Commercial Loans Blog

Banks Make Commercial Loans on These Properties

Posted by George Blackburne on Fri, Oct 28, 2016

Bank-1.jpgIn preparation on my big upcoming training article entitled, "How to Quote a Commercial Loan," you need to know what types of commercial property that banks will finance.  We can all guess that a commercial bank is unlikely to finance a gentlemen's club or a cannabis dispensary, but what about a used car lot or a bowling alley?

Here's the thing about banks.  Banks are portfolio lenders.  Portfolio lenders make portfolio loans.  A portfolio loan is loan that the lender has no intention of ever selling off.  The bank will hold the loan until maturity.  As a result, the bank is free to use common sense and special expertise in underwriting the deal.  It doesn't need to underwrite the loan or structure the payments in any standard way.




For example, suppose a successful young doctor wants to buy a medical office condo, but the deal does not cash flow at any higher than 52% loan-to-value.  This is common in office condo's because they sell for very high prices per square foot.  A commercial bank making a portfolio loan is free to make a 75% LTV loan on such a purchase because the M.D. might be making $600,000 per year.  The bank is free to use global income.  

Global income is a way of underwriting a commercial loan where the bank looks not at just the rental income the property is capable of generating, but the bank also considers the borrower's outside income, like his employment income or his investment income.

Here is an example of a bank making a portfolio loan based on its special expertise.  Suppose the owner of the bank is from New York City, where many apartments have been turned into co-op's.  Few lenders anywhere in the country will finance co-op's, but a commercial bank with special expertise is free to do so.

The second thing to understand about banks is that they will finance almost any type of income producing property - including bars, restaurants, used car lots, and bowling alleys - as long as the borrower is making lots of money and keeps a big horde of cash in the bank.  The bank most likely to finance a successful restaurant will either be the borrower's own bank or a nearby bank wishing to steal the banking business of this wildly successful restaurant owner.  Other than these two situations, business properties are seldom financed by banks.

So what is a business property?  A business property is one that is specialized and management intensive, where the property's ability to produce income depends on the owner being there every day to operate the business.  In the event of a foreclosure, it would be very expensive for the bank to hire any sort of management company to run the property.  Examples of business properties include, small unflagged motels, RV parks, campgrounds, miniature golf courses, and bowling alleys.




Keeping in mind that banks are portfolio lenders and will even finance business properties, as long as the operator is making lots of money and keeps a big horde of cash at the bank, below is a list of the property types that a commercial bank will finance.


Auto dealerships / Used car lots - If VERY successful
Agricultural or Ranch Properties - If the bank has special expertise in underwriting them
Assisted Living Facilities
Apartment Buildings
Auto Repair
Bowling Alleys - If VERY successful
Bed & Breakfast Inns - They cash flow very poorly
Congregate Care Facilities
Convalescent Hospitals
Commercial or Retail Buildings
Churches - Only filthy rich ones in superb neighborhoods
Cooperatives - Requires special expertise
Golf Courses - Tough to place.  Most are losing money hand over foot.
Hotels & Motels - Must be either flagged or making tons of money.
Industrial Condo - They cash flow very poorly
Industrial Buildings
Land - Purchase money deals for experienced developers greatly preferred.
Marinas - Must enjoy good occupancy and a good cash flow
Mobile Home Parks
Movie Theater - Better be making good money
Mixed Use Property - Apartments over retail or commercial very acceptable
Office or Commercial Condo's - They cash flow very poorly
Office Building
Parking Garage - Needs to be making reliable money
Restaurants - Needs to pay lots of taxes and the owner must keep lots of cash.
Residential Condo Subdivisions - Bankers lost their tails in 2008.  Better be perfect.
Residential Subdivisions - Bankers lost their tails in 2008.  Better be perfect.
Self Storage - Ideally they should be gated
Shopping Centers / Strip Centers (Mini-Malls)
Skilled Nursing Facilities
Special Use Property - If VERY succesful and owner has TONS of cash


Adult Bookstores
Churches - Unless filthy rich in Beverly Hills
Gas Stations - Unless VERY new and VERY successful
Gentlemen's Clubs
Residential Care Homes - Houses used for old folks

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Topics: Banks

Commercial Loans, Rental Rolls, and Schedules of Leases

Posted by George Blackburne on Mon, Oct 24, 2016

In a few days I am going to write an important blog article that will teach you How to Quote a Commercial Loan.  In that article I will need to refer to Rent Rolls and Schedules of Leases.  This training article will teach you the meaning of those two terms.

It is surprising, but when the typical commercial lender underwrites a commercial real estate loan, he will allow the borrower to use this year's scheduled rents and last year's actual expenses.  This is a surprisingly aggressive position.  Commercial lenders might easiy have underwritten their loans based on last year's actual income and last year's actual expenses.  Using this year's scheduled rents helps the borrower to qualify for a larger loan because this year's scheduled rents are usually higher than last year's actual receipts.


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In order to compute this year's scheduled rents, the lender will ask for a Rent Roll if the property is an apartment building, a self storage facility, or a mobile home park.  A Rent Roll is just a list of the tenants by unit number and the amount of each tenant's monthly rent.




If the property is an apartment building, the Rent Roll will also contain the number of bedrooms and bathrooms in each unit and sometimes the square footage of the unit.  Apartment units are sometimes called doors.  "The property is a multifamily project with 138 doors."  If the property is a mobile home park, the Rent Roll will list whether the home on the pad is a single-wide, double-wide, or triple-wide.


Rent Roll.jpg


If the property is a self storage facility, the Rent Roll will always contain the square footage of the unit.  By the way, mobile home park units are called pads.  After all, the tenant usually owns the mobile home.  The landlord only provides the pad upon which the mobile home sits.  [Hotels units are sometimes called keys.  "The subject property is a hotel with 86 keys."  Hotel units used to be called rooms until hotels started to build units with suites, each of which have multiple rooms.]

On any Rent Roll, it is very important that the Rent Roll contain the name of the tenant in the unit.  This is critical because a good appraiser will perform two or three audit checks of the Rent Roll.  "Good afternoon, Mrs. Rodriquez, my name is John Jones, and I am doing an appraisal of the property for Key Bank.  My Rent Roll here shows that you pay $750 per month in rent for this unit.  Is this correct?  It's not???  You pay only $600 per month??? Hmmmm."  Unfortunately, mortgage fraud like this is fairly common in commercial real estate finance.




Most other types of commercial property - like office buildings, retail buildings, strip centers, shopping centers, malls, power centers, lifestyle centers, industrial buildings, and industrial centers - will have longer term tenants.  To determine the current annual rental income, the typical commercial lender will ask for a Schedule of Leases.

A Schedule of Leases is a summary of the tenants in a commerial building that contains the (1) unit number or letter; (2) the name of the tenant; (3) the square footage of the unit; (4) the amount of the monthly rent; (5) the lease expiration date (and sometimes the starting date of the tenancy); and (6) any rent contribution paid by the tenant.

Important Tip:

The mortgage broker who gets his loan client the largest loan amount usually gets the deal, even though a competing lender's loan might be 0.25% or 0.50% lower.  To get the largest loan amount, be certain to include the market rent of any vacant units.  For example, let's suppose a 50-unit apartment building enjoys 18 2 bedroom-2 bath units rented at $1,500 per month and two 2-bedroom-2 bath units rented at $1,600 per month.  If a third 2 bedroom-2 bath unit is vacant on the rent roll, be sure to list that vacant unit as if rented at $1,600 per month, rather than $1,500 per month.

Is your client's company losing money? Is your borrower a foreign national? Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit?


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Topics: Rent roll

How To Screen Large Commercial Loans

Posted by George Blackburne on Thu, Oct 6, 2016

Large_commercial_building.jpgThis is the second most important training article about commercial real estate finance ("CREF") that I have ever written.  My most important CREF training blog article can be found here.

Most new commercial mortgage brokers start out arranging small balance commercial real estate loans.  These are the commercial loans of less than $5 million ($5MM).

Banks are by far the most active lenders for small balance commercial loans.  Unfortunately most bankers take the position that if a borrower has to hire a mortgage broker to help him get a commercial loan, that deal is proably a stinker.  After all, there are over 6,000 commercial banks in America.  Why couldn't the borrower find a bank on his own?  Why didn't the borrower's own bank make him the loan?  How many banks have already looked at this deal and turned it down?

A great many bankers are therefore highly prejudiced against commercial loans brought to them by commercial mortgage brokers.  Unfortunately this harsh environment is where most newbie commercial mortgage brokers must learn their trade.

By the way, it is the rare trade show that I attend where I am not greeted warmly and appreciatively greeted by at least one or two graduates of my nine-hour training course, How to Broker Commercial Loans.  When I first started out in commercial real estate finance 36 years ago, nobody taught this stuff!  It was all a closely guarded secret.


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Okay, so bankers are distrustful of small balance commercial loans brought to them by commercial mortgage brokers.  Got it.  But what about the Big Boys, the commercial lenders who make the major loans, the commercial loans larger than $5MM?  By the way, in my last few blog articles I have been referring to the really large commercial loans - the deals larger than $5MM - as large balance commercial loans.  That is not really the best term.  They are more often called major loans by the lenders themselves.

Two weeks ago my oldest son, George IV, and I flew to Las Vegas to attend the Western States Commercial Real Estate Finance Conference, the biggest trade show of the year for the CREF industry.  At the show, John Hancock Life Insurance Company had a booth soliciting the really large commercial loans - in this case $10MM+.  George IV and I approached the loan officer, coincidentally named John, to pitch our wonderful new web site,


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After my 90-second pitch, John politely but unapologetically said, "No."  By the way, John Hancock was just about the only lender to say no to us at the conference. was a smash hit.

"I'm an old man, George," continued John.  "I don't want to work that hard screening out deals.  My best brokers know what I want.  When one of my best brokers calls me, I know that there is a 50-50 chance that I am going to close a loan if I take that call."  Bam!!  An amazing epiphany hit me upside the head like a can of V8.




Commercial lenders making major loans actually WANT a good commercial mortgage banker involved in the deal in order to screen the deals.  They don't want to field the countless calls from direct borrowers.  They actually want a middle man, a good commercial mortgage banker to screen their deals.  (George IV and Tom, my sons, this is huuuuge!  Confused?  I write this blog mainly to teach my two great sons the family business, and you get to benefit by reading this invaluable training for free!  Make sure you subscribe!)


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By the way, when a commercial mortgage broker starts regularly closing major commercial loans - deals over $5 million - he becomes, in the parlance of the industry - a commercial mortgage banker, even though his company doesn't actually service (collects the payments) on the loans he originates.

The vast majority of the major loans originated in the country are, in fact, actually originated by life company correspondents who come across deals not suitable for their stable of life companies.  You will recall that a life insurance company correspondent is a mortgage company that is the exclusive representative for a life insurance company in a particular region of the country and who collects the payments every month for their life company clients.  This is why the lenders making major commercial loans often call their best brokers commercial mortgage bankers, even when the moniker is slightly inaccurate.




So how do you screen a major commercial loan?  In most cases, the large commercial loans that you will be screening will be either construction loans or bridge loans.  Large permanent loans are pretty straight forward.  Pop quiz:  Define a permanent loan.  A permanent loan is a garden-variety first mortgage on a commercial property that has at least some amoritzation (25-years is the most common amortization for commercial loans) and a term of at least five years.

When screening a construction loan or a bridge loan, there are four important questions for which you will need answers:

  1. What is the net worth of the borrower?  Remember, according to the Net-Worth-to-Loan-Size Ratio, the net worth of the borrower should be at least at least as large as the loan amount.  In other words, the net-worth-to-loan-size ratio should be at least 1.0.  If the two developers have a combined net worth of just $3 million, and they are trying to get an $8 million construction loan or bridge loan, they are smoking too much of that loco weed.

  2. What experience does the borrower have owning, managing, renovating, and/or building commercial projects of this size?  The answer to this question will be found in the borrower's curriculum vitae ("CV"), which is a fancy term for the borrower's ownership, management, renovation, and/or building experience resume.

  3. The single most important question is how much equity (skin) will the borrower have in the deal?  At an absolute minimum, the borrower will need to be able to cover at least 20% of the total cost of the project, and on the larger deals, 30% is far more likely.  The Total Project Cost includes land/acquisition costs, hard costs, soft costs (including loan points and an interest reserve), and a contingency reserve of 5% of hard and soft costs.

  4. If the loan being sought is a bridge loan, what is the borrower's exit strategy?  The exit strategy is how the borrower intends to pay off a bridge loan, which is of vital importance to any short term lender.  Remember, a bridge lender's yield plummets when a bridge loan goes past maturity.  Will the borrower refinance the property with a permanent lender when the property is stabilized (when every unit is leased at market rates)?  The mere sale of the property is probably the weakest exit strategy that a borrower can propose.

Hey guys, keep looking for the contents of the business card of any commercial banker making commercial real estate loans.  You can trade the contents of that one business card for a free directory of 2,000 commercial real estate lenders.  We have one idiot who stays up every night trying to scrape the contents of our wonderful new commercial loan portal,  He is trying to get our list of commercial lenders.  Hellooooo, Mr. Dodd Frank (the name he uses when he scapes our site for hours), you can get the same list by giving us the just one good banker!  Silly.


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The truth:  Every day two salesmen for contact banks to invite them to join  The grumpy, sleepy old guys who really don't care that much about originating many new commercial loans we add to  Need to actually close a commercial loan?  Submit your commercial real estate loan request through


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Topics: Screening