Commercial Loans Blog

How the Romans Lost Their Republic

Posted by George Blackburne on Thu, Aug 11, 2022

Screen Shot 2022-08-10 at 4.09.10 PMIn 49 B.C., General Gaias Julius Caesar led the 11th Legion across the Rubicon River, little more than a small stream, in Northern Italy.  Under Roman law, any general who marched his troops across the Rubicon - thereby threatening Rome - was automatically guilty of treason and subject to the death penalty.

The resulting Roman Civil War did not go well for the forces of the Senate.  A year later, at the Battle of Pharsalus in Greece, Caesar led his legions against the much larger army of Pompey, fighting for the Roman Republic and the Senate.

With the opposing legions locked in a death struggle, shield wall to shield wall, Pompey took his calvary and tried to turn Caesar's right flank.  Unbeknownst to Pompey, Caesar had a cohort, armed with pila (spears), hidden and waiting.  When Pompey's horsemen ran onto this wall of spears, they retreated in chaos, crashing into and collapsing Pompey's left flank.  Caesar promptly rolled up Pompey's left flank and routed the much larger force.

 

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The stepson of Caesar, Brutus, surrendered, as well as numerous other Senators, who had fought alongside Pompey.  They were all immediately pardoned by Caesar and welcomed back as prodigal sons.  

But the Battle of Pharsalus marked the end of the Roman Republic.  While the Senate continued on in name only, it no longer had any power.  Rome had become a dictatorship, with all of the real power held by Caesar and his successors.  The Senate was just a figurehead.

And it was all for nothing.  The Roman Civil War never need to have happened.  Unfortunately, a great many members of the Senate hated Caesar with an irrational passion.  They were afraid of his military and financial power.

 

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Years before, Caesar had been appointed Governor of the Roman province of Cisalpine Gaul.  He picked a fight with a nearby tribe of Gauls, so he asked the Senate for permission to raise a legion, at his own expense.  Once granted permission, Caesar quickly stomped the tribe, made its people slaves, and then sold off these slaves for a vast sum of money.  War, in those days, could be exceedingly profitable.

Now one of the richest men in Rome, Caesar, without permission, started raising even more legions and conquering even more tribes in Gaul.  He sold off the slaves for Bill Gates kind of wealth, sponsoring great gladiatorial games and feasts in Rome.  This made the people of Rome love him, but it freaked out his political enemies even more.

While Caesar was finishing with the conquest of Gaul, gaining even more slaves, more wealth, and more power, his enemies started to file lawsuits.  Some claims were legitimate, but others were pure fiction.  In those days, Rome suffered a huge gang problem.  Caesar's gang, armed with clubs, would often battle against the gangs of his political enemies.  People were hurt and even killed.  Not all of the claims against Caesar were shams.

 

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The judicial system in Rome at that time was incredibly corrupt.  Judges would openly hold bidding auctions for their decisions.  False testimony was only a matter of money.  Once the courts got ahold of Caesar, he would be executed within a week.  "His gang killed my husband."

Fortunately for Caesar, governors could not be sued, as long as they remained in office.  Therefore, the enemies of Caesar petitioned the Senate repeatedly to declare the term of his governorship of Gaul ended.

Eventually his enemies prevailed.  He was ordered to disband his eight veteran legions and report for trial before the Senate.  Uh, huh, sure.  This was really going to happen.  The members of the Roman Senate were smoking that California oregano.

 

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Now scroll forward 2,070 years and imagine the following scenario.  In 2023, old man Biden is asked to retire.  This could easily happen.  Kamala Harris assumes the presidency for a year and then runs against Trump in 2024.  A vengeful (but unwise) Trump has promised to try Harris for treason for allowing the invasion of illegal immigrants over the border.

President Harris loses the election to Trump, and she is now faced with Caesar's dilemma.  Does she quietly resign the presidency and submit herself to a treason trial, with a possible sentence of death?  Or does she cross the Rubicon?

Folks, no matter if you are liberal or conservative, it is exceedingly unwise for this country to pursue ex-presidents.  We want them to step down quietly and to fade into the sunset.  George Santayana, a Spanish philosopher, essayist, poet and novelist, once said, "Those who cannot learn from history are doomed to repeat it."

 

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Topics: commercial loans, caesar

A Chinese Jet Accidentally Downs Pelosi's Jet.  Who Wins the War?

Posted by George Blackburne on Mon, Aug 1, 2022

Screen Shot 2022-08-01 at 5.42.07 PM

The above image links to an impressive video, prepared by the People's Liberation Army and designed to scare the poop out of Americans.  It sure worked on me.  I am genuinely scared.

I went to dinner with some friends last weekend, and they said that World War III - even a conventional war against China with no nukes - was absolutely impossible.  Really?  War with Russia used to be impossible too.

My friends argued that the U.S. military has spent hundreds of billion of dollars on defense every year for decades.  No one can match the U.S. military and its huge defense budget.  Right?

 

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Hmmm.  What if we had spent that money on wooden shields and stone-tipped javelins, while our enemy spent its gold on matchlock muskets, steel armor, steel swords, and cavalry horses?  The Spanish conquistador, Francisco Pizarro, conquered all of Peru and the Inca Empire with just 180 armored men and a handful of horses.  His enemy numbered in the thousands.  How?  Better technology.

For the past twenty years, America has been spending hundreds of billions of dollars to fight the last war.  Winston Churchill once said, "Generals always fight the last war."

There was only one large naval engagement in World War I, the Battle of Jutland.  The German Navy was much smaller than that of Britain, but it was extremely well-trained.  The German Navy finally sortied out to challenge Britain's dominance of the seas.  

 

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The Battle of Jutland started out well for the Germans.  Britain's navy was scattered across the North Sea, while that of Germany was concentrated at the tip of the spear.  Four lightly-armored but fast British cruisers attacked the Germans, and three of them were promptly sunk.  By the end of the day, six thousand British sailors were dead.  Think about that, six-thousand young men.  

The problem?  The German dreadnoughts (battleships) were heavily armored, and the British gunners couldn't hit the broad side of a barn.  The British sailors had been taught to lay alongside the enemy and slug it out.  The Germans sat back, with longer-ranged guns and highly trained gunners, and blew the British cruisers out of the water.

But eventually Britain's own dreadnoughts, with even longer guns than those of the Germans, arrived and pounded the Germans from afar.  Even though only about one out of every fifteen British shells landed, the shells were so large and damaging that the Germans were finally driven off, with German losses of about 2,000 sailors.

 

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Advantage to the largest dreadnoughts.

So as World War II approached, the U.S. Navy built a dozen huge battleships.  After all, battleships ruled the seas, right?

Then the Japanese carrier air fleet destroyed our battleship fleet at Pearl Harbor.  All of that money spent on battleships was wasted.

I don't think a single U.S. battleship ever fired a round in anger at a Japanese aircraft carrier during all of World War II.  They couldn't get close enough.  Battleships were of little use.  They were obsolete.

 

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Okay, so after World War II, the U.S. Navy began building an immense fleet of aircraft carriers.  Oops.  Our carrier jets can only fly out around 450 miles before they have to head back to their carriers.  Chinese missiles can sink a carrier from 1,000 miles away.  Our carriers can't get close enough.

Mark Twain once said, “History doesn’t repeat itself, but it often rhymes”  The war over Taiwan, which historians may mark as the start of World War III, is likely to start as a sneak attack, with Chinese hypersonic missiles destroying our carriers and our air bases on Guam in the opening moments of the war - Pearl Harbor Part II.

Finally We Reach the Point of This Article:

It is going to be very expensive for the U.S. to rebuild its Pacific Fleet.  We won't just lose aircraft carriers.  We will also lose cruisers (think of Russia's Moskva) and other support ships.  

 

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The rebuilding of the Pacific Fleet will be a source of massive hyperinflation in the future.  (If you are a savvy, far-sighted investor, be sure to read that last sentence again.)  With our Pacific Fleet humiliated by a larger Chinese Navy, confidence in the dollar will plummet.  Who wants to own dollars when Hawaii is next on China's hit list?  

After Hawaii, California could even be next.  Think this impossible?  Ludicrous?  Imagine a Chinese fleet off the coast of California, firing missiles with pinpoint accuracy at our shipyards, our missile manufacturing plants, and our computer chip plants.  Occupying California would be easy.  The Chinese could easily field a land army of 5 million men.

Did you read how Congress just passed a huge spending bill to build new computer chip plants throughout the U.S.  Mark my words.  Those new computer chip plants will be constructed far inland from the California coast.  Not every American general is an idiot.  

 

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So when they announce remote Des Moines, Iowa as the site of one of these new computer chip plants, be sure to spot it as evidence that World War III is not quite as impossible as you currently think.

If the war goes badly - for example, if missiles from a Chinese sub in the Gulf of Mexico take out the launch facilities of SpaceX - any chance of America counter-attacking becomes futile.  We must keep the Chinese fleet at least 2,000 miles from the coast of California.  

Let me say again:  The cost for America to rebuild its Pacific Fleet will be staggering, and inflation will soar.  What foreign country will want to sell us their precious raw materials for our potentially useless paper dollars?  We will surely need to print a whole lot of them.

 

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Remember these words -

"History does not always happen to the other guy."

What makes you think that you can escape a devastating world war in your own lifetime? Both combatants - China and the U.S. - have tacitly agreed to use only conventional weapons.  A third world war is not only conceivable, but it could happen as early as this month, if China shoots down Nancy Pelosi's plane.

Think the U.S. will beat China in this war.  Take a look at this display of China's  military power.  Terrifying, huh?   Our Pacific Fleet is going to get mauled.  We have aircraft carriers with short-ranged jets, while they have mobile missiles on trucks that can pull off any road and fire DF-17 carrier-killer hypersonic missiles in minutes.

You'll know that war is imminent when the price of gold begins to soar.  Gold just hit a one-month high.  Makes sense.  Pelosi flies to Taiwan in the next two weeks.

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Picture this.  The Chinese scramble jets to surround and threaten Pelosi's jet.  American jets, protecting Pelosi, tell the Chinese to, "Back off, Bucko."  Some Chinese pilot, who just had a fight with his girlfriend, tells the Americans to, "Sod off."  Macho pilots start to showing off their flying skills, one gets too close, guns chatter, missiles fly... and then far larger missiles fly.

Impossible?  When I went to look up the price of gold for this article, somehow I just knew that that price of gold would be up.  Not every American investor is an idiot.

 

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Topics: commercial financing, War With China, commercial loans

Get an SBA Loan to Buy a Business Without Real Estate

Posted by George Blackburne on Tue, Jun 21, 2022

Screen Shot 2022-06-20 at 4.16.15 PMI know a commercial loan broker that specializes in placing SBA-guaranteed commercial loans.  He has done some pretty surprising loans using this SBA guarantee.

Commercial Loans Without Real Estate:

This commercial mortgage company recently blasted out a tombstone announcing the closing of a $2.4 million SBA-guaranteed commercial loan to purchase a sushi and hibachi restaurant business in Florida.  The exciting part of this news is that there was no real estate involved.

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The business was 34-years-old and successful.  The founder was retiring, and he wanted to sell the business to his long-time managers.

Even though this was a business-only transaction, with no real estate, this lender was even willing to roll in $200,000 of working capital!  

The borrowers put down 10% or $260,000 - and they got back $200,000 in working capital.  Holy mackerel.  Arguably they had only $60,000 net out of pocket to buy the restaurant that they have been running for 30 years.

 

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Holy mackerel.  What a deal!  The SBA lender boasted of another deal in process, a $3.4 million SBA loan to finance the purchase of a bar and restaurant in Georgia.  This was another legacy-type deal with a long-time manager buying the business from the founder.

Start-Up Franchise Loans Nationwide:

This miracle SBA lender also funds start-up franchise loans all the time.  A recent closing was special because it was a new franchise with less than 20 locations open. Lenders shy away from young franchises, but we have brought many young franchises to success.

These start-up franchise loans can sometimes be closed with only 10% down, although this is only for very strong borrowers.  A 20% downpayment is the norm; but that is 80% of all of the costs needed to open.

 

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In this latest case, the cost to build out the space, the franchise fees, the equipment, the training, the marketing, and the working capital of $50,000 came to roughly $400,000.  The borrower put down only 20%. Interest is factored in, so that the borrower does not have to make a payment until the doors open. These loans are great, and this market has stayed very hot.

The SBA lender pointed out that "people are constantly starting businesses, buying businesses, expanding, and growing.  This market still has legs.  Yes, the risk for a recession continues to grow, and things are not all rosy.  However, business is still going on, and it will continue, even in a recession.  Even in communist China there are businesses.  Billionaires and commerce goes on."

How To Reach This Miracle SBA lender:

This miracle SBA lender is not Blackburne & Sons.  At Blackburne & Sons, we make sub-prime commercial real estate loans up to $2 million nationwide.  The loan must be secured by commercial real estate.

 

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The special thing about Blackburne & Sons is that our loans are amortized over 30-years, and they are not due for 15 years.  Grasp that.  Fifteen-year private money loans - wow.  This sure spreads out the cost of third party reports.

A loan term of 15-years means you will never have a balloon payment coming due during a bad recession.  Want to march through hell?  Trying refinancing a balloon payment during a bad recession, especially if real estate has just plunged by 45%.

In addition, private money commercial loans from Blackburne & Sons never have a prepayment penalty.  Click here to apply for a 15-year private money commercial real estate loan from Blackburne & Sons.

 

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Topics: SBA loan, SBA loans

Interesting and Fun Tidbits

Posted by George Blackburne on Fri, May 20, 2022

BoschJoke Du Jour:

A balding man went into a barber’s shop and asked how much it would be for a haircut.  “Twenty-five dollars,” said the barber.  “Twenty-five dollars?  That’s crazy!” exclaimed the man. “I’ve hardly got any hair.  How can it be that expensive?”  The barber explained, “It’s $5 for the actual cut and $20 for the search fee.”

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What is FreeVee?

The reason why you care is because the latest season of Bosch, called Bosch Legacy, has just been released on FreeVee.  Bosch, written by Michael Connelly, is the best detective show on TV.  Michael Connelly has written 31 novels, and he has sold 74 million books worldwide.

Anyway, FreeVee is the new name for the old IMDB Network.  I love that network, but the name, IMDB was horrible.  IMDB stood for Internet Movie DataBase.  I think that the new name of the network, FreeVee, is fantastic!  I love good marketing.

The reason I love-love-love FreeVee (IMDB) is because they show lots of free, older, blockbuster movies.  The typical movie might be twelve years old, but that movie was often a smash hit in theaters.  Yes, FreeVee has commercials, but they don't go crazy with them.  For the record, even Netflix will have commercials next year.

 

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I actually bought this T-shirt.  :-)

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Golf Tip:

If you don't play golf, just move on to the next tidbit.  I played in a little club golf tournament this week.  The nice thing about these little tourneys is that you get to meet new members of the club.  In the words of a six-year-old, you get to make lots of new "best friends."  Haha.  One of them taught me a smart lesson.

Whenever I play with a new set of golfers, and I am introduced, I often immediately forget their names.  For the rest of the round, I often stumble with embarrassment.  The trick, my new best friend just taught me, is to immediately write their names down on the score card, even if you are not personally keeping score.  List the driver of the other golf cart first.  

TIL:

This acronym stands for "Today I Learned", as in TIL that the new Rolls-Royce Ghost soundproofing was so over-engineered that occupants in the car found the near-total silence disorienting, and some even felt sick.  Acoustic engineers had to go back and work on "harmonizing" various sounds in the car to add a continuous soft whisper.

 

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Just One False Positive?

Yields on the two-year Treasury note briefly rose above those on the benchmark 10-year note in March for the first time since September 2019.  That so-called yield curve inversion has preceded every recession since 1955, producing a "false positive" just one time, according to the Federal Reserve Bank of San Francisco.

YSK:

This acronym stands for "You Should Know," as in YSK that if you go to India, an Indian restaurant, or an Indian home, and you see a swastika, it is there to welcome you and wish you prosperity.  It has nothing to do with the Nazi symbol.

Cracker Jack:

This week I got FOUR boxes of Crackerjack for 1.25.  Deal of the century?  I think so!  Yum.

 

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Topics: Fun Tidbits

Reports That World War III Has Been Canceled Were Greatly Exaggerated

Posted by George Blackburne on Mon, May 2, 2022

Mark TwainIn late May of 1897, the English correspondent for the New York Journal, Frank Marshall White, contacted Mark Twain in London to inquire about his health.  The editors of the newspaper had sent a cable White on May 28, asking him to get Twain’s response to reports that he was on his deathbed in England.

White relayed this request to Twain.  On May 31, 1897, Twain wrote down his response and sent it to White.  The next day, White wrote an article that quoted from Twain’s letter.  On June 2, 1897, the article was published in the New York Journal.  It said, in part:

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Uh, where's the Moskva?  Haha!

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"Mark Twain was undecided whether to be more amused or annoyed when a Journal representative informed him today of the report in New York that he was dying in poverty in London... The great humorist, while not perhaps very robust, is in the best of health.  He said:

"I can understand perfectly how the report of my illness got about.  I have even heard on good authority that I was dead.  (Haha!  Humorist indeed.)  James Ross Clemens, a cousin of mine, was seriously ill two or three weeks ago in London, but is well now. The report of my illness grew out of his illness.  The report of my death was an exaggeration.”  Source: This Day in Quotes.)

The Coming War With China:

For weeks I was joyous.  Russia was struggling so badly against Ukraine that it occurred to me that China might become less aggressive.  The economic sanctions against Russia have been brutal, and Russia's massive army is bogged down in a slugging match.

 

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Both Russia and the West are finding that their "vast stores" of artillery shells, rockets, missiles, anti-tank missiles, and anti-aircraft missiles are quickly becoming depleted.  And the war has only been going on for two months!  At this rate, the two sides will soon be reduced to throwing rocks at each other.

But My Hopes Were Dashed With the Sinking of the Moskva:

We all chuckled when Russia's flagship in the Black Sea, the huge missile cruiser Moskva, was hit by two Ukrainian Neptune surface-to-sea missiles.  Yay!  Apparently both missiles struck the Moskva, while it was steaming across the Black Sea at night, more than 50 nautical miles from the coast.

This was good news, right?  Both missiles hit a moving ship many miles away at night.  Hellooo?  Surface-to-sea missiles apparently work very, very well.  At any given time, the U.S. Navy operates two to three aircraft carriers within range of China's DF-26 carrier killer missiles.

 

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The typical carrier has a crew of 5,000 to 5,2000 sailors, including more than a few women, and carries 24 F-35B's fighter / bombers.  These are the special versions of F-35's that can take off and land vertically.  Each of these F-35's cost around $115 million, and we only have about 700 of them.

Within range?  Holy crap.  China's DF-26 missiles have an effective range... are you ready for this... of 2,000 nautical miles.  Our F-35's can only fly around 1,300 miles round trip.  In other words, we can only attack targets 600 miles away.  It's hard not to be scared.

Economic Sanctions Would Devastate China, Right?:

Yes, they would.  If rational men were making the decision to invade Taiwan, we would be safe.

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But here's the deal.  President Xi of China was supposed to resign at the end of his second five-year term.  His predecessor, Hu Jintao, stepped down exactly on the last day of his second term, and he was widely praised for the smooth transition.

President Xi, however, doesn't want to give up power.  Two years ago, Xi manipulated the Communist Party rules to rescind the prohibition against more than two five-year terms.  Uh-oh.  Can you say Dictator-For-Life over 1.4 billion people?

The Presidents of China are elected by the National People's Congress (NPC), and Xi has spent the last three years putting his supporters into place in the National People's Congress.  Anyone who complains is arrested, and they are either shot or imprisoned.

 

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I asked my buddy if he thought Xi would be reelected.  He laughed and suggested that Xi knows how to count.  Xi has made sure that he has enough votes, so when the NPC meets on October 13th to elect its president for the next five years, the issue is fait accompli, which is Latin for "the thing is already done."  

Why You Need to Care About Xi's Refusal to Step Down:

Not every leader in China can be thrilled with the country's new Dictator-For-Life.  Xi has made a ton of boneheaded decisions in the past two years.  For example, Xi picked a border fight with India over some mountaintops that are so high that soldiers on both sides get altitude sickness.  There is nothing of value in those stupid mountains!  He also drove the Philippines back into the arms of the U.S. by trying to seize the Spratly Islands.  

China's domestically-produced COVID vaccines no longer work.  Instead of asking the U.S. to buy Moderna's or Pfizer's vaccines, Xi has locked tens of millions of people in their apartments in Shanghai and other huge cities, while trying to maintain this crazy zero-COVID policy.

 

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Because the Chinese people never got salted with the COVID virus, and because Sinovac and the other Chinese COVID vaccines have fallen to less than 20% effectiveness (due to the Omnicron variants), there is no way out for China.  Millions of people are going to die in China, while the U.S., Europe, and the rest of the world are past the pandemic.  

Someone posted a video on Reddit.com this week of Shanghai's residential apartment towers at night.  Tens of thousands of people were screaming at the top of their lungs to be let out. They were pounding on pots and pans.  It was deafening.  This is going on right now every night in China.  These people have got to be pissed.

Xi has scared so many business owners worldwide with his militarism that company owners are shipping their manufacturing orders to other countries.  Did you know, according to the big investment bank, Piper Jeffries, that China's GDP went negative this quarter?

 

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Do you remember the deal between the Chinese people and the Chinese Communist Party ("CCP")?  The Chinese people will put up with totalitarianism, as long as the CCP continues to grow the country and improve their lives.  Uh, oh.

Soon the Riots May Start:

If Xi falls from power, he will not be allowed to just retire to the country.  His power grab has freaked out so many of China's leaders that he will be taken on a long drive and then shot in a ditch.

If the people in China start to riot - imagine the people of Shanghai breaking out of their apartments like screaming, hungry zombies - Xi will have no choice but to distract his people by invading Taiwan.

 

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China may try to sink an American carrier or two (or three) in the opening minutes of the war, and the sinking of the Moskva suggests that China will be successful.

The sinking of the Moskva suggests that the
Chinese will successfully sink our carriers.

When 5,000+ of our young men and women are being torn apart by sharks, you gotta believe that World War III will be "on."  

Dang.  The rumors that World War III had been called off were greatly exaggerated.

 

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Topics: World War III is On Again

Debt Service Coverage Ratio Conventions

Posted by George Blackburne on Tue, Apr 26, 2022

debt service coverage ratioJoke Du Jour:

Seeing a homeless guy begging on the street, a woman took pity on him and gave him a handful of change.  “Thank you,” said the homeless man.  “Your generosity is much appreciated.  You know my life used to be great, but just look at the state of me now.”  “How do you mean?” asked the woman.  “Well,” he explained. “I once was a multi-millionaire.  I had bank accounts all over the world, with hundreds of thousands of dollars deposited in each.”  “So where did it all go wrong?” she asked.  The homeless man sighed, “I forgot my mother’s maiden name.”

 

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Quick Review of the Debt Service Coverage Ratio:

Once we get past a quick review of the basics, we will get into today's lesson.  You will recall that commercial real estate lenders usually want the property's net operating income ("NOI") to be higher than the projected loan payments (the "Debt Service").  This extra income provides the lender with a a cushion against vacancies and recessions.

How much higher does the NOI have to be than the projected Debt Service (loan payments)?  This is determined by the Debt Service Coverage Ratio ("DSCR").  

You should be able to say this ratio's name three times in a row very quickly.  Years ago, when I was healthy enough to give nine-hour classes, I would single out a student in the audience and ask,  "What is the name of this ratio again?"  The jumbled answers I would get would soon have the other students in stitches.  "Uh... debt cover ratio?"  "Service debt ratio?"  Hahahaha!

 

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Okay, so what is the Debt Service Coverage Ratio?

DSCR = NOI / Debt Service

The result is usually expressed as something like 1.31 or 1.02.

Conventions When Discussing the DSCR:

The Debt Service Coverage Ratio is alway expressed to two digits to the right of the decimal point; e.g., 1.41, 1.25, or 1.00.  If you express the DSCR with one-digit; e.g., 1.2, or with three-digits; e.g., 1.117, your commercial lender will know that you are a rookie.  In his mind, you're an idiot.  Sorry.  The world is a tough place.



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A debt service coverage ratio, without a loan constant, is almost meaningless.  You can't just say that the debt service coverage ratio is 1.25.  What interest rate did you use?  What amortization?  A deal may have a 1.25 DSCR at a 3.5%, 30-year constant or a very unsatisfactory 0.92 DSCR at a 6%, 20-year constant.

Most commercial loans, especially those from banks, will be amortized over 25-years.  Therefore, you will usually use a 25-year loan constant.  If a commercial property is older than 40 years, your bank may require a 20-year amortization because the property will not stand forever.  In that case, the commercial loan officer at the bank will use a 20-year constant.  

You, of course, will never submit a commercial loan to a bank asking for a 20-year amortization.  Hellooo?   Your job is to get the borrower the most possible cash.  Your bank commercial loan officer may just automatically use the customary 25-year amortization for commercial loans.

 

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When computing the debt service coverage ratio, you must use annual numbers.  You must use the annual debt service, rather than converting the annual income to a monthly income and then using monthly payments.

Unfortunately for borrowers and brokers, if you compute the debt service coverage ratio using monthly payments, you actually gets you a higher DSCR.  In other words, you might have a deal where the DSCR is 1.23 when computed using the annual debt service and a 1.25 DSCR when computing the ratio using the monthly payments.  That 1.25 DSCR number is sooo important because it is often the minimum DSCR for banks.  

I suppose in this borderline case that you could submit the deal at 1.25 and see what happens.  If you are challenged by the commercial loan officer at the bank, you could always play dumb and show him your monthly calculations.  Worth a try.

 

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Sometimes commercial buildings are so prime that they sell at insanely low cap rates.  When this happens, even commercial loans of just 50% LTV don't cash flow.  But if your borrower is putting down 45% of the purchase price on a super-primo building in a filthy rich area, you should find the closest bank and submit the deal as follows:

Debt Service Coverage Ratio - 0.89% based on a 5.75%, 25-year constant ($237 per month negative)

Even though the DSCR is far less than the usual minimum of 1.25, by showing that the actual amount of the negative cash flow is quite affordable, most banks will approve the loan for your physician borrower (or other high-income borrower).

 

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Topics: Debt Service Coverage Ratio Conventions

Soft Landings and Other Fantasies

Posted by George Blackburne on Sun, Apr 10, 2022

Screen Shot 2022-04-10 at 3.26.53 PMI went onto Google this afternoon and asked, "Has there ever been a soft landing?"  The answer was interesting.

But before we get into unicorns (the horses with a big wart on their foreheads), soft landings, and other fantasies, let's first define a soft landing.  Adam Hayes, in a superb article for Investopedia, defined a soft landing as follows:

 

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"A soft landing, in economics, is a cyclical downturn that avoids recession.  It typically describes attempts by central banks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a significant increase in unemployment, or a hard landing.  It may also refer to a sector of the economy that is expected to slow down without crashing."

Alan Greenspan, former chair of the Federal Reserve, engineered the only true soft landing in U.S. history from 1994 to 1995, when the Fed raised interest rates enough to slow the economy, but not enough to cause an economic contraction.

With inflation raging at almost 8% annually, and with the construction cost of new homes soaring by 17%, the Fed is receiving heavy criticism for allowing inflation to imbed itself into the economy.  It may take us a decade to unwind this inflationary bonfire.  Wage-push inflation, once ignited, is hard to contain.

 

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Wage-push inflation is an overall rise in the cost of goods and services that results from a rise in wages.  Workers at an Amazon plant this month successfully formed a union, the first for an Amazon plant.  According to Amazon Union's President, workers at another 100 facilities want to unionize.

Inflation is just transitory?  Someone has been smoking dope... not that there is anything wrong with that.  Haha!

The Fed recently announced that will soon start selling off the bonds it holds in its portfolio.  And it has trillions and trillions of dollars worth of bonds.  When the Fed sells off bonds, investors take money out of their bank account and securities accounts to buy them.  This takes money out of the economy.

 

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Think of a slice of bread sopping up some delicious gravy.  Yummy.  In our metaphor, that gravy is the money supply of the country, and a lot of it is suddenly about to get soaked up.

Unfortunately, too much of it.  Far too much.  As a result, the coming stock market and real estate crash is almost certainly going to brutal - at least as bad as the Great Recession.  We are talking about an imminent decline in real estate of at least 45%.  How imminent?  Certainly within the next 18 months and possibly even sooner.

Why is a horrible economic slump so certain?  Answer:  The Fed is about to reduce the money supply at the absolutely worst time.  It's going to be a disaster.

 

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A bad recession is already guaranteed by
the crash in China and the Ukrainian War.

China's once roaring economy has hit a brick wall, and to make matters worse, Covid-19 is raging in Shanghai.  The Chinese people never really got seeded, and their vaccines were not the best.  On top of China's crash is the fact that Ukrainian War has prevented the planting of half of Ukraine's vast wheat fields.  Ukraine is called the bread basket of the world.  Food prices are already rising sharply, and we haven't seen anything yet.  And, of course, oil prices are through the roof.

Therefore the Fed doesn't have to do anything to slow the U.S. economy and to cool inflation.  A major economic slowdown is already baked in, but the Fed won't have the courage to just say so.

Americans are furious with the Fed over inflation.  This is not a good year to be a Democratic Senator or Congressman running for reelection.  Blame will be spread.  Political blood will flow.

 

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Therefore, the Fed is about to make the worst mistake since the Great Depression in 1929.

The Fed is about to greatly reduce the money supply,
just as the U.S. economy enters a bad recession.

It will be like dousing a raging fire with gasoline.  Someone needs to tell Fed Chairman Powell not to start reducing the Fed's portfolio of bonds.  He needs to get up and simply say, "We blew it.  We missed the build-up of inflation.  This was OUR fault; but if we raise rates now, we will crush the U.S. economy."

But I suspect that Fed Chairman Powell lacks the courage to admit his mistake and to resist the pressure to raise rates.  We're toast.

Cute story:  Ted Turner used to own the Turner Broadcasting Company, and his two sons were both highly-paid executives.  He secretly sold out to Time-Warner for $7.5 billion.  If the story is true, he announced the sale for the first time to his sons at a family dinner.  "What about us?" asked one of his sons.  "You're toast," he dryly replied.  Ouch.

So when Fed Chairman Powell fearfully starts selling off bonds, you and I?  We're toast.

 

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My Advice to Mortgage Brokers:

  1. Downsize your office immediately.  Negotiate for far less space and MUCH lower rent.

  2. Kick yourself in the butt for not acquiring loan servicing rights.  I have been telling you for years that the real money in the mortgage business is in loan servicing fees.  Mortgage bankers are the guys who service their own loans.  Mortgage bankers survive real estate crashes because they have a steady cash flow.  Mortgage brokers simply get crushed.

  3. Consider getting into the property management business.  Your property management fees may be your only income when real estate falls by 45%.

  4. You love your employees, but if you have more than a dozen, you won't be able to keep them anyway.  Why wait for an economic miracle that is never going to happen?  Why waste the very last of your savings, when you are only going to have to lay them off anyway?  You could use the last dregs of your savings to do some fix-and-flips during the crash.

  5. Don't be too proud to retreat to your house.  Thousands of mortgage brokers work from their homes.  Don't apologize.  Most borrowers will salute your wisdom and envy your commute.  Over the past 42 years, I have been forced to retreat to my house at least four times.  Fortunately, since I began servicing hard money loans, it has not been necessary.  Hint-hint.  "It's the loan servicing income, Stupid!" (President Clinton had a yellow Post-It note on his wall for years.  "It's the economy, Stupid!"  Haha!)

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Topics: soft landing for real estate

Putin's Invasion May Prevent World War III

Posted by George Blackburne on Mon, Apr 4, 2022

Screen Shot 2022-04-04 at 3.04.09 PMJoke Du Jour:

Wandering inside a pet store, I stopped in front of a birdcage to admire a parakeet.  We watched each other for a few minutes before it asked, “Can’t you talk?”

Ukraine is Losing the War

We have all relished reading the frequent articles about how the brave Ukrainians, using just anti-tank and anti-aircraft missiles, are devastating the once mighty Russian Army.  Certainly the Ukrainian propaganda industry is waging a brave struggle to maintain the morale of its people.

 

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In truth, however, is that whole Ukrainian towns and cities have been reduced to smoking ruins.  You could be the bravest soldier in the whole wold, but there is no defense to an artillery barrage.  Those inexpensive howitzer shells are heartless, and they tear bodies from limb to limb.  If you go underground, the Russians collapse buildings on top of you.

The U.S., when it invades, first sends in their stealth fighters to destroy the enemy's air defense batteries.  After they are knocked out, the aerial attacks begin, taking out bridges, ammo dumps, military bases, and command and control centers.  American missiles are very accurate, but they are also very expensive.  Finally, the U.S. sends in our infantry, our tanks, and our artillery.

Russia wages war in a far cheaper manner.  They use their tanks to take territory, and then the Russians advance their artillery pieces, hundreds of them, to pound the enemy cities to rubble.  At the end of World War II, when Russia invaded Germany and attacked Berlin, the Russians were said to have had tens of thousands of howitzers, aligned wheel-to-wheel, stretching for miles.  For miles!

 

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Russia has not been using its best tanks either.  Most modern tanks have reactive armor, which fires off an explosive charge, the moment before impact, to destroy incoming missiles.  The tanks the Russians have been using are their old, obsolete tanks, which have no reactive armor.  In the meantime, the Ukrainian are burning through thousands of expensive anti-tank missiles.  The West does not have an unlimited supply of these advanced anti-tank missiles, and NATO stockpiles are dwindling.

Like the rebel cities in Syria, the cities of Ukraine are doomed because the Ukrainians lack the means to reach those Russian howitzers - which fire relentless salvos of cheap, high-explosive rounds - from ten to twenty miles behind the lines.  It sucks.  Perhaps the Russians are not completely inept.  

How Putin's Botched Invasion May Prevent World War III

If 4,000 Russian nuclear missiles are currently headed towards the United States, kindly disregard this article. I was an idiot.  Haha!  Otherwise, one could make a good argument that Putin’s botched invasion of Ukraine may have just prevented World War III.

 

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The hold of the Chinese Communist Party (“CCP”) over 1.4 billion Chinese citizens has been based for decades on an implied contract.  The Chinese people will put up with their totalitarian government, as long as the CCP materially improved the lives of the Chinese people every year.  To their credit, the CCP has delivered for decades.

But right now, China has more economic problems than Carters has pills. Their real estate and construction industry, which used to contribute 29% of their total GDP, has hit a brick wall, due to over-building. 

China has made so many military threats against its neighbors that war with the West began to look almost inevitable.  Who wants to rely on parts and products from a country that might soon be subject to a blockade? 

 

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As a result, companies worldwide have started to move their parts manufacturing facilities to other countries, like Vietnam, Bangladesh, and Thailand. Opening a manufacturing plant in China is now almost viewed as unpatriotic.

China has driven into retirement twenty of their largest entrepreneurs - their great capitalists, like Elon Musk - all for the sin of becoming too rich.  By becoming Soup Nazi’s about COVID, they have shut down huge manufacturing centers, forcing even more worldwide companies to find alternative suppliers.

China has also destroyed its own own access to the international investment banking community.  "China is uninvestible, in my opinion, at this point," the bond king, Jeffrey Gundlach, recently told Yahoo Finance.  Hong Kong and U.S.-listed Chinese stocks witnessed their worst selloffs since the Great Financial Crisis.

 

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Economically, China is screwed.  Personally I think we have already witnessed Peak China.  So what will President Xi of China do when his people start protesting their declining economic prosperity?  His plan used to be that he would rally his people to attack Taiwan. There’s nothing like a good war to defuse civil unrest and to get citizens to rally around the flag.

The U.S. would likely defend Taiwan, especially if China sank some of our carriers in the opening minutes of the war.  That war might have lasted for decades, and there is no guarantee that the U.S. would have won.

Finally we get to my point.  As horrible as Putin’s invasion of Ukraine has been, the invasion has opened the eyes of China’s leadership. (1) Complete economic sanctions can devastate your economy.  (2)  Your precious trillion-dollar foreign reserves can be seized in an instant.  (3)  That huge hoard of gold you keep with the New York Fed?  It’s not there.  It was sold off or loaned out decades ago.  (4) Lastly, inexperienced troops perform very poorly in combat.

 

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One reason why so many Russian generals are getting killed is because they have to get right up there at the front, showing the troops how to perform the most mundane of attacks.  (We have also been hacking their unencrypted cell phone calls.)

Two-thousand years ago, the battle-tested Roman Legions were usually outnumbered at least three-to-one when they fought barbarians, but their superior training, tactics, and experience would usually produce wildly one-sided body counts.

The Chinese Army is far less effective than the Roman Legions.  When China invaded Vietnam in 1979, China’s Army performed so poorly as to be embarrassing.  To this day, China’s military leadership is also keenly aware of the fact that the Chinese Army has very few experienced NCO's and veterans.  The poor performance of the Russian Army has to remind them of China’s own military weaknesses.

 

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So will China still invade Taiwan in the Spring of 2023?  I used to think that the invasion was inevitable.  Now… maybe not.  But to those of you who think that a conventional World War is out of the question, I say to you, “History does not always happen to the other guy."

 

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Topics: Invasion of Ukraine

World Trade is Breaking Down.  I'm Terrified.

Posted by George Blackburne on Sun, Mar 13, 2022

world tradeIf you are listening to and reading the news, and you are alert to this issue about the breakdown in world trade, you too will see the signs everywhere.

There was a time when you could walk into a Wal-Mart store and be stunned at the low prices.  Bicycles that retailed for $275 ten years earlier could be purchased for just $79.  

The reason why was because the world was (relatively) at peace, and free trade was at its apex.  While that bicycle may have have been assembled in China, the tires might have come from Indonesia.  The seat covers may have come from Bangladesh, and the sprockets may have come from South Korea.  World trade was humming.

 

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In the early 19th Century (1800's), the famous economist, David Ricardo, advocated for world trade, and he coined the expression, comparative advantage.

Comparative advantage is working at what you do best, while also giving up the least.  For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing.  This is because you’ll make far more money as a plumber.

The opportunity cost of babysitting, on the other hand, is high.  Every hour you spend babysitting is an hour’s worth of lost revenue you could have earned from a plumbing job.  

If you are better than everyone else in the neighborhood at both plumbing and babysitting, you have absolute advantage in both fields; but plumbing is still your comparative advantage.

 

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David Ricardo is also credited with being the first economist to systematically consider how two economies can benefit if they choose to trade.  He suggested that if one country could produce an item at lower opportunity cost than another country, and the other country could produce a different item at a lower opportunity cost, both countries could benefit by trading some of the goods that they were better at producing for some of the goods the other country was better at producing.

The whole world benefits when countries
specialize in what they do best.

This is what is breaking down across the world.

Russia and the Ukraine are the breadbasket of the world.  Collectively they produce 30% of the world's wheat.  Right now Ukrainian farmers should be fertilizing their winter wheat, but they have no diesel fuel with which to run their farm equipment.  One desperate farmer even resorted to siphoning diesel from a gully next to a destroyed Russian tanker truck.

 

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Ukrainian wheat farmers also desperately need more fertilizer.  Ammonium nitrate, urea, and potash are all key ingredients in the production of fertilizer.  Russia accounts for 23% of ammonia production globally, as well as 14% of urea and 21% of potash production.  In response to Western economic sanctions, Russia just banned the export of ammonia, urea, and potash.

Expecting far lower yields, yesterday Ukraine banned the export of wheat.  Countries in the Levant - the countries along the Eastern coast of the Mediterranean Sea - used to get almost half of their wheat from Ukraine.  From where will it now come?  At a minimum, the price of wheat worldwide will be painfully high.  For third world countries, the poor may simply be unable to afford it.  Will there be bloody riots in Egypt?

Will farmers in the Ukraine even be allowed to plant?  Will Russia be allowed to sell its wheat?  Farm land prices here in the U.S. are skyrocketing.  We can grow more wheat here in the U.S., but that takes away land from corn and soybean production (feed for livestock).  Meat prices will surely be increasing.

 

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Then there is China.  The cold war between China and the rest of the world is causing many international companies to seek alternative locations for their parts plants.   China is no longer a reliable parts supplier because it may soon invade Taiwan.  Crushing sanctions would surely follow, and trade with China would come to a screeching halt.  How are you going to get widget parts for your huge doohickey plant in France or the United States when China is blockaded?

It's going to take some time before Vietnam, Bangladesh, and India can pick up the parts manufacturing slack.  At a minimum, costs will be higher.

And that assumes that enough container ships survive a shooting war with China.  If American aircraft carriers are sinking, you can bet that it will be open season on container ships and oil tankers going into and out of China.

 

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Then there is nickel.  Every electric vehicle ("EV") battery requires a a heavy chunk of nickel.  The latest and greatest EV batteries, the ones that get the super-extended mileage, use significantly more nickel than the first generation EV batteries.  

And guess which country produces the most nickel?  You got it.  Russia.  Three days ago, Russia banned the export of nickel.  Yes, there are alternative sources of nickel, but they are much more expensive, and it will take some time for these mines to ramp up.  If you owned a nickel mine, would you invest millions to increase production, when Putin could be assassinated by his own generals at any time?  Just sayin'.

Where will this all end?  Will the standard of living of almost everyone on Earth fall by 40%?  More?  I dunno.  Things could get ugly.

 

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Why do you care?  You may deeply and intimately care when the U.S. stock market finally wakes up to the threat that world trade is breaking down.

 

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Topics: world trade

Ten Short Commercial Loan Training Points

Posted by George Blackburne on Mon, Feb 21, 2022

Lake City BankMini-Lesson #1:

Banks and credit unions make 90% of all commercial real estate loans.  If you need a commercial loan, your first thought should be of a bank.  From now on, whenever I say, "bank", please think of either a bank or a credit union.

Mini-Lesson #2:

Banks greatly prefer to make commercial real estate loans located close to one of their branches.  Forget about some New York bank coming in with much lower rates.  The commercial lender with the lowest rate will almost always be the bank located right next door to the property.  If an Iowa deal falls in your lap, you can instantly and easily search either C-Loans.com or CommercialMortgage.com for a half-dozen nearby banks in Iowa.

 

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Mini-Lesson #3:

Banks largely charge the same rates and terms.  The idea of shopping banks for a lower rate is usually an exercise in futility.  Well, that's not complete true.  Banks price their commercial real estate loans at between 275 to 350 basis points over five-year Treasuries, so there is a tiny bit of play there.  The loan will have a term of ten years.  It will have a fixed rate.  There will be one rate readjustment after five years, according to any changes in five-year Treasuries. 

Mini-Lesson #4:

If you have a near-bankable deal, but the borrower's credit has some blemishes, take the deal to a credit union, rather than to a bank.  Credit unions are a little more forgiving about credit, perhaps because they are non-profit organizations.  In addition, credit unions are often desperate for loans.  People just don't think about credit unions when they need a commercial loan.  The reason why is because until twelve years ago, credit unions weren't even allowed to make commercial real estate loans.

 

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Mini-Lesson #5:

Match the size of your commercial loan to the size of the bank.  Take small loans (less than $2 million) to small banks and credit unions.  Take medium-sized commercial loans ($2 million to $8 million) to mid-sized banks, which are often known as regional banks (lending in three or more different states).  Take large loans (over $8 million) to one of the top fifty banks by asset size, which have asset sizes larger than $50 billion.  You'll immediately recognize the names of most of these big banks.

Mini-Lesson #6:

Ideally your borrower will have plenty of liquidity at the time he applies for any bank loan.  Remember, banks only like to make loans to borrowers who don't need the money.  You might even have to refinance the borrower's home and put the proceeds in a bank account, just to show your commercial lender that your borrower has plenty of liquidity.

 

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Mini-Lesson #7:

One of the best ways to get a bank to do a deal is to tell the bank that your borrower will move his company's business accounts to the bank if they will make the loan.  This technique isn't as important as in years past because most banks have more deposits right now than they can possibly use.

Mini-Lesson #8:

Construction loans are made by banks and credit unions.  Banks love-love-love to make construction loans because they are short term deals.  Another reason why banks love to make construction loans is because the bank earns its loan fee on the entire amount of the loan, even though for most of the term of the loan, the bank has only released a few pennies.  The effect on the bank's yield is delicious.

 

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Mini-Lesson #9:

Construction loans are almost always made by local lenders.  The reason why is because the bank's loan officer has to run out to the property regularly to verify that construction is proceeding according to the plans and specifications and to verify that construction is on schedule.  These short site visits are called progress inspections.  Because of the need to conduct six to eight progress inspections on every project, banks only make construction loans close to their office.  

Mini-Lesson #10:

The single most important thing I ever learned about commercial real estate finance ("CREF") is that banks makes commercial loans for their friends.  The smart commercial mortgage banker therefore becomes buddies with his bank loan officer.  I once knew of a very successful commercial mortgage banker who brought cocaine and hookers with him whenever he brought a new commercial loan application to his bank loan officer.  He made the equivalent today of over a $1 million per year in fees, but the drugs eventually caught up with him.  He ended up living in a homeless shelter on Skid Row in San Francisco.  Many of his questionable commercial loans ended up going bad, and the S&L went bankrupt.  Maybe the lesson to be learned is to bring cocaine and hookers when you bring your commercial loans to the bank.  Haha!

 

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