Commercial Loans and Fun Blog

In negotiating an income property loan, the size of loan the borrower can obtain is usually more of a sticking point than the rate or the loan fee.  

Since income property loan sizes are generally limited by the debt service coverage ratio (i.e., cash flow), rather than the loan-to-value ratio, the operating expense figure that the lender uses in his calculations is critical.

Suppose a property has the following Pro Forma Operating Statement:

ABC APARTMENTS
1234 MAIN STREET
SAN JOSE, CALIFORNIA

PRO FORMA OPERATING STATEMENT

Income:

Gross Scheduled Rents $100,000
Less 5% Vacancy & Collection Loss 5,000

Effective Gross Income: $ 95,000

Less Operating Expenses:

Real Estate Taxes $12,500
Insurance 2,550
Repairs & Maintenance 5,890
Utilities 7,345
Management 4,865
Fees & Licenses 987
Painting & Decorating 3,986
Reserves for Replacement 1,900

Total Operating Expenses: 40,023

Net Operating Income: $54,977

Then we hereby define the Operating Expense Ratio as follows:

Operating Expense Ratio = Total Operating Expenses divided by
the Effective Gross Income

Using our example above:

Operating Expense Ratio = $40,023 ÷ $95,000 = 42.1%

Appraisers and professional property managers often keep track of the operating expenses of the buildings they appraise or manage, and they publish their results. For example, the National Association of Realtors publishes the results of their surveys annually in several hardbound books including Income and Expenses Analysis-Apartments and Income and Expense Analysis Office Buildings.

Lenders have access to these type of publications, and they therefore are reluctant to accept at face value operating expenses supplied by the borrower when their operating expense ratios are less than those experienced by similar buildings in the area.

While it might be possible to operate an apartment building IN THE SHORT RUN at an operating expense ratio of less than 30 to 45%, in the LONG RUN, the end result will be a seriously deteriorated building.

It might be possible to get a lender to accept an operating expense ratio as low as 28% on a very new building, if it had fewer than 10 or so units, and if it had no pool and very little landscaping, and if you had authentic source documents to back up your claim. But in general, lenders will very seldom accept an operating expense ratio on apartments of less than 30 to 35%, and have been often known to use 40 to 45%.

The following are factors that will influence the lender to use a higher operating expense ratio:

1. Lack of individual metering of utilities
2. Swimming pool
3. Elevator
4. Extensive landscaping
5. Low income area and/or tenants
6. Presence of families with children

The larger the project, the larger the required operating ratio.  Large projects usually entail extensive recreational facilities and pools, and they often require full-time on-site management teams.

Operating expense ratios are not as useful in evaluating most commercial or industrial properties.  The reason why is because the space can be rented on a triple net basis, a net basis, or a full service basis.

Certain commercial properties, however, have surprisingly predictable operating expense ratios"

1. Self storage facilities:  25%
2. Mobile home parks:  25%
3. Non-flagged hotels and motels:  50%
4. Flagged hotels:  60%
5. Residential care homes:  85%  (food, nurses, etc.)

Never knew I had a gas mask fetish, but... wow.  :-)

If you are a commercial loan broker, and you are not calling every commercial real estate loan officer, working for a bank or credit union, within 20 miles of your office, you are missing out one of the biggest feasts in commercial real estate finance ("CREF") in forty years.  Please grasp this concept: 

Almost every bank in the country is turning down almost every commercial loan request that it receives.  Helloooo?  What are they doing with these turndowns?  

These bankers would welcome anyone who could help them service their high-net-worth clients, especially since you will be taking the deals to a private money lender, like Blackburne & Sons, as opposed to a competing bank, which might steal their client.

Commercial Mortgage Rates Today:

Here are today's commercial mortgage interest rates on permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans.

Be sure to bookmark our new Commercial Loan Resource Center, where you will always find the latest interest rates on commercial loans; a portal where you can apply to 750 different commercial lenders in just four minutes; four HUGE databanks of commercial real estate lenders; a Glossary of Commercial Loan Terms, including such advanced terms as defeasance, CTL Financing, this strange new Debt Yield Ratio (which is different from the Debt Service Coverage Ratio), mezzanine loans, preferred equity, and hundreds of other advanced terms; and a wonderful Frequently Asked Questions section, which is designed to train real estate investors and professionals in the advanced subject areas of commercial real estate finance ("CREF").

Did you bookmark it?

Gold prices are climbing due to DE-flation?  That makes no sense.  As you will see, it makes perfect sense.  Gold cannot default.

Gold is only a so-so hedge against inflation.  The reason why is because physical gold does not pay a dividend.  There are better hedges against inflation.  For example, real estate is a much better hedge against inflation because it produces net rental income, as well as appreciate in price.

But what about gold mining stocks during times of inflation?  They pay a dividend, don't they?  That's income.

Yes, they do; but gold mining stocks are investments in a company.  When companies compete, there are winners and losers.  You could have the right sector - gold mining stocks - and yet still take a loss, or at least lag the market, if you chose the wrong gold mining companies in which to invest.  Gold miners are not a pure play.

Okay, but what about a precious metals mutual fund or a precious metals index fund?  These might indeed be reasonable investments during a period of sustained inflation, but you would probably do much better in REIT's or commercial development companies.  Real estate offers a significantly higher cash flow.  

The bottom line is that gold is no better than a so-so investment during times of inflation.  

Where gold really shines is during times of DEFLATION.  What?  Huh?  "Why would anyone want to own gold when prices are falling?  I don't get it."  The reason why is because gold cannot default.

Most periods of deflation occur during financial crises, like the S&L Crisis, the Dot-Com Meltdown, the Great Recession, and now the Coronavirus Crisis.  A ton of companies fail during these financial crises, and these slumps seem to hit about once every twelve years or so.  

More than 1,000 savings and loan associations (S&L's) failed during the S&L Crisis.  Hundreds of highly-capitalized dot-coms, like Pets.com and Webvan, failed during the Dot-Com Meltdown.  Hundreds of financial firms, like Lehman Brothers, and manufacturing companies, like General Motors, failed during the Great Recession.   While the factories and the name survived due to a government bailout, the shareholders in GM were essentially wiped out.

Before we are done, hundreds and hundreds of otherwise successful companies will unfortunately fail during this Coronavirus Crisis.  Already the Fed has had to buy up hundreds of billions of dollars worth of junk bonds to keep major U.S companies afloat.  Despite the help of the Fed, thousands of bondholders will lose most, if not all of their investments.

Much of the wealth in America is invested in bonds.  Bonds are the debt of another.  Most of the assets held by our banks are loans, which are the debts of another.  Mortgage funds, hedge funds, and REIT's have huge investments in mortgage loans, once again, the debts of another.

What happens when these borrowers simply cannot make their payments?  How valuable is a bond from a company that just got downgraded from investment grade to junk status because the company is on the verge of failure?  Imagine if you were a bondholder of Lehman Brothers in 2008.  You would have suffered a near-total loss.

In a deflationary economic collapse.  Gold is a supermodel.  Gold is one of the few financial assets that is not the debt of another.  Gold cannot default.

Therefore, whenever you see the price of gold rising, when the price of most other financial assets is falling, look for a dangerous financial storm cloud somewhere on the horizon.

That storm cloud is the deflationary tidal wave that is poised to crash on our shores in about four more weeks.  Please note that I am assuming that the President, the Fed, and Congress will continue to do everything possible to shore up the U.S. economy.

Unfortunately, this imminent financial calamity is not anything that American financial authorities can prevent.  You could build the most seaworthy and stable cruise ship on Earth, but it won't protect you from some huge, rogue tidal wave

This tidal wave is coming from China.  Chinese demand for raw materials and fine products will shrink so far that tens of thousands of companies worldwide will flounder, as their second largest market suddenly shrinks to just a fraction of its former size.

If you have not read my article, A Huge Deflationary Tidal Wave is Coming Out of China, you simply must read it now.  You need to move to cash, if you don't want to lose half of your retirement savings.

In about four-and-a-half weeks, the new, hot story on Bloomberg, CNBC, and Fox Business will be about how far the demand for raw materials and goods by China has fallen.  By then it will be too late to save half of your savings.

The price of gold is rising.  Winter is coming.

Commercial Mortgage Rates Today:

Here are today's commercial mortgage interest rates on permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans.  

Be sure to bookmark our new Commercial Loan Resource Center, where you will always find the latest interest rates on commercial loans; a portal where you can apply to 750 different commercial lenders in just four minutes; four huge databanks of commercial real estate lenders; a Glossary of Commercial Loan Terms, including such advanced terms as defeasance, CTL Financing, this strange new Debt Yield Ratio (which is different from the Debt Service Coverage Ratio), mezzanine loans, preferred equity, and hundreds of other advanced terms; and a wonderful Frequently Asked Questions section, which is designed to train real estate investors and professionals in the advanced subject areas of commercial real estate finance ("CREF"). 

Did you bookmark it?

Hilarious video:  Archie Bunker gets a close shave.

An amazing thing happened today in the oil markets.  Oil producers couldn't even give their oil away for free.  The price of oil fell to its lowest price in history.  

West Texas Intermediate crude for May delivery fell more than 100% to settle at negative $37.63 per barrel, meaning producers would pay traders to take the oil off their hands.  Huh?  What?

Oil is a commodity, and like many commodities, oil contracts sell on the futures exchange.  Producers, users, and speculators buy and sell oil contracts every business day.

Contracts for the delivery of commodities are settled on the 20th day of the prior month.  In other words, the final market price for May oil delivery was settled today, April 20th.

Since the start of the Coronavirus Crisis, oil demand has fallen by around 30 million barrels per day.  We were using around 100 million barrels per day before the crisis.  At the same time, oil producers have kept on pumping oil.  One reason why is because once you shut down a fracking well, you can never re-open it again.  

On the regular stripper wells, the cost to get the well producing is a sunk cost.  You can't get it back.  While it might take an oil price of $40 per barrel to eventually break even on your long-term investment, if you can even get $10 per barrel, it still makes sense to keep the well pumping.

But there is no place to put it all of this excess oil.  Just about every oil storage facility in the world is filled to capacity.  Supertankers are being used as floating storage facilities, at a phenomenal rental cost per month.  And still there is no place to store the new oil.

So oil producers now have to pay a negative $37 per barrel to get rid of it.  Can you imagine?

Do you remember when we all wished the Arabs would drown in their oil?  Well, the world's largest oil producer is now the United States.  Uh, oh.

This oil glut is really going to hurt the American economy, as hundreds of U.S. fracking wells across the country are forced to shut down permanently.  Tens of thousands (hundreds of thousands) of highly-paid American workers are going to lose their jobs.  A severe economic recession, if not an outright depression, is now pretty much written in stone. 

The truth is that the Saudi's did this to us.  U.S. oil production has severely hurt their oil revenue.  The cost of oil production here in the United States is around $30 per barrel, while it is less than $10 per barrel in Saudi Arabia.   

If oil settles around the $17 per barrel price fo the next several years, U.S. oil producers will be largely wiped out.  Once they are gone, Saudi Arabia can then raise the price back up to $70 per barrel.

The Saudi's are using this coronavirus crisis to drive our smaller oil producers permanently out of business, just like they drove many of our ethanol producers out of business fifteen years ago.

I say that we give Saudi Arabia and the European Union a six-month notice.  Guard Saudi Arabia and the Straits of Hormuz yourselves.  We're pulling out.  Forget these bums.

Quick funny:  Tomorrow is the National Home-School Tornado Drill.  Lock your kids in the basement until you give the all clear.  You're welcome.  Haha!

For the past two weeks, we have been discussing the fact that just about every commercial bank in the country is out of the commercial mortgage market.

The CMBS market remains broken for now too, although the Fed's recent purchase of billions of dollars worth of commercial mortgage-backed securities has helped to prevent a complete collapse of the CMBS market.  CMBS lenders will likely survive to lend again in a year or so.

ABS lenders are also out of the market.  You will recall that ABS stands for asset-backed securities, which are smaller securitizations of an eclectic collection of debt obligations.  An ABS pool might contain subprime auto loans, scratch-and-dent residential loans that have been kicked out of some regular securitization pools, aircraft loans and leases, equipment loans and leases, credit card loans, movie residuals, and non-prime commercial loans.

As a result of recent huge declines in the value of asset-backed securities, ABS commercial real estate lenders; like Silverhill, Velocity, and Cherrywood; are now out of the market right now.  

We also discussed how several hundred commercial hard money lenders nationwide are either out of the commercial loan market or have completely closed their doors.  The slaughter has been particularly bloody among those hard money shops that use a mortgage pool to fund their loans.

As soon as the coronavirus crash started, most of their private investors lined up to withdraw their money from these hard money mortgage funds.  This left these hard money shops with no new money with which to lend.  Suddenly they had zero loan fee income coming in, so they didn't have enough money to make payroll and to keep their doors open.

Bottom line:  When a borrower goes out searching for a commercial loan today, he is going to get turned away by just about every lender.  

Isn't this wonderful?!  As a commercial loan broker, you make your dough helping borrowers find commercial lenders.  When every bank in the country was making commercial loans, most borrowers didn't need you.  Now they do.

Commercial real loan officers, working for banks, are telling their prospective borrowers, "I'm sorry, but our bank is not making any new commercial real estate loans right now."  In other words, the bank is out of the market.

I can also tell you that, after having survived the S&L Crisis, the Dot-Com Meltdown, and the Great Recession, most commercial banks are going to remain out of the market for several years.  Whenever banks bolt to their hidey-holes, they come out very, very timidly.  

Those of you who have read and understood my articles about how the Multiplier Effect can sometimes work in reverse should be able to understand the huge deflationary pressures building in the U.S., as well as China.  You may not want to go "all-in" on the stock market, even though Gilead Sciences announced last night that their new therapeutic drug for the coronavirus is doing very well in a large trial.  That huge deflationary tidal wave from China is still coming.  Chinese small business owners have been traumatized, and a new drug does little to immediately restore their savings accounts.

You think it's bad now?  In 20 years, our country will be run by people home-schooled by day drinkers...

Since banks are turning down every new commercial borrower, it is therefore an incredible time to call bankers for their commercial mortgage turndowns.  The bankers will be grateful to have someone - anyone - to service their frustrated clients.

It also makes good sense to also tell these bankers that you will not be taking their good customers to some competing bank.  "All of your bank competitors are out of the market too."  Tell them that you have some reasonably priced private money with no prepayment penalty.

Make sure you gather the contact information on every commercial real estate loan officer working for a bank that you meet.   You can trade each bank commercial loan officer for either a free commercial mortgage underwriting manual, a free loan broker fee agreement, a free commercial mortgage marketing course, or a free regional copy of The Blackburne List containing 750 commercial lenders.

These trades are made under the Honor System.  Please don't cheat.  You can trade trade a banker for ONE of the above four goodies.  If you want all four goodies, please find me four bankers.

And this guy must work for a bank or credit union.  ABC Bank.  First National Bank.  Helloooo?  Banks have huge metal vaults with tens of thousands of dollars in cash on hand, right?  Mortgage companies are NOT banks.  You are not a commercial loan officer working for a bank.  You can't fill in your own name.  Nice try.  Sorry.

When this is over, what meeting do I attend first... Weight Watchers or AA?

Have you ever coveted my famous, nine-hour course, How to Broker Commercial Loans?  I will give you this course for free if you gather up twenty commercial real estate loan officers working for banks for me.

But where do you go to find these bankers to call?  Simple go to Google Maps and type in your office address.  In the Nearby field, type in "Banks".  Voila!

Since we can't eat out, now's the perfect time to eat better, get fit, and stay healthy.  Hellooo?  We're quarantined!  Who are we trying to impress?  We have snacks, and we have sweatpants.  I say we use them!  :-)

Commercial Mortgage Rates Today:

Here are today's commercial mortgage interest rates for permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans.

Be sure to bookmark our new Commercial Loan Resource Center, where you will always find the latest interest rates on commercial loans; a portal where you can apply to 750 different commercial lenders in just four minutes; four huge databanks of commercial real estate lenders; a Glossary of Commercial Loan Terms, including such advanced terms as defeasance, CTL Financing, this strange new Debt Yield Ratio (which is different from the Debt Service Coverage Ratio), mezzanine loans, preferred equity, and hundreds of other advanced terms; and a wonderful Frequently Asked Questions section, which is designed to train real estate investors and professionals in the advanced subject areas of commercial real estate finance ("CREF").

Be sure to bookmark this wonderful, free resource.

Short video of twins recognizing themselves for the first time.  Pretty sweet.

Don't get caught up in this dead cat bounce in the stock market.  To those of you unfamiliar with this old financial saying, a dead cat bounce refers to the fact that even a cat will bounce if it falls from a high enough building.  Please be assured that no sweet, little kitties were hurt in the writing of this article.  Cisca and I have four cats, and they are reasonably decent employers.  Haha!

The stock market fell a whopping 30% from its all-time high a few months ago.  It was never going to fall straight down, and this current rebound is probably nothing more than a rally in a bear market.  Elliott Wave Theory suggests that markets go up gradually in five pretty big waves, and they fall in three larger, faster waves.  These waves are also called legs.

I believe we are likely see the second big leg downwards in the U.S. stock market in the next six weeks.  The reason why is because a deflationary tidal wave is gaining strength in China, and it is poised to drown the rest of the world.  

Money is being destroyed din China at a prodigious rate.  Money can be destroyed? Huh?  What?   At the end of this article, I will explain how it happens; but for now, assume that China has erected huge blast furnaces, and prisoners are shoveling thick stacks of 100 yuan notes into these furnaces by the truckload.  Money in China is being destroyed.

Cute, short video.  Make sure your sound is on.

"Okay, George, even assuming that money can be destroyed (really?), how does this affect me?"

For the past few years, Chinese manufacturers and consumers have been a wonderful new market for raw material suppliers (think copper and iron miners) and manufacturers around the world.

If Chinese manufacturers and Chinese consumers soon will have no money left to buy raw materials and consumer goods (those darn prisoners keep burning it), mining companies and manufacturers around the world will soon have lost their second largest customer.  Their sales and profits will plummet, and the value of their stock and your retirement savings will fall precipitously.  Layman's translation:  Stocks markets worldwide are poised to take another huge dump.

Those are tiny crocodiles (her babies) on her back.

The Coronavirus Crisis has traumatized small Chinese business owners.  Did you know that sixty percent of the people in China work for small businesses?

These small business owners have been forced to keep paying their rent and their loan payments to the bank, but their sales have plummeted because so many people have been locked indoors.  Most of these small business owners have burned through huge chunks of their savings.  

If you owned a small business, and you had just spent the last of your savings, would you be in the mood to borrow even more money from the bank in order to expand your business?  Of course not!  And therein lies the problem.

I will explain why further below, but did you know that if a bank takes in a $1,000 loan payment and can't find a willing borrower to whom to re-lend it, that a whopping $20,000 gets sucked out of that country's money supply?  Twenty thousand dollars gets destroyed!  The Multiplier Effect works in reverse to the tune of 20:1.  Note, the starving prisoners didn't even have to use their blast furnaces.  The money just disappeared.  

So Chinese small business owners burned through their savings.  They definitely don't want to borrow more money to expand their business right now.  At the same time, since the very start of this crisis, these small businessmen have been sucking money out of their savings and sending it to their banks for mortgage payments and business loan payments.

These banks have been raking billions of yuan in the form of loan payments, but the banks themselves are scared.  Loan losses are way up.  Even if they could find a ton of brave, qualified borrowers, the banks in China are far too frightened and traumatized themselves to lend much money.

So billions of yuan worth of monthly payments have been flowing back to Chinese banks, but that money is not being re-lent out into the Chinese economy.  Twenty-to-one, bucko's.   (Most of you are much too young to remember the show, Happy Days, starring Ron Howard as Richie Cunningham, the classic, lovable, 1950's-era, Every Man.  Whenever Richie got a little too full of himself, he would call people, "Bucko."  Twenty-to-one, bucko's.  Haha!

But this is serious, guys.  Whole mountainsides of money are being destroyed in China.  Soon the Chinese consumer will have far less money to buy iPhones, Tesla's, GM cars from the U.S. and fancy perfumes, fashions, cosmetics, and wines from Europe.  

Chinese companies will also suffer painful declines in sales, which will lead to layoff's, which will lead to even less demand and even more layoff's.  It becomes a self-feeding negative cycle, like the water speeding up when you flush.

The horrible thing about deflation is that is a very difficult cycle to stop.  Prices will start to fall, as companies, desperate for income, slash pries to the bone.  And once prices start to fall, why buy a new car, a new bicycle, or a new phone today?  Why not hold out for an even lower price.  Deflation can be awful.

And as Chinese companies sell fewer washing machines, the demand for cooper and iron plummets.  Mining companies in Australia, South America, and Africa get gut-punched.  This Coronavirus Crisis has the potential to get awful.

Folks, I am 67 years old, and what little I have saved for retirement, I cannot risk in the stock market right now.  This dead cat bounce may last another five to six weeks; but soon the analysts and the smart money will start to realize that there are few places, other than cash, to hide when the Chinese Deflationary Tsunami comes crashing on our shores.  

There is actually a button on Zoom to make yourself prettier.

A financial writer for Apple News has caught a glimpse of the building deflationary tidal wave; but I assure you that China's new, free, spending vouchers are like using a pea shooter against an M1A1 tank.  They aren't going to be near strong enough against the Multiplier Effect working in reverse (20:1).

How Money is Destroyed:

Deflation?  How is deflation even possible?  Why would anyone ever burn $100 bills?

Currency is just a tiny fraction of a country's money supply, only about 10%.  The vast majority of a country's money supply consists of the proceeds of bank loans.

Very short video of a bird yoyo.

For example, your bank loans you $1,000 to buy three used desks and a computer.  The seller of that equipment deposits the proceeds of that $1,000 sale into his bank.  The bank keeps around $50 in reserve (5%), and then it loans out $950 to a barber.  The barber spends the $950 for a new cutting chair and some good electric razors.  The $950 end up in the next bank, and this next bank keeps $47.50 in reserve, and it lends out $902.50.  The third bank receives this deposit, keeps $45.13 in reserve, and lends out $857.37.  

And so on.  By the time the cycle is complete, that $1,000 new loan resulted in an increase of the money supply of a whopping $20,000 (20:1).  This is the Multiplier Effect and the miracle of fractional banking.

The problem is that the Multiplier Effect also works in reverse.  If a bank gets scared and fails to re-lend a $1,000 loan payment, a whopping $20,000 get sucked out the money supply.  In effect, $20,000 is destroyed.  Yikes.

Think I am an idiot?  I wrote my book, The Reverse Multiplier Effect, in late 2006, right before the deflationary crash of 2008.  At the time, few people believed that deflation was even possible.  Ah, geez, this coming financial crisis has the potential to be awful.

Are any of you guys savvy stock pickers?  If so, you might want to consider shorting those companies which provide services to the construction industry.  For example, those companies that manufacture, deliver, and/or set up huge construction cranes are likely to face some tough years ahead.

Why?  There may be very little new commercial construction - apartments, office buildings, shopping centers, residential subdivisions - over the next three years.

The reason why is because the banks have stopped making new commercial construction loans.  Banks are terrified right now, and the first thing that banks do when they get scared is to stop all commercial real estate lending.  

This lending freeze is especially true of commercial construction loans.  I have lived through three commercial real estate crashes in my forty years in commercial real estate finance ("CREF") - the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  Each time commercial real estate declined by almost exactly 45%.  Remember that number - 45%.  Commercial real estate may decline by 45% again as a result of this Coronavirus Crisis.*

It's almost like a game of musical chairs.  Whichever banks are caught with construction loans outstanding are the ones that take the largest losses during the commercial real estate crashes that seem to happen about once every twelve years.

Eeeuuu!

Short, funny alligator video.

It is important to grasp the concept that local commercial banks make 95% of all commercial construction loans.  Construction loans are are funded gradually, as the work progresses.  If you just gave a developer $5 million to build an apartment building, he's likely to skip the country, along with Lola La Boom-Boom, to some sunny beach to South America.

Because Lola looks awfully good in a string bikini, we simply cannot trust Don Developer with all of the money at once.  Instead, the proceeds of the construction loan are paid directly to Don's subcontractors, and they are paid only after the subcontractors have correctly completed their work.  The bank has to sign off on this work too, after it has made a progress inspection.  A progress inspection is a quick inspection by a bank employee to verify that certain construction work has been properly completed.

Every ten or fifteen days the bank has to send a loan officer out to the construction site to take a look at the progress of construction.  The subcontractors will be clamoring to get paid.  Some huge New York bank, for example, couldn't possibly fly a loan officer all the way out to Phoenix every two weeks to make these inspections.  This is why commercial construction loans are almost always made by local banks.

"But George, if the banks are too scared to make construction loans right now, why can't some other type of enterprising commercial lender start making them?"

There are several problems with this.  First of all, banks offer construction loans at rates as low as 4.25%.  I actually had to look up the current rate on commercial construction loans for this blog article, and do you know where I went?  I actually went to our new Commercial Loan Resource Center, which always shows you the latest interest rates on commercial real estate loans.  Haha!  If you have not checked out our new Commercial Loan Resource Center, you are really missing out.  Totally free.

A competing commercial real estate lender (private money lender) might have to charge 8% to 11% for a construction loan, and that higher interest cost would cut deeply into the developer's profit.  An extra 4% interest on a $5 million construction loan is real money.

12 seconds of hilarity

The second problem is that construction loans have to be disbursed as the work progresses.  That means that the lender has to sit on his dough, not earning any meaningful interest, until the developer is ready to draw down on his loan.  That's not very attractive for non-bank commercial lenders (think private money lenders).

The private money lender could fund the entire loan proceeds into a builder's control account and demand that the developer pay interest on the entire loan amount from Day 1; but this would be horribly expensive for the developer.  A builder's control account is an independent escrow set up to hold the proceeds of a construction loan until certain work is done.

The last problem with having a private money commercial lender make construction loans is that the lender will often be located too far away to make timely progress inspections.  Suppose the lender is based in San Diego and the project is located in Phoenix.  Progress inspections would be hard... but not impossible.

It has occurred to me that a great many developers across the country have started residential subdivisions, and they personally guaranteed their acquisition and development loans ("A&D").  They had their normal bank all primed to make the construction loan, once the horizontal improvements were in place.

An A&D loan is a loan to a developer to buy the land, to get it properly zoned, and to complete the horizontal improvements.  It's like a pre-construction loan.

Horizontal improvements including the clearing of the land, grading of the land, compacting the land, and installing streets, curbs, water, sewer, and power.

Now imagine you're a very good homebuilder, a responsible guy who tries not to use excessive debt or take too many chances.  You have successfully built out and sold off five previous residential subdivisions.  You have built up a respectable $7 million net worth.  You take out a $4 million A&D loan on your next subdivision.

Suddenly the Coronavirus Crisis hits, and the $4 million balloon payment on your A&D loan, which you have personally guaranteed, is due in just three more months.  Your bank notifies you that they will not be making any construction loans for the foreseeable future.  You contact two dozen other banks, and they all say the same thing.  "Quick, Jack, what do you do?"  (Famous movie line.  Can you name it?  Hint: The bad guy lost a finger defusing a bomb.)

I think there is a real opportunity for some mortgage funds, if any of them have survived, to fund the completion of this project for the developer and to charge him an equity kicker of an absolutely insane percentage (85%?) of the profits.  What choice does the developer have?  He personally guaranteed the A&D loan!  He simply must get out from under that personal guarantee.

An equity kicker is additional interest, in addition to the nominal interest rate, that takes the form of a share of the increased value of the property or a share of the profits upon sale.  A common equity kicker might be 10% to 30%.  The nominal interest rate is the interest rate stated or "named" on the note.  

Conclusion:

If your brother-in-law is a union carpenter, he would be smart to apply right now for a job delivering goods for Amazon or Wal-Mart.  His construction job is not coming back.  There will be very few commercial construction loans funded over the next three years, which translates to very few required construction jobs.

*President Trump and the Fed are determined not to let commercial real estate fall by 45% again, so they are using massive deficit spending and even more massive quantitative easing to keep the U.S. economy from deflating like a pierced balloon.  The problem is that China is not taking similar inflationary steps.  I fear a deflationary tidal wave coming from China later this year, and that wave will impair much of Trump's and the Fed's inflationary efforts.  I will blog on what this deflationary tidal wave might look like later in the week.

You will fall in love with wombats.

Before we go any further, please click on this link and listen a beautiful rendition of the song, Hallelujah, played on a cello, on a gorgeous, snow-covered mountaintop.  You can listen as you read.  

I just have created for you a wonderful new tool, our Commercial Loan Resource Center.  There you will always find the latest interest rates being quoted by banks and by conduits on their commercial real estate loans.

You will be able to apply directly to 750 commercial lenders in just four minutes.  Going forward, you need to appreciate that it is going to be very difficult - but not impossible - to find a bank willing to make a conventional commercial real estate loan.

You may have to submit your bank-quality commercial loan request deal to scores and scores of banks before finding just one willing to take a chance during the severe recession that will surely follow gate Coronavirus Crisis.  C-Loans.com is ideal way to quickly submit your deal to fifty banks, six banks at a time.  It takes just four minutes to create the mini-app, and all 750 of our commercial lenders will accept it.

Next you will find four different databanks of commercial lenders.  You don't need to go anywhere else to find thousands of commercial lenders to whom you can submit your deal.

Next you fill a glossary of commercial of real estate finance terms, like senior stretch financing, mezzanine loans, preferred equity, B-pieces, venture equity, defeasance, CTL financing, lockout clauses, Bad Boy Acts, the debt yield ratio (different from the debt service coverage ratio), shadow banking, standby takeout commitments, and hundreds of other very sophisticated commercial real estate finance ("CREF") subjects.  This is all free in our Commercial Loan Resource Center.  I urge you to bookmark the page right now.

Lastly, we have extensive answers to about a dozen Frequently Asked Questions relating to commercial real estate finance.  No matter how experienced you are, the industry is constantly new types of commercial real estate financing and new terminology.  

Very short video - Lion grabs his hand.

Special Note to Wealthy to Investors:

Now is the time to jump in with both feet into our 8% to 13% commercial first mortgage investments.  Why?  Because just about every competing commercial mortgage lender in the country is now out of the market.  Where else are good borrowers going to go?

Investing in commercial real estate first mortgages will always involve substantial risk.  You definitely need to read our Offering Circular and study the Risk Factors section carefully before investing; BUT never again will we get to dance with such beautiful girls.  By beautiful girls, I mean, of course, less-risky loans:  stronger borrowers, better-credit borrowers, and nicer properties.  We never, ever use the word "safe"; but some first trust deeds are certainly less risky than others.  We get to cherry pick only the less-risky loan right now.

Special Reminder to Commercial Loan Brokers:

Instead of sitting around at home watching Netflix, I know that you commercial loan brokers are hard at work calling at least thirty nearby business owners every working day, looking for guys who own their buildings.

You find them on Google Maps.  Start by typing in your company address.  You'll see the nearby businesses listed right on the map.  See the example below:

You don't have to ask these small business owners whether they need cash.  Duh!  Of course they need cash!  Every business owner in the country needs cash right now, and you know one of the only commercial lenders in the entire country who is still in the market - Blackburne & Sons.

Super fun video.

If you need a commercial real estate loan right now, there are very few remaining commercial lenders from whom to choose.

Because of the Coronavirus Crisis, almost every commercial bank in the entire country is out of the commercial mortgage market. 

Commercial banks are herd animals, and they are easily frightened.  They are all waiting for the danger to completely pass before venturing timidly back into the market.  "Oh, my Goodness, are we going to have a depression?"  (Actually, we might.)

If you are a real estate developer, and you will be trying to get a commercial construction loan later in the year, you may really be screwed.  I just can't see the banks coming back into the commercial real estate loan market for a very long while.

Quick Training Note:

In the first paragraph, I used the term, commercial bank, rather than just bank.  This is to contrast a commercial bank from an investment bank or a merchant bank.  Investment banks (think Goldman Sachs and Morgan Stanley) sell equity investments (stocks) and help companies to go public.  

A merchant bank is a very different animal.  Merchant banks today make very high interest rate loans (mezzanine loans, preferred equity investments, and venture equity), or they make direct equity investments in start-ups and young companies.

Merchant banks are often subsidiaries of bank holding companies and life insurance company holding companies.  They are where the super-rich owners of banks and life companies speculate and gamble in high finance.  There are probably fewer than 50 bona fide merchant banks remaining in the entire country.  If you are ever at a commercial real estate finance trade show, and some guy describes himself as a merchant banker, 99% of the time he is full of poop.

The second training note is that 95% of all construction loans are made by commercial banks.  This means that very few commercial construction loans will be made over the next three years.  If your brother-in-law is a union carpenter, working in commercial construction, he may not be working for awhile.

Okay, Back to the Destruction of the Commercial Lending Market:

Last week I wrote that the asset-backed securities ("ABS") market is drying up.  This means ABS commercial lenders, like Silver Hill, Velocity, and Cherrywood, are likely to remain out of the commercial loan market for a very long time.

CMBS bonds - investments secured by large first mortgages on shopping centers, office towers, and industrial centers - have taken a beating since the start of the Coronavirus Crisis.  I think the plunge in CMBS bond values must be more than 20%.  I can't see bond buyers rushing back into a low-yield market, where they just lost 20% of their principal.

As a result, no new CMBS loans are being closed... at all... period.  The CMBS industry never completely recovered from the Great Recession, and this new setback may leave the industry without even the slightest wind in its sails for several more years.  

It's really a shame.  The CMBS loans written over the past five years have truly been of superb quality.  "Hey, Federal Reserve and the Treasury Department, you can buy CMBS bonds right now, save the entire industry, and earn some really nice yields, all at no real risk to the U.S. taxpayer!"

But commercial real estate income has coodies right now.  Eeeuuu.  Don't touch it.  

The abhorrence of any type of commercial real estate income is so bad that Freddie Mac and Fannie Mae, in their SBL apartment loan programs, won't let their underwriters use one penny of income from any commercial units.  Let me explain this more clearly.

SBL stands for Small Balance Loans.  Both Fannie Mae and Freddie Mac have competing apartment loan programs with terrific, low interest rates.  Their Small Balance Loan programs are for apartment loans of between $1 million and $7 million.

Haha, I actually look like Albert Einstein myself.

Many apartment buildings in big cities are built as relative high-rises, and they have retail units on the ground floor.  Perhaps one of the retail units will have a convenience store, a hairdresser, or a clothing store.  

This type of building, with retail units on the bottom floor and apartments above them, is known as a mixed use building.  Mixed use does not mean a mixed combination of office and retail units, nor does it mean retail units on the street and self storage units in the back.  That is known as a mixed commercial center.

Historically, Fannie Mae and Freddie Mac will finance mixed use buildings, as long as the income from commercial units does not exceed 20% of the total scheduled income.  But no longer.

Check out and bookmark our new Commercial Loan Resource Center:

While Fannie Mae and Freddie Mac will still finance mixed use buildings, they will not use even one penny of scheduled commercial income.  The deal has to fly based solely on the income coming in from from the residential units.  In other words, they will only go around 12% loan-to-value on mixed use properties right now.  I'm kidding, of course, about the 12% LTV.  They might even go 13% LTV.  Haha!

Income from commercial real estate has coodies.  Eeeuuu!

But then the bombshell dropped this week about hard money lenders.  With the banks, the CMBS lenders, and the ABS commercial lenders out of the market, you would think that the hard money lenders would be making a killing.

A dear friend of mine, a fellow old veteran, read to a list to me this week of twenty-one of the largest commercial hard money lenders in the country that had either dropped out of the market or completely closed their doors.  The list was a veritable bloodbath.  

Each of these failed commercial hard money lenders had one thing in common.  They were funds.

I have written extensively over the years that most hard money mortgage funds are almost Ponzi schemes.  In order for the sponsor of a hard money mortgage fund to survive, it needs to be constantly bringing in new deposits and making new loans.  It needs those new loan fees to make payroll and to pay for loan servicing and for the management of the inevitable foreclosed properties.

But here's the thing.  Every twelve years or so (four times now since 1980), commercial real estate crashes by 45%.  We had the S&L Crisis, the Dot-Com Meltdown, the Great Recession, and now the Coronavirus Crisis.  Am I saying that commercial real estate will crash by 45% in this crisis?  No one knows for sure, but if history holds true to form...

So when commercial real estate crashes, the private investors in these hard money mortgage funds all line up to withdraw.   Yikes, there is no new money with which to make new loans.  Any payoff's go to the investors lined up around the block to withdraw.  No loan fee income is flowing into the sponsor of the hard money mortgage fund.  He has no money with which to pay his loan servicing, property management, and accounting staff.  Bam!  The company goes belly-up.

So twenty-one of the largest commercial hard money mortgage funds have gone belly-up in the past three weeks.  Who does that leave to make commercial loans?

Blackburne & Sons is one of about forty surviving commercial hard money shops that syndicate every loan that they make.  We do not use a pool to fund our loans.  We send out an announcement to our wealthy private investors, and then we assemble a syndicate of these guys to fund each loan.  Every deal uses its own syndicate, and every syndicate has different members than the deal before.

I know that this sounds painfully slow, but the truth is that with email and DocuSign, it can be a very speedy process.

Summary:

Well over 98% of all commercial real estate lenders in the entire country are out of the market, and they are likely to remain out of the market for several years.

Even hard money lenders have gotten crushed.  Fortunately, about forty hard money shops that syndicate every commercial loan have survived to help out through the Coronavirus Crisis.

Heavens, the world was doing so well.  A trade deal had been reached with China.  Unemployment was at fifty year lows.  Real wages were increasing by over 3% per year.  And then, bam!  "Man plans, and God laughs."  -- old Yiddish saying

Attention Commercial Loan Brokers:

My Heavens, this is the greatest time in the history of commercial loan brokerage for you to make money.  You could make hundreds of thousands of dollars this year brokering commercial loans; so turn off Netflix and get your tail to work!

You can't rely on referrals in this market.  Your will have to find the commercial borrowers yourself.  But here's the thing - every business owner in the entire country needs cash right now!  It's like shooting ducks in a barrel.

Go onto Google Maps.  Plot your home or office address.  Surrounding your office you will see scores of businesses.  Call them!!!!!  Speak to the owner.  Does he own his commercial building?  If so, you already know he needs cash.  Start gathering up his loan package and get it to a commercial hard money shop that syndicates its investors to fund deals.

Naturally, I recommend Blackburne & Sons.  Oh, my goodness, you could make soooo much money right now.  American businessmen desperately need you because you know the one place to get money.  Work! 

Every year hundreds of commercial property owners get conned out of millions of dollars by advance fee scammers.  

An advance fee scammer is a criminal pretending to be a commercial mortgage lender.  He will issue a very fancy-looking conditional commitment letter, which will call for some huge "good faith deposit" or "third-party report fee".  Once he gets the deposit, he will disappear with your dough and stop returning phone  calls.

These advance fees could be anywhere from $20,000 to $100,000.  We are talking about serious money.

How can desperate commercial property owners be so foolish?  Forty-five years ago, I worked at an old-time finance company, where we made personal loans, secured by cars, vacuums, and sticks - the personal property (furniture, TV's, etc.) - of working people.

My old branch manger, my very first boss, taught me a very important lesson about con men. "If you are in a room with one-hundred people, pick out the one person who you are absolutely sure is not the con man.  He will be your con man."  Con men are very, very good.

Okay, but how can a commercial property owner or commercial loan broker spot one of these advance fee scammers?  Here are some techniques:

• Are the rates that this commercial lender is offering very low or very high.  If your deal has been turned down by three of four other lenders, and yet this "commercial lender" is offering you a very low rate and low points, there is a superb chance that this "commercial lender" is just a con man.
  
  
• On the other hand, if the interest rate and the points are brutally high, this commercial lender might legitimately want to make a commercial loan to you.  He'll fund your loan, when nobody else will, because he is desperate for borrowers.

• Take a close look at this lender's website.  The first thing to look for is an actual physical address, as opposed to just a P.O. Box.  In order for a process server to serve a complaint at the start of a lawsuit, he needs to able to find the defendant.  If the con man refuses to provide a street address, it is because he is ducking other process servers.  If he has no street address, you should run for the exit!
  
  
• Look up the lender's address on Google Maps.  You should see a picture of the property.  Is it some gleaming office tower or just a little rental house?  If a commercial lender has the dough to make multi-million-dollar commercial loans, he should have a pretty nice-looking office.
  
  
• Does a receptionist or the loan officer answer the phone every time you call, or are you always forced to leave your name and number for the loan officer to call back?  Any legitimate commercial lender, who has the dough to lend millions of dollars, can afford a receptionist.  If you have to leave a phone number each time, it suggests the con man may be screening his calls from prior, pissed-off marks.
  
  

• Please grasp this critically important concept.  In order to make multi-million-dollar commercial loans, the lender needs dough to lend.  So many people forget this!  A life company gets its dough to lend from life insurance premiums.  Commercial banks, credit unions, and Federal savings banks (former S&L's) get their dough to lend from their depositors.  Real estate investment trusts (REIT's) get their initial capital to lend by selling shares in their corporation.  (They then borrow from banks to achieve additional leverage.)  Hard money mortgage funds have depositors (although these hard money funds are rapidly going the way of the dinosaur.)  Blackburne & Sons, my own hard money shop, gets it dough by assembling a different syndicate of wealthy private investors on every loan.  There are always savvy investors willing to make prudent loans during a crash, as long as the rate is a little higher and the LTV is a little lower.
  
  
• So ask your con man straight out.  Where do you get your dough to lend?  In most cases, the con man will mumble something about "various investors" or the fact that he doesn't reveal his sources.  Uh, huh... sure.  Miserable butt-wipe!  Heavens I love owning my own company.  I get to say stuff like that.  Haha!  That expression, "various investors", is a red flag for either a con man or a commercial loan broker masquerading as a commercial lender.
  
  
• Looking at the lender's website again, can you find an Investor tab?  I find that very, very reassuring.  REIT's and mortgage funds have shareholders and depositors who provide the capital to lend.  Is entry into the Investor tab even protected by a password requirement?  If so, I am feeling even warmer and happier.
  
  

• Is there a Loan Servicing Department tab.  Such a tab really, really warms the cockles of my heart.  It suggests that this commercial lender actually services its own loans.  That is a huge, positive indicator.
  
  
• Is there a News Releases or Press Releases tab on his web site.  Do the press releases look legitimate?  If so, I am feeling better.
  
  
• Is there a tombstone section on his web site?  Many legitimate commercial lenders have such closing announcements; but it's always possible that a really smart con man might have created such a fake section to seduce you.
  
  

Kinda sad.  That's obviously his mate.

• Life companies are the only class of commercial lenders who have correspondents to originate and service their loans in certain areas, like Chicago or Los Angeles.  Every other legitimate class of commercial lenders services its own loans.
  
  
•  So ask your con man, do you service your own loans?  If not, run for the exit.
  
  
• How narrow is your commercial lender's lending niche or area?  If he tells you that he only makes commercial loans, between $1 million and $7 million, on convenience stores in the Northeast, that sounds very legitimate.
  
  

• On the other hand, if he makes loans from $100,000 to $50 million, on any kind of commercial property, located anywhere in the country, at best he is just a commercial loan broker masquerading as a lender.  If the deposit is huge, he is surely a con man.
  
  
• Google the company name of the commercial lender, along with that of the loan officer, the company president, and the company owner.  Lots of juicy stuff will often show up about con men.
  
  
• But here's the thing:  If you looked up this article on the internet, you already know the answer.  Your commercial lender is too good to be true.  He is too sweet of a talker.  Your subconscious mind has picked up some clues.  Trust such warning signs!  Your commercial lender is a con man - an advance fee scammer.

One of my loan officers got a call on Thursday from a frantic commercial loan broker.  He had four commercial loans in process with Cherrywood Mortgage, a small balance, non-prime commercial real estate lender.  Cherrywood had "temporarily" dropped out of the market. 

Like Monte Hall, of the Let's Make a Deal show, we told him to "come on down" and bring his four commercial loans.  Blackburne & Sons is very much in the small balance commercial loan market right now.  But this article is far more than just a plug for our 15-year commercial hard money loans.  A whole class of commercial lenders may soon be exiting the market.

I think the problem for Cherrywood and the other ABS commercial lenders is that their normal bond buyers no longer have an appetite for the type debt they are issuing.  For the record, ABS lenders make small, junky commercial real estate loans.  I say junky because a bank wouldn't make most of these loans.

The ironic thing is that I think these "small, junky commercial loans" are terrific.  I am not criticizing Cherrywood at all.  In fact, I very much approve of Cherrywood's loans.  My own hard money shop, Blackburne & Son, has specialized in such small balance, non-prime commercial loans for forty years.  

I have often written about how commercial real estate fell by exactly 45% during the S&L Crisis, the Dot-Com Meltdown, and Great Recession.  Most of our portfolio was therefore upside down; i.e., our borrowers owed more against their properties than their properties were worth; during these three crashes.

You know what?  A great many - dare I say most? - of our small balance commercial loans remained roughly current through the depths of these crashes.  Cherrywood was therefore probably making very good loans.

But here's the thing.  Many non-prime commercial lenders sell their paper to the issuers of ABS bonds.  This is why I call commercial real estate lenders, like Cherrywood and Silver Hill Funding, ABS lenders.

What on earth is an ABS bond?  ABS stands for asset-backed securities.  To understand asset-backed securities, think of a trust created to pool (collect) a whole bunch of different types of loans.

One type of loan you'll find in most ABS pools is the scratch-and-dent residential loan - a home loan kicked out of a securitization pool because, perhaps, the debt ratio or loan-to-value ratio was too high, or the property was too junky.  

Another type of loan that often goes into an ABS pool is the subprime car loan.  Then there are equipment loans, aircraft loans and leases.  You will often find credit card loans in ABS pools too.  Lastly, of course, are non-prime (sub-prime) commercial real estate loans.

Now the issuer of an ABS loan pool - say, of four-hundred-million dollars worth of these various loans - gets the loans in its portfolio rated by a rating agency.  Then it has the trust issue rated bonds, backed by the loans in this trust.  Investment bankers then sell these bonds off to life insurers, pension plans, family trusts, and high-net-worth individuals.

The advantage of ABS bonds to investors is that they are diversified.  Their bonds are backed by lots of different types of collateral - homes, cars, equipment, aircraft, credit cards, and commercial properties.  If, for example, commercial real estate went into a mild slump, the home loans and car loans might carry the portfolio through a slump.

Before the Great Recession, a company named Bayview Commercial Mortgage Finance, through its subsidiaries, Interbay Financial and Silver Hill Funding, made a large number of sub-prime commercial real estate loans.  As soon as the Great Recession hit, Bayview stopped lending because no one wanted to buy the ABS bonds and the small balance, non-prime commercial loans that went into their portfolios.

"Oh, my goodness, a sub-prime commercial loan!  Yuck.  Dump my ABS bonds immediately, no matter what the price."  The price of ABS bonds fell through the floor, and no new ABS bonds were issued for five years.

But then a funny thing happened.  Someone with some brains started to look at the junky little commercial loans in these failed ABS portfolios.  "Hmmmm.  The home loans, car loans, aircraft loans and credit card loans in these portfolios got smashed; but these junky little commercial permanent loans did surprisingly well.  Most of the borrowers kept making their payments, and eventually commercial real estate values recovered to new highs.  Hmmm."

As a result, ABS commercial lenders eventually returned to the market and kicked the butts of hard money lenders like Blackburne & Sons.  Dang.  Haha!  The new loans were called "non-prime", rather than "sub-prime"; but they were largely the same kind of commercial loan.  They were small commercial permanent loans that did not quite qualify for a bank loan.

Pop Quiz:

Q:  What is a permanent loan?

A:  A permanent loan is a first mortgage, secured by a commercial property, with a term of at least five years and with at least some amortization.  The typical amortization is 25 years.

Finally We Get to the Point of Today's Training Lesson:

I am pretty sure that the ABS bond market has dried up for new issues due to the Coronavirus Crisis.  This means that a lot of ABS commercial lenders may soon be dropping out of of the small, junky commercial real estate loan market.

If you find that your own commercial lender has dropped out of the market, do as ole' Monte Hall used to say, "Come on down to Blackburne & Sons."