Commercial Loans and Fun Blog

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."

You need to pay special attention to this article, especially if you intend to retire in the next fifteen years.  The current stock market rally is just a temporary reprieve against the irresistible power of the second big decline (of three) in the US stock market.

The current Federal Reserve Chairman, Jerome Powell, gets a call from Treasury Secretary Steven Mnuchin, "Hey, Fed Chairman Powell, the economy is on the verge of a complete collapse.  Would you please convince the Governors of the Federal Reserve Board to buy $2.2 trillion of newly-issued Treasury securities to fund the rescue of the U.S. economy?"  (Get your own dacha!  See below:)

Of course, this move by the Treasury Secretary was absolutely required.  I am going on record as saying that a lousy $2.2 trillion will not be enough to reverse the Second Great Depression.  The Fed and the Treasury will eventually be required to fund a whopping $8 trillion to check the huge deflationary tidal wave crashing in from China.

This deflationary tidal wave from China will NOT be some effort by the "evil" Chinese to hurt America.  The deflationary tidal wave coming out of China will be caused by the fact that the Chinese economy got crushed by the Coronavirus Crisis.  The Chinese will be buying far less raw materials from the world and far fewer products from U.S. companies because they simply don't have the money.

When hundreds of millions of Chinese got quarantined in their homes, Chinese consumers lost their wages, and they stopped buying goods.  Chinese small business owners lost three months' worth of income.

Chinese small business owners employ sixty percent of Chinese workers, and they have been absolutely crushed by the Coronavirus Crisis.  Even if their tiny businesses survived the collapse (many will not), they have burned through their savings.  Far from borrowing more money from their banks, these small business owners will be on a crusade to restore their savings.  

The last thing that a Chinese small business owner is going to do is borrow more more money from his bank to expand his business.  "Aye, there's the rub."  If a Chinese bank takes in a $1,000 payment from a Chinese small business, and it can't find a different business to accept a $1,000 new loan, a whopping $20,000 gets sucked out of the Chinese money supply (20:1 The multiplier effect works in reverse).

When the Chinese money supply starts collapsing like a black star, the Chinese will reduce their purchases of raw materials from the world by at least 50%.  Their purchases of finished goods from U.S. companies, like Apple, GM, and Tesla, will decline equally.

Now to the point of today's article:

In order to stave off the Coronavirus Depression (notice the use of the term, "Depression,"), the Fed and the Treasury will fund this $2.2 trillion rescue plan.  Maybe it will be enough.  (Haha!  Just two-and-a-half trillion dollars will be woefully insufficient.  It will take at least $8 trillion.)

The Fed will end up buying up $8 trillion worth of new US Treasuries and other assets.  The economy will be temporarily rescued.  But here's the problem:

Politicians like Andrew Yang will soon say, "The US government only sent you a lousy $1,200.  The rich kept the rest and partied in their dachas (see the pic at the top), with their mistresses, and drank expensive wines.  They could have sent each of you $3,000.  Elect me!"  

"No, that Andrew Yang dude is a scrooge.  Elect me!  I'll give you $4,000 per month."  "No, wait, I'll give you $5,00 per month."

Folks, we're screwed.  Back in 1811, a famous Scottish economic professor, Andrew Tytler, once wrote: 

“A democracy cannot exist as a permanent form of government.  It can only exist until the voters discover that they can vote themselves largesse from the public treasury.  From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."

"The average age of the world's greatest civilizations has been 200 years. These nations have progressed through this sequence:  From bondage to spiritual faith; From spiritual faith to great courage;  From courage to liberty;  From liberty to abundance;  From abundance to selfishness;  From selfishness to apathy;  From apathy to dependence;  From dependence back into bondage.”

Wrap your head around the concept that every business owner in the entire country needs cash right now.  His bank is definitely not going to loan it to him.  Banks today are terrified.  Here is exactly how to find some small commercial real estate loans during this Coronavirus Crisis.

I want to emphasis the word, "small" commercial loans.  Small commercial loans close.  Commercial loans larger than $1.5 million have a closing rate that is 1/20th of smaller deals.  One-twentieth (1/20th)!  You are foolish to work on commercial loans larger than $1.5 million right now, when every large commercial lender in the country is hunkered down in his bunker.

Go to Google Maps and type in the address of your office.  You will notice on the map a number of businesses plotted close to your office.  Ignore the big businesses, like the huge car dealerships and the huge national banks, like Chase.

Instead, focus on the small restaurants, the mobile home parks, the auto repair shops, the hairdressers, the RV parks, and the little retail shops.

Then call them up and ask to speak with the owner.  At first the receptionist might try to protect him from you, thinking that you are a salesman.  Explain to her that your company loans money to businesses, and right now her boss' business almost certainly needs money.  You might also mention that you are located right around the corner from her boss' business.

Perhaps the first time you will be sent to voicemail, but that's okay.  Make your pitch and leave your phone and email address.  You might call the receptionist back and explain that you left your name and number on his voicemail; but if she will please give you her boss' name and email address, you can send him more information about a coronavirus business support loan.  

I just invented that term tonight.  Sounds pretty good, huh?  A coronavirus business support loan.  If the receptionist fights you, you might politely remind her that her job might depend of her boss getting some business support cash right now.

Now the first time you reach out to the boss of the auto repair shop, he might not respond.  Keep leaving messages.  Make a call list, and try to call thirty small, nearby businesses every day.  Explain that your mortgage company is located right just down the street, but that you are working from home right now due to the crisis.

Send the business owner a new email every four days, personally addressed and referencing his particular business.  "Hey, Steve, this is Don from Jackson Mortgage, right around the block from you.  I drive by your auto repair shop there on Madison Avenue almost every day.  You must need cash right now, and I may be able to help."

As the days go by, slide left and right on Google Maps to find even more businesses to solicit.  It is important that your potential customers - and their receptionists - understand that you are located very close to them.  You are not some call center located in the Philippines.

When you get a deal, please do NOT call or email me.  I'm retired.  Phew!  Stressful times.  Haha!  Instead, please call Alicia Gandy, our largest commercial loan originator, at 916-338-3232 x 310.  We call Alicia our Loan Goddess.  Yes, she's that good.  You can also call my wonderful, first-born son, George Blackburne IV, at 916-338-3232 x 314.  

Remember, because you know Blackburne & Sons, you know one of the only conventional commercial lenders in the entire country still making commercial real estate loans.  We just closed a $1.65 million commercial loan on a hotel in the heartland on Friday.

Final lesson:  Alicia Gandy - we call her our Loan Goddess - will be absolutely killing it over the next two years.  Her fastest and best service will go to those commercial loan brokers who brought her deals when the market was saturated with competing hard money mortgage funds.  These loyal commercial loan brokers have a relationship with her.  

Haha!  My own hair is getting as long as a hippy, but I don't dare
go to a stylist because I am 67 and have high blood pressure.  
High blood pressure is what is the death sentence for us old farts.

If I do die, remember my immortal words.
"It's the loan servicing income, sillies!"

Those competing hard money mortgage funds are all gone now - along with the dinosaurs and the dodo birds.  Going forward, you also need to develop a relationship with Alicia and George IV, so they will be especially loyal to you when the proverbial stuff hits the fan.  

Remember, Blackburne & Sons put together a fresh syndicate* of wealthy private mortgage investors on every deal.  There are always savvy investors willing to invest when blood is running in the streets.  It's just a matter of price (interest rate).  Therefore, we were able to stay in the market every single day of the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

We are a small family company, and only a handful of brokers know us.  That's huge for you!  So get out there and feast.  Every business owner in America needs money right now.

*Hard money mortgage funds rely on fresh deposits to make new loans.  When the financial markets are in turmoil, not only do new deposits dry up, but existing investors line up to withdraw.

Remember, every business owner in America needs money right now.

The Coronavirus Crisis is now the fourth commercial real estate crash that I have experienced in my forty years of running our family commercial mortgage company, Blackburne & Sons.  They seem to happen about once every twelve years.  Each time commercial real estate fell by exactly 45%.

To those of you who are commercial loan brokers, you should keep working!  There is some serious money to be made during these crashes.  The old, savvy real estate investors know that the best time to invest is when blood is running in the street.

The first commercial real estate crash began in 1986, when President Reagan changed the income tax laws to eliminate the tax shelters previously provided by commercial real estate.  

Prior to 1986, a surgeon earning, say, $500,000 per year could shelter, say, $150,000 of his income from taxation by buying highly-leveraged apartment buildings or commercial properties.  The depreciation from these rental properties provided a paper loss - often without too much of a negative cash flow.  These paper losses could be used to reduce the amount of the physician's taxable income.

When rich guys could no longer use depreciation to shelter their earned income - bam - the value of commercial real estate suddenly plunged like a falling rock.  By the time the crash was over, commercial real estate values had fallen by a whopping 45%.  Please remember that number - 45%.

Great news!  I got my test results back.

Savings and Loan Associations ("S&L's) were heavily invested in first mortgages on commercial properties.  By 1992, one-third of them had failed.  The Resolution Trust Corporation ("RTC") came in, closed up 3,234 of these S&L's, and then sold off their foreclosed apartment buildings and office buildings at fire-sale prices.  

The RTC offered these buildings at just 50% of an already-depressed fair market value, but the purchase had to be for all cash.  Since 95% of banks in the country were out of the commercial real estate loan market, hard money brokers had an absolute field day.  So did the commercial loan brokers who stayed in the market, originating commercial loans for them.  (Please read that last sentence again.)

In October of 2002, the NASDAQ crashed by 78%, when most of the big dot-com stocks melted down.  Commercial real estate crashed by 45% during the Dot-Com Meltdown.  Once again, there is that magical number:  45%.

Once again, almost all of the banks pulled out of the commercial lending market in 2002, and they stayed out for more than four years.  Banks are nothing but a bunch of frightened herd animals.  Once the bottom (nadir) of the real estate cycle had been found, banks should have been making commercial loans like crazy.

During every one of the commercial real estate crashes in my lifetime, commercial real estate fell by 45%.  After hitting a bottom about two-and-half years into each crisis, commercial real estate recovered to new highs within three years.

But I was thrilled that the banks were a bunch of scarety-cats.  Surviving hard money shops ("Aye, there's the rub,"), like Blackburne & Sons, made a killing after the Dot-Com Meltdown.  We were the only guys at an all-girls school dance.  Our best commercial loan brokers, who brought us all of our deals, made a killing too.

During the Great Recession, commercial real estate once again fell by 45%.  There is that number, 45%, again.  Just as during the previous crises, the banks immediately dropped out of the commercial loan market, and they stayed out of the market for far too long.  

Hundreds and hundreds of hard money mortgage companies also closed up shop during the Great Recession, leaving Blackburne & Sons, and just a handful of others, as the last men standing.  Once again, as the only guys at the dance, we all found lots of dance partners.  We made a ton of superb quality loans.  The commercial loan brokers who brought us these deals made a fortune.

Why did so many competing hard money shops close their doors?  Answer:  Because most of them were structured as funds.  As soon as the crises hit, all of their investors lined up to withdraw their investments.  Previously, these mortgage funds made 85% of their money by making new commercial loans and earning new loan fees.  With no new money flowing into their funds, these hard money shops had no dough with which to make new loans and to earn new loan fees with which to make make payroll. 

The situation is even worse today for hard money shops.  Ninety-five percent of them are structured as mortgage funds - as opposed to just 55% of them before the Great Recession.  Your favorite hard money commercial lender?  I'd be surprised if it ever made a commercial loan again.

Do you own a hard money commercial mortgage fund.  Don't be pissed at me for telling the truth.  You're screwed, but you can still save your company.  Announce to your investors immediately that you are now charging 390 basis points (3.9%) for loan servicing fees and property management fees.  

The single best thing you can do for your hard money investors is to stay in business -  calling for late payments, force-placing fire insurance, exercising your assignment of rents, getting receivers appointed, moving properties out of Chapter 11, hiring property security companies, cleaning up the properties, winterizing the properties, renovating the properties, renting the properties, and selling the properties.

Yeah, your private investors will be pissed at you for awhile.  Remember, however, that most of then are invested in several different hard money mortgage funds.  When their other hard money shops close up entirely, their whole attitude will change.  The portfolios of these competing mortgage funds will get devastated by vandals, breaking pipes, and even worse, by greedy attorneys and their fees.  Your investors will bless you for raising their loan servicing fees and property management fees, thereby staying in business.

Anyway, now back to the needs of our commercial loan brokers.  Blackburne & Sons doesn't use a mortgage fund.  We syndicate every new commercial loan that we make - maybe 30 investors or so per deal.

Now the sexy thing about being a syndicator is that wealthy private investors always have dough to invest.  It's merely a matter a price (interest rate).  Therefore Blackburne & Sons intends to stay in the market, making commercial real estate loans, every single day of the Coronavirus Crisis - just like we did during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

Guys, you have time right now.  Put some link to C-Loans.com
on your website and start earning residual income.

If you are a commercial loan broker, your eyes should be seeing dollar signs right now.  The banks are now out-of-the-market, and so are 95% of the commercial hard money mortgage funds.  Commercial loan brokers by the tens of thousands have probably resolved to find another occupation.

Because of the Coronavirus Crisis, commercial real estate is likely to once again fall by 45%.  All of the banks will soon be out of the market.  They will no longer be competing against you.  You have broken into the clear.  The businessmen near you who own commercial real estate surely need money, and you know one of the few commercial lenders still making loans.   Go feast!

Contact every business owner you know who owns commercial real estate.  Do you need cash?  Seriously, who doesn't need cash right now?

No sooner had I written a blog post last week about the attractiveness of CMBS loan rates right now, than I got a message for one of my subscribers informing me that conduits are no longer making hotel loans.  

By the way, CMBS lenders are still making their large permanent loans on the Four Basic Food Groups - multifamily, office, retail, and industrial - at incredibly low interest rates today.

It makes sense why the conduits have stopped making hotel loans.  Hotel occupancy rates are getting slammed right now by the Coronavirus Crisis.

Conduits make large, cookie-cutter, commercial real estate loans that are quickly aggregated into large pools and securitized into commercial mortgage-backed securities ("CMBS").

Conduits are not portfolio lenders. They can't just say, "Well, hotels are getting clobbered right now, but the world is not going to stop needing hotels. Since all of our commercial lending competitors are out of the hotel loan market right now, our bank will sneak in there and make a bunch of juicy loans on some of the very nicest hotels in the country."

Because conduits are not portfolio lenders, they can't hold commercial loans on their lines of credit for very long.  They need to sell them off quickly.  They can't hold these loans for two years, say, until the hotel market recovers.

Conduit is short for commercial real estate mortgage investment conduit, a specialized type of commercial mortgage company that originates loans for the CMBS market.

The thing that is special about conduits is that they get to sell their loans to a special kind of trust, called a pass-through trust, created by Congress, which does not have to pay taxes on its income from these commercial mortgages.

This special pass-through trust assembles a whole bunch (100 to 300) of these large, cookie-cutter, commercial loans into a pool.  Then the trust sells pass-through securities, backed by the stream of payments and payoff's coming from the first mortgages in this pool.  We call them pass-through securities because only the securities buyer (bond buyer) has to pay taxes on his interest income, not the pass-through trust.

Think of an old-fashioned C-corp.  The C-corp pays taxes on its net income, and then the stock owners pay taxes on their dividends.  C-Loans is a C-corp.  Yikes.  It's a form on double-taxation.

Congress created authorized commercial mortgage investment pass-through trusts to avoid this double-taxation.  (They had created residential mortgage pass-through trusts a couple of decades earlier.)  This move to avoid double-taxation created the commercial Real Estate Mortgage Investment Conduit industry ("REMIC") industry.

By the way, a portfolio lender is a lender that makes its loans using its own dough and intends to hold these loans for the entire term.  A bank is an example of a portfolio lender.  A family office is another example of a portfolio lender.

A commercial lender using a line of credit from a bank is not a portfolio lender because the bank that is providing the line of credit is probably going to reevaluate that credit facility annually.  There is no guarantee that the bank will renew it.

Therefore, a commercial lender using a line of credit will need to sell off the commercial loans in his portfolio on a regular basis.  He won't hold them until maturity.

Lastly, I have used the term, "large commercial loan", throughout his article.  Conduits seldom make commercial loans of less than $5 million.

Some Thoughts on the Coronavirus Crisis:

You will recall that I made you uncomfortable (and probably bored) a few months ago when I described how the virus would soon become a pandemic and that it would cause another great recession, or possibly even a full-blown depression.

I just wanted to remind you that Chinese small business owners, who employ 60% of the Chinese workforce, have been traumatized.  They are not going to want to take on additional debt.

The Chinese Communist Party can order the Chinese banks to lend, but it can't order small business owners to borrow.  When banks can't find willing borrowers, yet they keep raking in monthly payments, the multiplier effect kicks into reverse.  Any monthly payment that is not recycled into a new loan reduces the Chinese money supply by a factor of twenty.  

In other words, if a Chinese bank takes in a $1,000 loan payment and doesn't immediately recycle it into a new loan, a whopping $20,000 gets sucked out of the Chinese money supply.  In the parlance of economists, $20,000 is destroyed.  During the Great Recession, about $4 trillion were destroyed.

The reason why this is important is because even if a cure, or even an effective treatment, for coronavirus is discovered today, the average Chinese small businessmen has already been traumatized.  He is not going to be borrowing even more money from the bank.

China is facing a horrible deflationary vortex, where tight money leads to company failures, which leads to employee layoffs, which leaves fewer workers with money to buy products, which leads to less demand, which leads to more company failures and more layoffs.  Its an ugly feed-forward cycle, a deflationary vortex.

If President Xi died and made me Emperor, I would put a moratorium on the loan payments on all bank consumer loans and bank business loans in the country.  The Chinese Central Bank ("CCB") can easily replace the dough lost by the country's banks.  After all, the dough is just digits in some computer.

Now if you hear the Chinese doing such a thing, there may be hope for us all; but absent that, prepare for a deflationary tidal wave coming out of China.  Despite what you might think, we do NOT want China to fall into riots and chaos.  They make the industrial parts and the medicines that our manufacturers need.  They buy a poop-ton of our industrial and agricultural products.  We should not wish them ill.

George Smith Partners recently released a tombstone about a commercial loan closing that used a financial term of which I had never heard:

"George Smith Partners arranged $23,750,000 in bridge financing for the refinance of a 229-key, full-service hotel located in Downtown Minneapolis, Minnesota...  The Property, built in 1986, underwent a PIP in 2017."

What in heavens is a PIP?

A PIP is a Property Improvement Plan required by a brand or franchise - usually a hotel franchise, like Marriott or Hilton - to maintain or improve standards.  Often the property owner needs to obtain a secondary loan or refinance the property.

A property improvement plan (PIP) is required to bring a hotel in compliance with brand standards.  According to HVS, an effective PIP should help owners gain market share, increase guest satisfaction, drive revenue performance, and enhance profitability.  Elements like lighting, faucets, and fixtures are foundational for brand standards, but now energy-efficient equipment upgrades are entering the equation.

One hotel franchisor recently said that her company is pushing hard to incorporate sustainability measures into the conversion process. There are things that the franchise is recommending in order for the franchisee to run an efficient building.

For instance, if a boiler system has a 30-year life expectancy, but it’s only 20-years-old, the franchisee might consider changing it out early because there is no down time, new systems are 30 percent more energy efficient, and there is a good ROI attached.  “We’re looking at mechanical systems, chillers, boilers, and things that are not very sexy,” she says. “It’s really important in looking at how much it’s going to cost to operate that piece of property.”

Property Improvement Plans (PIP's) are not cheap.  PIP costs can vary greatly with different brands, hotel sizes, and property locations.  One of the most popular PIP's, Holiday Inn's Formula Blue, usually costs between $10,000 and $25,000 per room.  Since the average Holiday Inn Express location has around 75 rooms, that adds up to between $750,000 and $1.875 million in total costs.  Hampton Inn's Forever Young Initiative is another popular PIP, which experts estimate will cost between $15,000 and $40,000 per room.  

Yikes.  That's real money. SBA loans are often, but not always, utilized to finance a PIP.  It is important to understand the types of improvements a prospective hotel owner can make using SBA funds.  Experienced hotel owners often focus on the following areas:

• Renovations to exterior facades – including signage, roofing, and colors
• Room and lobby updates such as lighting and fixtures
• New amenities such as indoor/outdoor pools and fitness areas
• Expand or improve parking
• Replacing mechanical items that are close to end of their useful life – such as the roof or heating system.

Instead of obtaining secondary financing, many property owners choose instead to refinance the entire property.  Because ten-year Treasuries are so low, this is the best time in history to refinance your property with a CMBS loan.

Conduit loans, also known as CMBS loans, enjoy a fixed rate for a whopping ten years.  Unlike a fixed-rate commercial loan from a bank, there is no rate readjustment after five years.  The rate is fixed for the entire ten years.

And with ten-year Treasuries at just 0.79%, there has never been a better time in history to get ten-year, fixed-rate conduit loan.

This guy clearly has a suicide wish.

Conduit loans are priced at some negotiated spread over the higher of ten-year Treasuries or corresponding interest rate swaps.  Here is where you go to find ten-year Treasuries.  Here is where you go to find today's interest rate swaps (as known as the swap rate).  Here is another site that provides interest rate swaps.

Today (3/8/20), ten-year Treasuries are at 0.79%, and ten-year interest rate swaps are at 0.81%.  Therefore we will use the higher of the two indices - interest rate swaps.

Okay, but what is the spread or margin over the index?  Conduits are pricing their office, retail, and industrial commercial permanent loans at 140 to 290 basis points over the index.  

Therefore, we are talking about conduit commercial loans priced at between 2.21% to 3.71%.  Wow!  So who gets the 2.21% rate, and who has to pay 3.71%?  It depends on the loan size, the risk, the debt yield ratio and the tenancy.  

The larger the deal, the smaller the spread.  The safer the deal, the lower the spread.  For example, if your property is located on Madison Avenue in New York City, you will enjoy a lower spread than a deal located on a nice retail street in Salt Lake City.  Madison Avenue is a more proven location.

There are some properties, however, that sell for such incredibly low cap rates - for example, Madison Avenue in New York City - that the debt yield can be too low.  This is a bad thing.  Sometimes the debt yield ratio on that Salt Lake City property can be more attractive to a CMBS investor.  

Do not confuse the debt yield ratio with the debt service coverage ratio.  Interest rates are so low that it is easy for most commercial properties to offer a 1.25 or higher debt service coverage ratio today.  The ratio is almost irrelevant when it comes to conduit-size deals ($5MM and larger).

The quality of your tenants also determines your spread over the index.  Quality refers to strength of your tenants.  If you have a shopping center anchored by Target or Krogers, you will enjoy a tighter spread than a shopping center anchored by a mom and pop grocery story.

CMBS loans are made by commercial real estate mortgage investment conduits "REMIC's", known as conduits.  There are specialized commercial mortgage companies that originate large, cookie-cutter commercial permanent (long term first mortgage) loans for eventual securitization.  In layman's terms, a conduit loan is a very plain-vanilla first mortgage on one of the four basic food groups - multifamily, office, retail, and industrial properties.

Is your deal kinky?  Does it need a long story to explain it.  If so, its probably not a conduit-quality deal.  

But it is important to note that your property does NOT need to be almost brand new and very beautiful.  Life company lenders demand such properties, but most conduits would be perfectly happy to make $8 million permanent loans on forty-year-old neighborhood shopping centers or on occupied, downtown, office buildings.

Every commercial lender prefers to make loans on multifamily properties, so the spreads on multifamily deals are about 10 bps. tighter.  You will not be shocked to learn that hospitality spreads are fifty basis points higher than standard conduit deals.

What about loan-to-value ratios?  You will seldom get a conduit lender to go higher than 65% LTV on a hotel.  The loan-to-value ratios on the four basic food groups are typically between 70% to 75%.  The higher the LTV and the lower the debt yield, the higher the spread (and eventually the higher the interest rate) that the borrower will pay.

Lastly, conduit lenders do NOT lock in their rates at application.  Most of them will, however, lock in their spreads, while the conduit commercial loan is in processing.  That being said, there will be a floor of 5 bps. to 10 bps. below the interest rate quoted at application.  In other words, if interest rates go up during application, the borrower will have to pay a higher rate.  If interest rates fall, the borrower might enjoy a slightly lower rate.

Investors, I know you are all freaked out that you might die from this coronavirus (its out to kill all of us "old-gomers"); but you can apply for a conduit loan from the safely of the virus bubble in your home.  Focus.  If you can close a conduit commercial loan during this crisis, your cash flow, and that of your heirs, will be fantastic!  Git 'er done. Ten-year Treasuries may never be lower.

A great many residential lenders make revolving lines of credit (home equity loans) on owner-occupied homes; so it it natural for lots of commercial loan brokers to ask if their investor clients can get a a line of credit, secured by an apartment building or an office building.

As a general rule, the answer is, "No."  Commercial real estate lenders do not make lines of credit secured by investment real estate estate.  At least I have never seen or heard of it done in my 43 years in the commercial loan business.

Therefore, I was quite surprised to receive a newsletter from the fine folks at George Smith Partners - one of the oldest commercial mortgage banking firms in the country - that contained the following tombstone:

"George Smith Partners placed a structured senior and collateralized line of credit revolver in a cash-out execution for a business in Los Angeles. The first loan was structured to be self-liquidating over 15 years with a fixed rate of 3.90%. The $1,000,000 second trust deed is a true revolver that can be used as a check-book and has no limitations on uses."

This courageous border collie only charges $600 to re-wire your house.

"The second loan is priced at 3.75% (Prime minus 1%).  Funds may be drawn down, re-paid and re-drawn without additional bank approval.  There is no non-utilization fee.  As the credit line is collateralized, there is no mandatory “clean-up” for funds outstanding over 12 months."

A revolver is revolving line of credit that allows the borrower to borrow some dough, pay interest on it a for a few months, pay it off, allow the line of credit to rest for six weeks, borrow some more money, pay half of it back, paying interest on the outstanding balance monthly, and then pay off the remaining balance in full.

This particular revolver had no utilization fee.  In other words, the borrower does not pay a fee each time that he draws down on his line of credit.

There was no annual clean-up for funds outstanding over 12 months either.  Bank regulators require that unsecured lines of credit to be rested (paid down to zero) for at least thirty days every year.

In this case, because the revolver was well-secured by commercial real estate, the bank did not require an annual clean-up.

So where do you go to get a revolver on commercial real estate?  I dunno.  Until recently, I would have sworn that such lines of credit, secured by commercial real estate, were never made.  

Apparently, however, such revolvers are occasionally being made.  But then some people swear there is a Santa Claus, and I have never seen him either.  Folks, revolvers are very, very, VERY rare; and they are no doubt reserved for commercial loans of least $5 million, made to borrowers with almost as much dough as Michael Bloomberg, who apparently is $500 million poorer these days.  Haha!

I am going to try to slip two cute GIF's into this blog article.  They probably won't work.  So if you see a strange picture just sitting in this article, with no funny text, it will because my attempt to insert a GIF failed.