Commercial Loans Blog

American Jets Are Out-Ranged By Chinese Missiles

Posted by George Blackburne on Mon, Dec 9, 2019

Screen Shot 2019-12-09 at 10.05.03 AMWhether you have noticed it or not, the U.S. is starting to seriously arm-up for the coming war with China.  In some recent war games ordered by the Joint Chiefs, "We got our asses handed to us (by the Chinese)."   It was pretty eye-opening.  If war were to break out today, we would lose most, if not all, of the 7th Fleet.  

The reason you should care is because it is the 7th Fleet that is keeping the larger Chinese Navy from steaming close enough (missile range) to take out out shipyards, power plants, bridges, military bases, railway hubs, missile manufacturing plants, computer chip factories, freeway interchanges, and reservoirs on the West Coast. 

 

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The problem we have is the range of China's area denial weapons (ADW's).  It's hard for us to get close enough to hurt them.  The jets flying off our carriers only have a maximum range of around 500 miles.  Our air-to-surface missiles can add maybe another 300 miles.  

China's surface-to-sea missiles can travel 1,100 miles.  It reminds me of the Battle of Crecy in 1346.  About 10,000 English troops took refuge on a hill top, and they were attacked by 110,000 French troops.  Surprisingly, the English crushed the French.  

The secret was the English longbow, which had a range of 400 yards.  The crossbows used by the French had a maximum range of just 300 yards, and they had a rate of fire of just two bolts per minutes.  The English longbowmen could fire ten to twelve arrows per minute.  The French just couldn't get close enough to do any serious damages.  

 

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Finally, the arrogant French knights got tired of waiting and watching a losing missile exchange, so they rode down (and killed) their own crossbowmen in a wild charge up the hill towards the English lines.  

The English longbowmen had a field day.  Their bodkin-tipped arrows could penetrate the French armor, and soon piles of dying horses and knights piled up so high that the French couldn't ride close enough to strike the English.  The French lost 14,000 knights - the cream of their nobility.  The English lost just 200 men-of-war and longbowman.

Now back to the Chinese.  How can the Americans, with their short-range jets and shorter-range missiles, get close enough to strike the Chinese missile batteries?

 

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The solution is really cool.  This week military journals released news this week that the U.S. has just ordered a bunch of new refueling tankers from Boeing, Lockheed, and Airbus.  By refueling our jets in mid-flight, we suddenly have the range to hit the Chinese from much further away.  We also ordered four refueling drones.  Pretty cool, huh?  The unmanned refueling tankers tag along like dogs in a pack.

Someone in the military must be seriously concerned because a consortium of Lockheed and Airbus will be delivering the first of their refueling tankers by the end of this year, which will supplement (and compete against) 179 KC-46 refueling tankers ordered several years ago from Boeing.  

The speed of the development of these new consortium refueling tankers is little short of amazing.  Someone in the Pentagon is very, very worried.  At learnt someone in the Pentagon is paying attention to the considerable range of the Chinese missile forces.

 

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Private Equity and a Shortage of Stocks

Posted by George Blackburne on Mon, Dec 2, 2019

Private equityAn interesting thing happened this week.  Warren Buffet got his butt handed to him.  Let me set the scene.  Berkshire Hathaway is sitting on $128 billion in cash; but in comparison to the $2 trillion in cash that private equity firms are siting on, Warren Buffet's massive cash hoard is chump change.  Haha!

 

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Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies, many of which are not even publicly-traded.  A source of investment capital, private equity actually derives from high net worth individuals and firms that purchase shares of private companies or acquire control of public companies with plans to take them private, eventually become delisting them from public stock exchanges.  Most of the private equity industry is made up of large institutional investors, such as pension funds and groups of accredited investors.

Okay, so Tech Data is a publicly-traded company in Clearwater, Florida.  It's a company that offers complete product lines in software, networking and communications, mass storage, peripherals and computer systems, from companies like Apple and Cisco.  In addition to distributing more than 75,000 products from over 1000 manufacturers and publishers, Tech Data provides extensive pre-sale and post-sale training, service and support.

Suddenly, Tech Data receives an unsolicited takeover offer for $130 per share from Apollo Global Management, a private equity firm with investors from all over the world.  The investment bankers, hired by Tech Data to advise on the transaction, take the deal to Warren Buffet.  He offers Tech Data $140 per share.

 

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Then Apollo comes back and increases its offer to $145 per share, and Buffet bows out of the bidding.  I think that Warren Buffet made a mistake because the world is running out of stocks.

"Huh?  Running out of stocks?  George, you must be smoking that Colorado oregano." 

In order to explain an important concept, please humor me as I share an imaginary economics parable.

 

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The year is 800 A.D., and the place is the imaginary island of Palm Tree, in the Solomon Islands.  The people of Palm Tree ("the Palms") have just fought and won a bitter war against the headhunters of Guadalcanal, the same island that would, eleven-hundred years later, be the site of one of the bitterest battles of World War II.  

In this bitter battle against the headhunters, the Palms lost two-thirds of their men and women (who had to fight alongside their men) between the ages of 14 to 55.  The island nation is now disproportionately old men, old women, and children.

Every day fewer than 175 fisherman, manning just 22 remaining fishing boats, head out to sea to bring back fish - one of the few sources of protein for the nation.  The problem is that 175 fisherman cannot catch enough fish to feed an entire nation of 6,500 souls.  

 

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The problem is not the availability of fishing boats (capital), but rather the lack of fishermen to man the boats.  Women are pressed into the fishing service, but the losses among the womenfolk (many of whom were carried away as slaves) were almost as large as the fighting men.  There are just not enough people of working age to take care of all of the old folks and young people.

When the fishing boats return to harbor at night, the bidding for the scarce fish steadily drives up the price of fresh fish.  Anxious not to starve, groups of elderly and wealthy islanders pool their valued oyster shells and start to buy up a partial ownership in the fishing boats and their precious crews.

You can't eat oyster shells, so the bidding for the shares of the remaining fishing boats is fierce.  If you own a share, you get fish to eat.  If not... sorry, old man, but you starve.

 

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The problem?  No matter how many oyster shells possessed by the elderly, there are only so many fully-crewed fishing boats.  To make matters worse, accidents and storms sink one or two fishing boats every year.

Obviously, the fully-crewed fishing boats, in my parable, are publicly-traded companies.  The accidents and storms represent companies that are purchased by private equity firms.  Once a company is purchased by a private equity firm, the shares of these companies no longer trade on any exchange.

And the bitter war against headhunters that greatly reduced the working age population?  That is the declining birthrate in the U.S., Europe, Japan, South Korea, and ... are you ready for it?  China!

 

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What is the moral of this story?  I am just musing here, but if you own a share in a well-maintained fishing boat, don't sell it.  If you get a chance to buy a share in a well-maintained fishing boat, buy it.  There is not an unlimited number of fully-crewed fishing boats.  Central banks worldwide, especially the European Central Bank, keep creating new oyster shells like crazy.

 

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Topics: Private Equity

Commercial Loans on Build-to-Rent Communities

Posted by George Blackburne on Sat, Nov 30, 2019

Build to rentNearly a decade ago, there was a foreclosure crisis.  Realtors were buying old houses and flipping them.  Now, the strategy is to buy new and rent out.  This new asset class that is taking the private equity market by storm.  It started in Arizona, spread to the Sunbelt, and is now spreading across the country.

 

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This new real estate asset class; a class of real estate that competes with apartment buildings, office buildings, and shopping centers; is the build-to-rent community ("B2R").  A build-to-rent community is a tract of brand new single-family homes that is constructed, not to be sold, but rather to be rented out to residential tenants.  The tract of, say, 60 homes, is then professionally managed and sold to an institutional investor as a reliable source of income.

My friends at George Smith Partners recently published the following tombstone:

George Smith Partners successfully advised on $12,000,000 in joint venture equity financing and $23,900,000 in non-recourse senior construction financing for the ground-up development of a 185-home build-to-rent community.  Single-family-for-rent communities are a newer asset class and this project was among the first in the market.  These communities offer the experience of living in a single-family home with the ease and cost of living in an apartment building.

The Sponsor expects the project to be well received as there are distinct competitive advantages over the existing apartment product in the market place for several reasons including the new construction, low density and both interior and exterior privacy.

 

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Institutional real estate investors absolutely love this new class of real estate.  The homes in B2R communities usually rent at significant premiums anywhere from 15% to 30% above equivalent-size apartments or single-family rental homes, located in traditional for-sale neighborhoods.

B2R communities typically lease three to five times faster than traditional multifamily housing.  Developers report strong pre-lease periods, often ending up with a waiting list.  Typically all of the homes are rented in three to four months, versus ten to fourteen months for multifamily.

Another reason institutional investors love B2R communities is because the homes are brand new.  Because these home are brand new, they are usually immune from some of the typical repair factors that come in at 15 or 20 years of ownership.  There is a general contractor warranty.  There is also a limited product warranty of the appliances.  The only major operating expense for landlords is the landscaping.

 

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Rents for single-family homes are growing fast at 4.5% annually now, compared with 3% rent growth for multifamily apartments.  There is also much less turnover in single-family rentals, and the rental market is much less volatile than the home sales market.  People will always need a place to live.

Renters are also digging these new B2R communities.  The huge millennial generation is aging into marriage and parenthood.  Not all of them want, or can afford, to buy a home.

Most of these B2R communities are pet-friendly and include a resort-style pool and spa, a covered ramada, walking paths, optional garages, and an electric-charging station.  They often offer the highest available Internet speeds.  The pool, exercise facilities, and planned social activities bring residents together, which doesn't always happen in apartment buildings.  The homes often offer keyless entry and tablet-controlled security, climate control, and entertainment systems.  There are sometimes even smart front gates at the communities.

 

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Institutional investors are learning that there is a cultural move away from your typical garden apartment with elevators, swimming pools, tennis courts and common areas. Homeownership is looking less desirable to some, particularly in the affordable arena, and renters now have a chance, for very close to the same price, to rent a three-bedroom, two-bath or a four-bedroom, three-bath home that they can call their own.

The renters obviously don't own their home, but as long as they pay their rent and behave like good neighbors, they can reasonably expect to live there for twenty years.  The stigma associated with renting, along with the historical drive toward homeownership, is waning.

The American Dream is changing.  The last recession hurt a lot of people, and homeownership is at a 20-year low.  Most single-family renters fall into one of two categories:  Baby Boomers who are downsizing and Millennials.

 

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Millennials are often saddled with large amounts of student-loan debt, and they either can't or won't buy a home.  Renting affords them a more mobile lifestyle.  The same goes for Boomers, many of whom lost their homes to foreclosure during the recession and are gun-shy about purchasing another.

B2R communities satisfy these renters' need for a single-family home, and the landlord takes care of the exterior maintenance to boot.  It's a unique lock-and-leave, managed experience more akin to the apartment world, with detached-home benefits.

Renting a detached home is attractive for many of the same reasons as renting an apartment: the portability/flexibility of a lease, no exterior maintenance, and no mortgage debt.  A single-family home offers more space and privacy, with a backyard, attached garage, and other features not available in multifamily housing.  I read where one developer of B2R communities automatically puts a dog door in every home.  Smart.

 

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Multifamily is vertical, with neighbors above and below you, and it's noisy.  With single-family homes, you have none of those acoustical issues.

There is a veritable ocean of capital now seeking B2R communities.  Consumer rental demand that is driving these institutions to want much greater levels of inventory of this product.  Institutional investors are learning that new B2R communities are a very safe product.

"I've got clients, multiple, well over a couple billion dollars worth of capital looking to place in this space," said a new Phoenix-based commercial brokerage firm focused on single family rental and build-to-rent investment portfolios.   They are looking to acquire 5-6,000 homes in the next two years."

 

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Toll Brothers, a luxury homebuilder, recently announced its commitment to invest $60 million in a $400 million venture that will build homes specifically for rent in seven major U.S. cities.

Lennar, the nation's largest homebuilder by revenue, experimented with a build-to-rent community in Sparks, Nevada, and announced in July its plans to move further into the space.

Clayton Homes, the 15th largest site-builder and home manufacturer, also recently revealed its build-for-rent home communities, to be built within its market.

 

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Your Free Commercial Loan Software (We Had a Bug) and a Scary War Update

Posted by George Blackburne on Thu, Nov 21, 2019

Screen Shot 2019-11-21 at 2.37.37 PMAt the end of this blog article, I am going to give you the correct link to our free commercial loan software.  Many of you were probably caught in an endless loop on our landing page when you tried to access it.  We had a bug.  Sorry about that.  It's fixed now.  At the end of this article, I am going to give you a link that takes you directly there, without the need to fill out any form.

 

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But first I have some good news and some bad news about the coming war.  I am sorry if I seem obsessed with the possibility of an imminent war with China; but it is a very real threat.  It is what is known as an existential threat.  Our very existence - your life and mine - is in danger.

The Good News:

In my last blog post, I outlined a line of dominoes that might have fallen if China had rolled tanks into Hong Kong -

"If Chinese tanks roll into Hong Kong, you need to start storing some long-term survival food.  After that, the dominoes may start to fall quickly - world economic sanctions on China, extreme economic distress in China, protest and riots against the rule of the Communists in China, the rallying of Chinese public opinion against America and its allies, the attack on the 7th Fleet, the invasion of Taiwan, the island hopping, the new island missile bases, the fall of Midway, the fall of Hawaii, the pinpoint destruction of our missile-making and ship-building capacity on the West Coast, and finally the capitulation and occupation of the United States."

 

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The good news is that the massive student protests in Hong Kong have now largely been broken up.  There are fewer than 500 remaining student protestors barricaded within a university.  They will, almost certainly, be rounded up and sent to jail within the next few weeks.  

Make no mistake.  I sympathize with the protestors, but they were a very dangerous provocation.  World War I started when a lone Serbian anarchist assassinated Austrian Archduke Franz Ferdinand and his wife, after their car made an unscheduled stop.  (See picture at the top.)  Seventeen million people died in World War I, all because of that lone assassin.   The world dogged a bullet this week.  Phew!

The Bad News:

I read this week a terrifying article entitled, In Future Wars, the U.S. Military Will Have Nowhere to Hide.  The premise that that the Chinese will be able to reach any military base in America and hit it with swarms of missiles and drones.

 

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"Advances in the fields of aerospace, robotics, machine learning, 3D printing, and nanomaterials are creating new classes of missiles and lethal drones that can be launched discreetly, travel great distances, and hamstring massed forces—all for a fraction of the cost of traditional manned weapons."

"New hypersonic missiles, for example, combine the speed and range of ballistic missiles with the maneuverability and accuracy of cruise missiles."

"Unmanned aerial vehicles (drones) and underwater gliders have achieved transoceanic range."  This means the Chinese can even hit you at your ranch in Wyoming, assuming they want to spend a few hundred dollars.

 

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"Now, however, China and Russia can send hordes of conventional missiles and expendable drones to wreak havoc on America’s networks, destroying U.S. weapons platforms while they are on base, cutting U.S. communications links, and wiping out vital fuel and ammunition dumps."

"Both countries (China and Russia) may have put advanced cruise missiles in shipping containers that could strike the future home of the B-21—Whiteman Air Force Base in Missouri—from the Gulf of Mexico."  Cruise missiles in shipping containers?  They can even hit Missouri?  

Algorithms can coordinate swarms of more than 1,000 drones. Carbon 3D printers can produce 1,000 drone bodies a day for less than $10 per copy, and nanomaterials can equip drones with warheads that are twice as powerful as conventional explosives."

"Isn't that special?"  --  The  Church Lady

Enough of this depressing stuff.  Let's get back to my usual whacky and fun stuff.

 

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How World War III Might Play Out

Posted by George Blackburne on Tue, Nov 19, 2019

Firing squad-1In my earlier posts about the Winds of War, I made the point that no country will ever use nukes again.  The resulting nuclear winter would end most life on earth.Need an example of a doomsday weapon not being used?  When the Russians rolled through East Prussia in their unstoppable march on Berlin, they were committing unspeakable atrocities against the East Prussian women.  (In defense of the Russians, they were merely giving the Germans a taste of their own medicine.)  The Germans had the option of using poison gas.  They didn't.  Nuclear weapons are no longer a deterrent.

 

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This means there could now be a single, big winner of World War III.  The coming world war, I submit, will be quick, total, and economically profitable for the winner.  It will be a lightening war, much like the Six Day War in 1967.  You need to open your mind to the possibility that we will be playing the role of the Arabs.

Here is how I see this war playing out.   There are 1.4 billion people in China, and the Chinese are now ruled by a single man, President Xi Jinping.  In March of 2018, China approved the removal of the two-term limit on the presidency, effectively allowing Xi Jinping to remain in power for life.  Whatever Mr. Xi says, goes.

The Chinese people are terrified of their government, and whenever a populace lives in constant fear of their government, they hate it.  As long as President Xi improves their lives every year, however, the Chinese people will tolerate him.

 

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But here's the thing.  The students in Hong Kong are thumbing their noses at Xi, making him appear weak.  These students are also showing the rest of China how to someday remove Xi from power - using mass protests and riots.  He cannot allow these protests to continue forever.  

If Xi rolls his tanks into Hong Kong, thereby reaffirming the fear that China is out to conquer the world, the world's backlash would be huge.  Crippling economic sanctions would likely be imposed on China by much of the world.  These worldwide sanctions would greatly reduce China's exports, greatly reduce their GDP, and greatly reduce the standard of living for the average Chinese citizen.

Uh-oh.  Remember,  Xi has to steadily improve the economic lives of the average Chinese worker; otherwise, he and the hated, semi-corrupt, Communist Party will be swept out of power.  

 

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The movie, Midway, came out a few weeks ago.  It is a terrific movie, and the audience, when I took my wife, even clapped at the end of it.   The special effects were terrific, especially during the attack on Pearl Harbor.

Do you know why the Japanese attacked us on December 7th, 1941?  Do you know why they risked awakening a sleeping giant?  Admiral Isoroku Yamamoto, their most brilliant Naval strategist, made this famous quote, the morning after the Pearl Harbor attack, "I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve."

The answer is that America had imposed an oil embargo on Japan for attacking and occupying Manchuria and China.  At the time, Japan imported most of its oil from the United States and the Dutch East Indies (Indonesia).  After the American embargo, the Japanese had no choice but to invade Indonesia and seize its oil.  The same day, the Japanese attacked Pearl Harbor.

 

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Interesting note:  I am married to a beautiful, exotic girl (for 37 years now), who was born in Indonesia to a Dutch father and a part-Indonesian mother.  Francisca's grandfather was the top executive for the Dutch Shell Oil Company in Indonesia, when the Japanese invaded.  Her grandfather bravely ordered that all of the oil wells in the country be set on fire.  The Japanese were not pleased.  They took her grandfather away in a  truck and shot him.  (See the picture at the top.)

Now if Xi rolls this tanks into Hong Kong, it will be the first domino in a long line to fall.  The crippling economic sanctions will force Xi to rail against the evil Americans and their stooges.  He will rally the people behind him by starting a war.  Tell me if you have heard this song before.

Under the the battle cry of, "Free the oppressed Taiwanese Chinese from the evil capitalists and imperialists," Xi will invade Taiwan.  The United States has a mutual defense treaty with Taiwan, so we will have no choice but to try to defend the country. Unfortunately, in the process, we will probably lose the 7th Fleet.

 

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I recently saw a war games presentation of how the Chinese would likely destroy every ship in the 7th Fleet.  They would first swamp our fleet with drones and cheap missiles, and we would defend by using our arsenal of about 2,000 pieces of anti-missile and anti-drone ordnance.  When we are out of "bullets", they would send their carrier-killer hypersonic missiles far out to sea, to loop around behind our fleet and start taking out our largest ships. 

After taking Taiwan, the Chinese would next use its 300-ship Navy (13 more than ours today even before the massacre of our 7th Fleet) to start seizing islands to be used as missile bases.  Remember, the coming war will be a missile war, and even today's hypersonic missiles "only" have a range of 1,000 to 1,100 miles.  (Nuclear-powered hypersonic missiles, with an unlimited range, have yet to be perfected.)  

Less-expensive cruise missiles have a maximum range of about 550 miles.  The name of the game will therefore be island-hopping again.  If the Midway Islands are seized, GPS-directed Chinese missiles will be able to fly into specific windows of capital ships and important buildings at Pearl Harbor.

 

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In the meantime, Chinese missile cruisers will be planting ship-launched cruise missiles into Boeing's missile and aircraft plants in Washington and into Lockheed missile and aircraft plants in California.  If the Chinese can also take out our shipyards in Long Beach and Oakland, with pinpoint missile accuracy, how long before we will be forced to sue for peace?  There will be no time to recreate our missile-making capability.  

The U.S. made a  number of fatal mistakes in the lead-up to this war.  Our first mistake was to fall so far behind China in our missile construction capability.  The second mistake was to waste scores of billions of dollars on aircraft carriers and their supporting ships.  They will be mere cannon-fodder in the coming missile war.  The Chinese, in contrast, had it right.  They built lots and lots of smaller ships.  You can even use an old, rust-bucket, Liberty Ship from World War II as a missile platform.

Will America win this war?  Will we survive long enough to catch up with our missile arsenal?  We're trying.  In one of my earlier articles about the Winds of War, I suggested that SpaceX's (Elon Musk's company) cluster of satellites, called Starlink, might allow the U.S. to pull its fleet back behind Midway Island, thereby increasing its survivability.  I was gratified and relieved to read that SpaceX is indeed now working with the military.

 

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So could we win?  I don't think so.  I don't think that Xi will give us enough time to catch up to the Chinese in the missile production race.  A suburb of Indianapolis, located far from the West Coast, is looking like a decent place to try to survive World War III.  Am I serious?  Yes.  I tend to be early with my predictions, but I genuinely fear that we will fight and lose World War III in less than four years.

If Chinese tanks roll into Hong Kong, you need to start storing some long-term survival food.  After that, the dominoes may start to fall quickly - world economic sanctions on China, extreme economic distress in China, protest and riots against the rule of the Communists in China, the rallying of Chinese public opinion against America and its allies, the attack on the 7th Fleet, the invasion of Taiwan, the island hopping, the new island missile bases, the fall of Midway, the fall of Hawaii, the pinpoint destruction of our missile-making and ship-building capacity on the West Coast, and finally the capitulation and occupation of the United States.  

 

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It's not as though China couldn't raise an extra two to three million soldiers to garrison the U.S.  Did you know that China has thirty million young men without wives?  Unmarried Chinese soldiers would make the perfect occupying force and a source of new husbands for our women citizens.  (Oh, goody.)  Sadly, too many Chinese parents left their baby girls out to die of exposure on some hillside 25-years ago during the One-Child Policy.  (In truth, most of these so-called abandoned baby girls were actually and thankfully snatched up and sent to relatives far away.)

With 350 million guns in the United States, we would be hard country to occupy; but  this thing about these extra thirty million young Chinese men without wives is a real phenomenon.  Yes, we could fight a guerrilla war, but the Chinese could also round up the population of entire states and put the people in concentration camps.  The British fought and won a guerrilla war in Malaya between 1948 to 1960.  It was one of the few victories against a guerrilla war.  They did it by rounding-up the population and holding the people in concentration camps.  Would the Chinese really land troops on American soil?  Geez, I hope not.  Reminds me of the Amazon Prime TV show, The Man in the High Castle.

 

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Topics: commercial loans, World War III

What is Programmatic Equity?

Posted by George Blackburne on Wed, Nov 13, 2019

mobile home parkProgrammatic equity is a facility of capital; similar to a line of credit, but remember, equity is not debt; delivered by an equity provider to a sponsor of commercial real estate developments or value-add projects for a particular strategy that the sponsor is pursuing.  Typically, such facilities of equity capital are larger than $25 million.  The typical sponsor will have a high-net-worth and be extremely experienced.

A company named JCR Capital sent me an email flyer several months ago advertising their equity capital for value-add real estate investments.

Value-add commercial real estate investments typically target properties that have in-place cash flow, but they seek to increase that cash flow over time by making improvements to, or repositioning, the property.  In other words, the property has tenants, but they are paying substantially below the potential rent that the property could be getting.

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In a value-add investment deal, the transaction’s sponsor makes an active effort to elevate the income stream of the property, typically through a significant capital improvement program, such as a partial or property-wide renovation.  Examples of such improvements might include new paint, new signage, renovating the lobby, and improving the security of the property and the parking area, etc.

In their marketing flyer, JCR Capital advertised preferred equity, joint venture equity, and programmatic equity.  Programmatic equity?  What the heck is programmatic equity?

Before we get into programmatic equity, lets first do a quick review of the term, "equity".  Equity is not just the difference between what your house is worth and the balance on your first mortgage.

 

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Equity - in the context of real estate - is the money that the owner stands to lose before "the bank" loses its first penny.  Obviously, "the bank" could also mean a credit union, a life company, a conduit, or any other type of real estate lender.  

Equity is often referred to as the first-loss piece.  If anyone is going to lose any money on a real estate deal, the first guy to lose a chunk out of his tush is the equity holder (the owner).

Example:

ABC Development Company specializes in turning around big apartment projects that have become run down.  In downtown Washington, DC, ABC Development learns of a 360-unit apartment project within two miles of Capital Hill.  The well-located apartment project was once filled with ambitious, young political staffers; but when the old man died, and his wife took over the management, the condition of the property and the rents plummeted.

 

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ABC Development can acquire the property for just $32 million, but the renovation costs are another $9 million.  With an interest reserve and the other necessary soft costs, the total project cost is $46 million.  The bank, with whom ABC Development has a relationship, will only loan up to 70% of the total cost because the project has become a big drug house and a gang hang-out.  

A huge renovation project like this needs to be structured like a construction loan.  Who remembers the four elements of Total Cost?  Of course, there is the land cost (in this case, the cost of the land and the building), and then there are the hard costs (bricks and mortar).  What else?  Soft Costs - that's right!  Good job.

But you are still forgetting the fourth element of Total Cost (of a development project). It's the contingency reserve.  A good rule of thumb when computing the contingency reserve is to use 5% of hard costs and soft costs.  Why not 5% of the land cost?  Because by then the developer already knows the cost of the land.  There is NOT going to be a cost overrun in connection with the land.

 

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Therefore the total cost of a development project is the land cost, plus the hard costs, plus the soft costs (interest reserve, architectural fees, engineering fees, points, closing costs, etc.), plus the contingency reserve.

Okay, now let's get back to ABC Development's big value-add deal.  We said the total cost was $46 million, and the bank was willing to lend $32.2 million - which is 70% of the total cost.  Therefore ABC Development will need to contribute $13.8 million.  The development company has $3.8 million to contribute, so it will need an equity provider willing to put up the remaining $10 million.

This is the type of value-add deal that would be perfect for the nice folks at JCR Capital.  Their transaction sizes include equity contributions of between $5 million and $50 million nationwide.  (We are talking large deal sizes here, folks.  The property should at least be worth $20MM.)  You can reach my buddy, Sam Isaacson, at JCR Capital at 917-902-1421.

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Okay, But What the Heck is Programmatic Equity?

As Sam explained to me, "Programmatic equity is where we provide a facility of capital, say $25 million to $50 million of committed capital, for a particular strategy that a sponsor is pursuing."

Example:

Let's suppose that a developer specializes in buying large, older, mobile home parks, and then the developer repaves all of the streets, tears out the landscaping and puts in far-nicer lawns and bushes, puts in a new pool and a new clubhouse, enforces the park rules about skirts and storage sheds, squeezes out the mobile homes being used as rentals, squeezes out the ugly and/or single-wide coaches, and then dramatically raises the rent.

 

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When everything is stabilized, the developer then sells the mobile home park to a REIT.  This is his program.  He has flipped four parks already, and he has identified fifteen other parks in need of his program.  He needs just $3 million in equity to satisfy each bridge lender providing the underlying first mortgage, but in order to renovate all fifteen parks, he might eventually need a total of $45 million in equity.

A provider offering programmatic equity might go all the way down to just $3 million on each mobile home park because the sponsor will be doing 15 of these projects.   The provider might offer the developer a capital facility (kind of like a line of credit) of $30 million in equity to start renovating these large, old, mobile home parks.

 

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Topics: Programmatic Equity, value-add investment

Booms Do Not Cause Recessions - Hooray!

Posted by George Blackburne on Wed, Nov 6, 2019

DamoclesToday's article contains great news for investors and brokers alike.

According to an important Bloomberg article published this week, the economic boom currently being enjoyed in America will probably not result in an extra big bust, according to the work done by the Nobel-prize-winning economist, Milton Friedman.

You may recall that Milton Friedman was a famous economics professor at the University of Chicago from 1947 to 1977.  Friedman was the foremost proponent of the Monetarist School of Economics, and once famously said, "Inflation is always and everywhere a monetary phenomenon..."  In everyday English, he meant that if a government creates a lot of new money, there is going to be a ton of painful inflation. "Inflation is taxation without legislation," was another one of Friedman's famous quotes.

 

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In 1964, Milton Friedman developed an economic hypothesis called the Plucking Model.  The Plucking Model holds that the economy is like a string on a musical instrument — recessions are negative events that pull the string down, and after that it bounces back, like a guitar string.  But here's the thing:  When you pluck down on a guitar string, it only snaps back to its original position.  It doesn't go careening to the other side of the neck.

And just as a string snaps back faster if you pull it harder, the Plucking Model holds that the deeper the recession, the faster the recovery that follows.  But you can only pluck the economy in one direction; bigger expansions don’t lead to bigger recessions!

But is the Plucking Model true?  "Friedman proposed the idea in 1964 and argued that if he was right, future recessions would show a correlation between the depth of the bust and the speed of the recovery that followed.  He then waited 20 years to see if his predictions were borne out.  In 1993, he looked at the business cycles that had happened in the intervening years, and he concluded that he'd been right."

 

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"Since then, others have found more evidence to support the plucking idea.  A 2005 paper by economist Tara Sinclair used advanced statistical techniques to confirm that, in the United States, bigger recessions are followed by faster recoveries — but not the other way around.  If you pull that guitar string really far - bam - it snaps back blazingly fast; but bigger recoveries don't produce faster recessions.  In other words, when a big expansion starts to end, an economy doesn't instantly plunge in a deep, dark recession."

After the Great Recession of 2007-2009, researchers looked at European countries and concluded that those that had it worse in the downturn ended up bouncing back faster.  In other words, those European countries which saw their GDP's fall the furthest were the first to recover.  

But there was no correlation between how well a country did before 2007 and how much it suffered afterward.  In other words, those countries which enjoyed the biggest increases in GDP did NOT suffer worse than the countries who fared only so-so in the preceding expansion.  All this evidence implies that recessions cause recoveries, but that booms don't cause busts.

 

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But why does this happen?  The answer is that it's easy to give people raises, but it's hard to make them swallow pay cuts.

In good times, growth simply feeds into higher wages (as well as higher profits). But when a recession or other negative shock comes along that hurts corporate earnings, employers might like to cut wages, but they can’t.  Instead, they lay off workers.  The more workers who get laid off, the bigger a pool of unused labor there is, so the faster the economy can grow once the recovery takes hold.  Makes perfect sense, huh?

All of this is great news.  We can now forget about the Sword of Damocles hanging over our heads and truly enjoy this expansion.  Yes, we will eventually have another recession, but it will probably not be a horrible one.

 

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Sword of Damocles

The famed “sword of Damocles” dates back to an ancient moral parable popularized by the Roman philosopher Cicero in his 45 B.C. book, “Tusculan Disputations.”

Cicero’s version of the tale centers on Dionysius II, a tyrannical king who once ruled over the Sicilian city of Syracuse during the fourth and fifth centuries B.C.  Though rich and powerful, Dionysius was supremely unhappy.  His iron-fisted rule had made him many enemies, and he was tormented by fears of assassination—so much so that he slept in a bedchamber surrounded by a moat and only trusted his daughters to shave his beard with a razor.

As Cicero tells it, the king’s dissatisfaction came to a head one day after a court flatterer named Damocles showered him with compliments and remarked how blissful his life must be.  “Since this life delights you,” an annoyed Dionysius replied, “do you wish to taste it yourself and make a trial of my good fortune?”

 

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When Damocles agreed, Dionysius seated him on a golden couch and ordered a host of servants to wait on him.  He was treated to succulent cuts of meat and lavished with scented perfumes and ointments.

Damocles couldn’t believe his luck, but just as he was starting to enjoy the life of a king, he noticed that Dionysius had also hung a razor-sharp sword from the ceiling (see the picture at the top).  It was positioned over Damocles’ head, suspended only by a single strand of horsehair.  From then on, the courtier’s fear for his life made it impossible for him to savor the opulence of the feast or to enjoy the servants.  After casting several nervous glances at the blade dangling above him, he asked to be excused, saying he no longer wished to be so fortunate.

Haha!

 

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Commercial Loans and the Meaning of "Last Dollar"

Posted by George Blackburne on Thu, Oct 31, 2019

Last DollarA buddy of mine - an old veteran in the commercial loan business - sent me an email marketing flyer last week.  He had just closed a big commercial loan, and he was telling me about his special new program - a sort of fix-and-flip loan for large commercial properties.

Here is how my buddy described his new program in his marketing piece:

"Low-Cost Non-Recourse Gap Equity - We are under application on several opportunities to bring high octane capital to new construction and deep rehab projects at a coupon rate of starting in the 6's with no equity participation."

 

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"Our investor funds his last dollar to 85 to 90% of cost on new construction and up to 100% of qualified renovation costs.  Our active pipeline includes multifamily, senior housing, and hotel projects."

Confused by his flyer, I wrote to my buddy and asked, "What on earth does last dollar mean?"   He wrote back:

"Let's assume the total capitalization of a renovation project is $10 million - with an $8 million purchase price and $2 million in the projected hard costs of renovations."

"Our investor funds up to 90% of the $8 million purchase price, or $7.2 million, and 100% of the hard renovation costs, or $2 million - for a total loan proceeds, based on cost, of $9.2 million."

"This assumes the property's After Renovation Value (ARV) is $13.2 million, since our lender limits loan proceeds to 70% of ARV."

 

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"This gap equity program for commercial properties sounds terrific," I told my buddy, "but I still don't understand what last dollar means!"  My buddy must have thought that I was mentally-challenged.

Kneeling down and speaking very slowly to his slow-witted friend, my buddy explained:

"Last dollar refers to the highest loan-to-value reached when a lender loans his very last dollar.  (See the pic at the top squeezing out the last dollar.)  The term is used most often when mezzanine loans or preferred equity investments are stacked on top of very large permanent loans.  The permanent lender's last dollar is 60% LTV, the mezzanine lender's last dollar is 75% LTV, and the preferred equity provider's last dollar is 85% LTV."

At last the light bulb clicked on for me.

 

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But wait a minute.  In trying to explain last dollar, my buddy described an incredible way to reach very high leverage on new construction deals and commercial renovation projects.  Eighty-five percent of cost for new construction?  Perhaps as high as 90% of cost?  Plus 100% of renovation costs?  This is fantastic! 

The program is also non-recourse.  The minimum loan amount is $3 million, and the maximum loan amount is  $200 million.  

This lender will make these high-leverage new construction loans and commercial renovation loans nationwide.  Acceptable property types include multifamily, senior housing, hotels, and several other standard property types.

 

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Got a potential deal?  Please email me, George Blackburne III, no more than three sentences, along with your contact information.  Please type into the Subject line, "Gap Equity Program."  I'll make sure that the opportunity gets to my buddy.

You might even text me a message to 574-360-2486, "Just sent you a gap equity request."  I get an average of 1,350 email per day - every day - so its easy for me to miss emails.  Why don't I employ a junk mail filter?  I live in Indianapolis - a beautiful city, but a bit of a financial backwater.  Mortgage flyers are my window to the industry, and I don't want to miss a single one.  Add me to your newsletter list, so I can steal your jokes.  :-)

 

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By the way, I had to look up the term, high-octane too. High-octane, in this context, means exciting and full of energy.  My buddy was specifically using the term high-octane to refer to a loan that is very high in terms of loan-to-cost.  

It's no fun being slow-witted; but it really helps when I teach.  Since I have to reduce difficult concepts to baby language in order to learn, I teach the same way.  Haha!

 

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Topics: commercial loans, last dollar

Are Referral Fees on Commercial Loans Legal?

Posted by George Blackburne on Wed, Oct 30, 2019

CashCute Halloween joke:

Mr. and Mrs. Hill, along with their three children, were on a touring holiday in Transylvania, where they stopped for the night in Count Dracula's castle.  
During the night, the evil Count sucked the blood out of all of them and put them in coffins in his vaults.

  The next night, Dracula sat by the organ thundering out loud music, while down in the cellar the poor Hills stirred in their coffins.  They made their way up to the organ gallery, and when Dracula saw them, he said, "Welcome to the Vampire Club.  The next tune is especially for you."

  And guess song he began to play?

  "The Hills Are Alive to the Sound of Music."

 

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Are referral fees legal on commercial loans?

Absolutely, yes!  Final answer.  Remember, I am an attorney, and my private money commercial mortgage company - Blackburne & Sons - has happily been paying referral fees on commercial loans for almost forty years.

Don't I have to be licensed?

Only nine states that I know of - California, Arizona, Arkansas, Florida, Maryland, Nevada, North Dakota, South Dakota and Wisconsin - even require a license to broker commercial loans.  (Careful.  There may be one or two more.)

Therefore, most states have no licensing requirement whatsoever to broker commercial loans.  The state licensing scheme might read something like, "A license is required to broker mortgage loans."  This language makes it seem like a license is required to broker commercial loans... until you look up the definition of "mortgage loan".   A mortgage loan is defined as a loan on a one-to-four family dwelling.

 

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But even in states that require a license to broker commercial loans, referral fees are perfectly legal, as long as you do not negotiate loan terms or try to fetch documents.

Therefore, in states requiring a license to broker commercial loans, you must never talk to the borrower about interest rates, points, the term of the loan, or the prepayment penalty.  In those nine states, you must not collect tax returns or financial statements for the lender.

But as long as you work on a name and number referral basis only, then you are perfectly legal in EVERY state.


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How large is the typical referral fee on a commercial loan?

C-Loans.com once paid a referral fee of $21,250.  Wow.  The loan amount was $17 million, so a referral fee of this size is pretty rare.  

More commonly, the typical referral fee on a commercial loan is around $1,000 to $2,000.  That ain't hay for just a name and a phone number.

The most common formula is some percentage of the lender's or mortgage broker's loan fee - usually either 10% or 20%.  Blackburne & Sons pays a referral fee on commercial loans of 20% of our net loan fee.

 

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How do I refer commercial loans?

If you know how to recognize a hard money loan, and you want to refer a commercial hard money loan to Blackburne & Sons, please call our office at 916-338-3232 and ask for a loan officer.

You can also email Alicia Gandy or George Blackburne IV (age 35), our loan officers,  and deliver the lead this way.

Most of you guys are not experts in commercial real estate finance, however, so you would be wiser to just send your referral leads to me, George III (the old man), by inputting your commercial referral leads here.  Be smart.  Please bookmark this Referral Leads Input Form right now.

 

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Want to earn huge referral fees in your sleep?

Do you remember that $21,250 referral fee that I mentioned above?  We paid that huge fee to a guy named Alan Dunn, and Alan was asleep when he sent that lead to us.

What?  Huh?  How could he be asleep when he referred that $17 million commercial loan?  Alan Dunn created a link on his website entitled, "Commercial Loans", and he pointed that link to C-Loans.com.

C-Loans.com is programmed to capture the URL of the referring site.  When this big $17 million loan closed, we looked up the loan application.  Automatically printed at the bottom of the loan application was the URL of Alan's website.  Imagine Alan's surprise when he got a call, "Hey, Alan.  We have a check here for you for $21,250!"

 

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How can I be sure that I won't be cheated?

In truth, you can't be sure, but it may give you a little confidence to know that I am an Eagle Scout, and so are both of my sons.  My sons and I also went to Culver Military Academy, where we lived under an Honor System.  A cadet does not lie, cheat, or steal.  

I am attorney, licensed in California and Indiana.  My family hard money mortgage business also services about $45 million in hard money loans for about 900 private investors.  The average daily balance in our trust accounts is on the order of $300,000 - and after payoff's, that amount can surge to over $1 million.  We have also been servicing hard money commercial loans for our elderly private investors for almost 40 years.

My point is that if we were ever going to become crooks, we probably would have run off with at least $1 million out of our trust accounts thirty years ago.  :-)  And there was no way that Alan Dunn would have known about his big loan closing, but for our family honor code.

 

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But watch out for the link police.

A referral partner of ours made the mistake of adding too many links to C-Loans.com on his website.  The poor guy had his front door kicked in by the FBI at 3:00 in the morning.  They dragged him out of bed, beat him batons, and took him away.  Despite the frantic pleas of his wife, he was never heard from again.  Guantanamo?  All because he put too many links to C-Loans.com on his website...

By now you have probably figured out that I am joshing you.  Haha!  There is no law against putting six or seven links to C-Loans on your website.  You can put some links at the top of your pages, some at the bottom, some in the middle, and some in the body of your articles.

The links might say, "Commercial Loans", "Commercial Mortgages", "Commercial Financing", or "Apply for a Commercial Loan."  The more links you create, the more chances you have of earning some huge referral fees.

Note:  Our referral fee links do NOT work in emails.  Please call Tom Blackburne at 574-210-6686 if you have a regular email newsletter.  He will create a special kind of link for you.

 

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How large of a referral fee does C-Loans.com pay?

Our hyperlink referral fees are 12.5 basis points.  For example, on a $4 million loan, your feral fee would be 0.125% of $4 million - which equates to $5,000.

Important Note:  On deals larger than $5MM, closed by banks, credit unions, life companies, and agency lenders, C-Loans itself only earns 25 basis points.  Our referral fee is then 8.33 basis points.

So give yourself a chance to make some serious dough in your sleep.  Now a confession.  We don't know for sure that Alan was actually asleep when his borrower found his Commercial Loans link, but he certainly could have been!  Haha.

 

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Topics: referral fees, referral fees legal, legality of referral fees

Why Get a USDA Commercial Loan Rather Than an SBA Loan?

Posted by George Blackburne on Tue, Oct 22, 2019

Rural Industrial PlantIf you are a well-heeled real estate investor or a commercial real estate broker, you really need to pay attention to today's article.  I am going to show you how to use a USDA commercial loan to obtain 90% leverage on a rental property (not just on an owner-occupied property) in an Opportunity Zone.  For once, the Federal government is going to help you, even though you had the selfishness to work hard and build wealth.

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Commercial loan brokers:  Please sit up and focus.  You can make some serious money brokering USDA commercial loans, and very few borrowers and competing mortgage brokers know much about the program.  Yesterday we got a loan approval on a $5 million USDA Business and Industry loan.  Our fee will be $25,000.  That's gonna pay some bills.

Quick Joke:

An old farmer wins the ten-million dollar lottery and is being interviewed. The reporter asked what he is going to do with all the money.  "Oh, I reckon the first thing I'll do is go and pay a few bills."  "And what about the rest?" the reporter continued.  The farmer shrugs. "Well, I guess they'll just have to wait."

Now on to USDA Commercial Loans:

Many of the poorest people in America live in small towns or in very rural areas.  In order to help these people get better paying jobs, the USDA has developed a commercial loan program that is very similar to the SBA loan program.  It's called the USDA Business and Industry (“B&I”) Guaranteed Loan Program.

 

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The USDA Business and Industry ("B&I") Guaranteed Loan Program is a loan guarantee program designed to assist credit-worthy rural businesses obtain needed credit for any legal business purpose. The intent is to save and create jobs in Rural America.

Business headquarters located in cities or towns with a population of less than 50,000 qualify as Rural America.  A quick glance below will show you just how much of the country is eligible for a USDA B&I loan.  White means eligible:

Screen Shot 2019-10-22 at 8.45.13 AM


In most cases, a borrower who qualifies for an SBA loan will also qualify for a USDA commercial loan, but why bother with a USDA commercial loan?  Why not just apply for an SBA loan?

 

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  • The maximum loan amount for a USDA loan is a whopping $25 million, and this loan amount can sometimes even be increased.  The maximum loan amount for an SBA 7a loan (the 25-year adjustable loan program) is just $5 million. The maximum loan amount on a SBA 504 loan (the fixed rate program) is just $10 million.
  • USDA B&I loans are amortized over 30 years, rather than just 25 years.  This means that they have lower monthly payments.
  • The USDA will guaranty 15-year commercial loans on equipment, rather than just 7 years on SBA loans.  This significantly frees up cash flow.
  • USDA B&I loans have no balloons, which saves new loan fees, new closing costs, and new third-party property fees.  In contrast, the underlying first mortgage on an SBA 504 loan has a term of just ten years.  Tick-tock.

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  • USDA commercial loans do NOT have to be owner-occupied!!!  Wealthy investors can qualify for B&I loans.  Suppose an investor wants to renovate an old, vacant industrial property in the Boonies (see picture at the top) and lease it to a manufacturing company willing to move to a rural area. The USDA will guarantee such a loan, even though the loan is arguably a subsidy to the wealthy investor.
  • The USDA will guarantee commercial loans of up to 90% loan-to-value, even to investors.  If the loan-to-value ratio is going to be a full 90%, the tenant has to be an existing, experienced company.
  • Imagine a wealthy investor combining the the high-leverage and low interest rate of a USDA B&I loan with a property located in an Opportunity Zone!  Wow.  $$$.
  • Unlike SBA loans, where the interest rate is set by rule and long-custom, the interest rate on USDA commercial loans is individually-negotiated between the parties.

 

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  • The interest rate on a USDA B&I loan can be fixed or adjustable.
  • Individual investors, rather than just for-profit companies, can qualify for a USDA-guaranteed B&I loan.
  • Non-profits, cooperatives, Federally-recognized tribes, and public bodies are also eligible for USDA commercial loans.
  • Few SBA lenders are enthusiastic about making large commercial loans in very rural areas.  Remember, only a portion of an SBA loan is guaranteed by the Federal government.  SBA lenders therefore have a piece of their own tushes exposed and at risk on every deal.  SBA loans in Bum Flowers, Egypt are not terribly appealing to most banks.  The USDA B&I loan fills this void.
  • A single lender will usually makes the entire USDA commercial loan. There is no need to bring in a community development corporation to make the second mortgage and a conventional lender to make the underlying first mortgage.  Anyone who has ever gotten an SBA 504 loan can testify that the complicated SBA 504 process can be slow, buggy, and maddening.

 

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If you need a USDA commercial loan of less than $1 million, you will want to enter the deal into C-Loans (just click the blue button below).  It's free, and it will take just you just four minutes to create your C-Loans app.

You can then shift your C-Loans app from USDA lender to USDA lender in seconds, until you find one willing to do your deal.  Remember, because each USDA lender will have some of his own money at risk (the USDA only guarantees a portion of the loan), the Loan Committee of each bank will look at the deal differently.  The secret is to just keep submitting your deal until you find the right fit.  This is the secret of C-Loans.

By the way, after you have created your C-Loans app, be sure to click on the button, "Create a PDF", at the bottom of the page.  You will then have a gorgeous PDF of your deal that you can then submit to your own USDA lenders.  

And be sure to write to Tom Blackburne afterwards and claim your two free commercial finance training courses - something you earn every time you enter a new commercial loan into C-Loans.com.  There are four courses / tools from which to choose.

 

USDA Commercial Loans Apply to 90 Different B&I Lenders

 

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But if you need a USDA loan of greater than $1 million, would you please send a brief summary (just a few sentences), along with your contact information, to me, George Blackburne III?  Thanks!  I am hungry to close a few more of these big puppies.  I get 1,350 emails every day (no kidding), so please be sure to make the subject line read exactly, "I Need a Big USDA Loan."  You might even text me at 574-360-2486 and say, "Just sent you a USDA loan."  Thanks!

 

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Topics: USDA B&I Loan, USDA Business and Industries loan, USDA commercial loan, USDA lender, USDA loan, USDA loans versus SBA loans