Commercial Loans and Fun Blog

If you have been reading my articles about the coming war with China, you know that I am super-freaked-out about accuracy of modern missile warfare.  The woeful Indians successfully launched a ship-to-ship missile that hit a steaming frigate that was 130 miles away four months ago.  

The Chinese are far better at missile technology than the Indians.  Our carriers are in serious trouble.  The U.S. is a carrier power.  China is a missile power.  It's like being a battleship power in World War II, rather than a carrier power.

In the years leading up to the attack on Pearl Harbor, the U.S. was overly-focussed on battleships.  British dreadnoughts (battleships) won the huge sea battle known as Battle of Jutland in World War I, even though British gunnery was absolutely atrocious.  The hapless Brits could hardly hit a thing; but if you throw up enough shells...  

In World War II, however, I don't think a single battleship from either side fired a single shot at an aircraft carrier in the entire war.  We're a carrier power.  China is a missile power.

You will recall from my earlier articles that the U.S. ran a war game simulation eight months ago between the Chinese and the Americans, assuming the Chinese were trying to take Taiwan.

In our own simulation, we got our butts kicked.  Super-accurate Chinese missiles hit our airfields on Guam so effectively that our $27 million fighters and bombers couldn't land to reload and refuel.  Our pilot were forced to ditch our incredibly expensive (and very few) jets into the ocean.

That's the bad news.  The good news is that U.S. Navy and Air Force officers are not afraid to push back against their admirals and generals.  "Admiral, if we don't do something different, we are going to get our butts handed to us."

I was therefore pleased to see that U.S. Air Force tested this month a new distributed force concept.  Rather than having all of our expensive jets located at our airfields on Guam, where the Chinese can quickly and easily destroy them in the first twenty minutes of war, the Air Force is fixing up old airfields on tiny little islands and atolls all throughout the South China Sea.  

These remote airfields are gawd-awful, with dirt runways that have not been cleared in thirty years.  There might be 150 indigenous inhabitants on these islands, with 25 head of cattle, and 60 wild boars.  When someone talks about Bum Flowers, Egypt,  this is what they are talking about.

First the Air Force cleans up the old landing strip.  Then we fly in just three moderns jets - maybe one bomber and two fighters - to Wild Boar Island.  We also fly in a C-130 military cargo plane, with a crew cross-trained in lots of different functions - reloading missiles and bombs onto our fighters and bombers, refueling them, repairing them in the field, and putting rested and fresh pilots onto the planes.  

The fresh fuel come right from the C-130, while the engines of our jets and fighters keep running.  Hot refuelling is a procedure to refill an aircraft with aviation gas while at least one engine is still running.  It is intended to reduce the amount of time it takes an aircraft to get back into the air and carry out an additional mission.

The idea is to turn these planes right around before a Chinese missile slams into the field.  Now I am sure the initial tests were a complete disaster, but I am thrilled that the U.S. Air Force is spreading out their forces in the South China Sea.  Our modern jets are siting ducks right now.

"Si vis pacem, para bellum" is a Latin adage translated as "If you want peace, prepare for war."

One final thought.  The Air Force general who was discussing with the press this concept of distributed and independent forces - where the force of two fighters and one bomber pick their own targets - mentioned something that startled me.  Startled me?  Heck, it made need fresh underwear.  Haha!

He said these little independent forces need to be able to operate all by themselves, even when all our satellite systems are down.  All of our satellite systems are down?  Holy poopski.  The Chinese can take down all of our satellites?

Why am I so freaked out about this coming war with China?  Your home in Kansas City or my home in Indianapolis will be within range of Chinese missiles, when a Chinese missile ship or submarine sails into the Gulf of Mexico.

Do you know any retired officers in the U.S. Navy?  Would you kindly forward to them  the following article about interlocking flight deck drone ships.   This is the proposal that capitalizes on Elon Musk's experience with drone ships to create a landing surface for our returning jets.

C'mon, guys.  This is fifth-grade math today.  Don't tune out simply because you see a handful of easy algebraic expressions.  Your math teach told you that you would need this stuff some day.  Haha!

A cash-on-cash return is a form of yield calculated on real estate investments.  It is seldom used for bond or other investments.

Lockdown Tip #1:  Never leave your rice uncovered.

Your cash-on-cash return is your actual net cash flow, after debt service, divided by the amount of cash you invested, times 100% to convert it a percentage.

Example With No Leverage:

You buy an apartment building for $1 million all-cash.  There are no mortgage payments.  After all expenses, you net $57,000 in cash flow.  Therefore -

Cash-on-Cash Return = (Net Cash Flow / Cash Invested) x 100%

Cash-on-Cash Return = ($57,000 / $1,000,000) x 100%

Cash-on-Cash Return = 0.057 x 100% 

Cash-on-Cash Return = 5.7%

My golf buddies can be so cruel.  Haha!

Remember, the above calculation assumes that you paid all cash for the apartment building.

"So, George, the cash-on-cash return is the same as the cap rate, right?"

Not quite.  You will recall that that a cap rate is the return on investment that an investor would earn if he paid all cash for an income property.  

It is calculated by dividing the projected Net Operating Income (NOI) by the purchase price (and then multiplying result by 100% to covert it to a percentage.)

Cap Rate = (NOI/Purchase Price) x 100%

But here's the thing.  A property's net operating income (NOI) is really a budget for next year, assuming the use of a professional property management company.  Included in that budget is a Reserve for Replacements to replace the roof, to replace the HVAC system, and to repave the parking lot.  

A good rule of thumb, when preparing a Pro Forma Operating Statement for a  commercial lender, is to use 3% of Effective Gross Income as your Reserve for Replacements.  

The Effective Gross Income is the Gross Scheduled Income, plus any Parking Income and Vending Machine Income (which together is your Total Gross Income), less a 5% Reserve for Vacancy and Collection Loss.  The remaining number is your Effective Gross Income.

A Pro Forma Operating Statement also makes a deduction for Professional Property Management - sometimes onsite management as well - even if the owner intends to manage the property himself.

In contrast, the Cash-on-Cash Return will not factor in a Reserve for Replacements, nor will it factor in a property management fee, if the owner intends to manage the property himself.

In real life, most real estate investors use a mortgage.  Let's look at a cash-on-cash calculation where the borrower uses a mortgage.

Example With a Mortgage:

You buy an apartment building for $1 million.  You put $300,000 down and get a $700,000 mortgage.  The property throws off $57,000 per year in gross cash flow.  The annual payments on the $700,000 mortgage are $32,000 per year.

What is your Cash-on-Cash Return?

Cash-on-Cash Return = (Net Cash Flow / Cash Invested) x 100%

Cash-on-Cash Return = ($57,000 - $32,000) / $300,000) all times 100%

Cash-on-Cash Return = 0.083 x 100% 

Cash-on-Cash Return = 8.3%

You will recall that the Debt Yield Ratio is different from the Debt Service Coverage Ratio.  They are two completely different ratios.

The Debt Yield Ratio is defined as the Net Operating Income (NOI) divided by the first mortgage debt (loan) amount, times 100%. 

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

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

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

The only factor that the Debt Yield Ratio considers is how large of a loan the commercial lender is advancing compared to the property's NOI.  This is intentional.  Commercial lenders and CMBS investors want to make sure that low interest rates, low caps rates, and high leverage never again push real estate valuations to sky-high levels.

A CMBS loan originator named StackSource recently sent out a very helpful update on the CMBS markets and on the Debt Yield Ratio currently being used on apartment loans:

"The CMBS market had a rough year in 2020, but (the CMBS market) has strengthened considerably and is ready to compete for loans on stabilized assets nationwide in 2021."

"As a reminder, CMBS stands for Commercial Mortgage Backed Securities, and this type of loan execution offers long-term holders of commercial real estate several advantages: competitive interest rates (George:  Not much higher than the rates from life companies), non-recourse loans, and the potential for interest-only payments."

George:  A good way to think about CMBS loans is to call them scratch-and-dent life company loans.  They might have qualified for a life company loan, but the property was a little too old, it was in a secondary location (not the single best location in a football team city), and/or it had mom-and-pop quality tenants, rather than national near-credit-tenants.

"Multifamily CMBS loans are beating the agencies (Fannie and Freddie) for certain assets today based on lower interest rates and full-term interest-only payments (I/O)."  

George:  Full-term interest only payments?  CMBS lenders beating agency lenders for apartment loans?  Wow.  For many years, CMBS lenders had trouble competing with agency lenders.  Fannie Mae and Freddie Mac have always offered terrific apartment loans, but these agency lenders were never known for offering the absolute largest loan amounts.

"The ideal scenario is up to 70% for full-term I/O or 75% with amortization.  A minimum debt yield of 7.5% (or 8.0% for smaller markets) for apartments will apply."

"Interest rates on apartment loans for full-term I/O will be around 3.00-3.55%, based on today's spreads."  

George:  With interest rates this low and interest-only payments, apartment investors much be raking in cash flow hand-over-fist."

"CMBS is even coming back for hotel financing, granted at a lower leverage point (60% LTV, 12% Debt Yield) and at relatively higher rates in the 4's."  

George:  As long as the loan is larger than $5 million, it might even make sense to work on hotel loans again.

This is going to surprise you, but commercial banks, credit unions, and federal savings banks (the old S&L's with a Federal charter) all quote pretty much the exact same interest rates and terms on commercial real estate loans.  

This is true for huge commercial banks in Los Angeles and for little credit unions in Maine.  No matter where the property is located, as a commercial loan broker, you will always know what to quote.  

To be clear, we are talking about commercial real estate loans on standard commercial rental properties, like office buildings, shopping centers, retail buildings, and industrial buildings.  

The rates and terms will be a little more scattered for multifamily properties.  Some banks, especially savings banks, love-love-love apartment buildings.  They will quote delicious interest rates and terms.

Smaller commercial banks are less enamored with apartment buildings because their owners seldom keep huge deposits in their company checking accounts.  If they have cash, they immediately go out and buy another building.  In contrast, widget manufacturers might keep large balances in their bank for the the new bank to win.  Banks, especially smaller ones, are all about deposit relationships.  

Before we get into the interest rates being quoted by banks on commercial loans today, let's first talk about terms:

Amortization:

Most banks will quote a 25-year amortization.  A twenty-year amortization is to commercial loans what a 30-year amortization is to home loans.  It's the norm.

If the property is older than, say, than 35-years, the bank might insist on just a 20-year amortization because the property is getting pretty long in the tooth.  The building is not going to last forever.  The bank needs to eventually get their principal back before the termites stop holding hands.

Term:

Most commercial banks today will give you a ten-year term on your commercial loan.

Fixed on Adjustable:

The typical bank commercial loan is fixed for the first five years.  There is one rate readjustment at the beginning of year six, and then the rate is fixed for the remaining five years.

When the rate readjusts, what is adjustment tied to?  In other words, what is the index and what is the margin?

This is going to surprise you, but most banks don't say!  What????  The promissory note will simply say, "The rate will readjust to whatever the bank is quoting at the time for similar commercial loans."

What if the bank tries to raise the interest rate to 20%?  This could actually happen, if the dollar were to suddenly collapse.  

In such a case, the bank would give you a window in order to pay off their loan, without penalty, with a new loan from a cheaper lender.  A window is a period when there is no prepayment penalty.  Most commercial real estate loans from banks give the borrowers a 90-day window after a rate readjustment.

Prepayment Penalty:

Banks differ on prepayment penalties.  The penalty could vary from 1% to 2% during the entire 5-year term, to a declining prepayment penalty of 3% in year one, 2% in year two, 1% in year three, and perhaps 1% in years four and five.

So what do you quote on a $300,000 permanent loan on a little retail building in Bum Flowers, Alabama?  I want you to quote 3%-2%-1% and none thereafter.  No bank is going to refuse to make a good commercial loan if it can get a declining prepayment penalty of 3%-2%-1%.

Will a bank ever make a commercial real estate loan with absolutely no prepayment penalty?  The deal would have to be very, very good to get them to waive it completely.

Interest Rate:

Banks all quote pretty much the exact same interest rate - between 2.75% to 3.5% over five-year Treasuries, depending on the quality of deal (more on this below).

Five-year Treasuries as of January 22, 2021 were 0.44%.  Therefore the bank is going to quote you between 3.19% to 3.94% today.

You can always find the latest commercial real estate interest rates and Index values by going to our wonderful Resource Center.  Be sure to bookmark this wonderful reference source.

Quality of the Deal:

Here are the factors that affects bank interest rates on commercial loans -

1. How much cash does the borrower keep in the bank?  The more liquid your borrower, the lower his interest rate.
   
   
2. How old is the property?  The younger the building, the lower the rate.
   
   
3. How gorgeous is the building?  The prettier the building, the lower your rate.
   
   
4. How desirable is the location?  If your building is located on the bets street in town, you may get the bank's very lowest commercial loan interest rate.
   
   
5. Assuming you are at a bank of suitable size, the larger the loan, the lower the rate.  Big banks make big commercial loans.  Small banks make small commercial loans.  Match the size of your bank to the size of your deal.
   
   
6. How close is the building to the bank?  The further your building is from the bank, the higher the interest rate you will probably get.

Moral of the Story:

Always apply to a local bank.

Did you remember to bookmark our wonderful Resource Center?

My friends, you are about to read something that will send your jaws dropping to the floor.  

As a history buff, I have often read about the beatings and murders of moderate journalists by the Nazi brownshirts in Germany in the 1930's, as Hitler was rising to power; but I never expected to be a victim.  

Three days ago, I posted a thoughtful blog article about how the left had gone a little over-the top in their purge of conservative journalists and their news agencies over the past three days.  No reasonable man, after reading my intentionally-understated article, could call my arguments inflammatory.  All it basically said was, "Hey liberals, you are leaving us conservatives nowhere to speak."

Facebook just banned my company
for a month for writing that article!

They said that my article about the liberal monopoly on the news agencies violated "Community Standards."  Here is the message we received from Mark Zuckerberg's Facebook Thought Police:

Get ready for a belly laugh.  Are you ready?  It's going to be a good one.  :-)

In 1984, Apple Computer, under Steve Jobs, used a brilliant and visually stunning commercial to announce the introduction of the Macintosh computer.  The commercial railed against Big Brother, which was obviously the monopoly of Microsoft's operating system.  Here is the final image from that famous commercial, perhaps the most famous commercial of all time.  If you have never seen this commercial, you are in for a real treat.

Do you see the irony?  Apple Computer removed Parler, the conservative competitor to Twitter, from their App Store two days ago.  Apple is now controlling our thoughts.  Hahahaha!

Confused?  The political satire, 1984, was written in 1949 by George Orwell.  Your old English teacher would agree that 1984, along with Animal Farm, is one of the most important political satires of all time.  

Back in 1949, the year 1984 was still a very long time away.  The book describes a bleak, dark future, when the country was ruled by a single party, and where the actions of everyone are overseen by a ubiquitous computer program called Big Brother.  Even the very thoughts of the people are controlled by the Thought Police.  So Apple Computer, you say that 1984 won't be like 1984?  Hahahaha!

Note:  Too much to think, not drink.

By the way, since I wrote my blog article, YouTube has joined in the Big Tech purge, and it has cut off even more conservative commentators.  It is becoming immensely more difficult for advocates of free speech to be heard.

“The only thing necessary for the triumph of evil is for good men to do nothing.” -- Edmond Burke

What can we conservatives do?  The solution is easy.  We can bring rationality, civility, and fairness back to the news industry in just nine months - with no violence or street protests whatsoever.  We simply need to start boycotting the products that are advertised on Facebook, Twitter, CNN, and MSNBC - starting with GEICO, the largest advertiser on CNN.

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.