Commercial Loans Blog

Hard Money Commercial Loans and Family Offices

Posted by George Blackburne on Fri, Jan 14, 2011

What on Earth is a Family Office?

It sounds like a simple concept, but a lot of commercial mortgage brokers and investors forget it. In order to be a direct commercial lender, you actually need money to lend.

So the next time some clown, who is asking you for a $20,000 application fee, tells you that he is a direct commercial lender, ask yourself this question, "Where is he getting the dough to lend?"

Money to make commercial loans only comes from a small handful of sources. Life companies get their commercial lending dough from the premiums that policy holders pay for their life insurance policies. Banks, savings banks, S&L's, and credit unions get their commercial lending dough from the deposits that they receive from depositors.

Conduits, also known as CMBS lenders, get their commercial lending dough on an interim basis from bank lines of credit. Their commercial loans are eventually sold to a trust, that securitizes the loans into commercial mortgage-backed securities. This source of funds was almost completely dried up for two years following the crash in 2007, but the CMBS market is now showing some signs of life - but only for deals of $5MM or larger.

I think there are only two surviving commercial mortgage REIT's - Avatar and BRT Realty Capital - and they are making loans at hard money rates. (Do you know of any other commercial mortgage REIT's? I'd love to hear about tem. REIT's get their commercial lending dough from the sale of shares in the real estate investment trust.

The remaining source of commercial lending dough comes from private investors and mortgage funds. In 2006, before the Great Recession, there were about 250 large mortgage funds making commercial loans nationwide. Virtually every one of these funds got crushed during the Great Recession. Commercial real estate fell by 40%, and then commercial lenders flooded the for-sale market with commercial foreclosures. Since "everybody" knows that you can buy commercial foreclosures for 60 cents on the dollar, everybody wants a deal. Nowadays few commercial property buyers will pay more than 60% of 60% of 2006 valuations. Therefore almost every commercial mortgage fund in the country is now in the process of being wound down.

This means that today, in early 2011, the only way to fund a hard money commercial loan was for the hard money broker to syndicate a fresh group of private investors. Raising private money is much more difficult in 2011, compared to 2006, because so many private investors got chewed up in commercial real estate and in stocks because of the Great Recession. Large hard money commercial loans - deals larger than $2 million - have become almost impossible to obtain because there are so few mortgage funds remaining, and large syndicates of private investors are extremely hard to assemble.

I did see recently, however, a brand new commercial mortgage fund that raised $100 million in their initial offering. They were able to raise this kind of money because they raised their dough from endowment funds and family offices.

So what is a family office?

A family office is a private company that manages investments and trusts for a single wealthy family. The company's financial capital is the family's own wealth, often accumulated over many family generations.

Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional family office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. A family office can cost over $1 million to operate, so the family's net worth usually exceeds $100 million. Recently, some family offices have accepted non-family members.

More recently the term "family office" or multi family office is used to refer primarily to financial services for relatively wealthy families.

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Topics: family office, hard money commercial loan, hard money loan

Commercial Loans and Additional Collateral

Posted by George Blackburne on Mon, Jan 10, 2011

A Wise Friend Has Advised Me to Often Get Additional Collateral

A buddy of mine, Paul, owns a hard money commercial mortgage company similar to Blackburne & Sons. He was kind enough to share the following pearls of wisdom:

Paul wrote: "It's been my experience (and I've been around longer than George, although I've been told that I'm younger and better-looking) that when your run-of-the-mill, medium-sized investor gets into trouble, he doesn't sink all at once. He takes a while to drown."

"There's generally some money coming in in dribs and drabs, and the question is, 'What is his motivation to pay us, rather than the other guy? Maybe some money comes in on rents, or maybe he manages to sell one property, etc. It's not just our problem with the debtor. It's just as much us versus the other creditors. The more dear the guaranty or the additional security, the more likely it is that we'll get paid in preference to someone else. AND, I CAN TELL YOU DEFINITIVELY THAT THIS IS THE REALITY, NOT JUST THE THEORY!"

"The vast majority of my deals include either a guaranty and/or additional security (cross-collateralization). Probably half my deals include both. It has saved my (bottom) MANY times. It can be a very effective weapon."

"My convoluted logic: A lender should demand and obtain the type of additional security that provides the borrower with a strong motivation to retain the property. When brokers ask me, "How much additional security do you need?", my answer is, "Enough to make it WALK-PROOF". The borrower cannot walk away from the loan."

"The example I use is - suppose the borrower has $1MM in equity he can pledge in a first mortgage position on something questionable (let's say land in . . . Indiana?), I may or may not be terribly interested. If he could also give me a $750,000 second mortgage on a high-quality apartment building, that could well be more interesting that the $1MM first mortgage on land. And, if he has $500,000 he can put up in third position on his primary residence, he has my undivided attention. Why? Because in a lot of these homes there's a wife with a butcher knife! ... and, she's my best friend. You've just added a whole another element to the motivation factor. We all want to keep our appendages intact.

"(Obtaining a personal guaranty also helps to make a property walk-proof.) The borrower certainly doesn't want his friends and relatives getting a letter from the guarantee holder notifying the guarantor of a default. I could go on and on about guarantys and additional security or both. The laws can differ in different states."

"Just one 'head's-up' that almost all the brokers and the majority of the lawyer's get wrong. Be very careful about additional property being put up by someone who is not the borrower. Don't make them both borrowers by taking the easy way out and having them both sign the note. One is the guarantor, and one is the borrower. Don't make them both borrowers on the note. In California, screwing that up can get you in big trouble. Further, the additional security being put up by the guarantor is not the security for the loan. It's security for the guaranty. One one property, you'll have a note secured by a mortgage. On the other, you'll have a guaranty secured by a mortgage."

Note to self and staff: Get either an outside personal guaranty (not just the owner of the LLC) or additional collateral, or both, on every deal.

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Topics: hard money commercial lender, private money commercial lender, hard money loan

Fabulous Article About How to Present a Bridge Loan

Posted by George Blackburne on Wed, Mar 3, 2010

Even Old Veterans Will Learn From This Brilliant Article

I didn't write this wonderful article. Instead, it was sent to a group of mortgage brokers to solicit business. I begged Brian O'Shaughnessey for permission to publish it. I want my sons - and their kids someday - to read and study it.

How to Properly Pitch and Submit a Loan Request to a Bridge Lender/Fund Manager

As you know banks are barely lending in these uncertain economic times. So the Bridge Lenders/Fund Managers that are still lending are seeing an increase in submissions that are overwhelming them. You must be aware that most Bridge Lenders/Fund Managers are usually a 1 to 5 man operation and are not used to receiving 100 calls a day and 3 to 6 hundred emails a day with scenarios.

Though Athas is larger than most Fund managers we still suffer from the same problem. When a Fund Manager gets overwhelmed he usually defaults to saying "No" to any deal that is poorly presented; and let me tell you 50% to 70% of deals presented to our firm are presented poorly. So from a Fund Managers perspective let me guide you to presenting your file in a professional and attractive way thus enhancing the possibility of getting interest in your loan request.

The Preparation Before Presentation

75% of commercial and 25% of residential deals I am pitched are from a broker chain. Let’s face it. Brokers, in my opinion, are the life blood of our industry no matter what the banks are trying to do to them. But deals that are presented to me from a broker on the back side of a broker chain I don’t take very seriously nor do I spend much time on. So if you are in a broker chain…penetrate it professionally and speak directly to the borrower, with permission of all brokers of course.

You want to make sure of what the borrowers needs are and there is only one person that can express it to you and that is the borrower. Make sure the borrower is ready for a Bridge Loan. Be candid and upfront with the borrower about what typical bridge loans costs are and what the condition of the capital markets are. Let’s face it borrowers want to avoid getting a Bridge Loan at 9% to 13%, 2-5 points and terms from 1 to 5 years if they can avoid it…don’t blame them! So many brokers submit and procure LOI’s from us just to have a “back up”. Don’t do this for you are not making friends with the Bridge Lender/Fund Manager! Make sure the borrower is ready, if they are not don’t waste your time or the Fund Managers time.

Know Your File

There is nothing worse than a broker pitching a deal to a lender and the broker truly has no clue. This is a quick step in the direction that will not be fruitful for you and certainly is not a relationship building experience. As a fund manager I must tell you I will go higher LTV’s and farther outside my box for a broker that knows his way around his deal! If you add the fact that I have closed deals with that broker in the pass I am more willing to stretch for that proven relationship. So you as a broker always want to build that relationship and that usually starts with a proper presentation and intimate knowledge of your file.

Be Prepared to Answer a Myriad of Questions

The Bridge Lender/Fund Manager will have many. Once again I can’t stress enough, know your file. If your loan request is a commercial down, know the total of all income of the project. Also know the type of leases that this property has. Are they full service, modified gross ore triple net leases? If there is credit issues finds out if there are any believable excuses behind it. If the income on the rent roll is more than on their schedule E (rarely a deal killer) be prepared to answer why that is. If there is cash out know what they are going to use it for.

The Presentation

When getting on the phone with the lender he or she will want to ask the questions so they can make sense of the deal that best suits their needs. Don’t tell a story; just answer their questions in a quick and professional way. Don’t hide the negatives about the deal because the lender will look sideways at you and your future deals. So always express the negatives upfront and then follow it up with the positives and sell the positives without telling a 5-20 minute story. If the borrower has other collateral that has lendable equity in it express that to the lender quickly and don’t save it for the last second. If there are special needs of the borrower, like but not limited to, the borrower doesn’t want to sign a personal guarantee, express this to the lender before he makes his decision. If the lender doesn’t like your deal and turns it down don’t get upset or confrontational! If you want to learn why he turned it down don’t give him attitude just ask him why he turned it down so the next time you can learn what he or his fund likes and doesn’t like. If the lender likes your deal then great and be very prepared to email him the file quickly. This is not the time to collect conditions because that takes time and your lender will hear 100 deals after yours that could be better/safer or he will have forgotten your good deal because of all the bad deals he has to listen to. So submit your file immediately after the positive conversation!!!

Prepare to Submit Your Loan Request

OK you have a lender that is interested in your file, don’t blow it by submitting him a crazy discombobulated, and unprofessional file via email! A well submitted package is paramount to keeping you professional image alive and a lender interested in YOUR file over the others! A list of items most lenders will need to make a proper decision are as follows…

-Executive Summary - Yes I know you have already explained this all over the phone conversation but it is paramount that the lender can go back to the executive summary and get the story again.

-PFS (personal financial statement) or 1003 – It is paramount that your PFS or 1003 be professionally and fully filled out. Nothing is worse than a hand written and barely legible PFS or 1003!

-Credit Report – A recent Credit Report (not that stuff) or a detailed explanation of what the borrower’s credit is like (must come from the Borrower). That description should touch on FICO’s, mortgage lates, BK’s, Judgments, etc.

-Pictures of property –Believe it or not this is so important! A deal can go from hot to not or more importantly from NOT to HOT from quality pictures of the outside and inside of the property. So have them ready.

-2 years Personal and Corporate (if applicable) Tax Returns – “But I want to go stated” Is a usually response to this request. The Stated days are for the most part over. Every Fund Manager wants to see the Returns. Maybe just for the reason that he wants to make sure they are filing them. A lot of Fund Managers don’t use them and they wind up in the trash can but the fact that you showed them makes us Neanderthal fund managers feel comfortable. Remember Bridge loans can get creative with borrowers that don’t show all their income or show too many expenses………It’s OK to show us the returns!!

-Rent Roll – A clear and concise rent roll that shows tenant’s full name, unit number, monthly rent amount, beginning and end dates of lease is the best!

-Last years or Year to Date Income and Expense Statement- A quick P+L on the property is usually good. Yes we can add back in the mtg expense, depreciation and sometimes a lot of expenses we know the borrower is just writing off to write off.

Submitting Your Loan Request

There are some rules you should follow to submit your loan request. These rules will make your submission stand out from the rest…which in this market is paramount!

-The subject line of the email – Many times you have to email a file broken up into many emails because all the attachments are too big to fit on one email. So the subject line will keep the continuity of your submission. The subject line should have the borrower’s last name or name of the project then the word “Part” then the number of the email. For example Smith – Part #1 next email would be Smith – Part #2 so on and so forth.

-The attachment names – Name each attachment properly so that the lender knows what is in that attachment. Nothing is worse than getting 20 attachments and all of them have crazy names like *0473#-C or something like that. No one wants to go thru 20 attachments to figure out what they are. Once again separate yourself from all the other brokers……….for your better than the rest!

-The attachment size – Be cognizant of the size of the attachment for no email you send out should have more than 5 megabytes of attachments. Just because you can send it doesn’t mean your lender can receive it. Now some lenders can receive very large attachment groupings but just because they can receive it doesn’t mean you can send it. Most email systems have a limitation of 5 to 10 megabytes. Remember some Bridge lenders/fund managers are just small shops and don’t have a large emphasis on technology and might be using a restrictive email carrier that can bounce files just for attachments that are too big and no one is notified.

-Follow up – Call the lender within 1 hour of submitting your file to see if he or she has received all your emails. This serves two purposes, #1 you make sure he received all your emails, #2 the lender knows you proactive and if you don’t get an answer within 24 hours you’re going to follow up again. He or she will defiantly work on your file first!

Tips for Those Who Are New to Bridge Lending

-Stick to “The Good Deals” - What is a good deal? The current answer is a deal that closes! In this marketplace there are so many deals out there that just are never going to get funded or will take a monumental effort just to get a maybe. Examples of these deals are out of country request, land loans, development deals, theme parks, golf courses, retreats, coal mines or precious metal mines, quarries, electrical plants, hospitals, casinos, marinas, ski resorts, biodiesel plants, parking garages or white elephants. These deals you might get a person to say yes to but I would be willing to bet there will be a $25,000 to $250,000 upfront due diligence fee that you will never get back!

Good Deals look like the following. Plain vanilla Residential properties, multifamily, mixed use, student housing, fractures condos, office buildings, retail shopping centers, light industrial, warehouse and rehab or finish construction deals of the above properties. Some hard to fund asset classes that are still getting attention are gas stations or any auto related project, small hotels or motels, assisted living facility, daycare centers and restaurants. Try to stick to the “Good Deals” because in this marketplace those are the deals that are actually closing.

Upfront fees – Now my company does not charge upfront lender fees but sometimes I wish I did. If you get a LOI that is requesting upfront fees make sure the company producing the LOI is legitimate! In this marketplace there are a lot of “upfront fee scammers”. It’s not the end of the world just proceed with caution

-Make sure the LOI is coming from a legitimate source – There are many ways to get a comfort level with your LOI and the company that produced it. Letter of Testimonials are one way. Make sure the person writing the testimonial is a real company and call them. If a lender wants to earn your business they should have testimonials upon their website that shows the broker or borrowers name and number. This way you can verify them. Funding lists are also something you should be able to ask for and more importantly be provided with. Any real lender should be able to provide addresses of properties they have lent on so that you can run a property profile on and see the Trust Deed or mortgage in the name of the lender. Deal plaques, if the “lenders” website does not show deal plaques then they are making no effort at showing you what they funded in the past. Why would a real lender not want this up on their website? Just be careful for unfortunately there are a lot of scammers out there and it is your duty to your borrower to get them involved with a real lender.


Brian O'Shaughnessy


26901 Agoura Road. Suite 250
Calabasas Hills, CA. 91301
P: 877.877.1477 x555
F: 818.647.0175
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Topics: bridge loan, hard money commercial loan, hard money loan