Commercial Loans and Fun Blog

Yesterday I received an email advertisement from a commercial loan company offering senior stretch financing.  Huh?  I've been making commercial loans for 34 years now, and even I was thinking, "What on earth is senior stretch financing."

Fortunately, Michael Hoffenberg, Founder and Managing Principal of Trevian Capital, was kind enough to explain it to me:  "George, instead of the borrower obtaining both a garden-variety CMBS first mortgage and a separate mezzanine loan from a different lender, senior stretch financing is one loan priced similar to the blended rate of the first and the mezz."

Confused?  Let me translate this from commercial mortgage-ese into English.  As you know, a permanent loan is simply a commercial loan in a first mortgage position that has some amortization (usually based on a 25-year amortization) and a term of at least five years.  Because of the massive commercial loan losses suffered by most commercial lenders during the Great Recession, most permanent lenders today will not exceed 60% to 65% LTV.

Sixty-three percent loan-to-value financing is simply not enough leverage for most commercial real estate investors.  Therefore, the modern trend is for the investor to record a mezzanine loan from another lender simultaneously with his new permanent loan, thereby bringing the capital stack up to, say, 75% loan-to-value.  (I'll translate this into English for you too in just a minute.)

What is a mezzanine loan?  A mezzanine loan is not a real estate loan.  It's not a mortgage.  A mezzanine loan is a personal property loan secured by the stock* of the corporation* that owns the real estate.  If you own 100% of the stock of the corporation that owns a huge office tower in New York City, then you own the office tower.

By the way, personal property is defined as anything that is not real property - such as cars, boats, furniture, sewing machines ... or fifty shares of stock in IBM.

* To keep this article simple, I will be using words like "stock" and "corporation".  In real life, most large commercial properties are owned by a single-asset limited liability company ("LLC").  In an LLC, the ownership units are called membership interests, but its easier to just think of membership interests in an LLC as shares of stock in a corporation.

Okay, we said above that a mezzanine loan is simply a personal property loan secured by the "shares" of the "corporation" that owns the property.  Why not just make a garden-variety second mortgage?  Because it takes far too long to foreclose!  It once took Blackburne & Sons over 17 months to foreclose a mortgage in New York.  Yikes!

In stark contrast, you can execute (foreclose) on personal property in just a matter of weeks.  Think about your car - another form of personal property.  If you missed your car payments, would the bank wait 17 months to pop (repossess) your car?  Heck, no!  They'd catch you in less than six weeks, going to the bathroom at McDonalds, and drive away with your car before you got back.  In my youth I used to pop cars.  It was scary ... but very exhilarating.  You never know if you're going to get shot or cracked open by a baseball bat.

So using mezzanine financing, a junior lender can pop a $100 million office tower in less than two months.

Okay, before we finally reach senior stretch financing, let's look at how the Big Boys might finance the purchase of a $100 million office tower.  Some conduit lender might make a $63 million CMBS first mortgage at, say, 4.5%.  Then a separate finance company might make a $13 million mezzanine loan, bringing the total amount of outside financing - the capital stack - up to $75 million.  The buyer would then put $25 million down.  

The interest rate on the $13 million mezzanine loan might be 12.5%.  Twelve-and-a-half percent interest sounds horrible, until you think about the $63 million first mortgage that the buyer gets to enjoy at just 4.5%.  The borrower's weighted-average cost of funds is only around 5.95% - a historically very low rate.

Now we are finally ready to talk about senior stretch financing.  Some portfolio lender might look at this deal and say to himself, "Gee, the buyer is putting down $25 million.  He's not gonna just walk away from the property.  If I make just the first mortgage, I am only going to earn a lousy 4.5%.  But if I stretch my loan amount to the full $75 million, I'll bet I could get this borrower to pay me a whopping 5.95%.  It's a good deal.  I'm gonna stretch on my first mortgage and just eliminate the need for any mezzanine loan at all."

And that, folks, is senior stretch financing.  You can apply for senior stretch financing by simply using C-Loans.com and asking for a large first mortgage.

But folks, exotic loans like mezzanine loans and senior stretch loans are for the Big Boys.  Most mezzanine lenders have a minimum loan of $5 million, which means the underlying first mortgage is probably going to be at least $12 million.  Therefore, unless the property you are trying to finance has a purchase price of close to $20 million, structured finance is not going to help you.  Structured finance includes mezzanine loans, preferred equity, venture equity, and senior stretch financing.

Fortunately there is a solution.  Blackburne & Sons is the only small balance preferred equity provider in the entire country.  We will make preferred equity investments as small as $100,000 - which allows small investors to buy small commercial-investment properties.

How would you like a wonderful directory of over 2,000 hungry commercial real estate lenders?  You can get it here free!

Are you a commercial loan broker?  We give away a lot of free stuff here:

This article will teach commercial loan brokers where to go to find lots of commercial real estate loans.  It will also teach commercial real estate brokers (sales brokers) about some great new commercial real estate finance tools - really cool stuff - that will make it easier for them for them to sell or buy commercial real estate.

Recently I have been urging my commercial loan officers to agressively solicit commercial brokers (commercial real estate sales brokers) for commercial loans.  Commercial brokers are a great source of commercial loans.  Here's why:

Each active commercial broker probably knows at least 15 active commercial real estate investors.  When I say commercial real estate investors, I am talking about wealthy investors who own two or more commercial-investment properties.

You will recall that a commercial-investment property is a fairly standard kind of income property where the investor's profit comes from passive rental income, as opposed to operating a business.  Examples of commercial-investment propety include apartments, offfices, retail, industrial, and mobilehome parks.  Examples of business properties include restaurants, motels, bowling alleys, self storage, and assisted living facilities.

Okay, so suppose a commercial broker knows 20 investors, and each investor on average owns three commercial-investment properties.  Therefore that single commercial broker is connected to 60 commercial-investment properties.  

Now the thing about commercial properties is that every five to ten years the property has a balloon payment coming due.  Remember, the vast majority of all commercial loans have a term or either 5 years or 10 years.  Balloon payments keep commercial loan brokers in business.

Five years ago Broker Bill helped Investor John buy a rental office building.  They used a five-year commercial loan from the bank.  Now that commercial loan is ballooning, so Investor John calls Broker Bill and says, "Hey, Bill, would you please help me refinance my ballooning commercial loan?"

Now Broker Bill would prefer not to be bothered; but he wants Investor John's future business, so he says, "Sure."  Now Broker Bill is stuck.  He has volunteered to play commercial loan broker, and he's not even going to get paid for it.  Then your email arrives, offering Bill expert commercial loan brokerage assistance.  You're like the cavalry, which comes charging to the rescue in an old John Wayne western movie.  Broker Bill can turn Investor John's situation over to you and wash his hands of the affair.

Now, you commercial loan brokers, we're almost done.  Commercial brokers, your goodies are about to arrive.

Finally we come to the most important lesson of this training article.  The vast majority of all veteran commercial brokers own at least one commercial-investment property of their own!  Therefore, when you advertise to commercial brokers for commercial loans, not only do they have lots of clients who need commercial loans, but commercial brokers often need commercial loans themselves.

Okay, now here are the goodies for commercial brokers:

You have a web site, right?  How would you like to earn a $21,250 referral fee in your sleep?  C-Loans.com, our commercial mortgage portal (think of it as the LendingTree of commercial real estate finance), once paid Alan Dunn of Spydercube.com a $21,250 referral fee because he put a link to C-Loans.com on his website.  An investor saw his "Commercial Loans" link, clicked on it, came to C-Loans.com, applied for a commercial loan, and closed the deal.  I am not really sure if Alan was actually asleep when all of this ocurred, but he certainly could have been.  Makes for a great story.  :-)  Interested?  Please click below.

This next product is way cool.  Suppose you have an investor wishing to buy a non-owner-user commercial-investment property.  He wants to put down just 25%, but the bank refuses to go any higher than 60% LTV.  The bank won't even allow the seller to carry back a second mortgage!

Blackburne & Sons is the ONLY small balance preferred equity provider in the country.  We will contribute equity dollars - not loan dollars - and increase your buyer's downpayment from just 25% to the 40% required by the bank.

Let's suppose you have a listing on a strip center.  It's been four months, the seller needs cash, and your listing is about to expire.  He probably won't renew.  Why not get him a 6-month commercial bridge loan for just one point?  There is no prepayment penalty.  Relieved from his money pressure and grateful for your help, the investor renews your listing.

Do you have an investor-client in need of an "A" quality commercial loan?  Using C-Loans.com, you can submit your commercial loan to 750 different commercial lenders in just four minutes.  And C-Loans.com is free!

Wish you had a big list of hungry commercial lenders?  Get one for free here.

Our commercial hard money mortgage company, Blackburne & Sons, is making a really interesting commercial loan this month.  We are making a $1.6 million loan to the owner of two large apartment buildings so that the owner can take advantage of a discounted pay-off (DPO) being offered by the bank.

Now the really interesting thing about the deal is that the bank would not discount the four existing  commercial loans that it has with the borrower ... directly to the borrower.  They agreed to sell the four notes and mortgages to Blackburne & Sons at a discount, but not to the borrower.  Huh.  Kinda odd ... but whatever.  We get to make a nice loan fee on the deal.

So this complicated escrow will go as follows:  Blackburne & Sons, in escrow, will buy the four mortgages.  Then we will simultaneously sell these four mortgages to the borrower at a discount (they total around $2.3 million) using a brand new blanket loan of $1.6 million on both apartment buildings.

This deal is what is known as a brainer deal, as opposed to a no-brainer deal.  A no-brainer deal is a commercial loan that is so obviously good that the lender doesn't even have to think about it.  You should make a note that Blackburne & Sons is owned by a real estate attorney with 34 years experience in commercial mortgage finance.  If your commercial loan is fundamentally excellent, but the deal is just a little complicated (a brainer deal), we may be the perfect commercial lender for you.

Now we finally get to the point of today's article.  One of the four mortgages that we are buying in escrow is an open-ended mortgage.  An open-ended mortgage is a commercial loan with no fixed loan amount.  The bank might loan the borrower $600,000 to start with and then increase its loan amount to $2 million at a later date.  Junior lenders are put on notice, by the language in the mortgage, that the senior lender could increase its loan amount to $17 bazzillion without losing its seniority position.

Open-ended commercial mortgages are extremely rare.  I haven't seen one in almost two decades.  Open-ended mortgages are a lot like commercial lines of credit.  A line of credit is a form of debt where the borrower can borrow a certain amount of money, pay some or all of it back, and then, as the borrower needs it, borrow the money right back again, up to a certain loan amount.

The difference between a line of credit and an open-ended mortgage is that a line of credit has a fixed, maximum loan amount.  For example, the borrower might be authorized to draw down as much as $200,000 - but no more than that.  On an open-ended mortgage, the bank - at the bank's option - can increase its loan amount to $17 bazzillion, without recording a new mortgage and while maintaining its senior position.

But now let's talk about commercial lines of credit.  In home loan finance, home equity lines of credit are as common as dirt.  Surprisingly, in my 34 years in commercial real estate finance (CREF), I have never seen a bank offer commercial real estate lines of credit to the public.

Now a bank might offer a business line of credit, partially secured by a second mortgage on the borrower's owner-user commercial property, but banks almost never make such loans for anyone other than good bank customers.

A good bank customer is a company that keeps large deposits at the bank.  For example, Blackburne & Sons is a good bank customer because we service about $50 million in hard money commercial loans.  Our loan servicing trust account (not our money) contains, on average, well over $400,000.  The bank loves us because it doesn't have to pay a dime in interest for those trust  deposits.  Therefore, if we ever applied for a commercial line of credit, the bank might make us the loan, secured by our little office building in Indiana; however, it would almost never make such a loan to the public.

Bottom line:  If you are a commercial mortgage broker, you're never going to earn a big loan fee trying to broker a commercial real estate line of credit.  Unlike residential lenders, commercial lenders do NOT make commercial real estate equity lines of credit to strangers.

Finding a lender for a commercial loan secured only by land is pretty hard these days.  Many commercial lenders are still sitting on huge portfolios of land upon which they foreclosed during the Great Recession.

There is one kind of land, however, that is infinity financeable.

Actually there are two types of land upon which it is fairly easy to obtain a commercial loan.  The second type is farmland.  Farmland is a hot commodity right now.  Farmland in Indiana, for example, has tripled over the past seven years.  My own commercial loan company, Blackburne & Sons, loves to finance corn farmland.

But the subject of today's lesson is commercial out-parcels or pad sites (same thing).  An out-parcel is a small lot at the outer edge of a shopping center, usually reserved for later sale to a fast-food outlet or a chain restaurant; also called a pad site.

Usually there is a large shopping center on some busy commercial strip (thoroughfare).  Further back from the strip is the grocery store or the Wal-Mart, and well as some inline retail units.  Right on the actual strip, however, are several building pads that are ideal for a fast-food or a chain restaurant.  Please look carefully at the picture above.  The Advanced Auto Parts site and Burger King site are perfect examples of out-parcels.

Lenders love to make commercial loans on out-parcels or pad sites.  While the typical loan-to-value ratio for most land loans is in the range of 25% to 40%, many commercial lenders will happily make purchase money commercial loans of 55% to 65% loan-to-value on out-parcels.

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We're now down to the final 38 weeks of the World Cup.  This morning when France played Nigeria, it was the first time an American referee ever officiated a knockout round match. The French won it by a touchdown.  -- Jimmy Kimmel

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The thing to be careful about when underwriting a commercial loan on a shopping center is NOT to apply the same outrageous price paid per square foot by a fast food chain for an out-parcel to the value of the land underneath the entire shopping center!  No-no-no.  The success of a fast food restaurant is very dependent on street visibility and easy street access.  A fast food franchise owner might pay five times the price per square foot for the convenient out-parcel on the left compared to the difficult-to-reach out-parcel on the right.

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I used another fancy term above - inline retail.  Inline retail is another word for a store.  The term inline came about as malls were developed in the 60's because the stores were literally all in a line in the mall.

Inline tenants are smaller tenants than anchor tenants.  Inline tenants pay higher rental rates and sign shorter leases.  These stores benefit from the foot traffic that anchor tenants bring to a retail center, and inline tenants account for the majority of the scheduled rents at most retail centers.

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There was a huge blowout at the World Cup yesterday when Germany beat Brazil 7-1 in the semifinals.  It got so bad that the refs told Brazil, “You know what? Go ahead and use your hands.” -- Jimmy Fallon

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Be on the look-out for an old, dog-eared business card of a banker that you know who makes commercial loans.  You can trade the contents of that one business card for a free directory of 2,000 commercial real estate lenders.

Do you need commercial mortgage leads?  Most lead sellers ask a small fortune per lead ($20 to $50 apiece), and they often post the same lead again and again.  C-Loans.com sells commercial leads for just $1 to $9 apiece, plus 37.5 bps. if you close the deal.  We have one former lead buyer who has closed 40 loans for us!

After 34 years of marketing for commercial loans, I have learned a few things - like what utterly fails and what works like turning on a spigot.

I am about to really tick you off, but its for your own good.  If you don't invest a lousy $199 for my Practice Course, you are a flipping idiot.  This five-hour audio course contains 67 separate lessons on how to fix your commercial mortgage business.

Now if you're netting $120,000+ per year (not gross but net) from your commercial mortgage business, maybe you could argue that you don't need this course.  But the truth is that even you heavy-weights, you natural born salesmen, could learn a ton from a guy who has been in commercial real estate finance (CREF) for 34 years.

Now here's why you are a flipping idiot if you fail to buy this course - I guarantee that will double your net income as a commercial mortgage broker within 12 months - or I will refund 100% of your cost.  I have never guaranteed any other training product.

You've been reading my blog articles.  I hope you'll agree that my training is practical, do-able, down-to-earth kind of stuff.  I am promising to double your net income as a commercial mortgage broker within 12 months.  All for a lousy $199?  Guys, this is far more about making you a loyal supplier of loans to Blackburne & Sons and C-Loans.com than making a lousy $199.  If I turn your economic life around, in appreciation you will still be bringing business to my sons twenty years from now.  Don't be a flipping idiot.