Commercial Loans Blog

Example of a Commercial Loan That Will Never Close

Posted by George Blackburne on Fri, Sep 21, 2012

Just as I was finishing up my new training course on The Practice of Commercial Mortgage Brokerage - How to Fix Your Commercial Mortgage Business if You're Not Making Any Money (available 11/20/12), I received the following email from a sweet but obviously new commercial mortgage broker:

“Would any of your contacts fund a $50 million construction loan on a renewable energy project in Mexico?”

What a perfect teaching opportunity!  Let’s count together just how many important reasons why such a deal would never close.  The first three reasons are glaringly obvious.  The last two reasons are a bit more subtle:

  1. The loan is much too large for a newbie commercial mortgage broker.  Remember, to qualify for a $50 million loan, the borrower would need a net worth of roughly $50 million.  Don’t forget that the borrower’s Net-Worth-to-Loan-Size Ratio is supposed to be at least 1.0.  Borrowers with a $50 million net worth don’t often apply to newbie commercial mortgage brokers.  Borrowers with a bona fide $50 million net worth typically have a dozen different bankers soliciting their business regularly.

  2. Very few banks are making commercial construction loans right now Those few banks that are making commercial construction loans will seldom exceed 58% loan-to-cost.  This means that on a $50 million project, the developer would have to cover 42% of the total project cost, which equates to $21 million.  Not a whole lot of developers can contribute $21 million to any project these days.

  3. The property is located in Mexico, making this an international loanInternational loans almost never close.  Why?  Because most countries levy a 30% tax on the interest income of foreign banks.

  4. Daisy chains don’t close.  You’ll recall that a daisy chain is a deal that goes from broker to broker.   Blackburne & Sons is a small hard money shop, and our maximum loan is around $2 million.  There is no way we could fund a $50 million deal.  This means that we would have to broker out the deal ourselves, making this a broker-to-broker deal; i.e., a daisy chain.  Daisy chains don’t close!  (Unless each broker charges just a tiny fee – say, 15 to 25 basis points – and all of the brokers quickly get out of the final lender’s way.)
  5. The collateral for the loan will be a highly-unusual property type, an alternative energy project.  Properties like ethanol plants are always far more difficult to finance than plain vanilla commercial properties, like shopping malls.  Trying to finance an unusual property type during the Great Recession is a pipedream.

Folks, this nice lady broker is not likely to feed her family with a commission earned on the closing of this deal. 

Free List of 3,159 Commercial Lenders Sort By Your Own Criteria

She needs to spend her time soliciting her referral contacts for do-able deals, like a $1.2 million refinance of a ballooning loan on an apartment building.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

Fee Agreement and Fee Collection Course. Just $199.

Click me

Submit Your Loan to 750 CommercialLender

Click me

Click me

Submit Your Bridge Loan  to Blackburne & Sons

Click me

Click me

Please Click Here ToBuy Commercial Lead

Click me

Click me

Click me

Click me

Commercial mortgage training

Click me

Put a Link on Your Site To Earn Huge Referral Fees

 

Topics: Foolish commercial loan example