Commercial Loans Blog

George Blackburne

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Commercial Real Estate Brokers Please Pay Special Attention Today

Posted by George Blackburne on Wed, Jan 8, 2020

Convenience storeWhy do almost all gas stations now have convenience stores?  Answer:  A convenience store is an extra profit center.  The gas pumps pull in the customers, and while they are waiting for their tanks to fill, the convenience store sell them sodas, snacks, lotto tickets, and hot dogs.

Right now your real estate web site is like a gas station without a convenience store.  You are leaving all kinds of dough on the table.  Over the next five to six years, C-Loans.com could pay you enough dough to pay for a year of college for one of your kids.

 

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But what I am asking you to do is a lot of hard work.  You might have to spend up to... gasp... two whole minutes on this project.  It's exhausting work earning that kind of money.  Phew.

Just send an email to your web site guru.  "Hey [Steve], please create three new hyperlinks on my home page.  Please find a place to put one at the top, one in the middle, and one at the bottom.  The top link should say, 'Commercial Loans'.  The middle link should say, 'Commercial Real Estate Loans'.  The bottom link should say, 'Commercial Financing'.  Please point all three links to https://www.c-loans.com."

Just cut and paste the above paragraph and send it to your webmaster.  Voila.  You're done.  You've just added a convenience store to your gas station - a new profit center.

Now here is what happens:  C-Loans is programmed to automatically capture the URL of the referring site and print it at the bottom of our loan application.  It's automatic.  We don't have to think.  Bam!  Right there at the bottom of our loan application are the words, "This loan was referred by billsmithrealty.com."

 

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When the deal closes, we look up the owner of Bill Smith Realty and send him a check for 12.5 basis points.  That's what happened a few years ago with Alan Dunn, the owner of a site named SpyderCube.  We ended up closing a $17 million commercial loan for Alan's customer, so we sent Alan a check for a whopping $21,250.

Alan was even asleep when he made that $21,250.  The deal came in late at night.  Can you imagine the thrill of getting a call, "Hey, Alan, I have some good news for you."  Hot snot, I'll bet that we made his whole day.

And here's the thing.  That potential borrower is your referral forever.  Maybe the first deal falls out, but the borrower comes back and applies for a different loan two years later.  You still get paid.  He's your guy.

 

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Here is another wonderful thing.  C-Loans is not a commercial real estate lender, limited to its own lending programs.  C-Loans does not make loans.  C-Loans.com is merely a  commercial mortgage portal where borrowers can submit their deals to 750 different lenders.  We have life companies, conduits, banks, credit unions, savings banks (S&L's), REIT's, hard money lenders, SBA lenders and USDA business and industry specialty lenders.

C-Loans lenders will make permanent loans, construction loans, bridge loans, SBA loans, USDA B&I loans, mezzanine loans, preferred equity investments, SBA construction loans, and USDA construction loans.  A link to C-Loans gives you a chance to earn a big referral fee on ANY kind and size of commercial real estate loan, from $100,000 to $500 million.  Yes, our conduit lenders have made loans of this size on chains of major hotel franchises or portfolios of office buildings.

Important note:  C-Loans usually earns at least 37.5 bps. per closing, so we can afford to pay you 12.5 bps.  On deals of greater than $5 million, our best-rate lenders only pay us 25 bps., so your referral fee would be 8.33 bps.

 

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"Gee, George, this all sounds great and everything, but how do I know that you won't cheat me?"  For one thing, we didn't cheat Alan Dunn, and there was no way he would have known that we had closed that big deal.  I am also an attorney, licensed in both California and Indiana.

Lastly, my hard money commercial lending shop, Blackburne & Sons, has been in business for 40 years now.  The average daily balance in our trust accounts is $400,000; and after a loan payoff, there could be several million dollars in that account.  If I ever decide to go bad, I am gonna steal the millions in that trust account, not your stinky 'ole referral fee.  :-)  Fortunately, I have managed to resist the temptation for 40 years.  I am proud to say that both of my sons and I are Eagle Scouts.  There was a time when that mattered.

But hey, while 100,000 people in this industry may know me, I might be a complete stranger to you.  Trust but verify, some would say.  So here is my proposition:  If you create five or more commercial financing links across your real estate web site, we will create for you a special partner link.  With a special partner link, you will get a copy of every deal that comes from your site.  Just create the five (or fifteen) commercial loans links on your real estate website, and we will create this special partner link for you.  It takes us about 30 minutes to create such as a partner link, so we obviously don't want to have to create the link unless we are getting some really good visibility.

 

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Now back to the good stuff.  After awhile, you are going to have several hundred of your loan clients registered on C-Loans as your guys, and you are likely to close two or three deals every year going forward.  Every year going forward - think about that.  You will have your old referrals and then you will add to that base of potential referral fees even more clients every year.

And if you create at least five links on your website to C-Loans, you can also use your partner link to imbed commercial real estate loan links in your regular newsletters to your clients.  Remember, with a partner link, you get a copy of every commercial loan application generated by your site or one of your newsletters.  

I could see a time when one of your clients applies for a purchase money loan using C-Loans, and you suddenly realize that he is looking to buy another apartment building.  (Please read that last sentence again.)

 

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Important note:  We cannot track links inside of newsletters because there is no referring URL.  To imbed commercial financing links in your newsletters, you will need for us to prepare a partner link for you.  Therefore, please create your five referral links to C-Loans.com right away and then contact Tom Blackburne at 574-210-6686.

Now some real estate brokers only like a little bit of referral income, so they only create one Commercial Loans link to C-Loans.com on their home page.  Smarter real estate brokers like to make a TON of referral fee income, so they put three links to C-Loans on every one of their interior web pages.  

The way you can easily do this is to have your website guru edit the template of your pages to add these three links.  Then, whenever your webmaster creates a new web page for you, the links automatically appear on the new page, without anyone having to think about adding them.  The more links to C-Loans, the more chances you have have of earning a $21,250 referral fee.

 

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In conclusion, I urge you to add a convenience store to your gas station.  Just cut and paste the following message into an email to your webmaster:

"Hey, [Steve], please create three new hyperlinks on my home page. Please find a place to put a link at the top, one in the middle, and one at the bottom. The top link should say, 'Commercial Loans'.  The middle link should say, 'Commercial Real Estate Loans'.  The bottom link should say, 'Commercial Financing'.  Please point all three links to C-Loans.com."

Now, the really, really smart guys will add the following:

"In addition, [Steve], would you please edit the template you use to create new web pages for our site to add these three links (top, middle, bottom)?  This way, the next time you create a new web page for us, the new page will automatically contain these three links."

 

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Voila!  You have now added a convenience store to your gas station.  I said it would take a whopping two minutes, and you did it in just 97 seconds.  :-)

Questions:  Call Tom Blackburne at 574-210-6686.

 

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Topics: referral fees, commercial loans

Commercial Loans and Modern Monetary Theory

Posted by George Blackburne on Fri, Dec 13, 2019

Space MothershipNow that I have mentioned it, you will start to hear the term, Modern Monetary Theory, all of time.  The commentators use it a lot on Bloomberg, CNBC, and Fox Business.  The financial commentators will often just use the acronym, "MMT".  

According to Wikipedia, Modern Monetary Theory (MMT) is a macroeconomic framework that says monetarily sovereign governments should sustain higher deficits and print as much money as needed because they do not need to worry about insolvency, and inflation is a distant possibility.

 

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The key to MMT is that the sovereign government borrows in its own currency, pays it back in its own currency, and controls the printing press to print more of its own currency.  Countries in the European Union - France, Spain, Italy, and Greece - are examples of sovereign governments that do NOT have this option.  They use the Euro, which is a currency that they don't control.

Interesting note:

Since I started this article, Boris Johnson and his conservatives won a landslide victory in the United Kingdom.  The U.K. will be leaving the European Union (Brexit) on January 15th.  The pound has soared!  Apparently investors think that the Brits are going to do better financially without Europe.

The Japanese, in contrast to EU members, can borrow in yen and repay their debt in yen.  If the debt service on Japan's debt, denominated in yen, becomes unbearable, Japan can simply print hundreds of trillions of yen, buy back their own debt, and retire it permanently.

 

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In other words, as long as inflation remains tame, the U.S. should go ahead and pass a $1.5 trillion infrastructure spending plan, even if the deficit soars to $2.5 trillion annually.  We spend the money to repair our bridges and upgrade our airports.  Then we take another look at inflation.  

If inflation is still tame, we could increase military spending by another $1 trillion and bolster our missile forces, bolster our missile defense forces, and greatly expand our Space Force.

I read a military journal article this morning where one of our leading air force generals (just forced into retirement) begged the country to prepare for war in space.  China is already working on a space mothership (think of it as an aircraft carrier in space - see the picture above) from which attack space ships will fly out to destroy our constellation of satellites.  "... and you don't believe we're on the Eve of Destruction?"  (Famous hippie song from the 1960's.)

 

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So go ahead and spend that $1 trillion on defense and then take another look at the inflation rate.  Has inflation increased from 1.75% to 4.5%?   In that case, maybe the country dials back on any extra MMT spending.

Is it a good idea?  I am convinced that a world war is coming, so I am all for it.  If we can spend enough in space and on missiles, maybe China won't attack us.  I'll gladly live with some inflation, if that means that my precious kids (and now grandkids) get to live.

But absent a war, is it a good idea?  If Trump died and made me king, I would use the power of the printing press to buy up many of the nicest apartment buildings, office buildings, and shopping centers in Rio de Janeiro, Jakarta, Seoul, Ho Chi Min City, Bangkok, and Manilla.  I would intentionally devalue the dollar to make our manufacturing companies more competitive.  In the process, the rents from those trophy properties would be sweet.

 

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But you know that's not what is going to happen.  Opportunists like Andrew Yang are going to promise to give away $1,000 per month to every American voter, in order to rise to power.  We are going to teach our people - instead of working hard to advance themselves - to stay home all day, take drugs, and play video games.

In the words of Alexander Fraser Tytler, the famous Scottish historian, in 1807:  

“A democracy cannot exist as a permanent form of government.  It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.  The average age of the world's greatest civilizations has been 200 years.  These nations have progressed through this sequence:  From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage.”

 

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He made this famous observation way back in 1807.  Our 200 years of power are long past.  Hail Chairman For Life, Xi Jinping!  It's important to get in good graces with our future rulers early.  Haha!

 

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Topics: commercial loans, Modern Monetary Theory

American Jets Are Out-Ranged By Chinese Missiles

Posted by George Blackburne on Mon, Dec 9, 2019

Screen Shot 2019-12-09 at 10.05.03 AMWhether you have noticed it or not, the U.S. is starting to seriously arm-up for the coming war with China.  In some recent war games ordered by the Joint Chiefs, "We got our asses handed to us (by the Chinese)."   It was pretty eye-opening.  If war were to break out today, we would lose most, if not all, of the 7th Fleet.  

The reason you should care is because it is the 7th Fleet that is keeping the larger Chinese Navy from steaming close enough (missile range) to take out out shipyards, power plants, bridges, military bases, railway hubs, missile manufacturing plants, computer chip factories, freeway interchanges, and reservoirs on the West Coast. 

 

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The problem we have is the range of China's area denial weapons (ADW's).  It's hard for us to get close enough to hurt them.  The jets flying off our carriers only have a maximum range of around 500 miles.  Our air-to-surface missiles can add maybe another 300 miles.  

China's surface-to-sea missiles can travel 1,100 miles.  It reminds me of the Battle of Crecy in 1346.  About 10,000 English troops took refuge on a hill top, and they were attacked by 110,000 French troops.  Surprisingly, the English crushed the French.  

The secret was the English longbow, which had a range of 400 yards.  The crossbows used by the French had a maximum range of just 300 yards, and they had a rate of fire of just two bolts per minutes.  The English longbowmen could fire ten to twelve arrows per minute.  The French just couldn't get close enough to do any serious damages.  

 

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Finally, the arrogant French knights got tired of waiting and watching a losing missile exchange, so they rode down (and killed) their own crossbowmen in a wild charge up the hill towards the English lines.  

The English longbowmen had a field day.  Their bodkin-tipped arrows could penetrate the French armor, and soon piles of dying horses and knights piled up so high that the French couldn't ride close enough to strike the English.  The French lost 14,000 knights - the cream of their nobility.  The English lost just 200 men-of-war and longbowman.

Now back to the Chinese.  How can the Americans, with their short-range jets and shorter-range missiles, get close enough to strike the Chinese missile batteries?

 

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The solution is really cool.  This week military journals released news this week that the U.S. has just ordered a bunch of new refueling tankers from Boeing, Lockheed, and Airbus.  By refueling our jets in mid-flight, we suddenly have the range to hit the Chinese from much further away.  We also ordered four refueling drones.  Pretty cool, huh?  The unmanned refueling tankers tag along like dogs in a pack.

Someone in the military must be seriously concerned because a consortium of Lockheed and Airbus will be delivering the first of their refueling tankers by the end of this year, which will supplement (and compete against) 179 KC-46 refueling tankers ordered several years ago from Boeing.  

The speed of the development of these new consortium refueling tankers is little short of amazing.  Someone in the Pentagon is very, very worried.  At learnt someone in the Pentagon is paying attention to the considerable range of the Chinese missile forces.

 

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Topics: Missile range

Private Equity and a Shortage of Stocks

Posted by George Blackburne on Mon, Dec 2, 2019

Private equityAn interesting thing happened this week.  Warren Buffet got his butt handed to him.  Let me set the scene.  Berkshire Hathaway is sitting on $128 billion in cash; but in comparison to the $2 trillion in cash that private equity firms are siting on, Warren Buffet's massive cash hoard is chump change.  Haha!

 

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Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies, many of which are not even publicly-traded.  A source of investment capital, private equity actually derives from high net worth individuals and firms that purchase shares of private companies or acquire control of public companies with plans to take them private, eventually become delisting them from public stock exchanges.  Most of the private equity industry is made up of large institutional investors, such as pension funds and groups of accredited investors.

Okay, so Tech Data is a publicly-traded company in Clearwater, Florida.  It's a company that offers complete product lines in software, networking and communications, mass storage, peripherals and computer systems, from companies like Apple and Cisco.  In addition to distributing more than 75,000 products from over 1000 manufacturers and publishers, Tech Data provides extensive pre-sale and post-sale training, service and support.

Suddenly, Tech Data receives an unsolicited takeover offer for $130 per share from Apollo Global Management, a private equity firm with investors from all over the world.  The investment bankers, hired by Tech Data to advise on the transaction, take the deal to Warren Buffet.  He offers Tech Data $140 per share.

 

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Then Apollo comes back and increases its offer to $145 per share, and Buffet bows out of the bidding.  I think that Warren Buffet made a mistake because the world is running out of stocks.

"Huh?  Running out of stocks?  George, you must be smoking that Colorado oregano." 

In order to explain an important concept, please humor me as I share an imaginary economics parable.

 

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The year is 800 A.D., and the place is the imaginary island of Palm Tree, in the Solomon Islands.  The people of Palm Tree ("the Palms") have just fought and won a bitter war against the headhunters of Guadalcanal, the same island that would, eleven-hundred years later, be the site of one of the bitterest battles of World War II.  

In this bitter battle against the headhunters, the Palms lost two-thirds of their men and women (who had to fight alongside their men) between the ages of 14 to 55.  The island nation is now disproportionately old men, old women, and children.

Every day fewer than 175 fisherman, manning just 22 remaining fishing boats, head out to sea to bring back fish - one of the few sources of protein for the nation.  The problem is that 175 fisherman cannot catch enough fish to feed an entire nation of 6,500 souls.  

 

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The problem is not the availability of fishing boats (capital), but rather the lack of fishermen to man the boats.  Women are pressed into the fishing service, but the losses among the womenfolk (many of whom were carried away as slaves) were almost as large as the fighting men.  There are just not enough people of working age to take care of all of the old folks and young people.

When the fishing boats return to harbor at night, the bidding for the scarce fish steadily drives up the price of fresh fish.  Anxious not to starve, groups of elderly and wealthy islanders pool their valued oyster shells and start to buy up a partial ownership in the fishing boats and their precious crews.

You can't eat oyster shells, so the bidding for the shares of the remaining fishing boats is fierce.  If you own a share, you get fish to eat.  If not... sorry, old man, but you starve.

 

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The problem?  No matter how many oyster shells possessed by the elderly, there are only so many fully-crewed fishing boats.  To make matters worse, accidents and storms sink one or two fishing boats every year.

Obviously, the fully-crewed fishing boats, in my parable, are publicly-traded companies.  The accidents and storms represent companies that are purchased by private equity firms.  Once a company is purchased by a private equity firm, the shares of these companies no longer trade on any exchange.

And the bitter war against headhunters that greatly reduced the working age population?  That is the declining birthrate in the U.S., Europe, Japan, South Korea, and ... are you ready for it?  China!

 

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What is the moral of this story?  I am just musing here, but if you own a share in a well-maintained fishing boat, don't sell it.  If you get a chance to buy a share in a well-maintained fishing boat, buy it.  There is not an unlimited number of fully-crewed fishing boats.  Central banks worldwide, especially the European Central Bank, keep creating new oyster shells like crazy.

 

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Topics: Private Equity

Commercial Loans on Build-to-Rent Communities

Posted by George Blackburne on Sat, Nov 30, 2019

Build to rentNearly a decade ago, there was a foreclosure crisis.  Realtors were buying old houses and flipping them.  Now, the strategy is to buy new and rent out.  This new asset class that is taking the private equity market by storm.  It started in Arizona, spread to the Sunbelt, and is now spreading across the country.

 

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This new real estate asset class; a class of real estate that competes with apartment buildings, office buildings, and shopping centers; is the build-to-rent community ("B2R").  A build-to-rent community is a tract of brand new single-family homes that is constructed, not to be sold, but rather to be rented out to residential tenants.  The tract of, say, 60 homes, is then professionally managed and sold to an institutional investor as a reliable source of income.

My friends at George Smith Partners recently published the following tombstone:

George Smith Partners successfully advised on $12,000,000 in joint venture equity financing and $23,900,000 in non-recourse senior construction financing for the ground-up development of a 185-home build-to-rent community.  Single-family-for-rent communities are a newer asset class and this project was among the first in the market.  These communities offer the experience of living in a single-family home with the ease and cost of living in an apartment building.

The Sponsor expects the project to be well received as there are distinct competitive advantages over the existing apartment product in the market place for several reasons including the new construction, low density and both interior and exterior privacy.

 

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Institutional real estate investors absolutely love this new class of real estate.  The homes in B2R communities usually rent at significant premiums anywhere from 15% to 30% above equivalent-size apartments or single-family rental homes, located in traditional for-sale neighborhoods.

B2R communities typically lease three to five times faster than traditional multifamily housing.  Developers report strong pre-lease periods, often ending up with a waiting list.  Typically all of the homes are rented in three to four months, versus ten to fourteen months for multifamily.

Another reason institutional investors love B2R communities is because the homes are brand new.  Because these home are brand new, they are usually immune from some of the typical repair factors that come in at 15 or 20 years of ownership.  There is a general contractor warranty.  There is also a limited product warranty of the appliances.  The only major operating expense for landlords is the landscaping.

 

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Rents for single-family homes are growing fast at 4.5% annually now, compared with 3% rent growth for multifamily apartments.  There is also much less turnover in single-family rentals, and the rental market is much less volatile than the home sales market.  People will always need a place to live.

Renters are also digging these new B2R communities.  The huge millennial generation is aging into marriage and parenthood.  Not all of them want, or can afford, to buy a home.

Most of these B2R communities are pet-friendly and include a resort-style pool and spa, a covered ramada, walking paths, optional garages, and an electric-charging station.  They often offer the highest available Internet speeds.  The pool, exercise facilities, and planned social activities bring residents together, which doesn't always happen in apartment buildings.  The homes often offer keyless entry and tablet-controlled security, climate control, and entertainment systems.  There are sometimes even smart front gates at the communities.

 

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Institutional investors are learning that there is a cultural move away from your typical garden apartment with elevators, swimming pools, tennis courts and common areas. Homeownership is looking less desirable to some, particularly in the affordable arena, and renters now have a chance, for very close to the same price, to rent a three-bedroom, two-bath or a four-bedroom, three-bath home that they can call their own.

The renters obviously don't own their home, but as long as they pay their rent and behave like good neighbors, they can reasonably expect to live there for twenty years.  The stigma associated with renting, along with the historical drive toward homeownership, is waning.

The American Dream is changing.  The last recession hurt a lot of people, and homeownership is at a 20-year low.  Most single-family renters fall into one of two categories:  Baby Boomers who are downsizing and Millennials.

 

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Millennials are often saddled with large amounts of student-loan debt, and they either can't or won't buy a home.  Renting affords them a more mobile lifestyle.  The same goes for Boomers, many of whom lost their homes to foreclosure during the recession and are gun-shy about purchasing another.

B2R communities satisfy these renters' need for a single-family home, and the landlord takes care of the exterior maintenance to boot.  It's a unique lock-and-leave, managed experience more akin to the apartment world, with detached-home benefits.

Renting a detached home is attractive for many of the same reasons as renting an apartment: the portability/flexibility of a lease, no exterior maintenance, and no mortgage debt.  A single-family home offers more space and privacy, with a backyard, attached garage, and other features not available in multifamily housing.  I read where one developer of B2R communities automatically puts a dog door in every home.  Smart.

 

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Multifamily is vertical, with neighbors above and below you, and it's noisy.  With single-family homes, you have none of those acoustical issues.

There is a veritable ocean of capital now seeking B2R communities.  Consumer rental demand that is driving these institutions to want much greater levels of inventory of this product.  Institutional investors are learning that new B2R communities are a very safe product.

"I've got clients, multiple, well over a couple billion dollars worth of capital looking to place in this space," said a new Phoenix-based commercial brokerage firm focused on single family rental and build-to-rent investment portfolios.   They are looking to acquire 5-6,000 homes in the next two years."

 

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Toll Brothers, a luxury homebuilder, recently announced its commitment to invest $60 million in a $400 million venture that will build homes specifically for rent in seven major U.S. cities.

Lennar, the nation's largest homebuilder by revenue, experimented with a build-to-rent community in Sparks, Nevada, and announced in July its plans to move further into the space.

Clayton Homes, the 15th largest site-builder and home manufacturer, also recently revealed its build-for-rent home communities, to be built within its market.

 

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Your Free Commercial Loan Software (We Had a Bug) and a Scary War Update

Posted by George Blackburne on Thu, Nov 21, 2019

Screen Shot 2019-11-21 at 2.37.37 PMAt the end of this blog article, I am going to give you the correct link to our free commercial loan software.  Many of you were probably caught in an endless loop on our landing page when you tried to access it.  We had a bug.  Sorry about that.  It's fixed now.  At the end of this article, I am going to give you a link that takes you directly there, without the need to fill out any form.

 

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But first I have some good news and some bad news about the coming war.  I am sorry if I seem obsessed with the possibility of an imminent war with China; but it is a very real threat.  It is what is known as an existential threat.  Our very existence - your life and mine - is in danger.

The Good News:

In my last blog post, I outlined a line of dominoes that might have fallen if China had rolled tanks into Hong Kong -

"If Chinese tanks roll into Hong Kong, you need to start storing some long-term survival food.  After that, the dominoes may start to fall quickly - world economic sanctions on China, extreme economic distress in China, protest and riots against the rule of the Communists in China, the rallying of Chinese public opinion against America and its allies, the attack on the 7th Fleet, the invasion of Taiwan, the island hopping, the new island missile bases, the fall of Midway, the fall of Hawaii, the pinpoint destruction of our missile-making and ship-building capacity on the West Coast, and finally the capitulation and occupation of the United States."

 

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The good news is that the massive student protests in Hong Kong have now largely been broken up.  There are fewer than 500 remaining student protestors barricaded within a university.  They will, almost certainly, be rounded up and sent to jail within the next few weeks.  

Make no mistake.  I sympathize with the protestors, but they were a very dangerous provocation.  World War I started when a lone Serbian anarchist assassinated Austrian Archduke Franz Ferdinand and his wife, after their car made an unscheduled stop.  (See picture at the top.)  Seventeen million people died in World War I, all because of that lone assassin.   The world dogged a bullet this week.  Phew!

The Bad News:

I read this week a terrifying article entitled, In Future Wars, the U.S. Military Will Have Nowhere to Hide.  The premise that that the Chinese will be able to reach any military base in America and hit it with swarms of missiles and drones.

 

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"Advances in the fields of aerospace, robotics, machine learning, 3D printing, and nanomaterials are creating new classes of missiles and lethal drones that can be launched discreetly, travel great distances, and hamstring massed forces—all for a fraction of the cost of traditional manned weapons."

"New hypersonic missiles, for example, combine the speed and range of ballistic missiles with the maneuverability and accuracy of cruise missiles."

"Unmanned aerial vehicles (drones) and underwater gliders have achieved transoceanic range."  This means the Chinese can even hit you at your ranch in Wyoming, assuming they want to spend a few hundred dollars.

 

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"Now, however, China and Russia can send hordes of conventional missiles and expendable drones to wreak havoc on America’s networks, destroying U.S. weapons platforms while they are on base, cutting U.S. communications links, and wiping out vital fuel and ammunition dumps."

"Both countries (China and Russia) may have put advanced cruise missiles in shipping containers that could strike the future home of the B-21—Whiteman Air Force Base in Missouri—from the Gulf of Mexico."  Cruise missiles in shipping containers?  They can even hit Missouri?  

Algorithms can coordinate swarms of more than 1,000 drones. Carbon 3D printers can produce 1,000 drone bodies a day for less than $10 per copy, and nanomaterials can equip drones with warheads that are twice as powerful as conventional explosives."

"Isn't that special?"  --  The  Church Lady

Enough of this depressing stuff.  Let's get back to my usual whacky and fun stuff.

 

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Here is that link to our wonderful, free commercial loan software.  There are no forms to fill out.

 

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How World War III Might Play Out

Posted by George Blackburne on Tue, Nov 19, 2019

Firing squad-1In my earlier posts about the Winds of War, I made the point that no country will ever use nukes again.  The resulting nuclear winter would end most life on earth.Need an example of a doomsday weapon not being used?  When the Russians rolled through East Prussia in their unstoppable march on Berlin, they were committing unspeakable atrocities against the East Prussian women.  (In defense of the Russians, they were merely giving the Germans a taste of their own medicine.)  The Germans had the option of using poison gas.  They didn't.  Nuclear weapons are no longer a deterrent.

 

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This means there could now be a single, big winner of World War III.  The coming world war, I submit, will be quick, total, and economically profitable for the winner.  It will be a lightening war, much like the Six Day War in 1967.  You need to open your mind to the possibility that we will be playing the role of the Arabs.

Here is how I see this war playing out.   There are 1.4 billion people in China, and the Chinese are now ruled by a single man, President Xi Jinping.  In March of 2018, China approved the removal of the two-term limit on the presidency, effectively allowing Xi Jinping to remain in power for life.  Whatever Mr. Xi says, goes.

The Chinese people are terrified of their government, and whenever a populace lives in constant fear of their government, they hate it.  As long as President Xi improves their lives every year, however, the Chinese people will tolerate him.

 

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But here's the thing.  The students in Hong Kong are thumbing their noses at Xi, making him appear weak.  These students are also showing the rest of China how to someday remove Xi from power - using mass protests and riots.  He cannot allow these protests to continue forever.  

If Xi rolls his tanks into Hong Kong, thereby reaffirming the fear that China is out to conquer the world, the world's backlash would be huge.  Crippling economic sanctions would likely be imposed on China by much of the world.  These worldwide sanctions would greatly reduce China's exports, greatly reduce their GDP, and greatly reduce the standard of living for the average Chinese citizen.

Uh-oh.  Remember,  Xi has to steadily improve the economic lives of the average Chinese worker; otherwise, he and the hated, semi-corrupt, Communist Party will be swept out of power.  

 

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The movie, Midway, came out a few weeks ago.  It is a terrific movie, and the audience, when I took my wife, even clapped at the end of it.   The special effects were terrific, especially during the attack on Pearl Harbor.

Do you know why the Japanese attacked us on December 7th, 1941?  Do you know why they risked awakening a sleeping giant?  Admiral Isoroku Yamamoto, their most brilliant Naval strategist, made this famous quote, the morning after the Pearl Harbor attack, "I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve."

The answer is that America had imposed an oil embargo on Japan for attacking and occupying Manchuria and China.  At the time, Japan imported most of its oil from the United States and the Dutch East Indies (Indonesia).  After the American embargo, the Japanese had no choice but to invade Indonesia and seize its oil.  The same day, the Japanese attacked Pearl Harbor.

 

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Interesting note:  I am married to a beautiful, exotic girl (for 37 years now), who was born in Indonesia to a Dutch father and a part-Indonesian mother.  Francisca's grandfather was the top executive for the Dutch Shell Oil Company in Indonesia, when the Japanese invaded.  Her grandfather bravely ordered that all of the oil wells in the country be set on fire.  The Japanese were not pleased.  They took her grandfather away in a  truck and shot him.  (See the picture at the top.)

Now if Xi rolls this tanks into Hong Kong, it will be the first domino in a long line to fall.  The crippling economic sanctions will force Xi to rail against the evil Americans and their stooges.  He will rally the people behind him by starting a war.  Tell me if you have heard this song before.

Under the the battle cry of, "Free the oppressed Taiwanese Chinese from the evil capitalists and imperialists," Xi will invade Taiwan.  The United States has a mutual defense treaty with Taiwan, so we will have no choice but to try to defend the country. Unfortunately, in the process, we will probably lose the 7th Fleet.

 

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I recently saw a war games presentation of how the Chinese would likely destroy every ship in the 7th Fleet.  They would first swamp our fleet with drones and cheap missiles, and we would defend by using our arsenal of about 2,000 pieces of anti-missile and anti-drone ordnance.  When we are out of "bullets", they would send their carrier-killer hypersonic missiles far out to sea, to loop around behind our fleet and start taking out our largest ships. 

After taking Taiwan, the Chinese would next use its 300-ship Navy (13 more than ours today even before the massacre of our 7th Fleet) to start seizing islands to be used as missile bases.  Remember, the coming war will be a missile war, and even today's hypersonic missiles "only" have a range of 1,000 to 1,100 miles.  (Nuclear-powered hypersonic missiles, with an unlimited range, have yet to be perfected.)  

Less-expensive cruise missiles have a maximum range of about 550 miles.  The name of the game will therefore be island-hopping again.  If the Midway Islands are seized, GPS-directed Chinese missiles will be able to fly into specific windows of capital ships and important buildings at Pearl Harbor.

 

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In the meantime, Chinese missile cruisers will be planting ship-launched cruise missiles into Boeing's missile and aircraft plants in Washington and into Lockheed missile and aircraft plants in California.  If the Chinese can also take out our shipyards in Long Beach and Oakland, with pinpoint missile accuracy, how long before we will be forced to sue for peace?  There will be no time to recreate our missile-making capability.  

The U.S. made a  number of fatal mistakes in the lead-up to this war.  Our first mistake was to fall so far behind China in our missile construction capability.  The second mistake was to waste scores of billions of dollars on aircraft carriers and their supporting ships.  They will be mere cannon-fodder in the coming missile war.  The Chinese, in contrast, had it right.  They built lots and lots of smaller ships.  You can even use an old, rust-bucket, Liberty Ship from World War II as a missile platform.

Will America win this war?  Will we survive long enough to catch up with our missile arsenal?  We're trying.  In one of my earlier articles about the Winds of War, I suggested that SpaceX's (Elon Musk's company) cluster of satellites, called Starlink, might allow the U.S. to pull its fleet back behind Midway Island, thereby increasing its survivability.  I was gratified and relieved to read that SpaceX is indeed now working with the military.

 

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So could we win?  I don't think so.  I don't think that Xi will give us enough time to catch up to the Chinese in the missile production race.  A suburb of Indianapolis, located far from the West Coast, is looking like a decent place to try to survive World War III.  Am I serious?  Yes.  I tend to be early with my predictions, but I genuinely fear that we will fight and lose World War III in less than four years.

If Chinese tanks roll into Hong Kong, you need to start storing some long-term survival food.  After that, the dominoes may start to fall quickly - world economic sanctions on China, extreme economic distress in China, protest and riots against the rule of the Communists in China, the rallying of Chinese public opinion against America and its allies, the attack on the 7th Fleet, the invasion of Taiwan, the island hopping, the new island missile bases, the fall of Midway, the fall of Hawaii, the pinpoint destruction of our missile-making and ship-building capacity on the West Coast, and finally the capitulation and occupation of the United States.  

 

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It's not as though China couldn't raise an extra two to three million soldiers to garrison the U.S.  Did you know that China has thirty million young men without wives?  Unmarried Chinese soldiers would make the perfect occupying force and a source of new husbands for our women citizens.  (Oh, goody.)  Sadly, too many Chinese parents left their baby girls out to die of exposure on some hillside 25-years ago during the One-Child Policy.  (In truth, most of these so-called abandoned baby girls were actually and thankfully snatched up and sent to relatives far away.)

With 350 million guns in the United States, we would be hard country to occupy; but  this thing about these extra thirty million young Chinese men without wives is a real phenomenon.  Yes, we could fight a guerrilla war, but the Chinese could also round up the population of entire states and put the people in concentration camps.  The British fought and won a guerrilla war in Malaya between 1948 to 1960.  It was one of the few victories against a guerrilla war.  They did it by rounding-up the population and holding the people in concentration camps.  Would the Chinese really land troops on American soil?  Geez, I hope not.  Reminds me of the Amazon Prime TV show, The Man in the High Castle.

 

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What is Programmatic Equity?

Posted by George Blackburne on Wed, Nov 13, 2019

mobile home parkProgrammatic equity is a facility of capital; similar to a line of credit, but remember, equity is not debt; delivered by an equity provider to a sponsor of commercial real estate developments or value-add projects for a particular strategy that the sponsor is pursuing.  Typically, such facilities of equity capital are larger than $25 million.  The typical sponsor will have a high-net-worth and be extremely experienced.

A company named JCR Capital sent me an email flyer several months ago advertising their equity capital for value-add real estate investments.

Value-add commercial real estate investments typically target properties that have in-place cash flow, but they seek to increase that cash flow over time by making improvements to, or repositioning, the property.  In other words, the property has tenants, but they are paying substantially below the potential rent that the property could be getting.

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In a value-add investment deal, the transaction’s sponsor makes an active effort to elevate the income stream of the property, typically through a significant capital improvement program, such as a partial or property-wide renovation.  Examples of such improvements might include new paint, new signage, renovating the lobby, and improving the security of the property and the parking area, etc.

In their marketing flyer, JCR Capital advertised preferred equity, joint venture equity, and programmatic equity.  Programmatic equity?  What the heck is programmatic equity?

Before we get into programmatic equity, lets first do a quick review of the term, "equity".  Equity is not just the difference between what your house is worth and the balance on your first mortgage.

 

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Equity - in the context of real estate - is the money that the owner stands to lose before "the bank" loses its first penny.  Obviously, "the bank" could also mean a credit union, a life company, a conduit, or any other type of real estate lender.  

Equity is often referred to as the first-loss piece.  If anyone is going to lose any money on a real estate deal, the first guy to lose a chunk out of his tush is the equity holder (the owner).

Example:

ABC Development Company specializes in turning around big apartment projects that have become run down.  In downtown Washington, DC, ABC Development learns of a 360-unit apartment project within two miles of Capital Hill.  The well-located apartment project was once filled with ambitious, young political staffers; but when the old man died, and his wife took over the management, the condition of the property and the rents plummeted.

 

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ABC Development can acquire the property for just $32 million, but the renovation costs are another $9 million.  With an interest reserve and the other necessary soft costs, the total project cost is $46 million.  The bank, with whom ABC Development has a relationship, will only loan up to 70% of the total cost because the project has become a big drug house and a gang hang-out.  

A huge renovation project like this needs to be structured like a construction loan.  Who remembers the four elements of Total Cost?  Of course, there is the land cost (in this case, the cost of the land and the building), and then there are the hard costs (bricks and mortar).  What else?  Soft Costs - that's right!  Good job.

But you are still forgetting the fourth element of Total Cost (of a development project). It's the contingency reserve.  A good rule of thumb when computing the contingency reserve is to use 5% of hard costs and soft costs.  Why not 5% of the land cost?  Because by then the developer already knows the cost of the land.  There is NOT going to be a cost overrun in connection with the land.

 

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Therefore the total cost of a development project is the land cost, plus the hard costs, plus the soft costs (interest reserve, architectural fees, engineering fees, points, closing costs, etc.), plus the contingency reserve.

Okay, now let's get back to ABC Development's big value-add deal.  We said the total cost was $46 million, and the bank was willing to lend $32.2 million - which is 70% of the total cost.  Therefore ABC Development will need to contribute $13.8 million.  The development company has $3.8 million to contribute, so it will need an equity provider willing to put up the remaining $10 million.

This is the type of value-add deal that would be perfect for the nice folks at JCR Capital.  Their transaction sizes include equity contributions of between $5 million and $50 million nationwide.  (We are talking large deal sizes here, folks.  The property should at least be worth $20MM.)  You can reach my buddy, Sam Isaacson, at JCR Capital at 917-902-1421.

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Okay, But What the Heck is Programmatic Equity?

As Sam explained to me, "Programmatic equity is where we provide a facility of capital, say $25 million to $50 million of committed capital, for a particular strategy that a sponsor is pursuing."

Example:

Let's suppose that a developer specializes in buying large, older, mobile home parks, and then the developer repaves all of the streets, tears out the landscaping and puts in far-nicer lawns and bushes, puts in a new pool and a new clubhouse, enforces the park rules about skirts and storage sheds, squeezes out the mobile homes being used as rentals, squeezes out the ugly and/or single-wide coaches, and then dramatically raises the rent.

 

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When everything is stabilized, the developer then sells the mobile home park to a REIT.  This is his program.  He has flipped four parks already, and he has identified fifteen other parks in need of his program.  He needs just $3 million in equity to satisfy each bridge lender providing the underlying first mortgage, but in order to renovate all fifteen parks, he might eventually need a total of $45 million in equity.

A provider offering programmatic equity might go all the way down to just $3 million on each mobile home park because the sponsor will be doing 15 of these projects.   The provider might offer the developer a capital facility (kind of like a line of credit) of $30 million in equity to start renovating these large, old, mobile home parks.

 

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Booms Do Not Cause Recessions - Hooray!

Posted by George Blackburne on Wed, Nov 6, 2019

DamoclesToday's article contains great news for investors and brokers alike.

According to an important Bloomberg article published this week, the economic boom currently being enjoyed in America will probably not result in an extra big bust, according to the work done by the Nobel-prize-winning economist, Milton Friedman.

You may recall that Milton Friedman was a famous economics professor at the University of Chicago from 1947 to 1977.  Friedman was the foremost proponent of the Monetarist School of Economics, and once famously said, "Inflation is always and everywhere a monetary phenomenon..."  In everyday English, he meant that if a government creates a lot of new money, there is going to be a ton of painful inflation. "Inflation is taxation without legislation," was another one of Friedman's famous quotes.

 

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In 1964, Milton Friedman developed an economic hypothesis called the Plucking Model.  The Plucking Model holds that the economy is like a string on a musical instrument — recessions are negative events that pull the string down, and after that it bounces back, like a guitar string.  But here's the thing:  When you pluck down on a guitar string, it only snaps back to its original position.  It doesn't go careening to the other side of the neck.

And just as a string snaps back faster if you pull it harder, the Plucking Model holds that the deeper the recession, the faster the recovery that follows.  But you can only pluck the economy in one direction; bigger expansions don’t lead to bigger recessions!

But is the Plucking Model true?  "Friedman proposed the idea in 1964 and argued that if he was right, future recessions would show a correlation between the depth of the bust and the speed of the recovery that followed.  He then waited 20 years to see if his predictions were borne out.  In 1993, he looked at the business cycles that had happened in the intervening years, and he concluded that he'd been right."

 

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"Since then, others have found more evidence to support the plucking idea.  A 2005 paper by economist Tara Sinclair used advanced statistical techniques to confirm that, in the United States, bigger recessions are followed by faster recoveries — but not the other way around.  If you pull that guitar string really far - bam - it snaps back blazingly fast; but bigger recoveries don't produce faster recessions.  In other words, when a big expansion starts to end, an economy doesn't instantly plunge in a deep, dark recession."

After the Great Recession of 2007-2009, researchers looked at European countries and concluded that those that had it worse in the downturn ended up bouncing back faster.  In other words, those European countries which saw their GDP's fall the furthest were the first to recover.  

But there was no correlation between how well a country did before 2007 and how much it suffered afterward.  In other words, those countries which enjoyed the biggest increases in GDP did NOT suffer worse than the countries who fared only so-so in the preceding expansion.  All this evidence implies that recessions cause recoveries, but that booms don't cause busts.

 

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But why does this happen?  The answer is that it's easy to give people raises, but it's hard to make them swallow pay cuts.

In good times, growth simply feeds into higher wages (as well as higher profits). But when a recession or other negative shock comes along that hurts corporate earnings, employers might like to cut wages, but they can’t.  Instead, they lay off workers.  The more workers who get laid off, the bigger a pool of unused labor there is, so the faster the economy can grow once the recovery takes hold.  Makes perfect sense, huh?

All of this is great news.  We can now forget about the Sword of Damocles hanging over our heads and truly enjoy this expansion.  Yes, we will eventually have another recession, but it will probably not be a horrible one.

 

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Sword of Damocles

The famed “sword of Damocles” dates back to an ancient moral parable popularized by the Roman philosopher Cicero in his 45 B.C. book, “Tusculan Disputations.”

Cicero’s version of the tale centers on Dionysius II, a tyrannical king who once ruled over the Sicilian city of Syracuse during the fourth and fifth centuries B.C.  Though rich and powerful, Dionysius was supremely unhappy.  His iron-fisted rule had made him many enemies, and he was tormented by fears of assassination—so much so that he slept in a bedchamber surrounded by a moat and only trusted his daughters to shave his beard with a razor.

As Cicero tells it, the king’s dissatisfaction came to a head one day after a court flatterer named Damocles showered him with compliments and remarked how blissful his life must be.  “Since this life delights you,” an annoyed Dionysius replied, “do you wish to taste it yourself and make a trial of my good fortune?”

 

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When Damocles agreed, Dionysius seated him on a golden couch and ordered a host of servants to wait on him.  He was treated to succulent cuts of meat and lavished with scented perfumes and ointments.

Damocles couldn’t believe his luck, but just as he was starting to enjoy the life of a king, he noticed that Dionysius had also hung a razor-sharp sword from the ceiling (see the picture at the top).  It was positioned over Damocles’ head, suspended only by a single strand of horsehair.  From then on, the courtier’s fear for his life made it impossible for him to savor the opulence of the feast or to enjoy the servants.  After casting several nervous glances at the blade dangling above him, he asked to be excused, saying he no longer wished to be so fortunate.

Haha!

 

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Commercial Loans and the Meaning of "Last Dollar"

Posted by George Blackburne on Thu, Oct 31, 2019

Last DollarA buddy of mine - an old veteran in the commercial loan business - sent me an email marketing flyer last week.  He had just closed a big commercial loan, and he was telling me about his special new program - a sort of fix-and-flip loan for large commercial properties.

Here is how my buddy described his new program in his marketing piece:

"Low-Cost Non-Recourse Gap Equity - We are under application on several opportunities to bring high octane capital to new construction and deep rehab projects at a coupon rate of starting in the 6's with no equity participation."

 

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"Our investor funds his last dollar to 85 to 90% of cost on new construction and up to 100% of qualified renovation costs.  Our active pipeline includes multifamily, senior housing, and hotel projects."

Confused by his flyer, I wrote to my buddy and asked, "What on earth does last dollar mean?"   He wrote back:

"Let's assume the total capitalization of a renovation project is $10 million - with an $8 million purchase price and $2 million in the projected hard costs of renovations."

"Our investor funds up to 90% of the $8 million purchase price, or $7.2 million, and 100% of the hard renovation costs, or $2 million - for a total loan proceeds, based on cost, of $9.2 million."

"This assumes the property's After Renovation Value (ARV) is $13.2 million, since our lender limits loan proceeds to 70% of ARV."

 

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"This gap equity program for commercial properties sounds terrific," I told my buddy, "but I still don't understand what last dollar means!"  My buddy must have thought that I was mentally-challenged.

Kneeling down and speaking very slowly to his slow-witted friend, my buddy explained:

"Last dollar refers to the highest loan-to-value reached when a lender loans his very last dollar.  (See the pic at the top squeezing out the last dollar.)  The term is used most often when mezzanine loans or preferred equity investments are stacked on top of very large permanent loans.  The permanent lender's last dollar is 60% LTV, the mezzanine lender's last dollar is 75% LTV, and the preferred equity provider's last dollar is 85% LTV."

At last the light bulb clicked on for me.

 

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But wait a minute.  In trying to explain last dollar, my buddy described an incredible way to reach very high leverage on new construction deals and commercial renovation projects.  Eighty-five percent of cost for new construction?  Perhaps as high as 90% of cost?  Plus 100% of renovation costs?  This is fantastic! 

The program is also non-recourse.  The minimum loan amount is $3 million, and the maximum loan amount is  $200 million.  

This lender will make these high-leverage new construction loans and commercial renovation loans nationwide.  Acceptable property types include multifamily, senior housing, hotels, and several other standard property types.

 

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Got a potential deal?  Please email me, George Blackburne III, no more than three sentences, along with your contact information.  Please type into the Subject line, "Gap Equity Program."  I'll make sure that the opportunity gets to my buddy.

You might even text me a message to 574-360-2486, "Just sent you a gap equity request."  I get an average of 1,350 email per day - every day - so its easy for me to miss emails.  Why don't I employ a junk mail filter?  I live in Indianapolis - a beautiful city, but a bit of a financial backwater.  Mortgage flyers are my window to the industry, and I don't want to miss a single one.  Add me to your newsletter list, so I can steal your jokes.  :-)

 

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By the way, I had to look up the term, high-octane too. High-octane, in this context, means exciting and full of energy.  My buddy was specifically using the term high-octane to refer to a loan that is very high in terms of loan-to-cost.  

It's no fun being slow-witted; but it really helps when I teach.  Since I have to reduce difficult concepts to baby language in order to learn, I teach the same way.  Haha!

 

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Topics: commercial loans, last dollar