Commercial Loans and Fun Blog

It is extremely dangerous when one political party controls almost all of the news agencies and methods of mass communication.

When Hitler ascended to power in 1933, Joseph Goebbels took over the Ministry for Public Enlightenment and Propaganda, which controlled radio, press, publishing, cinema and the other arts.

Paul Joseph Goebbels was a small man with a large head, a crippled foot, and a fragile body; but his voice was mesmerizing.  Unlike Adolf Hitler, whose rough voice sometimes broke when he reached a fever pitch of oration, Goebbels' speech was deep and resonant, never wavering from its carefully crafted message of German superiority and rabid anti-Semitism.

Goebbels subjected artists and journalists to state control and eliminated all Jews and political opponents from positions of influence.  On May 10, 1933, he staged a massive book burning in Berlin, where university students destroyed the works of Jewish and other blacklisted authors in huge bonfires.

Goebbels promoted the Nazis' anti-Semitic message through black and white films, such as The Eternal Jew (1940), and reinforced an ideology of Nazi supremacy, with Leni Riefenstahl's (a beautiful German movie producer) state-funded documentaries Triumph of the Will, about a Nazi rally in Nuremberg in 1934, and Olympia, about the Berlin Olympics of 1936.

"While Hitler is a fair orator ... Goebbels is a past master," observed American ambassador William E. Dodd. "He ... has combined all the newspaper, radio, publications and art activities in Germany into one vast propaganda machine."

After creating an atmosphere of fear and hatred, Goebbels began to authorize violence himself.  On November 9, 1938, after the assassination of a German diplomat by a Jewish student in Paris, Goebbels called for "spontaneous demonstrations" against the Jews.

When the pogrom, known as Kristallnacht, was over, rampaging mobs had killed 91 Jews, burned more than 900 synagogues, destroyed nearly 7,000 Jewish businesses, and caused 30,000 Jewish men to be deported to concentration camps.

Goebbels later helped execute Hitler's "Final Solution," issuing public warnings that "the Jews will pay with extermination of their race..." and supervising the deportations of Jews and other people considered undesirable by the Nazis from Berlin to extermination camps.

During World War II, Goebbels wrote innumerable articles and speeches rousing the German people to arms.  On February 18, 1943, Goebbels delivered his most famous speech, the Sportpalast, or Total War, speech, in which he motivated the German people to continue their struggle even though the German war effort was failing.  

Although the Allies were by then winning the war, and insisting on unconditional surrender, Goebbels whipped the crowd into a frenzy and mobilized them for a near-suicidal "total war."  Inventing secret weapons and mountain fortresses where the Nazis would make their last stand, Goebbels never lost his faith in his cause.

On May 1, 1945, with Berlin under siege and Adolf Hitler dead, Goebbels and his wife Magda poisoned their six children and then killed themselves with the help of bodyguards from the German SS.  Their bodies were burned, left unburied, and quickly found by Soviet troops.  Before his death, Goebbels declared, "We shall go down in history as the greatest statesmen of all time, or as the greatest criminals."

The Final Solution for Parler:

Until yesterday, Parler was a competitor of Twitter, where Republicans and other advocates of free speech could challenge the near-total dominance of news publication in America by supporters of the left, without having their views "moderated" or banned by Facebook and Twitter.  

For Parler, yesterday was its Kristallnacht.  Google announced that it would no longer allow Android users to download its app in its app store.  Apple did the same for their iPhones.

Their excuse?  Parler was not moderating the posts of its users.  Uh, huh.  Who gets to decide what is true?  How can falsehoods and fake news stories best be prevented?

Supreme Court Justice Louis D. Brandeis suggested the answer in his classic concurring opinion in Whitney v. California (1927), when he wrote:

“If there be time to expose through discussion, the falsehoods and fallacies, to avert the evil by the processes of education, the remedy to be applied is more speech, not enforced silence.”

Nevertheless, Amazon Web Services (AWS) gave Parler just 24 hours to find 350 servers to carry its software and to remove itself from AWS.  Faced with an impossible task, Parler closed down today.

And of course you know that Donald Trump has been banned for life by Facebook and for one year (?) by Twitter. 

The Point of Today's Post:

It is extremely dangerous when one political party controls almost all of the news agencies and methods of mass communication.  

Notwithstanding my jokes and funny pics today, this is serious stuff.  The enforced silencing of the right over the past three days might even make the pages of a history book someday, and you were alive to witness it.  

Never forget the work of Joseph Goebbels and his Ministry for Public Enlightenment and Propaganda.

The race to select the next two Georgia Senators was close, so the clever minds behind Joe Biden came up with the perfect campaign slogan in the final hours.  "Give us control of the Senate, and everyone will get their $2,000 coronavirus stimulus check."

What voter would turn down a stimulus check for $2,000?  Perfect.  Brilliant.  

Whoever are the puppeteers behind Joe Biden - his advisors and controllers - they are absolute masterminds.  These are the guys who made Joe Biden stay in his basement and stop campaigning by 11:00 am every morning - long before he could possibly start to sundown.

The term sundowning refers to a state of confusion occurring in the late afternoon and spanning into the night.  Sundowning can cause a variety of behaviors, such as confusion, anxiety, aggression or ignoring directions.  Sundowning can also lead to pacing or wandering.  

Sundowning isn't a disease, but a group of symptoms that occur at a specific time of the day that may affect people with dementia, such as Alzheimer's disease.  The exact cause of this behavior is unknown.

My own beloved father started to sundown at the end, as mini-strokes destroyed his brain; so I will probably start to sundown myself in ten years.  Yikes.  After reading this politically-charged article, you might think that I have started to sundown already.  :-)

Trump joked that if he lost, it would be incredibly humiliating because he would have lost to a cardboard cutout, a creature that almost didn't speak; yet this is what ended up happening.

These controllers urged Biden to nominate Janet Yellen as Secretary of the Treasury.  What a smart choice to calm our nervous financial markets!  A former Fed Chairman to oversee the largest money-printing operation in the history of the country - oh, the irony.  Haha!  It would be like appointing General George Patton to handle peace negotiations with China.  

Now Biden's handlers have chosen Merrick Garland as Attorney General.  I once again salute these crafty puppeteers in Washington on another smart-smart choice.  Who could possibly start the job of A.G. with more prestige and trust than a former Supreme Court nominee who got screwed by politics?

My friends, please don't misunderstand me.  The decision to limit Biden's comments during the Democratic debates to empty phrases what the right thing to do for his campaign.  The decision to limit Biden's campaigning to just 90 minutes in the morning, all carefully choreographed, was world-class wisdom.  Trump indeed lost to a cardboard cutout.

The cabinet selections - Yellen and Garland - are brilliant too.  The campaign slogan to trade Georgia's Senatorial votes for a $2,000 coronavirus stimulus check was perfectly legal and not horribly immoral.  Politicians are always promising to buy votes with political promises.  I salute these brainy puppet masters.

But here's the deal.  None of us voted for these crafty controllers.  I don't even know their names.  If they keep leading the country in a healthy and prosperous direction, like they have done so far, that would be fantastic.  

But who are these ladies and gentlemen who are "guiding and directing" Joe Biden?  Was one of their mothers murdered by an illegal gun?  Are they going to start by requiring every gun in America to be registered?  That is a slippery, very dangerous slope.  

Are these puppet masters Christian-haters?  "Christians are a bunch of dangerous fanatics!"  I am not sure that civilization would have reached this point if people were not worried about a Judgement Day.

Ann Coulter, the Republican advocate of freedom, wasn't even allowed to speak at Berkeley University, at one time the epicenter of free speech!  "She inspires right-wing violence."  Uh, huh.  By reminding young people that it was communists (Stalin, Mao, and Pol Pot) and socialists (Hitler) who rounded up over 120 million people for execution.  

If President Trump died and appointed me king, I would require every college student to watch the movie, The Killing Fields.  if you wore glasses in Cambodia, you were presumed to be a capitalist.  You were rounded up, shot, and thrown in the Mekong River.  

The hero escapes from one of these re-education camps In Cambodia and dives into the river.  He floats for miles downstream, until he comes to a tall, half-mile long dam.  It is a stack of 600,000 bodies, eighty bodies high.  Pol Pot's communists killed 1.5 million to 2 million educated Cambodians.  All hail socialism.

The irony - that Ann Coulter was not allowed to speak at the former epicenter of free speech - is almost like Alice being lost in Wonderland.  But politics is dangerous for our relationship, you and I, so let's move on.  

The Dems now control  both the House and the Senate.  This is fantastic for folks in real estate, like you and me!  Inflation is coming back big-time.  Real estate is going to soar.  No wonder homes are selling like hotcakes.  Hallelujah!

You and I make money when real estate goes up, and with the Dems in charge of fiscal policy (government spending), the racehorses have been called to the post.  The Great Money Printing Race is about to begin.

Deficits?  Who cares?  Deficits no longer matter.  "We don't need no stinkin' fiscal discipline!"

This actually is Helen Keller.  Surprisingly lovely.
A few hours with Kim Kardashian...

"The greenback has lost around 6.5% against a basket of major currencies over the course of 2020, racking up a loss against every developed market currency, and now trades around its lowest since April 2018."  So wrote the Business Insider on the December 16th.  Since the 16th, the dollar has fallen even further.  It ended the year down a whopping 6.7%.

"So what?" you might think to yourself.  "It doesn't affect my life.  In any case, doesn't a cheaper dollar make our manufactured goods more competitive in world markets?"

Well, the falling dollar might not help American businesses as much as you might think.  Suppose it costs Schwinn Bikes $70 to manufacture a mountain bike in America, and they retail it worldwide for $100.  If the dollar falls by 6%, this bike now costs foreign buyers just $94.  That's not going to help bike sales in Peru, however, if the Chinese are selling a comparable bike for just $50.

And a falling dollar does affect your life.  The years of continuously falling prices at Wal-Mart are now at an end.  The Chinese have snuffed out American manufacturing, so there is less competitive pressure to keep lowering prices.

The Chinese will soon be passing on the cost of a falling dollar on to Americans.  I predict that you will finally notice these higher prices at Wal-Mart this year.  "Gee, didn't printers used to be really cheap?"

So why is the dollar falling?  In fairness, the dollar had been strong because the world was worried about the tension between China and the U.S. over the South China Sea, crashing worldwide stock markets, and the coronavirus.  When investors get nervous , they tend to flee to the dollar.

So a big reason why the dollar is falling right now is because investors are much less worried.  Economies worldwide are starting to recover, we've found our new American president, and the vaccines have finally arrived.

In the parlance of investment bankers, this is a risk-on environment.  Investors are willing to take risks right now in search of higher yields.  They don't feel the burning need to flee to the dollar in panic.

But I suspect something else is also happening.  The U.S. used to be financially disciplined.  We worried about deficits.  Now it seems like deficits no longer matter.

Chuck Butler, a really enjoyable blogger on currencies, wrote about this new lack of financial discipline yesterday in his smart blog, The Daily Pfennig.  A pfennig was 1/100th of a mark, back in the days before the Germans adopted the Euro.  Think of a pfennig as a German penny.

Chuck, the expert on currencies, wrote:  "The dollar continued to get sold last week, holiday or not… Yesterday, with the news that while the stimulus checks weren’t $2,000 (George:  This should have strengthened the dollar), the outlook for the economy continues to weaken, and the outlook for a recovery from the virus doesn’t look like it’s going to be coming to a Theater near you, any time soon, and mark my words here, the new administration will go back to the wishing well and ask for more money soon enough… "

"And therein lays the problem, as I told you back when he first checks went out, that it was setting a bad precedence, in that, once you give somebody something for nothing, they will expect more, and more, and more, etc.   And so we are in our second of those “mores”…"

As the famous Scottish judge and history professor, Alexander Fraser Tytler, famously wrote back in 1798:

"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..."

There is another reason why America may not longer be be perceived as the ultimate bastion of financial security.  It won't be long before the Chinese could probably defeat the U.S. in a war.  And they could kick out butts right now in a war in the South China Sea, at least according to an extensive war game conducted by the Navy and the Air Force last year.  

We are a carrier power.  The Chinese are a missile power.  We are armored French knights.  The Chinese are English longbow men.  The Chinese are building modern new warships at a far greater pace.  

I watched a video this morning of China launching it's second aircraft carrier this month.  Shiny.  Modern.  Impressive.  The Chinese built this carrier themselves, and they are hard at work on their third carrier.  It will enter service in 2021.  They already have 350 modern warships, compared to just 293 of ours.

A Pacific Ocean that is 12,300 miles wide may not be wide enough to protect Fortress America, not when a Chinese sub could sail into the Gulf of Mexico and take out our largest oil refineries, leaving Americans with no gasoline.  It's one thing to produce crude oil.  It's another thing to refine it into gasoline.  The U.S. is no longer an unassailable military bastion.

Sooner or later this bull market in the U.S. stock market has to end.  My bet is that the price of Tesla will suddenly crater, and that will be the catalyst for the next bear market in stocks.  Just my opinion.  (It simply takes too long to recharge an electric car.)  A bust in the U.S. stock market will drive down the dollar sharply, as worldwide investors no longer need to buy dollars to invest in U.S. stocks. 

According to Chuck Butler, the currency expert, Biden and the Dems will also be back soon to the trough for even more money to give away.  "The economy needs the stimulus."  I can hear Alexander Fraser Tytler moaning from his grave.

As it become more clear that China is now the dominant world military power, confidence in U.S. real and financial assets has to slacken. This will further weaken the dollar.

It's no wonder that the dollar fell by 6.7% in 20020.  It's no wonder why the best performing assets in 2020 were Bitcoin and gold.

I have asked you in the past to watch for news coming out the South China Sea and to watch the price of gold.  Now I am also suggesting that you watch the U.S. Dollar Index.  If worldwide investors see Congress increasing the deficit even further, and if they see the Fed obediently just buying up these new Treasury bonds, this is NOT going to be good for the prices of goods at your local Wal-Mart.

Damn Chinese seagulls  :-)

In a recent tombstone, my friends at George Smith Partners wrote:

"George Smith Partners identified a national balance sheet lender with an intimate knowledge of the submarket and arranged $13,340,000 in acquisition/bridge financing for the purchase and repositioning of a six-property multifamily portfolio located in Long Beach, California."

So what is a balance sheet lender?  A balance sheet lender is one which makes a commercial loan, with the intention of keeping that loan on its own books.

In contrast, Real Estate Mortgage Investment Conduits (REMIC's) are commercial mortgage companies that originate very standard and cookie-cutter commercial loans that are destined for re-sale in the secondary market.   REMIC's are known as conduits for short.

Conduit loans are usually larger than $5 million, and the loan has to be secured by one of the Four Basic Food Groups - multifamily, office retail, or industrial.  

Conduit loans can't be too kinky.  For example, you might have great deal on a shopping center, but part of the parking lot is not owned in fee.  Instead, part of the parking lot is on leased land.  This unusual twist or kink is probably too tough for the loan to be suitable for a conduit.

All conduits loans are destined for re-sale to a trust, set up usually by a major investment bank or commercial bank.  When around $1.5 billion or more of these standard, cookie-cutter commercial loans have been assembled into the trust, the loans in the trust are then securitized.

Securitization means that some rating agency comes in and looks at each of the loans.  Some loans may even be kicked out of the pool as being too risky or too unusual.  

The sponsor of the securitization; i.e., the investment bank or major commercial bank (think of a Bank of America, a Credit Suisse, or a Deutsche Bank) will then issue and sell bonds, backed by the commercial loans in the portfolio.

A conduit lender is therefore the opposite of a balance sheet lender.  It's loans are destined from Day One to be re-sold in the secondary market.

Another name for a balance sheet lender is a portfolio lender.  The big advantage to submitting your commercial loan to a balance sheet lender or a portfolio lender is that the lender can choose to forgive or ignore any flaws in the loan.

Flaws or unusual conditions on a commercial loan are often called black hairs.  "This commercial loan has a black hair because the personal guarantor has a net worth of less than the loan amount."

Remember, folks, the Net-Worth-to-Loan-Size Ratio says that the net worth of the borrower should be at least as large as the loan amount.

Conduits are not the only type of commercial lender that is not a portfolio lender.  The originators of non-prime commercial loans - formerly called subprime commercial loans - do not keep their loans on their books.  Bayview Financial is the largest originator of non-prime commercial loans these days.

Non-prime commercial loans are intended, from Day One, to be sold to some Asset-Backed Securities (ABS) pool.  An ABS pool contains various types of loans - credit card loans, equipment leases, scratch-and-dent residential loans that got kicked out of some residential mortgage backed securities pool, and non-prime commercial loans.

Even though ABS commercial lenders can be forgiving of borrower credit and even on occupancy, their ability to overlook too many black hairs is limited.  They still have to re-sell the loan.

What about life companies?  They intend to keep their commercial loans on their books, right?  Yeah, but when you are the prettiest girl at the dance, you probably won't choose a guy who is missing his front tooth.  Life companies have the best rates on commercial loans in the country, so they get to pick the most perfect deals.

Therefore, I really do not consider a life company to be a balance sheet or portfolio lender.

Balance sheet lenders are known for being able to forgive flaws and black hairs.  Most balance sheet lenders are mid-sized or smaller commercial banks.

Let's suppose you're a commercial loan broker, and you are trying to get a loan on an office building that is 12% vacant.   Let's further suppose that office space in the entire city is, on average, 11% to 13% vacant.

When you are a preparing the Pro Forma Operating Statement, should you therefore use 12% as the Reserve for Vacancy and Collection Loss?  The answer is no.  You should always use a 5% Reserve for Vacancy and Collection Loss, no matter the actual vacancy rate for the city.

Why?  Because you can.  Remember, the commercial loan broker who gets his client the largest loan - the most leverage - almost always is the one who gets to close the deal and earn a nice fee.

But why aren't commercial real estate lenders using a 12% reserve for vacancies?  Perhaps the simplest reason is because you have doing it for decades.  Commercial real estate loan officers are also used to seeing appraisers, commercial brokers (realty sales brokers), and commercial mortgage brokers use a 5% reserve for vacancy.

If you were to try to be "more honest" and use, say, 8%, the lender might say to himself, "Hmmm, I was going to use 5%  in my pro forma operating statement; but perhaps I will use 8% instead."  That can't be good for your client or you.

If a competing commercial loan broker used 5% in his operating statement, and you used 8%, guess which one of you would get the largest loan approved and would earn the loan fee, win the pretty girl, and ride off with her into sunset?

Okay, but why has a 5% Reserve for Vacancy and Collection Loss become the standard in the industry?  Part of the reason has to do appraisal theory.  I makes no sense for an office building owner to have vacancies.  In theory, he should just lower his rent until he fills his building.  The 5% reserve should really be designed to cover just the turnovers - that period when a tenant moves out and until a new tenant can be found.

In real life, however, there are practical reasons why an office building owner might learn to live with 10% to 20% in vacant space.  For one thing, tenants beat up buildings.  There is wear and tear on the lobby, the elevator, and the hallways.

Secondly, the landlord often has to pay for utilities.  The more tenants, the higher his utility bill.  If the rent has to be fairly low to fill the building, the landlord may not be gaining very much.

Another issue is that it costs the landlord money to fill his building.  There are tenant improvements that must be paid for, as well as large leasing commissions that must be paid.  These are also know as TI/LC's.  While "appraisal theory" might say that it is economic stupidity to leave space vacant, sometimes the landlord simply doesn't have the money to lease his unused space.

Leasing can also be very cyclical.  As an economy comes out of a recession, leasing activity can be brisk; but during the depths of a recession, the space will likely remain vacant, even if the landlord lowers the rent by 50%.  In the words of economists, the demand is inelastic.

In economics, inelastic demand occurs when the demand for a product doesn't change as much as the price.  For example, if the price increases 20%, but the demand only goes down by 1%, the demand for that product is said to be inelastic.  In the case of leasing office space during a recession, you could lower your asking rent by 50% and not even lease 1% more space.

And how are your existing tenants going to feel about you lowering the rent on space, identical to their's, by 50%?  There will be resentment and demands to renegotiate existing lease.  Lots of unpleasantness.

What should you do with any vacant space on your Pro Forma Operating Statement? Answer:  You should show the market rent of any vacant space!  It may not be precisely in line with appraisal theory, but lenders will usually let you get away with it.

Facebook Portal:

Do you guys remember that Facebook commercial where a lovely young woman is rushing to make dinner for a very special new boyfriend, and she burns it.  In a panic, she calls her kind and patient father on her Facebook Portal, and he calmly coaches her through making a nice pasta dish.  She finishes just as the doorbell rings, and the day is saved.

Well, my dear son, George IV, lives in California, with his fiancee, while his wonderful brother, Tom, and his lovely sister, Jordan, live here in Indiana, near Cisca and me.  Well, our entire family used our Facebook Portals to spend two hours together during Christmas.  It was a delightful experience.

I have to say that the Facebook Portal is one of the most wonderful devices ever invented.  It automatically follows the speaker around, and the picture quality is crystal  clear.  What a terrific way to spend time with your loved one.  As head of one of the major tech companies, Mark Zuckerberg gets bashed around; but he and his engineers did a helluva good thing when they absolutely perfected these portals.

Those of you who live in California may want to leave the state.  The following few paragraphs come from a blog article that I wrote this year entitled, The Coming War With China:  Time to Start Building a Bomb Shelter?   I have written 100+ blog articles.  This one was the most liked by far.  I received comments from as far away as China.

World War I started in 1914, but as early as 1910, it had become clear that Germany and Britain would soon be going to war.  Each had embarked on a crash program to build dreadnoughts.  Dreadnoughts were massive battleships that could throw huge shells accurately for miles.  The entire class of ships was named after the H.M.S. Dreadnought, Britain’s first battleship (see image above).

China and the United States are on a similar path.  The Chinese are constructing warships at a much faster pace.  Already China has 350 modern warships, compared to just 293 for the United States.  China is hard at work building its third aircraft carrier.  Their cruisers are already tougher than our ancient ones.  They are building new warships at a pace three times faster than the United States.

People still think of China as a communist country, but since President Xi had himself appointed President-For-Life, China is really now a dictatorship.  Just one guy is the total, uncontested ruler of 1.4 billion people.  A ton of these guys are scientists and engineers.

If the Chinese economy ever started to slow down, and the Chinese people started to get restless for a new government, President Xi might order the invasion of Taiwan.  This would rally the people behind the Chinese flag, distracting the populace from any political challenge.

The outcome of the war would likely be determined by the accuracy of their missiles. Folks, modern missiles are so accurate that they can hit targets dead-on from over 1,000+ miles away.  India, arguably not the world's leading technological military power, in November fired a test from a missile ship that hit an aging, steaming Indian frigate dead center from 130 miles away.

Now imagine the accuracy of Chinese missiles.  The crews of our aircraft carriers are toast.  True story: In 1996, Ted Turner sold Turner Broadcasting to Time-Warner for $7.5 billion.  He announced the secret sale of the company to his family across the supper table.  One of his sons, a highly-paid executive with Turner Broadcasting, asked, "What happens to me?"  Turner reportedly replied, "You're toast."  Ouch.  Haha!

Would the U.S. then back off and let the Chinese take Taiwan, Guam, and Okinawa? nI don’t think we could.  The war against China needs to be fought in the “second island chain” in the South China Sea, rather than off the coasts of Hawaii and California.

We are mustering allies, as President Xi keeps angering and alarming the entire world.  Heaven only knows why Xi picked a fight with the Indians over some frozen rocks on their mutual border; but the result has been the addition of Australia to the Quad “Alliance" of India, Japan, and the U.S.  Recently, even the pacifist governments of France and Germany have started to push back against the Chinese.  The French and the Germans have now sent subs and destroyers to the Indian Ocean.

Who will win the coming war?  China.  The Chinese will strike first and without warning.  They will knock out much of our fleet and all of our airfields on Guam, before the centipede can even finish tying his shoes (old joke about the football game between the big animals and the little ones).

Then China would likely start island-hopping on its way to California.  When their missile bases and missile ships got close enough, imagine powerful conventional missiles flying through the windows of Google, Microsoft, Intel, Lockheed-Martin, General Dynamics, Northrop Grumman, Raytheon, and Boeing.  A missile ship 1,000 miles from California would be close enough.  Yikes!

What can we do?  We need new shipyards on the East Coast, new oil processing plants scattered all across our coasts, and dozens of underground missile manufacturing plants scattered throughout the Heartland.  We need to buy up forty old container ships and convert them to missile ships, at about 1/50th of the cost of building new aircraft carriers.

What can you do?  A nice home in the Boonies would be smart.  What if you simply must live in California?  How about a combination wine cellar / bomb shelter in your partial-basement?

Remember, these incoming missiles will be both highly-accurate and conventionally-tipped.  The whole city is not going to be flattened - just the seaports, the airports, the power plants, the dams, the reservoirs, the California Aqueduct, the water treatment plants, the freeway overpasses, the railway stations, and the major food distribution warehouses.  As the Church Lady used to say on Saturday Night Live, “Isn’t that special?”

The moment Elon Musk takes The Boring Company public, I intend to buy some shares.  It’s not hard to imagine a missile war that could drag on for a decade, forcing a lot of American companies to move their manufacturing facilities underground.

How soon before the war starts?  Well, when is China's next recession?  No economy ever goes straight up, not even that of the Chinese.  I wouldn’t fall off my chair in surprise if the coming war with China started in the next three years.  Watch the news from the South China Sea very closely.  "Only the dead have seen the end of war." -- George Santayana, 1886 - 1952

End of the Scary Stuff:

I retired at the end of last year, so Angela and George IV now run my old company.  By the time I found out that we were moving our office, after 25 years in the same location, they had already signed the new lease and had the new landlord start on the tenant improvements.  I was just shocked that they didn’t even consult me.  I guess now I’m just a pretty face.

But the Company simply had to move.  Homeless people were sleeping right outside our doors and windows, and they were leaving used needles and syringes laying right on our sidewalks.  Yuck.

George IV and Jonny finally got engaged!  Hooray!  We love Jonny.  They have an April wedding planned, a simple barbeque in their backyard.  Jonny’s mother takes care of her own aging mother every day, so in order to limit exposure, only Jonny’s and George’s immediate families will attend.

Alex - Tom’s fit, slender, and lovely bride who looks just like Gisselle - gave birth to a beautiful baby girl, Salem Rose Blackburne, in December of last year.  Salem is named after a road trip that Tom and Alex took to Salem, Massachusetts while they were dating.  It was a long, three-day drive from Indy to Salem, and normally drives that long will kill a relationship.  Instead, those six days in the car ended up being the most romantic road trip of their lives.  The two grinning and joyous lovers got engaged shortly thereafter… and hence Salem’s name – a reminder of the love that they discovered on that trip.

But Salem, at the age of just 11-months, is a drinker.  Really.  Whenever Alex and Tom bring Salem and Reagan to Grammy’s house to watch a football game, Salem staggers around like she’s had a few too many.  Yes, she can walk, but she’ll never pass a sobriety test.

Poor Jordan.  She is one of the hardest-working college athletes you will ever see.  She is slender and extremely fit - rock solid too from lifting weights.  She is a superstar, All-Conference college goalie at Earlham; but she may never play another game of lacrosse.  Unless this COVID vaccine gets distributed super-quickly, her season may be cancelled.  It would break her heart.  She loves the sport so much that she intends to find a college coaching job when she graduates in May.

My cute-as-a-button granddaughter, Reagan Paige, has finally found the sport she loves – horseback riding.  Every Saturday morning, Grammy (Cisca) and I go to the barn to watch her ride.  She hasn’t been thrown yet, so as they always say, “If you ain’t been thrown, you ain’t ridden very much.”

My darling wife, Cisca, is in excellent health; but she is bored out of her mind.  Three times a week we used to go together to the Senior Center.  Cisca would take a Zumba dancing class (my love is a wonderful dancer), and I would lift weights.  No more.  The Senior Center is now closed.  [Sob]

My health isn’t the greatest – afib and congestive heart failure.  There are days when I can’t climb stairs without getting horribly out of beath.  Two ablations.  Both failed.  But I walk our two large dogs every day for 3.25 miles.  They never let me forget.  One wears a watch and points to it.

What did I learn this year?  Life marches on, and a lot of it is good.  You meet a girl, you pull your head out of your tailpipe and realize that you love her madly, you get married, you overcome infertility, you make some babies, you go to their games and make a complete fool of yourself in the stands, they go to college, they fall in love, and the wonderful Circle of Life continues.  Not so bad.  Not so bad at all.  Merry Christmas and Happy Holidays everyone!

My friends at George Smith Partners, the old-time commercial mortgage banking firm that services loans for life companies, recently posted the following tombstone:

"George Smith Partners successfully arranged $7,600,000 in permanent financing for a non-traditional anchored shopping center in Northern California.  The Big Lots and Dollar Tree anchors had short terms remaining on their primary leases, (but) they both had exceptional health ratios."

What on earth is a (tenant) health ratio? 

The Tenant Health Ratio is computed by taking the cost of occupying a space and dividing it by the tenant's total sales at that location.  In other words:

Tenant Health Ratio  = Occupancy Cost / Total Sales x 100%

Obviously the higher the ratio, the better the tenant is doing at that particular location. The better the tenant is doing at that particular location, the more likely it is that the tenant is going to negotiate an extension of his current lease.

They sure look like baby dinosaurs to me.  What are they???
But then I'm drinking right now.  Haha!

In the above case, Big Lots and Dollar Tree must have been selling goods like crazy.  The health ratio must have been so high that the bank financing this particular shopping center must have felt quite confident that these two tenants would want to renew, when their current short-term leases expired.

What is a high tenant health ratio and what is a low one?  I have no idea.  If anyone out there knows, kindly write to me at george@blackburne.com, and I will update this blog post.

Craig Cooper traded 20 loan officers for a
Find Your Own Private Investors course this week.

Watch the Price of Gold:

It's always wise to keep an eye on the price of gold.  There are a lot of very savvy investors out there, many with a whole network of contacts scattered throughout the world.  The price of gold can tell you a lot of things.

First of all, gold will warn you about any disturbing world events.  This is particularly important today, with China and the U.S. rushing to build ships and missiles in preparation for the First Taiwanese War.  

If you work for a major U.S. missile manufacturer, like Raytheon or General Dynamics, and you discover that gold has just soared $500 per ounce overnight in Asia, you may want to work from home that day.  A Chinese submarine, just 1,000 miles off the coast of California, could easily fly a conventional missile right through a particular window of your manufacturing plant.  If I were the Chinese, that's how I would open the First Taiwanese War.  Take out the U.S. missile manufacturing capability and the brains behind it.

Think 'ole George has gone off the deep end about this coming war with China?  My friends and my investors rolled their eyes when I first published my book (available still on Amazon) warning of a deflationary crash in 2007.  Deflation?  You can't have deflation!  That's impossible.  Once money is printed, no one is ever going to burn it, right?  Uh, huh.  Then the Great Recession hit in 2008, and investors leaned what happens when banks stop lending.  Trillions of dollars were destroyed.

The price of gold will also warn you when major corporations are going to start defaulting on their debt.  Do you know when gold outperforms just about every investment on earth?  During hyper-inflation, right?  Nope.

Gold performs the best during periods of deflation, when major corporations start defaulting on their bonds.  Think about the bonds from Enron, Worldcom, and Lehman Brothers.  They're toast.  Gold is one of the few assets that is not the debt of another.

Lastly, gold is also a warning about future inflation.  I want to make clear that gold is only a so-so investment during periods of inflation.  Why?  Because gold generates no income.  Stocks and real estate are far better investments.

But gold can still be the canary in the coal mine.  In the old days, miners would bring canaries into the mines with them.  If the poor canary suddenly died, it was a warning to the miners to get the heck out of the mine shaft.  The oxygen level in the mine was dangerously low.  

Gold is sitting at a lofty level right now - only about 12% off its all-time high. Why so high?   Is it because of the coming war with China?  I suspect that the coming war is just a small part of today's high gold prices.

Do you what CTL financing is?  You would
if you followed our Facebook page.

You can blame today's high gold prices on Andrew Yang.  He was the Asian-American presidential candidate who advocated giving every American a basic income of $1,000 per month.  From where would the income come?  The Treasury would simply issue Treasury bonds, and the Fed would buy them.  Presto-chango, there would be no cost.  Uh, huh.

This week Congressional negotiators came to an agreement on a $900 billion COVID relief bill.  And from where will the money come?  The Treasury will simply issue Treasury bonds, and the Fed will buy them.  There's no cost!  As the hard rock group, Dire Straights, used to sing in 1985, ".. Money for nothin' and your chicks for free."

Gold is not indifferent to inflation... and make no mistake, inflation is definitely coming back.  The passage of this COVID Relief Bill may prove to be a paradigm-changing event - the equivalent of Fed Chairman Paul Volker raising the prime rate to 21.5% in 1981.  This huge prime rate increase broke the back of inflation, and for the next 40 years we enjoyed disinflation.  To you young folks, welcome to 40 years of inflation.

Suppose I am commercial real estate loan officer working for a bank.  In the old days, I would have sat at my desk, in a three-piece suit, in one of the bank branch offices, waiting for borrowers to come visit me or for their phone calls to be transferred to me by the receptionist.  

Each bank branch would have its own loan officer, and he would handle all types of loans - personal loans, credit card loans, home loans, second mortgages, equipment leases, inventory loans, accounts receivable loans, and commercial real estate loans.  Those were the old days.  

Today, bank loan officers specialize.  There will typically be just one guy at the bank devoted exclusively to commercial real estate loans, and he will service six or seven bank branches.

This commercial real estate loan specialist will seldom come into any of the bank branches for more than a few hours per week combined.  When not actually processing commercial loans, he is expected to be out in the field, calling on wealthy investors and commercial brokers (commercial realty sales brokers), in order to hustle up new commercial loan business.

Modernly, anyone calling one of his six or seven bank branches, looking for a commercial real estate loan, will be forwarded to his cell phone by the branch.  A lot of the commercial real estate loan officers will not even have an office or even a desk at the bank.  They will simply float to a vacant desk.  

Moving On:

Suppose I am a bank commercial loan officer, and I get a commercial loan request on a small retail building currently leased to GameStop, a well-known national retailer of video games.  The lease is at a good rental rate, and it is scheduled to last another seven years.  GameStop appears to be making money and is growing.

The lease has an option to extend, but it is far from guaranteed that GameStop will choose to exercise its option.  Both the subject commercial building and the surrounding commercial district are looking pretty tired these days.  All of the new commercial growth is headed to the other side of town.  

So do I make this borrower a commercial loan, knowing that this key tenant will likely move out in seven years?

The folks at Adventures in Commercial Real Estate did a great job explaining the concept of hangout and hangout risk:

The hangout is the expected outstanding loan balance owed to the lender by the borrower at the end of the lease term of a key tenant.

The hangout risk is the risk to the lender associated with the borrower’s ability or inability to repay said loan.  

His "pet shark".

Obviously, if the loan is small and the borrower is very wealthy, there is very little hangout risk.  On the other hand, if the loan is large - saying $7 million - and the borrower barely has a net worth of $7 million, the hangout risk is large.

An especially important consideration in investments with a single tenant, the hangout risk is determined by comparing the hangout to the dark value (value of the vacant real estate) to determine whether the borrower will be able to repay the loan.  

The hangout risk can be quantified by dividing the hangout by the dark value.  

Example:

A borrower secures a $100,000, 20-year loan against a property leased to WalBlues for 15 years.  At the end of year 15, the outstanding loan balance is expected to be $50,000.  The lender projects the value of the vacant property in year 15 to be $50,000.  

Therefore the hangout risk is high, as represented by the expected LTV at the end of the lease term

LTV at the end of Year 15 = $50,000 ÷ $50,000  = 100%

since the borrower will need to re-lease the property before year 20 to be able to refinance the property to repay the lender.

Let's Do Some Horse (Rino?) Trading:

Do you know the commercial real estate loan officer for the Bank of Example?  Do you have his contact information?  C-Loans will trade you ONE of the following goodies for his contact information:

• Commercial Mortgage Marketing Course
• Income Property Underwriting Manual
• Commercial Loan Broker Fee Agreement 
• Regional List of 750 Commercial Lenders

Want all four goodies?  Find me four commercial real estate loan officers working for banks or credit unions.  Sorry, guys, no other lender types.

Get My Famous Nine-Hour Training Course:

Admit it.  You have always lusted in your heart (Jimmy Carter) to own my wonderful, 9-hour training course, How to Broker Commercial Loans.  Unfortunately you just couldn't afford it.  

If you gather for me TWENTY such commercial real estate loan officers, working for banks, I will trade you.  Here are the details of the swap.

Facebook Page.  Yeah-Yeah, Boooooring!

Imagine, three times per week, a commercial real estate finance (CREF) training lesson that is about the size of a Twitter post.  You will learn a ton of advanced CREF terms.  Borrowers, commercial brokers (realtors), and bankers will look at you with great respect.  

Just follow our new facebook page.  

Mr. Musk, here's the problem:  If war were to break out between China and the U.S., the Chinese would likely strike first.  President Xi of China is a virtual dictator, so he doesn't have to ask his Congress to declare war.  

Xi will almost certainly use that freedom to cripple the U.S. Navy in the opening hours of the war.  The war will likely start, without warning, with Chinese DF-21D carrier-killer missiles crashing down onto our carriers, our other capital ships, and our airfields on Guam.  

A lot of our wildly expensive fighter-bombers may never even get off the ground.  A good image would be the burning hulks of those Egyptian and Syrian jets in the opening hours of the Six Day War in 1967.

We may get a few F-35a's off the ground, but when they return after striking Chinese missile sites, they will have nowhere to land and refuel.  The U.S. Navy and Air Force ran a huge war game simulation last year of a conflict between the U.S. and China.  We lost badly.  The Chinese quickly took out our carriers, and they so accurately and repeatedly struck our airfields that no jets could land to refuel and re-arm.

In such a conflict, our massively expensive jets would eventually have to fall out of the sky, as they ran out of fuel, and our pilots are forced to bail out.  Each F-35a costs on the order of $75 million.

Mr. Musk, You Can Save Us:

Space X already uses drones ships to recover its own rockets.  Your engineers already have the expertise.

Please produce for the Navy a fleet of relatively-inexpensive interlocking flight deck drones.  

Each flight deck drone would be largely identical.  Each drone ship would be 1/36th the size of a carrier flight deck.  The Navy might assign 60 of these flight deck drones to a given area, all operated and directed by artificial intelligence.  Think of the wonderful light show put on by Intel every December using a fleet of hundreds of small aerial drones.

Even if Chinese missiles take out 20 of these 60 flight deck drone ships, the AI can "quickly" assemble and lock in the place at least 36 of them to create a flight deck for our returning jets.  

As a jet lands, it can taxi to a drone ship located in one of the corners, which would then separate and carry the expensive jet out of the blast zone range of a missile hitting the assembled flight deck.  A replacement "Lego" then powers into the place of the departed "Lego", locks itself into the flight deck, and the next jet is recovered.

This isn't rocket science, Mr. Musk.  :-)  It would be a great service to the country and a new source of income for Space X - much like Tesla selling home battery packs.

Sent by one of my golf buddies.
 They can be so cruel.  Haha!

Last week, in their latest FinFacts newsletter, George Smith Partners released the following tombstone:

"George Smith Partners successfully placed $14,050,000 in construction financing, which funded 89% of total project cost, for the acquisition and reposition of a 79-unit, mixed-use property in a desirable and historic St. Louis City neighborhood.  GSP was engaged by the Borrower when its original lender, a national REIT, was forced to re-trade the Borrower on loan terms due to the COVID-19 pandemic."

What does it mean to "re-trade the Borrower on loan terms"?

According to Wikipedia, a re-trade is the practice of renegotiating the purchase price of real property by the buyer, after initially agreeing to purchase at a higher price.  Typically this occurs after the buyer gets the property under contract and during the period that it is performing due diligence.  The buyer may raise a due diligence issue and demand a purchase price adjustment to a lower re-trade price.

In a context of commercial real estate finance, to re-trade the borrower means to alter the loan terms negatively, usually due to some serious economic event, such as the Great Recession or the COVID Crisis.

Many conduit loan borrowers, when the Great Recession hit in mid-2008, were caught with their loans still in process.  The conduit lenders went back to their borrowers and told them, "Look, the market for commercial mortgage-backed securities is collapsing.  We can't sell your loan at our originally proposed interest rate.  We are going to have to raise your interest rate by almost 1% and cut you loan-to-value ratio back from 75% to just 62%."  More of these conduit borrowers chose to walk.

The re-trade of the big construction loan that George Smith Partners described above was probably a big cut in the loan-to-cost ratio.  You will recall that the Total Cost of a construction project is the sum of the land cost, the hard costs, the soft costs, and a contingency reserve of around 5% of hard and soft costs.

The Loan-to-Cost Ratio is therefore just the Construction Loan divided by the Total Cost, multiplied by 100%.  The most typical loan-to-cost ratio on construction loans is 80%.

Let's now go back to the big construction loan that George Smith Partners just closed.  Perhaps the REIT initially proposed a construction loan of 80% of cost; but after COVID became a pandemic, this REIT probably cut heir loan-to-cost ratio down to only 70%.  

The developer probably didn't have an extra $1.6 million in equity to contribute to the project.  Fortunately, the good folks at George Smith Partners saved the day.

Can lenders really re-trade a borrower legally?  You will recall that in commercial real estate finance ("CREF"), lenders almost never issue a firm commitment.  They merely issue a term sheet - also known as a loan proposal or conditional commitment letter.

A term sheet is not a firm commitment.  It is just a letter expressing an interest in making a commercial loan and providing a good faith estimate of the eventual terms.

Although the typical term sheet is not binding on a commercial lender, it is the custom and practice in the industry for the lender to honor a term sheet, absent a major change in the bond and/or real estate markets.  

In real life, the vast majority commercial lenders are pretty good at sticking to the terms of a term sheet.

Mini-Lessons this week:
Burn-off's, par passou notes, A/B notes