Commercial Loans and Fun Blog

Despite the recent turmoil in the stock market - Bernanke just announced the tapering of Quantitative Easing III - the U.S. housing and construction industry is recovering.  There has been almost no new residential construction for six years, yet the U.S. population has increased by 236,000 per month since the begiining of the Great Recession in mid-2007.

In the meantime, tens of thousands of home were foreclosed, abandoned, and left to vandals, water damage, broken pipes, and mold.  The bottom line is that the U.S. needs more housing construction.

Normally I discourage commercial mortgage brokers from wasting their time on commercial construction loans; but if a deal fell in your lap today, and you had plenty of small permanent commercial loans in the pipeline, I would not think you were a complete idiot for investing a little time in an apartment construction loan request. 

The reason why I am writing to you today is because I saw a $15 million multifamily construction loan request enter C-Loans.com today.  It looks like a do-able loan, but the broker screwed up big-time when he entered the deal.  Unless he fixes his loan application, it will never get approved.

You will recall that the Total Cost of a commercial construction project is the sum of the Land Cost, the Hard Costs, the Soft Costs, and the Contingency Reserve.  In the old days, commercial banks would regularly make commercial construction loans of 80% (and sometimes 90%) loan-to-cost (Loan-to-Cost Ratio).  In other words, if the Total Cost of the project was $10 million, the developer only had to contribute $2 million (and sometimes just $1 million). 

Today commercial banks are still reeling from their losses in commercial construction loans during the Great Recession.  Therefore few commercial banks will make commercial construction loans higher than 75% loan-to-cost.

So how did this commercial mortgage broker screw up his C-Loans app?  The developer apparently bought this land in Brooklyn in 2005 for $1.5 million.  Since 2005 Brooklyn has undergone a huge positive transformation.  Everywhere you look in Brooklyn the property is being gentrified.  This land that he paid $1.5 million for in 2005 is now worth $5,750,000!

Unfortunately when this broker completed his C-Loans app, he inserted $1.5 million as the cost of the land.  No-no-no! Even though the developer had TONS of equity in the land, the lender won't see it.  All he'll focus on is loan-to-cost ratio of 79.1%.  That ratio is too high, and the deal will be turned down.

What should the commercial mortgage broker have done?  He should have entered the current market value as the cost of the land.  After all, if the developer was buying the land today, that is what he would have to pay.  If we use the correct land value - $5.75 million instead of $1.5 million - the loan-to-cost ratio of this deal is less than 63%.  In other words, the deal will be approved!

Most states in America do not require a commercial mortgage broker to obtain a mortgage broker's license or a real estate broker's license in order to negotiate commercial mortgage loans in their state.  This fact, however, is often not obvious.

When you first look at the licensing scheme of most states, the law will say something like, "A broker must be licensed as a mortgage broker to negotiate a mortgage loan in this state."  Huh.  Sounds like a mortgage broker's license is clearly required, right?

However, when you look up the legal definition for a "mortgage loan" in that state, you will almost always find that a mortgage loan is defined as a loan on a one-to-four family dwelling!  In other words, no mortgage broker's license is required to negotiate a loan on 5+ residential units (five-plex and above), commercial properties, or land.

Be careful about land.  A loan on a single residential lot, purchased to be the future site of the borrower's personal residence, is often considered to be a residential loan.  This means that a mortgage broker's license would be required to negotiate such a loan.

I am not licensed as an attorney, outside of California and Indiana, but my research suggests that a mortgage broker's license may not be required in at least 40 states.

Some states definitely require some sort of licensing, such as California*, Nevada, Arizona, Florida (if the property is not owned by an LLC or corporation), New Jersey*, North Dakota, and Minnesota.  Stop!  Be careful here.  Just because I have not listed any other states does not mean that no license is required.  I'm just saying that I don't know for sure that a license is required for any other states.

* A real estate broker's license is required, rather than a mortgage broker's license.

Vermont is particularly interesting.  I am pretty sure that Vermont has an almost-full-time staff member going around "reminding" any broker who advertises they will arrange mortgage loans nationally that a licese is required to broker loans in Vermont. They use the $1,200 annual licensing fee that they collect from several thousand firms to help finance the Vermont Department of Financial Institutions.  Vermont exacted a $1,200 licensing fee from my own company for four years running, money I could have used to help pay for my daughter's college.  Here's my beef:  They knew we only arranged commercial loans, and I learned recently that no license is required to broker commercial loans in Vermont.  Like most states, Vermont defines a mortgage loan as a loan on a one-to-four family dwelling.  What a racket!

What if you only make a loan in a particular state once every two or three years?  Many states that normally require licensing will allow you to make the occasional commercial loan in their state without a license.  Certainly one loan per year would qualify as occasional.  What about two loans?  I dunno.  It's close.  What about three loans?  A license would probably be required.

Here's another helpful technique.  Let's suppose you want to negotiate a large commercial loan in the imaginary state of Artesia, and Artesia requires a license to negotiate commercial loans within the state.  You seldom make loans in Artesia, so you do not have a mortgage broker's license or a real estate broker's license in Artesia.

The good news is that you can sometimes "associate in" a licensed Artesian mortgage broker or real estate broker.  It's a very similar process to an out-of-state attorney associating in local counsel.  The Artesian mortgage broker would review your work and your loan to make sure that everything complies with Artesian law.  For this service, you would pay the Artesian broker a fee of, say, $750 or 25 to 50 basis points.

You are reminded to be very careful not to rely on this article!  This is just a summary of my best understanding; and the article, almost certainly, contains a number of mistakes.  You must be sure to consult local counsel.

I use this blog to train my two sons and the staff of Blackburne & Sons Realty Capital Corporation, one of the oldest private money commercial mortgage companies in the country.  If you subscribe to my blog, you'll receive two free training lessons in commercial real estate finance (CREF) every week.

I own a commercial mortgage portal called C-Loans.com.  It may be the largest of the commercial mortgage portals.  (I'm being modest here.  We're the Big Kahuna of commercial real estate finance websites.)  C-Loans is free to commercial mortgage brokers, so it makes good sense to always use it.  But people procrastinate.  People forget.  People fail to bookmark.  So I have a proposition for you.  If you just pre-register (fill out your name and address) on C-Loans.com, I'll send you a free copy of my famous Commercial Mortgage Underwriting Manual.  I sell it elsewhere on my site for $199.  Why would I do this?  If you are pre-registered, you are far more likely to input your next commercial loan into C-Loans.

And of course you will need to know some commercial lenders.

The nice thing about my own private money commercial mortgage company ($50 million - est. 1980) is that we are happy to work with new mortgage brokers and you do NOT have to get pre-approved with us.

I have repeatedly urged you to develop a list of referral sources and then to solict these guys regularly for commercial loan applicants.  As my oldest son once wisely said,"It's better to repeatedly touch ten referral sources than to speak with one-hundred referral sources just once."

Today I am going to give you some tips on writing a regular newsletter aimed at generating commercial mortgage leads.

1. Steal my jokes!  I like to always include lots of cute, clean jokes in my newsletters.  These jokes reward your readers for opening your newsletters.  Where can you find hundreds of cute, clean jokes?  Just steal them from me.  You'll find all of my past commercial mortgage newsletters here, and each one contains at least four or five cute, clean jokes.
2. Keep your commercial mortgage newsletters interesting by talking about cool stuff that has nothing to do commercial real estate finance.  For example, the best-selling commercial loan marketing piece of my career was about how the Ebola virus almost killed us all (based on the best-selling book, The Hot Zone).  Today I wrote a fax newsletter entitled, The Most Disgusting Story I Have Ever Told.  I then go on to tell how I stepped in a pool of congealed blood, from a fatal stabbing the night before, while doing a site inspection of a commercial property.
3. The purpose of your newsletters is to entertain and intrigue your readers.  Don't devote too much of your newsletter to plugging your commercial loan products.  To the  reader, that stuff is boring. Think of a one-hour TV show.  Most of the hour is devoted to following some likable cop around while he hunts down a cruel killer.  Then we have BRIEF word from our sponsor.  The key word here is brief.
4. And don't be afraid to write!  You might not have been an English major in college, but I'll bet you can tell a cool story in a bar after work, right?  Just tell cool stories, like you were talking to one of your buddies over a beer.

If you get serious about commercial real estate finance, you may also want to take my wonderful new course, Marketing for Commercial Real Estate Loans.

In commercial mortgage finance, it is customary to name a loan after the name of the income property.  For example, if the name on the monument in front of the apartment building is the "Greenwood Garden Estates", then the loan would be called the Greenwood Garden Estates deal, as opposed to the Smith loan, assuming the property was owned by Mr. and Mrs. Smith.

It is very important that you name your commercial loan with care.  For example, my own private money commercial mortgage company, Blackburne & Sons, just closed a commercial loan on Los Coches Road in Lakeside, California.

We unwisely called the deal, the Los Coches Commercial Building.  Now in Spanish, Los Coches simply means The Cars; but to me, an Anglo, Los Coches sounds too much like "The Roaches".  The name conjures up images in my head of the filthy creatures you might step on at night in the kitchen.  Yuck.  Now if we had named the loan, the Lakeside Commercial Building, that name conjures up in my mind images of cool, clear water, lush green vegetation, and pretty butterflies.

Years ago I was trying to place an apartment loan in East Palo Alto with a savings and loan association.  Now in the mid-1980's East Palo Alto was the murder capital of the world, with drive-by killings a nightly occurance.  Therefore, even though the name painted on the building was the East Palo Alto Apartments, I called the deal the Cypress Street Apartments.  The deal closed.

This subject reminds me of a story.  I was once in San Jose inspecting an apartment building.  As I stood in front of the apartment building, I stepped back to get a wider view.  As I did so, I felt my right heel step in mud.  As I looked down at my shoe, to my utter horror, I realized that it wasn't mud into which I had stepped.  It was a pool of congealed blood!  There had been a knife fight the night before, and bloody handprints marked where the dying victim had slid down a nearby car.  Eeeuuuu, yuck!

So give a dog a good name.  Take great care when naming your commercial loans.