Commercial Loans and Fun Blog

One day Sammy Shopper, a thrifty and tight-fisted Scottish American, called every bank within 50 miles to find the best commercial loan for his office building.  Guess what he found?  Just about every bank quoted him the same rates and terms:

• 3.97% to 4.81 fixed for the first five years
• 25 years amortized
• 10 years due
• Rate readjusted at the beginning of year 6
• Modest prepayment penalty of either 3-2-1 or 1 point.

Commercial bankers are herd animals.  They enter and leave markets with the herd (invariably much too late), and they all quote just about the same commercial loan.  If you know what a community bank in White Plains, New York is quoting on a commercial loan, you pretty much know what a community bank in Fresno, California is quoting on a similar commercial loan.

If you ever need to know what banks are quoting on commercial loans, simply go to our web site devoted solely to what banks are quoting on commercial loans, CommercialMortgageRates.co.  We update these commercial mortgage rates every week, so be sure to bookmark this page.  Please note that the extension is ".co" rather than ".com".  I had the chance to buy the ".com" version of this domain name, but the seller wanted $20,000; and one of my many web pages was already #1 on page 1 of Google for "commercial mortgage rates."

We often get calls from commercial borrowers trying to beat the rate quoted to them by their own bank.  I have a saying, "The only commercial lender who can beat a borrower's own bank is his mother."  It therefore seldom pays to spend hours and hours calling different banks in search of a lower rate.  Banks are all going to be about the same.

Where banks will differ, however, is in the amortization and the loan amount.  The typical amortization for a commercial loan is 25 years; but due in 10 years.  Twenty-five years is to commercial loans what 30 years is to residential loans.  Its the typical amortization.  Let's suppose, however, that your commercial building is 45 years-old, and it is showing signs of deferred maintenance.  Many banks will shorten their amortization schedule to just 20 years, thereby increasing your monthly payments and reducing the size of the loan for which you can qualify.  In a case like this, it pays to shop for a different bank who will use a 25-year amortization.

Another reason to shop banks for the best commercial loan is the loan amount.  Banks can vary significantly as to how much they will loan you.  Some banks today are still stuck in a Great Recession mentality, and they will only loan up to 60% to 65% loan-to-value.  Other, hungrier banks, will loan up to 70% to 72% LTV; but unfortunately few of them ever reach 75% LTV.

If you ever absolutely need a commercial loan of a full 75% loan-to-value, consider submitting your deal to Blackburne & Sons.  Because we use private investors to make our loans, we cannot possibly compete with the banks on rates.  Therefore Blackburne & Sons has to compete on the basis of giving the borrower more loan proceeds.  In other words, Blackburne & Sons regularly wins deals because we actually make loans up to 75% LTV.  We might even consider a non-SBA commercial loan of 80% LTV on the right purchase-money deal.  A purchase money loan is a mortgage loan used to purchase the property

Every one you - including commercial property investors and commercial brokers - needs at least a small Rolodex of six to eight bank commercial real estate loan officers.  You commercial mortgage brokers need a Rolodex of at least 30 to 50 bankers.  Now CommercialMortgage.com - our commercial lender search engine - can serve as your actual Rolodex; but you still need to develop a personal relationship with each of your bankers.  

The reason why you need a personal relationship with lots of different bankers is because bankers are fickle, moody, and totally unpredictable.  One moment a bank will love loans on self storage projects, and the next moment - usually after a loss - the bank wouldn't touch a self storage loan with a fifty-foot pole.

Therefore you need to have a bunch of different bankers to whom you can show your commercial loan, in hopes of finding that one bank who is in the mood to lend today.  A bank will often feel pressure to lend after some big commercial loan in their portfolio pays off.

It's easy to start adding bankers to your Rolodex.  There are 6,799 commercial banks in the U.S. today, and just about every bank in the country is in the market right now to make commercial real estate loans.  Remember, bankers move in herds.  Just call up the bank down the street and ask for a commercial real estate loan officer.  Ask for his direct phone number, his address, and his email address.  Lastly, you'll need to know his minimum and maximum commercial loan size and his lending area.  Voila! That's all you need to ask.  You don't need his rates (see above), nor do you need to know what types of properties the bank will finance (see below).

If the borrower is strong, and there is a potential for a continuing business relationship, most banks will finance most of the property types listed below.  The only qualification is that banks will only finance business properties if the business is making money.

Multifamily
Office Buildings
Retail buildings, Strip Centers, and Shopping Centers (and such condos)
Industrial Buildings and Warehouses (and such condos)
Hotels and Motels*
Self Storage (aka Miniwarehouses)
Auto Repair
Restaurants and Bars*
Gas Stations*
Residential Subdivisions and Land**

* If they are making good money.
** If the developer has a high net worth, lots of experience, and a ton of cash in the deal.

As to loan type, most banks usually have a good appetite for both permanent loans and commercial construction loans.  A permanent loan is a garden-variety first mortgage on a commercial property with a loan term of at least five years and at least some principal paydown (usually 25-years amortized).

So in conclusion, we know right off the bat that -

1. Almost every one of the 6,799 banks in the country is now making commercial loans.
2. Most of these banks will consider both permanent loans and construction loans.
3. The typical bank will consider almost all commercial property types, as long as the business owner is making good money.
4. The rate is going to be between 3.87% and 4.91%.
5. The loan will have a 25-year amortization
6. The loan will have a term of 10 years, with a rate readjustment after 5 years.
7. A modest prepayment penalty of 3-2-1 or 1 point is common.
8. Therefore all you really need to know from your bank loan officer is his mimimum loan, his maximum loan, and his lending area.
9. You need a rolodex of bank loan officers, but these guys (or gals) are easy to meet.  Just call the bank and ask for a commercial real estate loan officer.

Today I am going to teach you how to convince a bank to close a commercial loan on a building where part of the space is vacant.  Before we get into this discussion, however, please allow me to pitch a private money loan from Blackburne & Sons.  We regularly finance partially-vacant and wholly-vacant commercial buildings.  Click here to apply for a fast, easy private money commercial loan.

But now let's assume your commercial loan request is pretty strong.  Its bankable.  The only black hair on this otherwise bankable deal is the fact that about 8,000 sf of the total 65,000 sf of space is vacant.  Your borrower needs the income from that vacant space in order to qualify for a commercial loan large enough to pay off his balloon payment. "Quick, Jack, what do you do?"  (Dennis Hopper to Keanu Reeve in the movie, Speed.)

The good news is that banks are so hungry for commercial loans these days that they will listen to a good argument and a special structuring of the deal.  Here is what you do:  Tell the bank that they can hold back, out of the proceeds of the loan, enough money to pay for the anticipated tenant improvements and leasing commission to lease that last 8,000 square feet worth of space.  If the borrower is pretty wealthy - in order words he has plenty of global income - this should be enough of a fix to get Loan Committee comfortable enough to approve the loan.

Global income is the totality of the borrower's income, including his employment income, interest income, dividend income, and other net rental income.  If, in the above example, the borrower is a heart surgeon pulling down $600,000 per year, you can be sure that some bank would refinance his entire balloon payment.

Tenant improvements are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant.  For example, a tenant might insist on two handicap-accessible bathrooms, a reception area up-front, and a number of private offices in the back.  The lessor pays for these specialized improvements in order to attract the tenant.

What if the borrower is not a heart-surgeon, but rather he is just a real estate investor with a decent, but not huge, amount of outside income.  Now what do you do?  You could have the lender hold back the anticipated rent of the vacant 8,000 sf of space for, say, six months, out of the proceeds of the loan, in order to give the borrower time to rent that vacant space.  This reassures the lender that the borrower will have enough dough to make his payments during the lease-up period.  Remember, banks want to make commercial loans today.  This structure gives them an excuse to approve the loan.

There is another way to structure your deal.  Your lender could give you an earn-out.  An earn-out is defined as a provision in a commercial real estate loan where the commercial lender agrees to release more money to you upon the happening of a certain event; e.g., the leasing of more space or a major tenant renewing its existing lease.

Example:

Jones Development recently completed construction of an 800,000 sf lifestyle center in Houston.  The $32 million construction loan from Choppy Bank is now due.  Snoopy Life Insurance Company has approved a $34 million takeout loan, but Jones Development is not satisfied with the loan size.   The developer complains that when the last 85,000 sf of space is leased that they could qualify for a $40 million loan.  Snoopy Life therefore records a $40 million first mortgage, but it only releases $34 million.  When the last of the 85,000 sf has been leased out, Snoopy Life will release the remaining $6 million.

A lifestyle center is a huge mall for fat people.  Huh?  I'm kidding, of course, well... I'm only half-kidding. Americans have packed on a lot of pounds over the past two decades (me included), and we no longer like to hike two miles around malls.  Its too much walking and too much exercise.  Therefore lifestyle centers are huge malls where we can drive right up to the door of the particular store in which we want to shop.

Two paragraphs above I used the term, "takeout loan".  A takeout loan is just a garden-variety permanent loan on a commercial property that is used to pay off the construction loan.

I just love the funny pic below.  This is such good marketing:

C-Loans.com has closed over 1,000 commercial real estate loans totaling over $1 billion.  And we did it without venture capital.  Stay close to the Blackburne family over the years, especially now George IV (32) and Tom (30).  We'll make you money and save your bacon when the whole world is crashing down around you.  We may be the ONLY commercial real estate lender who was actively in the market every single day of the Great Recession.  Since 1980, we have survived three commercial real estate crashes of 45%.  Our investor clients made a killing during the S&L Crisis by buying up those RTC foreclosures.  You really-really want a relationship with the next generation of Blackburne's.

Every commercial real estate broker should also be a commercial mortgage broker.  Why?  There is no better way to meet wealthy commercial real estate investors than to advertise that you make commercial real estate loans.

I try to write two blogs articles every week to train my sons in commercial real estate finance.  You get to audit this training for free by subscribing to my blog.

Once upon a time, Mary Flakey bought an apartment building for $1 million from Mr. and Mrs. Jones, an elderly couple.  Mary put down $150,000.  She then took title to the apartment building "subject to" the existing $550,000 first mortgage from Choppy Bank, and Mr. and Mrs. Jones carried back a $300,000 second mortgage at just 6% interest.

For the first 18 months, all went well.  Then both Mary Flakey and the Joneses got a certified letter from the loan servicing department of Choppy Bank demanding to know why the payments were coming from Mary Flakey and not the Joneses.  When the story of the sale of the property came out, Choppy Bank accelerated its loan and demanded to be paid off in full.

An acceleration clause is a provision in a mortgage that gives the lender the right to stop accepting monthly payments and to demand that the loan immediately be paid off in full.  There are a number of triggers for a lender to use its acceleration clause.  Waste is one of them.  For example, if a borrower starts to intentionally demolish the property - the lender's security for its loan - the lender can accelerate its loan.

Now back to our story of Mary Flakey and the Joneses.  Sounds like a rock group from the 1970's - Eric Burton and the Animals, Paul Revere and the Raiders, Mary Flakey and the Joneses...  Ha-ha!  The reason why Choppy Bank accelerated its loan was because Mary Flakey failed to assume its loan, and the bank exercised the alienation clause in its mortgage.

An alienation clause is a provision in a mortgage that says that the lender can accelerate its loan if the borrower alienates (transfer) title in any way.  In our story, the bank actually had TWO grounds to exercise its alienation clause.  Can you guess them?  Well, first of all, the Joneses transferred title to a new buyer.  That one was easy, but there's one more.  The Joneses put a second mortgage on the property!  Mortgaging a property constitutes a transfer of some of the ownership rights to a property.  This is why commercial second mortgages are exceedingly rare these day.  Almost all bank first mortgages prohibit placing additional financing (second mortgages or mezzaine loans) on the property.

When Choppy Bank demanded that its full $550,000 first mortgage be immediately paid off, Mary Flakey simply didn't have the money, nor did the elderly Joneses.  The bank foreclosed, and the second mortgage owned by the Joneses was completely wiped out.  Not surprisingly, Mary Flakey stopped making payments on the old second mortgage.  It was a brutal blow.  That $1,500 per month in income was crucial to the budget of these poor retired folks.  

After Choppy Bank foreclosed, the building fell on hard times.  The tenants moved out, and the building was boarded up.  It sat there unoccupied for months, slowly falling apart.  Then Mary Flakey borrowed some money her parents and cut a deal to buy the neglected REO from Choppy Bank for just $100,000!  The term, "REO", stands for real estate owned, which is what banks must call their foreclosed properties.  Under banking regulations, banks are under tremendous economic pressure to get rid of their REO's quickly - which explains why Mary was able to get such a great deal.

So Mary Flakey is sitting there feeling pretty good about the situation.  She now owned a $1 million apartment building free and clear, and she had only $250,000 invested in the deal - her initial $150,000 down payment and her additional $100,000 investment to buy the REO.

But then an attorney for the Joneses came knock - knock - knocking on Heaven's door.  "Ms. Flakey, you need to start making payments again to the Joneses.  Under the After-Acquired Title Doctrine, the mortgage in favor of the Joneses has re-attached itself to the property, and if you don't make up the past due payments and keep them current, the Joneses will foreclose on their mortgage."

Well, that visit from the attorney certainly was a Buzz Kill for Mary Flakey.  What happened?  Weren't the Joneses wiped out by the foreclosure?  Well, they were; but then Mary Flakey reacquired the property.  The After-Acquired Title Doctrine says that if you give someone a mortgage or lien on a property that you do not own, but you later acquire it, that mortgage or lien immediately attaches to the property.

I write this blog to two teach my two sons, George and Tom, the business of commercial real estate finance.  By subscribing to this blog, you get to "audit the class" for free.  I try to write two training classes per week.