the default rate is 70% less, and we like long-term loans so we can earn our delicious loan servicing fees for a long time.  Do you want your relaxing, supermodel massage to last for ten minutes or an hour?  Uh, is this a trick question? 

 

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But enough about Blackburne & Sons.  The $10,000 question, how do you become some commercial lender's best broker.

Part of it is luck.  If you happen, by chance, to bring a perfect deal to just the right lender, and the deal closes, that commercial loan officer will pay much closer attention to the next commercial loan that you bring him.  He will look for a way to make the deal work.  Samuel Goldwyn once said, "The harder I work, the luckier I get."  So work hard, generate a lot of commercial loans, and eventually you'll get lucky.

 

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The second way to become some commercial lender's best commercial loan broker is to listen very hard when he tells you his preferences.  If he is not doing land development loans, don't keep bringing him land development loans.  Listen to him!

The third way is to focus your commercial mortgage marketing in an area close to your office, and then bring your local commercial loans to local commercial banks.  Banks like to make their commercial loans close to their branches.

 

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Here's a clever trick.  Suppose your office is in Maine, and you get a chance to work on a commercial loan in South Carolina.  How do you find a bank willing to make a commercial loan in South Carolina?  Just open Google Maps and type in the address of the commercial property that you are trying to finance.  Then hit the "Nearby" icon to find banks located close to the property.  Voila!

 

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The last way to become a commercial lender's best broker is to become his friend.  Invite him over to a BBQ and watch a football game with him.  Bring his administrative assistant a box of chocolates or some flowers.  Drop off some extra tickets to a game.  Develop a personal relationship with your commercial loan officer.

I once knew a fabulously successful commercial loan broker who always brought cocaine and two hookers whenever he delivered an apartment loan package to his favorite savings and loan association commercial loan officer.  Later that S&L went bankrupt, and my old buddy ended up on Skid Row in San Francisco; but for several years he made more dough than any other commercial loan broker I knew.

As for me, I'm content to earn $1,583 per month in loan servicing income for the next fifteen years on the $1 million pot loan that we just closed yesterday.  Geez, guys, the real money in CREF is in loan servicing fees!

 

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Topics: Best brokers

Commercial Loan Brokers: Forget About Commercial Construction Loans

Posted by George Blackburne on Sun, Oct 7, 2018

Suppose you're a commercial loan broker, and you have have four commercial loans in process.  Three of them are commercial construction loans.  The doctor says you're gonna die.  (Old joke about the snake venom and the need to suck it out.)

How come?  The banks are making commercial construction loans again, and banks close 95% of all commercial construction loans.  That sounds positive.  So why can't a commercial loan broker ever close a commercial construction loan?

 

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Your chances of EVER closing an international commercial loan are definitely zero.  (I'll be blogging on international loans again in a few months.)  Your chances of closing a commercial construction loan are NOT zero; but your chances are very low.  Today's training will explain why.

Banks love-love-love to make good construction loans, assuming the developer enough equity in the deal.  (Aye, there's the rub.)  Assuming that the financial world is not melting down, it has always been easy for qualified developers to simply trot down to a local bank and get a construction loan.

 

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As a result, only the unqualified developers ever called commercial mortgage brokers for a commercial construction loan of less than, say, $7 million.

One way a developer could be unqualified is because he has very little construction experience.  His CV is very unimpressive.  A CV stands for curriculum vitae, which, in practice, means his construction resume.  If a developer is seeking a commercial construction loan to build a 20-unit apartment complex, ideally this developer has already built a four-flex and then an eight-unit apartment building.

 

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More commonly, a developer is unqualified because he can't contribute 30% to 35% of the total cost of the project in cash or in equity in his land.  In the past, banks usually only required the developer to contribute 20% of the total cost of a project.  Since the Great Recession, however, commercial banks will rarely be satisfied with the developer contributing less than 30% to 35% of the total cost of the project.  That's a whole lot of equity.

Twice in the preceding paragraph I have used the term of art, "total cost". The Total Cost of a commercial construction project is the sum of the Land Costs (usually the actual purchase price of the land), the Hard Costs (bricks and mortar), the Soft Costs (fees, reports, points, etc.), and the Contingency Reserve (5% of hard and soft costs).

 

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As a commercial loan broker, you will find that 95% of your commercial construction loan applicants lack the required 30% to 35% equity.  In other words, your developer doesn't have enough skin in the deal.

If a developer was wealthy enough to contribute 30% to 35% of the total project cost in cash, you can bet that he has tons of contacts directly with banks.  He doesn't need you.

 

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Therefore, if you want to feed your family, don't waste time working on commercial construction loans or residential subdivision construction loans right now.

 

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Does this mean that there are absolutely no commercial construction loans that make sense?

No.  The deals that still make sense in today's market are the small commercial construction loans, made to owner-users, from SBA lenders, typically under the 504 Program.  You can apply to dozens of SBA 504 construction lenders using C-Loans.com.

 

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Topics: commercial construction loans

Large Commercial Loans Seldom Close for Commercial Loan Brokers

Posted by George Blackburne on Thu, Oct 4, 2018

Are you a commercial loan broker?  Do you absolutely, positively want to starve?  If so, then be sure to only work on large commercial loans.  You will quickly lose that pesky 50 pounds.

 

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By large, I mean commercial loans of $5 million or larger.  For the reasons listed below, large commercial loans seldom close for commercial loan brokers.  This is especially true for commercial loan brokers with less than five years of experience.

 

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  1. In order for a commercial real estate lender to be willing to make a huge commercial loan, the borrower must usually have a net worth at least as large as the loan amount. So if you're trying to place a $20 million commercial loan, your borrower better have a net worth of at least $20 million.

  2. Why on earth would a borrower with a $20 million net worth apply to you - the typical commercial loan broker?  He won't.  Sophisticated, high-net-worth real estate investors will quickly spot that you're not an expert on large commercial loans.  Heck, the top real estate investors and developers probably know far more about commercial real estate finance than you do.  Therefore the types of large commercial deals you will usually get will be borrowers and developers with $3 million net worths trying to borrow $20 million.  It's a pipe dream!  The loan will never close.

  3. If your borrower has a $20 million net worth, you can be sure that scores of bank loan officers calling on him regularly.  Therefore even if you someday got lucky and got a chance to work for an investor or developer with a huge net worth, you can bet that your client has also contacted his own bank and a half-dozen other direct bankers, many of whom have been calling on him for years.  As a result, even if you deliver a delicious term sheet from a bona fide mega-bank, you will have to add your half-point fee to the mega-bank's one point fee.  Guess what? The direct lenders who are also working on the deal will almost always be able to match your interest rate and offer a term sheet at only one point because there is no broker involved in the deal.

  4. But you probably won't be successful in delivering a delicious term sheet from some mega-bank or life company.  Why?  The top loan officers who work at those mega-banks and life companies are constantly in demand, and they will rarely waste their time working with some newbie or even an intermediate-level commercial mortgage broker.  These top-of-the-food-chain loan officers usually have a stable of about a dozen top commercial mortgage bankers who supply them with 95% of their loans - and you aren't one of them!  These top commercial loan officers will probably just blow you off the phone, even if your deal was perfect.

  5. Should you ever work on large commercial loans? The only time it might sense to take on such a deal would be if the borrower was a returning customer.  Maybe you closed a $3 million commercial loan for him seven years ago and then a $7 million loan three years ago.  Now he is trading up to a larger commercial property and needs a $13 million deal.  Sure, in this case, you should absolutely take on the commercial loan request.

  6. But absent a track record or some other personal relationship with this high-net-worth investor (maybe he's your father-in-law), you should not take on these large commercial loans.  Well, maybe you can take the deal on and try to close it, but you must not expect to feed your family with your efforts.

 

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Instead, stick to small commercial permanent loans, the types of deals that will actually close and feed your family.

 

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Topics: large commercial loans

Commercial Loan Brokers, Focus on Small Permanent Loans

Posted by George Blackburne on Wed, Oct 3, 2018

Small officeIn a recent blog article, I wrote to you extensively on the subject of permanent loans.  You will recall that a permanent commercial real estate loan is a first mortgage on a commercial property with a term of at least five years.  Commercial loans with shorter terms are considered either mini-perms (1-2 years) or bridge loans (1-3 years).

Right now commercial banks greatly prefer making permanent loans, as opposed to land development loans, commercial construction loans, or even bridge financing.  Banks lost their tails in land development loans during the Great Recession, so it is going to be a long time before commercial banks jump back into land development lending.

 

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As to construction lending, banks are perfectly happy to make commercial construction loans, as long as the developer contributes a whopping 35% of the total cost of the project.  What developer can contribute $3.5 million into a $10 million project?  Why not also ask for the broomstick of the Wicked Witch of the West, while they're at it?

As to banks making commercial bridge loans, they are simply too slow.

 

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Since commercial banks have the money to lend, it therefore makes sense to give them what they want.  You should therefore be focusing exclusively on small commercial permanent loans.  If you work on any other type of commercial real estate loan, the loan probably will not close, and you will not get paid.

Why am I recommending that you only work of small commercial permanent's?  By "small" I mean commercial loans under $3 million.  Small commercial permanent loans have by far the highest closing rate.

 

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Why is the closing rate on small commercial deals so much higher than on the larger ones?  First of all, the typical small commercial loan borrower is a small business owner who is busy running his tool and die shop or his auto repair facility.  He really needs the help of a commercial mortgage broker, and he appreciates you.

While this small business owner may be worth a one or two million dollars, he is not so rich that banks are beating down his door.  He therefore doesn't have some local bank quote in his back pocket that he can pull out to beat your best offer.

 

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Because he is a business owner, as opposed to a professional real estate investor or developer, he is not terribly sophisticated about commercial lending.  You know far more about commercial mortgage finance than he does.  Because this small businessman doesn't know where to go to get the best quote on a commercial real estate loan, squeeky-clean and do-able deals often end up being submitted to commercial mortgage brokers, just like you.

In contrast, the real estate investors who own the large commercial properties and need large commercial loans are usually very wealthy and sophisticated.  Some bank is almost certainly knocking on their door every month trying to sell them a loan.  If you try to broker a large commercial deal, and the deal is clean, almost every time the borrower will reject your best offer because he has a quote directly from a bank, without a mortgage broker fee.

 

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In fact, if a large commercial real estate loan does end up being submitted to a mortgage broker, there is usually something wrong with the deal. Perhaps there are too many vacancies, the deal doesn't cash flow, or the property is in a bad location.  You can easily waste months working on a large commercial loan that was never do-able.  In the meantime, you start to death.

So be smart.  Stick to small commercial permanent loans for your first five years in this business.

 

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Topics: small permanents