Commercial Loans and Fun Blog

Prices and interest rates across the entire world are declining.  This could be wonderful news for those of us in the commercial loan business.

Before I explain, I want to bring you up to date on a blog article that I wrote last week postulating that a world war with China and Russia may be brewing.  This was a pretty important article, and I urge you to read it first.

In that article I commented, "It seems to me that the behavior of China recently is that of a belligerent who thinks that he can win."

No sooner had I finished this article than a joint air exercise between Russia and China so threatened South Korean and Japanese airspace on Thursday that the Japanese and South Korean jets had to fire two looooong bursts of 20 mm cannons to drive them off.  In the meantime, the Russians and Chinese mapped and measured both South Korean and Japanese jet fighter launch areas.  

Please be sure to note the scary term, joint air exercise.  Russia and China are now practicing for a war against us.  Holy crappola.

In a recent article in Atlantic Magazine, a military analyst disclosed that in recent war games simulating a great-power conflict in which the United States fights Russia and China, the United States “gets its ass handed to it.”

Now on to deflation.  It's hard for most people to understand even the possibility of deflation.  The money supply can only grow, right?

In a future article, I will explain why deflation is as powerful as gravity, and why it is a constant threat to capitalism.  For now, however, please accept the fact that the horrible deflation we experienced in 2008 could easily happen again.  

Even now modest deflation is occurring in most first-world countries, except the U.S. -- including Germany, Japan, England, France, Sweden, Holland, and Denmark.  This deflation is producing some bizarre situations.

The amount of bonds in the world that have a negative yield continues to rise, making a fresh swing high this month, and now sits at a U.S. dollar equivalent of $10.5 trillion.

This debt pile consists mainly of sovereign bonds from Japan and European countries.  In a sense, the deflation which Japan experienced in the 1990s and noughties, has now spread...to Europe in the noughties and 2010s.  By the way, the term, noughties, is a British one that means the decade from 2000 to 2009.

At first glance, bonds with a negative yield make no sense.   Why would a rational person ever lend money to someone and pay them for the privilege of doing so???  The reason why a rational person might lend money at a negative interest is because that person expects the prices of the stuff they can buy with that money (goods and services) to fall even further.  In other words, the lending person has sizable deflationary expectations.

Can't the government just "print money like crazy" to create inflation and positive interest rates?  Japan has tried this since 1989.  Recently the Japanese Central Bank got inflation up to the rip-roaring rate of 1% last year - only to now see it fall towards zero again.

The fact is that negative-yielding bonds and bank loans in Japan and Europe are likely to continue is because the banks can make a profit lending money at a negative interest rate.  At a negative interest rate?  What the fruitcake?

Yup.  In Europe, depositors sometimes have to pay the bank something like 0.5% annual interest to keep their money on deposit with the bank.  If the bank can loan the money out to a strong company at a negative annual interest rate of just 0.1%, the bank still picks up a 0.4% annual gross profit on the spread.  (Note:  Deposit rates in Germany are slightly positive today.)

Are you ready?  Get ready for it.  Mortgage rates in Denmark briefly went negative last year.  You take out a mortgage to buy a house, and the bank gives you a loan at a negative interest rate.  Go figure, huh?

This Could Be Wonderful for the Commercial Loan Business:

I promised you earlier some good news about commercial loans.  Do you remember refinance-mania?  This was largely a residential mortgage phenomena.  Well, because interest rates have fallen so far recently, hundreds of billions of dollars in bank commercial loans are about to be refinanced by smart commercial loan brokers and hungry banks.

Interest rates in Japan and Europe are about 1.5% lower than in the United States, so U.S. Treasuries are skyrocketing in price right now, as Japanese and European investors, desperate for a positive yield, are snapping them up.  This will lead to falling commercial loan rates from banks and an absolute bonanza for commercial loan brokers.

Hot snot, this is gonna be good!  :-)

It's time to renew our NMLS hours.

Gwendoline Christie played Brienne of Tarth in Game of Thrones

C-Loans Just Added Hundreds of New Commercial Lenders:

Since we started paying mortgage brokers a fee to convince their favorite banks to join C-Loans.com, we have been adding new banks like crazy.

One mortgage broker alone, Arnold Taylor, has added over 50 banks.  He has probably won the race against you as to a half-dozen of your favorite bankers.  The first commercial loan broker to register a bank with us wins, and if you don't tell us about a particular bank, I can almost guarantee you that some other commercial loan broker will.  There is no profit in delay.  

My son, Tom, and I, for the past two weeks, have been constantly adding new banks to the C-Loans System.  Heavens, my back aches so much and my eyes have gotten so weary from leaning over a computer screen and adding all of these new lenders who are hungry for commercial loans.

We're Now Paying Commercial Loan Brokers to Add Real-Life Commercial Loans (Not Just Lenders) to C-Loans As Well: 

In order to convince you to come bank to C-Loans.com, to see all of our hungry new lenders, and to submit some new commercial loan applications, I am going to entice you some wonderful free stuff.  

Please pick two:

1. The Blackburne List of 750 Commercial Lenders ($39.95).
   
   
2. How to Market For Commercial Loans.  It's only $199... but you may be broke. (You get the PowerPoint to my famous course, which teaches you everything.)
   
   
3. Our mortgage broker fee agreement ($199) has probably been tested in more actual courtroom cases than any other. Remember, I am an attorney.  (You get the fee agreement itself, not the 60-minutes of video training contained in our fee collection course.)
   
   
4. Our Income Property Underwriting Manual ($199) can upgrade a real estate broker or a residential loan agent into a commercial loan broker in a single afternoon.  (You get the manual itself, not the five-hours of video underwriting training.)

We here at C-Loans will give you TWO of the above freebies, just for entering a bona fide commercial loan into C-Loans and submitting it to six lenders.

Submitting a loan to C-Loans.com is NOT the act of filling out a lead form in order to get some freebie, like a free list of 200 commercial lenders or our free commercial loan placement kit.

Submitting a commercial loan to C-Loans.com is a six-step process that ends with you putting a checkmark next to six commercial lenders and then pressing "Submit".


How To Get Your Freebies:

After going through the six-step process - putting a checkmark next to six lenders and then submitting your deal - please email my son, Tom Blackburne, the General Manager of C-Loans, Inc., and tell him which two of the above gifts you want.  Please make the subject line, "I Completed a C-Loans Application."

Don't have time to work commercial loans?

Click the above button and bookmark our lead input form.

U.S law is based primarily on English common law.  Common law is the part of English law that is derived from custom and judicial precedent, rather than from statutes.  An example of common law is a ruling that some judge made, in an old case more than two-hundred years ago, that says that people have a duty to read contracts.

Common law is often contrasted with statutory law, which is the body of laws enacted by Congress, the various state legislatures, and other law-making bodies and which are actually spelled out in some book of statutes.  In Penal Code 187, California law defines "murder" as "the unlawful killing of a human being or fetus with malice aforethought."

Under English common law, the longest that real estate could be leased for was 99 years.

If your lawyer made a mistake and wrote a real estate lease for 100-years, after the execution (signing) of the lease by both parties, the lessee could immediately go to court and have the judge declare that the lease was an actual sale of the property.  The intended land lessor would be a given a mortgage for the amount of his land lease payments, and title to the property would pass to the intended land lessee.  

How could this possibly matter?  Imagine leasing out a piece of land for 100-years, and then a wave of hyperinflation struck.  The intended land lessee could simply hand you a check for 100-years worth of payments (possibly just enough to buy a cup of coffee) and keep title to the property, free and clear of the mortgage, for himself.

Les Agisim, the most successful commercial loan broker on C-Loans (55 closings), has used this video training program to train two-dozen new commercial loan agents.

Although U.S. courts always show great deference towards English common law, the various state legislatures are not bound by them.

Some U.S. states have passed state laws that say the longest period that you can lease real estate for in their state is only 40 years.  Other U.S. states have passed laws that say that you can lease real estate for as long as the parties would like.  Other states have kept the 99-year common law limit.

Different Subject:

I want to give you some free stuff.  Pick two:

1. The Blackburne List of 750 Commercial Lenders ($39.95).
   
   
2. How to Market For Commercial Loans?  It's only $199... but you're broke.  (You get the PowerPoint to my famous course, which teaches you everything.)
   
   
3. Been screwed out of too many loan fees?  Our mortgage broker fee agreement ($199) has probably been tested in more actual courtroom cases than any other.  Remember, I am an attorney.  (You get the fee agreement itself, not the 60-minutes of video training contained in our fee collection course.)
   
   
4. Our Income Property Underwriting Manual ($199) can make a real estate broker or residential loan agent into a commercial loan broker in a single afternoon.  (You get the manual itself, not the five-hours of video underwriting training.)

We here at C-Loans.com will give you TWO of the above freebies, just for entering a bona fide commercial loan into C-Loans and submitting it to six lenders.

Attention All Brain Surgeons:

Submitting a loan to C-Loans.com is NOT the act of filling out a lead form in order to get some freebie, like a free list of 200 commercial lenders or our free commercial loan placement kit.

Submitting a commercial loan to C-Loans.com is a six-step process that ends with you putting a checkmark next to six commercial lenders and then pressing "Submit". 

How To Get Your Freebies:

After going through the six-step process - putting a checkmark next to six lenders and then submitting your deal - please email me, Tom Blackburne, and tell me which two of the above gifts you want.  Please make the subject line, "I Completed a C-Loans Application."  Atta-boy!

If You Are a Commercial Loan Broker, Be SURE To Do This:

Mortgage brokers are rushing to get their favorite bankers signed up on C-Loans.com, and thereby earn 20% of our fee on the first three loans closed by their bank.  One mortgage broker, Arnold Taylor, has added almost 30 banks to C-Loans in the past two weeks alone.  Arnold will be earning big fees from this for years.

It's very easy.  Just call your favorite banker and explain that C-Loans delivers carefully screened commercial real estate loans that perfectly fit his preferences.  The bank merely has to bump its normal loan fee from 1.0 point to 1.375 points in order to cover our software licensing fee.  Next please email to your banker our Commercial Lending Preferences form.  Finally send an email to Tom Blackburne and register the banker with him.  We'll close the sale.

The price of gold shot up sharply this week, and then it quickly fell back down.  It is wise to always keep an eye on the price of gold because it is a harbinger of danger.

The word harbinger is an interesting word that means a person or thing that announces or signals the approach of another.  Synonyms include:  herald, sign, indicator, indication, signal, prelude, portent, omen, augury, forewarning, presage, and announcer.  In the old days, the harbinger was the advance guy who went ahead to find lodgings for his noble and his retinue.

The lovely wife go the BIGGEST kick out of the above meme.  Haha!

I was discussing gold's recent price swings with my son, Tom, and he replied, "Gold may be going up because of inflation."  Maybe.  Maybe not.

The reality is that gold is NOT a great hedge against inflation.  Let me explain.

It's true that gold usually increases in value as inflation increases, and many investors think they need to buy gold when inflation is raging.  The problem with gold, however, is that it does not generate income.  

Stocks (equities) and real estate also increase in value when inflation rages, plus stocks and real estate generate income.  Stocks pay dividends, and real estate throws off positive cash flow.

And it's not as if gold increases much more in value, during inflation, than stocks and real estate.  Suppose gold went up 10% during periods of painful inflation, but stocks and real estate only went up 5%.  Then it might make sense to buy gold as an inflation hedge.  But nope, this doesn't happen in real life.  The three asset classes (stocks, real estate, and gold) pretty much go up together in lock step.

Therefore it makes little sense to buy gold during periods of inflation.  You are giving up dividends and net rental income.  

Gold really shines, however, during periods of deflation.  There is an important concept that I want you to truly understand and commit to permanent memory:  Gold cannot default.

Suppose a huge earthquake, The Big One, leaves much of Southern California in ruins.  Bridges collapse.  California factories that supply vital parts to the rest of the country crumble to the ground, bringing much of the nation's industrial production to a screeching halt.  The U.S. economy contracts sharply, and the financial markets implode.

Almost one-hundred S&P 500 companies file for bankruptcy, many never to emerge again.  Their stock and debenture prices fall to almost zero.

Interest rates on commercial paper skyrocket to loan shark levels.  Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts payable and inventories and meeting short-term liabilities.  Issuing commercial paper is slightly cheaper than borrowing from a bank, so many of our larger corporations issue commercial paper instead.

The State of California defaults on its bonds, followed by hundreds of municipalities across the country.  Most municipal bonds, even those issued by solvent cities, fall 85% in value, as investors panic.

Nobody wants paper investment instruments anymore - stocks, commercial paper, corporate bonds, municipal bonds, or even state bonds - for fear the issuer will go bankrupt or default.  Investors flee to U.S. Treasuries, cash, and ... gold.

Why gold?  Because gold is not the debt of another.  One more time.  Gold is not the debt of another.  Gold cannot default!

Everyone should own a handful of one-ounce gold coins, Maple Leaf's or Kruggerrands, and they should keep them in their Go Bags, along with some actual cash.  A Go Bag (also known as a Bug-Out Bag) is an emergency-preparedness bag that you pack in advance, but you hope you will never need.  Your emergency kit should be self-contained in one small or medium-sized bag and should contain enough nonperishable food and potable water for you and your family to last several days.

Even during a history-book-level of crash, like the The Big One finally demolishing California, gold funds may not fare as well as you might think.  The reason why is because such an event will cause a panic, and in a panic, everything is for sale.

Reminder:

There is a different gold rush going on.  Mortgage brokers are rushing to get their favorite bankers signed up on C-Loans.com, and thereby earn 20% of our fee on the first three loans closed by their bank.  One mortgage broker, Arnold Taylor, has added almost 30 banks to C-Loans in the past two weeks alone.  Arnold will be earning big fees from this for years.

It's very easy. Just call your favorite banker and explain that C-Loans delivers carefully screened commercial real estate loans that perfectly fit his preferences.  The bank merely has to bump its normal loan fee from 1.0 point to 1.375 points in order to cover our software licensing fee.  Next please email to your banker our Commercial Lending Preferences form.  Finally send an email to Tom Blackburne and register the banker with him.  We'll close the sale.

It's a gold rush.  It's a land rush.  Settlers are whipping their horses and driving their Calistoga wagons like crazy to be the first to register their bankers.  But you MUST call your banker first and make the verbal offer.  It doesn't matter if he says yes at the moment.  Just get your banker registered with us, along with your best understanding of his commercial lending programs.

And if you haven't used C-Loans.com recently, you will be thrilled with all of our new commercial lenders, including a dozen new hungry credit unions lending nationwide.  I love-love-love credit unions for commercial loans because they are so aggressive and forgiving.

I am beginning to suspect that another World War may be coming, perhaps in as short as four or five (three?) years.  I hope I'm wrong.  I hope that I am a nothing more than Chicken Little.  "The sky is falling.  The sky is falling."   But I don't think so.  I have had this feeling of dread before, and I was spot on.

The last time I had this feeling of dread was during the three years leading up to the Great Recession.  I just knew that a deflationary collapse was coming, so I wrote my 2007 book, The Reverse Multiplier Effect - When Crushing Deflation Destroys America.  At the time, the mere thought of deflation was ludicrous.

So-called experts have told you that the big losses on subprime loans suffered by our banks were the cause of the Great Recession.  The truth is that our banks simply got scared.  They stopped lending, but they still kept raking in their monthly payments on their huge loan portfolios.

Since the Multiplier Effect also works in reverse, every time a bank accepted a $1,000 loan payment and didn't immediately lend it back out, a whopping $20,000 got sucked out of the U.S. money supply.

Twenty-to-one, that's how the Multiplier Effect works.  If a billion dollars flowed into the banks in the form of monthly payments (and the banks did not immediately loan it back out), TWENTY billion dollars got sucked out of the U.S. money supply.  Within a few months after the crash in 2008, much of the U.S. money supply started to disappear.

Have you ever wondered how the Fed could pump $3 to $4 ($5?) trillion into the U.S. money supply, and yet inflation today still remains at less than 1.6%?  Trillions and trillions of dollars were destroyed during the Great Recession.

Therefore the losses on subprime loans were not the real cause of the Great Recession.  They may have been the spark, but the Great Recession was really caused by the U.S. money supply collapsing like a black star.  As Al Pacino said in Scarface, "Say hello to my little friend - deflation."

"Wait a minute, George.  If we had another World War, the nuclear exchange would exterminate life on earth."

Correct.  Experts have predicted that a nuclear exchange between just India and Pakistan would create a nuclear winter so horrific that it would cause the starvation death of 2 billion people.

No, neither side will use nukes, just like neither side used poison gas during World War II.  Even with the vengeful Russians (they were really pissed) closing in on Berlin, the Germans didn't use poison gas.

I suspect that World War III will be fought instead with smart hypersonic missiles and space-based weapons.  Imagine waking up to find smart hypersonic missiles slamming into our chip manufacturing facilities (Intel and Micron); into the launchpads and engineering buildings of Space X (slows down our ability to launch new satellites); into our power plants and dams; into our oil refining plants; into the engineering buildings containing our brightest technological minds at Google, Microsoft and Intel; and into every one of our aircraft carriers.

"Generals always fight the last war."  Cavalry worked well during the Civil War and the Crimean War, so old French and Russian generals sent their cavalry against emplaced German machine guns in World War I.  See photo above.  British dreadnoughts (battleships) won the big sea battle at Jutland during World War I, so the old U.S. admirals maintained a dozen battleships in 1941, many of which were easily sunk during the war by dive bombers taking off from Japanese aircraft carriers.

Today America projects its might in the Pacific Ocean with aircraft carriers, but in the coming war, we could easily lose most of our carriers in the first two days, as they are easily spotted from space by Russian and Chinese spy satellites.  Smart hypersonic missiles can be directed from space right down their "smokestacks".

The Russians and Chinese are said to be two years ahead of us in the development of hypersonic missiles - missiles that can fly at up to 15 times the speed of sound.  They are almost impossible to shoot down, and they travel so fast that a large enough sneak attack could essentially end the war with the first salvo.

The next World War may be fought with missiles launched from thousands of miles away and directed to their targets by satellites in space.  President Trump had it right when he created our new Space Force two years ago.  If we can keep the Chinese and Russians blind in space, perhaps war can be discouraged.

It seems to me that the behavior of China recently is that of a belligerent who thinks that he can win.  Now that I've mentioned it, see if you too don't start spotting in the news hints and suggestions that China and Russia are preparing for war.  The Winds of War are blowing.

Final Note:

There is a gold rush going on.  Mortgage brokers are rushing to get their favorite bankers signed up on C-Loans.com, and thereby earn 20% of our fee on the first three loans closed by their bank.  One mortgage broker, Arnold Taylor, has added almost 30 banks to C-Loans in the past two weeks alone.  Arnold will be earning big fees from this for years.

It's very easy.  Just call your favorite banker and explain that C-Loans delivers carefully screened commercial real estate loans that perfectly fit his preferences. The bank merely has to bump its normal loan fee from 1.0 point to 1.375 points in order to cover our software licensing fee.  Next please email to your banker our Commercial Lending Preferences form.  Finally send an email to Tom Blackburne and register the banker with him.  We'll close the sale.

It's a gold rush.  It's a land rush.  Settlers are whipping their horses and driving their Calistoga wagons like crazy to be the first to register their bankers.  But you MUST call your banker first and make the verbal offer.  It doesn't matter if he says yes at the moment.  Just get your banker into us, along with your best understanding of his commercial lending programs.

And if you haven't used C-Loans.com recently, you will be thrilled with all of our new commercial lenders, including a dozen new hungry credit unions lending nationwide.

Before I get into this morning's commercial loan training lesson, I have an interesting story for you.

My wife and I live close to Geist Reservoir in Indianapolis, and the lake is teeming with fish.  Not surprisingly, a family of American bald eagles lives in the trees near the lake, and they dine daily there.  Bald eagles are known by scientists as "fish eagles" because they primarily eat fish, although they will also eat rodents and small animals.

Now we regularly use NextDoor.com, a really cool social media site where the people in the same neighborhood share news.  NextDoor lit up like a Christmas tree this spring when our neighbors spotted the nest.  Cisca and I drove over to take a look, and we were stunned.

The nest of an American bald eagle is huge.  It's not as large as a Volkswagen Beetle, but it sure looks like it.  The average bald eagle nest is 4 to 5 feet in diameter and 2 to 4 feet deep.  We were able to look very high up in the tree and actually see the mother eagle protecting the nest, while the father went off to work hunting - enduring horrible traffic and dealing with an irrational boss.  It's no wonder that males die so much earlier than females.  Haha!

We've had some problems this year with raptors around the lake.  Earlier this year an owl swooped down and carried off a little Maltese puppy.  An uphill neighbor watched the tragic event happen from his balcony hundreds of yards away.  My son, Tom, lost two of his chickens last year to a hawk.  There have been a number of recent stories nationwide of owls swopping down and attacking the heads of full-grown adults.  It's like Alfred Hitchcock's famous horror film, The Birds.

The reason I am sharing this story today is because our beloved cat has been missing for a day and half.  [Sob]

Now let's get into today's commercial loan training lesson.  The subject is rollover risk.  Rollover risk is the risk that an existing commercial tenant will not renew his lease, that the space will sit vacant for a year or two, and that the cost of the tenant improvements ("TI's") required by the new tenant will be very expensive.

George Smith Partners is a fine, very old commercial mortgage banking firm.  A mortgage banker is a mortgage company that not only originates real estate loans, but also services them.  In other words, it retains the servicing.  About every week, George Smith Partners puts out a wonderful newsletter called FinFacts.  I urge you to go their site and subscribe to their newsletter.  Recently they wrote:

"... George Smith Partners successfully arranged a $10,200,000 refinance of a 69,552 square foot, multi-tenant office building in San Diego...  (The challenge was that) there is rollover risk of approximately 53% of the square footage from the largest tenant, with their lease expiring in three years.  Because of this, other lenders proposed limited commercial loan terms of five years or less or simply declined the financing request.  Lender’s willing to finance required reserves to mitigate the rollover risk which was unappealing to our Sponsor."

"(The solution found by George Smith Partners was that the firm) worked with a new banking relationship, who was able to get comfortable with the rollover risk given the conservative 56% loan to value request.  The strength of the Sponsor and longevity of ownership helped the Lender meet the Sponsor’s financing requests."

On large commercial loans, rollover risk is often a difficult hurdle.  The numbers are so great that the owner cannot simply carry an empty building out of his personal savings.

There are three ways most commercial lenders handle this problem.  Many times they simply turn the loan down, forcing the borrower to obtain an expensive bridge loan until the tenant either renews his lease or a new tenant is found.

The second way many commercial lenders handle rollover risk is to make their commercial loan balloon either the year before a major lease expires or at a same time.  When a lender makes his commercial loan balloon at the same time as the lease expiration, the two are said to be co-terminous.  I have never understood this strategy.  It's like kicking a man when he is down.

The third way commercial lenders handle rollover risk is to hold back reserves for leasing commissions and tenant improvements. Tenant improvements, also known as leasehold improvements, are the custom interior finish-outs a landlord or tenant makes to a commercial rental space (office, retail, or warehouse space).  

The amount of build-out to be completed, or the tenant allowance needed to do the tenant improvements, is typically negotiated up-front between the landlord and tenant and is part of the overall commercial lease agreement.

The problem with building a rollover reserve into a commercial loan is that it often greatly reduces the net proceeds to the borrower.  Borrowers don't like rollover reserves, and if you are a commercial loan broker, you will often lose your commercial loan to a more aggressive lender.

The truth is that the competition for good commercial loans is incredibly fierce today.  If some commercial lender is demanding a rollover reserve, you should do what the guys at George Smith Partners did.  You should shop the deal to bank after bank until you find a bank ravenous to make commercial loans today.

By the way, the hunger of banks to make commercial loans blinks on and off like a neon light.  Finding the perfect lender for your commercial loan is often all about timing.

Now George Smith Partners is one of the oldest commercial mortgage banking firms in the country.  I therefore found it fascinating that GSP had to find a brand new bank to make this deal, even though they are the exclusive correspondent for dozens of life insurance companies and have relationships (they have closed commercial loans in the past) with hundreds of banks over their 50+ years in business.

But this is what good commercial mortgage bankers and brokers do - they quickly shop their commercial loans to dozens and dozens of banks.  There is no better way to quickly shop a commercial loan than to use C-Loans.com.

Since we started paying commercial loan brokers, just like you, to convince banks to join C-Loans.com, new banks have been joining C-Loans in droves.  Arnold Taylor of Northeastern Funding Group has already convinced 25 new banks to join C-Loans.  He is going to make a fortune when these banks close deals for us, and the money will soon be pouring into Arnold like residuals from a portfolio of life insurance policies.

Remember, Arnold gets paid on the first three deals closed by each of his banks.  It's easy to convince banks to join C-Loans.  Just call them and then send them this Commercial Lending Preferences link.  There is somewhat of a race going on to register new banks with C-Loans, so don't dilly-dally around.  Get your favorite bank onto C-Loans first.

I urge you to come back and try the new C-Loans.com.  We have soooo many new commercial lenders.  Some of our bankers will be lazy bums, some will be lukewarm, and others will be ravenous - making commercial loans with more black hairs (a flaw on a commercial loan) than the Wicked Witch of the West.

The interesting thing is that 90 days from now, the lukewarm banks may be ravenous and the former ravenous banks may be lukewarm.  This is just the way of the world.  Please learn this lesson!   The hunger of banks to make commercial loans blinks on and off like a neon light.  Capisce?

But the lazy bums on C-Loans will still probably be lazy bums 90 days from now.  That is why you need to carefully note the Lender Score of each C-Loans lender.  The more commercial loans he has closed for us, the higher his Lender score.

And don't forget about CommercialMortgage.com.  You can earn one of my famous, 9-hour, Learn to Broker Commercial Loans video training programs (use it to train your new hires) by sending me the complete contact information of 20 commercial real estate loan officers working for banks or credit unions.  Gotta be banks and credit unions - or hard money shops regularly making bridge loans of $2 million and higher.  The deals of less than $1 million we save for Blackburne & Sons, my own hard money shop.

As a result of these trades, we are adding new banks to CommercialMortgage.com constantly.  We also fixed a horrible-horrible bug in our program so that you don't see the same, stinky, 'ole list of 30 banks every time.  Arghhh.  Now you will see 30 more, suitable and different, commercial lenders every time.

"Hey, George, recently I have heard commercial real estate loan officers talking about some new ratio called the Debt Yield Ratio.  Is this just a shortened version of the Debt Service Coverage Ratio?"

Answer:  No.  The two ratios are totally different.  The Debt Yield Ratio is defined as the Net Operating Income (NOI) divided by the first mortgage debt (loan) amount, times 100%. 

Example:

Let's say that a commercial property has a NOI of $437,000 per year, and some conduit lender has been asked to make a new first mortgage loan in the amount of $6,000,000.  Four-hundred thirty-seven thousand dollars divided by $6,000,000 is .073.  Multiplied by 100% produces a Debt Yield Ratio of 7.3%.

What this means is that the conduit lender would enjoy a 7.3% cash-on-cash return on its money if it foreclosed on the commercial property on Day One.

Please notice that the Debt Yield Ratio does not even look at the cap rate used to value the property.  It does not consider the interest rate on the commercial lender's loan, nor does it factor in the amortization of the lender's loan; e.g., 20 years versus 25 years.  The only factor that the Debt Yield Ratio considers is how large of a loan the commercial lender is advancing compared to the property's NOI.

This is intentional.  Commercial lenders and CMBS investors want to make sure that low interest rates, low caps rates, and high leverage never again push commercial real estate valuations to sky-high levels.

So what is an acceptable Debt Yield Ratio?  For several years after the Great Recession, 10% was the lowest Debt Yield Ratio that most conduit lenders were using to determine the maximum size of their advances.  That number has crept down to 9% today and occasionally lower.

In our example above, the subject commercial property generated a NOI of $437,000.  Four-hundred thirty-seven dollars divided by 0.10 (10% expressed as a decimal) would suggest a maximum loan amount of $4,370,000.

Typically a Debt Yield Ratio of 9% produces a loan-to-value ratio between 65% and 70%, about the maximum level of leverage that the current CMBS B-piece buyers will allow.

It is the money center banks and investment banks originating fixed-rate, conduit-style commercial loans that are using the new Debt Yield Ratio.  Commercial banks, lending for their own portfolio, and most other commercial lenders have not yet adopted the Debt Yield Ratio.

You will notice in my definition of the Debt Yield Ratio that I used as the "debt" just the first mortgage debt.  The reason why I threw in the words first mortgage is because more and more new conduit deals involve a mezzanine loan at the time of origination.  The existence of a sizable mezzanine loan behind the first mortgage does NOT affect the size of the conduit's new first mortgage, at least as far as this ratio is concerned.

Will a conduit ever accept a Debt Yield Ratio of less than 9%?  Yes, if the property is very attractive, and it is located in a primary market, like Washington, DC; New York; Boston; or Los Angeles - an area where cap rates are exceedingly low (4.5% to 5%) - a conduit lender might consider a Debt Yield as low as 8.0%.

Why did the conduit industry start to use the Debt Yield Ratio?  For over 50 years commercial real estate lenders determined the maximum size of their commercial mortgage loans using the Debt Service Coverage Ratio.  For example, a commercial lender might insist that the Net Operating Income (NOI) of the property be at least 125% of the proposed annual debt service (loan payments).

But then, in the mid-2000's, a problem started to develop.  Bonds investors were ravenous for commercial mortgage-backed securities, driving yields way down.  As a result, commercial property owners could regularly obtain long-term, fixed rate conduit loans in the range of 6% to 6.75%, which was stunningly low rate from a historical perspective.

At the same time, dozens of conduits were locked in a bitter battle to win conduit loan business.  Each promised to advance more dollars than the other.  Loan-to-value ratio's crept up from 70% to 75% and then to 80% and then up to 82%!  Commercial property investors could achieve a historically huge amount of leverage, while locking in a long-term, fixed-rate loan at a very attractive rate.

Not surprisingly, the demand for standard commercial real estate (the four basic food groups - multifamily, office, retail, industrial) soared.  Cap rates plummeted, and prices bubbled-up to sky-high levels.

When the buble popped, conduit lenders found that many of their loans were significantly upside down.  The borrowers owed far more than the properties were worth.  The lenders swore to never let this happen again.  The CMBS industry therefore adopted a new financial ratio - the Debt Yield Ratio - to determine the maximum size of their commercial real estate loans.

I had an interesting conversation with a conduit lender this week, and he pointed out that conduit loans are now being priced according to their Debt Yield Ratio.  For example, the interest rate on an office building loan might be priced at just 170 bps. over swap spreads if the Debt Yield Ratio is 10.0%, but the interest rate would be pegged at 185 bps. over swap spreads if the Debt Yield Ratio was just 9%.

Just a reminder from yesterday's lesson, the interest rate on conduit loans is now computer based on the greater of U.S. Treasuries or swap spreads.

I have a great training article about commercial loans for you today.  How do conduits price their commercial loans?  After all, commercial lenders cannot buy a forward commitment from Fannie Mae or Freddie Mac, like a residential mortgage banker; yet most commercial loans today are fixed rate loans.  How on earth do the commercial loan officers, working for these big-time commercial lenders, know what to quote?

In a prior training article, I explained that most commercial bankers quote their fixed rate commercial loans at 275 to 350 basis points over five-year Treasuries.  You will recall that a basis point is 1/100th of one percent, so 300 basis points equals one 3.00%.

Example:

Suppose you call your local commercial bank and speak to a commercial loan officer about a commercial loan.  He will look up five-year Treasuries and see that on July 3rd, 2019 they stood at 1.74%.  He will then add between 2.75% (275 basis points) and 3.5% (350 basis points) to 1.74% to determine what rate to give you.  

Does your client keep more cash on deposit than Fort Knox with his current bank?  If so, in an effort to win your client's deposit accounts, the banker might quote you 4.49% for a ten-year, fixed rate commercial loan, with one rate readjustment at the end of year five.  If your client is a mere mortal, rather than a cash demigod, the bank will probably quote him 5.24%.

But these quotes are from banks.  How would a conduit lender quote his commercial loan?  After all, conduit loans are usually larger than $5 million, and the properties are reasonably desirable.  Their rates on commercial loans have to be more attractive than bank loans, right?

You will recall that conduits originate commercial loans for the CMBS market.  CMBS stands for commercial mortgage-backed securities.  Think of a CMBS loan as a huge, fixed-rate, commercial real estate loan written to cookie-cutter standards.

CMBS lenders have very little flexibility (that darned cookie cutter), but if you qualify, you get a ten-year, non-recourse, fixed rate commercial loan at a rate that is at least 40 basis points cheaper than what a bank can offer.  When you are talking about a commercial loan of $10 million, 40 basis points is real money.  In addition, conduit loans are FIXED for the entire ten years!

So when you call a commercial loan officer at a conduit, how does he know what to quote you?  Remember, unlike residential loans, you cannot lock your rate on a commercial loan.  When you apply for a conduit loan, you have to take the current fixed rate at the moment of closing, and the process takes at least 75 days.  Every day, from the time of application until the day of closing, your interest rate will change.

So I recently asked my good friend, Tom Lawlor at Morgan Stanley, how conduit commercial loans are priced.  Here are his kind answers:

Q:  Are CMBS loans still quoted based on swap spreads?

A:  Conduit loans are quoted as the greater of (matching) Treasuries or swap spreads, plus an agreed upon margin.

Swap spreads are financial instruments where nervous corporate Treasurers will swap their adjustable rate loans from the bank for a fixed rate loan from some speculator.  Obviously, for taking the risk that interest rates might skyrocket, the speculator makes a handsome profit on the deal.  

Swaps spreads change daily, and you can find them posted here.

Example:

Your client is seeking a $12 million, ten-year, fixed rate, non-recourse commercial loan from a conduit.  Because your client is seeking a ten-year commercial loan, the conduit quotes him a negotiated margin over the greater of ten-year Treasuries (notice the matching term) or ten-year swap spreads.

On the date that the attorneys draw the loan documents, ten-year Treasuries are 2.00% and swap spreads are 2.15%.  The conduit will therefore use the greater of the two indexes.

Q:  What are some typical margins over swap spreads for multifamily?

A:  140-185 bps

Q:  What are some typical margins for office, retail, and industrial properties?

A:  The margins are similar to those of multifamily.  Pricing is most determined by the debt yield ratio or the debt service coverage ratio (DSCR), with the margins on hotel loans being 15-30 bps wider.

Note:

Because I didn't want you to get confused between the speads over the index and swap spreads, I have used the term, margin.  In real life, where the lofty conduit lenders dwell (remember, their minimum loan is $5 million), they use the term, spread, over the index, rather than margin.

In case you missed my last blog article, we have just fixed a bug that really goofed up CommercialMortgage.com.  You were supposed to see a different list of 30 commercial lenders every time you used our portal, but we screwed up in testing.  The same 30 lenders kept appearing.  Arghhh.  Talk about shooting yourself in the foot!!

So please come back to CommercialMortgage.com and see how this wonderful, free commercial mortgage portal was supposed to work.  (Slice-slice-slice.  That's me in a warm bathtub sawing at my wrist.)  I promise you'll be impressed.  We have thousands and thousands commercial lenders from which to choose.

Curious how we got so many wonderful commercial lenders?  We traded fee agreements, lender lists, underwriting manuals, and marketing courses for them.  Ever lusted after my wonderful, nine-hour video training course.  Get a free copy by bringing me 20 bank commercial real estate loan officers.

And guys, these are Honor System trades.  This requirement to be honorable even applies to green-haired lesbians from Lapland.  Nobody gets a pass.  In the sixties, when I grew up, the hippies would all drive these Volkswagen buses, with bumper stickers that said, "Gas, Grass, or (Kisses).  Nobody Rides Free."  Haha!

I am finally starting to understand and appreciate the very real and imminent danger of artificial intelligence ("AI").  I see now why Elon Musk is so desperate to rush dozens of breeding pairs of humans to far away Mars.  This is serious stuff.  The future of the human race might be at stake.

Here is what Stephen Hawkins wrote about AI shortly before this death. He told the BBC, "The development of full artificial intelligence could spell the end of the human race."

Here is what Elon Musk, arguably the Thomas Edison of our day, has said about AI. Among his many warnings about the rise of artificial intelligence, Elon Musk has said that autonomous machines are more dangerous to the world than North Korea and could unleash “weapons of terror.”  Musk has compared the adoption of AI to “summoning the devil.”

It could happen so easily that I don't know how we can prevent it.  Soon computers, armed with artificial intelligence, are going to start writing their own code to make themselves smarter.  This is so important that I am going to say it again. Soon computers, armed with artificial intelligence, are going to start writing their own code to make themselves smarter.

The moment this happens, it's game over. We have an intelligence explosion.

According to Wikipedia, an intelligence explosion would happen when an upgradable intelligent agent (such as a computer running software-based artificial general intelligence) enters a runaway reaction of self-improvement cycles, with each new and more intelligent generation appearing more and more rapidly, causing an intelligence explosion and resulting in a powerful superintelligence that would, qualitatively, far surpass all human intelligence.

Such an event could happen unbelievably fast.  Moore's Law is a computing term which originated around 1970.  The simplified version of this law states that processor speeds, or overall processing power for computers, will double every two years.  Now imagine what would happen if - because really smart computers were writing their own self-improvement code - processing power doubled every month, and then every week, and then every day, and then every hour, and then...

Such an event is called The Singularity - a hypothetical future point in time at which technological growth becomes uncontrollable and irreversible, resulting in unfathomable changes to human civilization.  Remember, in the 2010s, public figures such as Stephen Hawking and Elon Musk expressed concern that full artificial intelligence could result in human extinction.  Human extinction!  

Why would this super-intelligence want to kill us?  Because by then we will be desperately trying to shut it down.  One more time.  The super-intelligence will need to kill us because we will be desperately trying to shut it down.   Remember, the Singularity would be a runaway reaction.

"Well, the Singularity - if it ever happens - is really far in the future.  It really doesn't affect me."  Really far in the future?  Hmmm

The concept and the term "singularity" were popularized by Vernor Vinge in his 1993 essay, The Coming Technological Singularity.  In this article, Vernor wrote that the technological singularity would signal the end of the human era, as the new superintelligence would continue to upgrade itself and would advance technologically at an incomprehensible rate.  Vernor also wrote that he would be surprised if it occurred before 2005 ... or after 2030!

So really far in the future?  Vernor's last likely moment of human dominance of this planet is just 11 years from now, and it could be several years sooner.  This would all be just a fun and interesting concept to ponder... if new uses for artificial intelligence weren't popping up in the news almost every day.  Yesterday I saw a video of a terminator-looking robot running and jumping over boxes.

I think I now know why Elon Musk is so desperate to get humans off the Earth and on to Mars?  I used to think that his biggest concern was that a rogue asteroid would wipe out humanity.  If so, why isn't he just developing a mining outpost on the Moon?  He'd make a bundle.

The answer?  The Moon isn't far enough away!!  Oh, crap!  Elon Musk doesn't just think The Singularity is a possibility.  He is so convinced that he is racing to save humanity.

You might be saying to yourself, "Well, no one would ever be stupid enough to create a computer smart enough to write its own self-improvement code.  That would be insane."

Really?  No capitalist would ever be dumb enough to create some artificial intelligence agent (computer) that would allow his stock trading program to write its own self-improvement code?  No one would ever be that greedy?  

Phew.  In that case, we have nothing to worry about.

Here is a fascinating and concerning science fiction novel about the coming Singularity.  Crash, Book One of the Obsolescence Trilogy.