Commercial Loans and Fun Blog

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.

Last week I wrote a blog about how historically aggressive private money commercial bridge lenders are getting.  This month George Smith Partners, the big commercial mortgage banking company (the original founder started George Smith & Company decades before I founded Blackburne & Sons forty years ago) released a newsletter, FinFacts, containing the following tombstone:

"George Smith Partners ("GS P") placed a $10,900,000 non-recourse loan for the refinance of an underperforming stabilized 50-unit multifamily community in Los Angeles.  The Sponsor recently acquired the asset at approximately 50% below market from an affiliate party, and GSP was able to facilitate approximately $3,000,000in cash out proceeds at closing."

"A portion of the loan proceeds will be used to renovate units as they become vacant in order to achieve current market rents.  GSP identified a non-institutional lender (private money lender) who was comfortable with the cash out proceeds and who understood the history and dynamics of this non-arms-length acquisition.  The non-recourse loan is fixed for 1.5 years with a 7.99% interest rate and 4.99% pay rate."

Terms:

Interest Rate:  7.99% with 4.99% pay rate
Term:  18 months
LTV:  70%
Recourse:  Carve-Outs Only
Fees:  1.0%
Prepayment:  None; no exit fee

The reason I brought this closing to your attention is because the Big Girls (the originator of this commercial loan at GSP was a lady) are arranging large commercial bridge loans with less than interest-only payments.

The Big Boys, the ladies and men who make and arrange the really huge commercial real estate loans, have their own specialized language.  You can think of it as advanced commercial mortgage-ese.  Today we'll discuss one of their underwriting terms, mark-to-market (MTM) accounting in real estate.

Mark-to-market accounting assigns a value to real estate assets based on what the property could command on the market if it were sold today.  This often means assigning a value based on the current market rents for the building, as opposed to the actual rent being generated from existing tenants.

Now let's use mark-to-market accounting is some real life deals: 

When Boston Properties acquired the General Motors building for a record $2.8 billion in June of 2008, it internally assigned a value based on the current market rents for the building, as opposed to the actual rent being generated from existing tenants.  The company noted that the average rent being paid at the GM building was $90 a square foot, which it said was half the current market rent of $180 per square foot.  This MTM analysis played a significant part on its decision to buy the property.

Here is another one, which I pulled from a closing tombstone in FinFacts, the bi-monthly newsletter of George Smith Partners, one of the largest commercial mortgage banking firms in the country.

Pop Quiz:

What's the difference the a commercial mortgage banker and a commercial mortgage broker?  Commercial mortgage bankers retain the servicing on the commercial real estate loans that they originate for life companies and the Agencies.  The Agencies include Fannie Mae, Freddie Mac, HUD, and Ginnie Mae.

And what have I been preaching to you for decades?  The real money in commercial real estate finance is in loan servicing fees.  A commercial mortgage broker is often a poor person.  A commercial mortgage banker is usually a rich person.

Okay, so here is the MTM language from FinFacts:

"George Smith Partners secured a $4,500,000 refinance for a 13,051 SF mixed-use property in West Hollywood. The loan is fixed at a rate of 3.92% for a 5-year term.  At close, the Property had four month-to-month leases in place, plus two cell tower leases.  This was problematic since some lenders would not include MTM income or cell tower income in their underwritten cash flow.  Although several lenders offered a competitive interest rate, they used a high stress rate when applying their debt coverage ratio constraint.  As a result, most lenders quoted proceeds of less than 45% LTV."

"The selected lender was able to mitigate the impact of these challenges by using a lower stress rate, giving full credit for MTM leases and including the cell tower income. As a result, they were able to provide proceeds of 50% LTV at a fixed rate under 4%."

Sadly My Predictions of Stock Market Doom Were Accurate:

On Sunday I wrote:

"Even if COVID-19 never gets out of control in the U.S., hundreds of thousands of small businesses in China are in serious trouble, especially with tens of millions of their workers confined to their homes. The owners of most small businesses in China have no more than four months worth of operating expenses in savings, and small businesses employ 60% of China's workers."

"And the thing is, many of these small Chinese companies manufacture parts for American companies. As a result, the worldwide supply chain has been shaken. We can't manufacture our own high-value goods without many essential parts coming from China. Container ships coming in from China are coming back only 25% full."

"...A worldwide pandemic is a virtual certainty.  I am writing this article on Sunday afternoon. It will be interesting to see if the U.S. stock market gets hammered on Monday."

Unfortunately, the stock market lost more than 1,000 points on Monday, and it has been getting hammered ever since.  

You guys are my buddies, and I am trying to warn you.  The consequences of this virus are far, far greater than the precious lives that the world will lose.  Small business owners in China have been traumatized.  They are NOT going to be borrowing more money from their banks.

Grasp the concept that the multiplier effect, in a world of fractional banking, can work in reverse at the rate of 20:1.  If a Chinese bank takes in a $1,000 monthly loan payment, and it does not immediately recycle that payment into a new loan, a whopping $20,000 gets sucked out of the Chinese money supply.

Now get your mind around the shocking reality that Chinese banks rake in on the order of US$4 billion per month in loan payments.  If these banks have no willing borrowers to whom to lend, the unfathomable sum of US$1 trillion will disappear every year from the Chinese money supply.  

Money is going to be destroyed in China like it is being sucked into a black hole.  A tidal wave of deflation is likely to sweep over the world.  Your $1 million home might be worth just $550,000 in 20 months, even if the authorities can mass-produce a vaccine before the end of the year.  

Borrowers have been traumatized, and traumatized borrowers seldom borrow.  The government cannot force companies and people to borrow, so the world's money supply is headed down a giant drain.  You will see deflation everywhere because no one will have any money.

Think 'ole George is crazy?  Think back to the depths of the Great Recession, when Fed Chairman Ben Bernanke injected a whopping $4 trillion into the U.S. money supply.  (Remember all of that talk about the Fed's big balance sheet?) Why didn't we have runaway hyperinflation?  Because the Fed was merely replacing the $4 trillion worth of money that was destroyed when banks stopped lending and borrowers stopped borrowing during the Great Recession.

I sold all of my stocks and invested in a short fund eight days ago.  As my golf buddies would say, when I occasionally sink a long putt, "Even a blind squirrel finds a nut on occasion."  Haha!  

Or maybe I am one of a small handful of folks who understand that the multiplier effect can work in reverse.  I remember reading a wonderful economics book, by James Dale Davidson, entitled The Great Reckoning, in the mid-1990's.  In about the middle of the book, in the middle of some chapter, he briefly mentioned, "that under some circumstances, the multiplier effect can actually work in reverse."  I remember the blood suddenly rushing to my head, and tiny pins and needles suddenly sweeping all over my body.  "Oh, my God!"

So in 2007, a year before the Great Recession, I wrote the financial novel, The Reverse Multiplier Effect, When Crushing Deflation Destroys America.  At the time, the concept of deflation was unfathomable, even to most investment advisors.  My book prescient.  During the Great Recession, trillions of dollars were destroyed, as banks took in loan payments and did not recycle them.  Only the heroism and determination of Helicopter Ben Bernanke and his injection of $4 trillion saved this country.  

Deflation is coming.

No one liked my last blog article, Commercial Loans and the Second Great Recession.  Not one person.  [Sob]  But I understand.  No one likes to hear bad news.

Unfortunately, my fears of another Great Recession might be on point.  The mainstream business media picked up the same theme on Thursday and Friday, as the Dow lost ground.  There will be some severe economic consequences from the coronavirus.

Even if COVID-19 never gets out of control in the U.S., hundreds of thousands of small businesses in China are in serious trouble, especially with tens of millions of their workers confined to their homes.  The owners of most small businesses in China have no more than four months worth of operating expenses in savings, and small businesses employ 60% of China's workers.

And the thing is, many of these small Chinese companies manufacture parts for American companies.  As a result, the worldwide supply chain has been shaken.  We can't manufacture our own high-value goods without many essential parts coming from China.  Container ships coming in from China are coming back only 25% full.

Clusters of COVID-19 are now out of control in South Korea (602 cases, 3 deaths), Japan (135 cases, not counting cruise ships), Italy (132 cases), and Iran (43 cases, 8th deaths).  A worldwide pandemic is a virtual certainty.

I am writing this article on Sunday afternoon.  It will be interesting to see if the U.S. stock market get hammered on Monday.  

Now on today's training in commercial real estate finance.

In this week's FinFacts, a superb, free publication of George Smith Partners, one partner, after returning from this year's Mortgage Bankers Association Commercial Real Estate Finance ("CREF") Conference, wrote about the competitiveness of bridge lenders:

"Bridge Lenders:  Floating rate bridge loan spreads used to be stratified, ranging from 2% to 6% over LIBOR, depending on the transaction dynamics.  That’'s so 2017” (the old days).  Now there's a “race to the bottom” occurring, with lenders bunched up at 2% to 4% over LIBOR.  More and more of them are pushing to the bottom of that range."

"So how do lenders differentiate themselves?  Deal structure, credit officers are casting a wider net” (One lender even remarked: “ We will do some funky stuff”), source of capital (mortgage REIT vs CLO execution vs leveraged debt fund), flexibility, certainty of execution (we met with senior committee members that stressed their lean and efficient approval process), and borrower costs (exit fees can be waived)."

"Warehouse line rates are compressing for debt funds, contributing to tighter spreads on loans and increased leverage.  Lenders are more willing to listen to “stories”.  For  example:  We will look at heavier risk for strong sponsors.”"

"Also, more heavy bridge loans (major renovation, unoccupied properties) are being priced almost like “light bridge.”  As one lender remarked: “ No cash flow, no problem, for the right deal.”  Geographic:  Secondary and tertiary markets are being considered, and the right deals are being priced tightly.  Yet many high-yield lenders are still in business, now offering high-leverage, non-recourse construction loans or going very high up the capital stack.  The net needs to widen as nearly every lender indicated that their marching orders are to increase production over 2019."

Okay, so what on earth is the difference between a heavy commercial bridge loan and a light commercial bridge loan?

A light bridge loan is where there is only some minor renovation and/or the property is a proven location.  You may be able to negotiate a bridge loan at just LIBOR plus 2.0% or LIBOR plus 3.0%.

Examples of Light Bridge Loans:

1. You just found a good tenant for your standing office building, but you need $350,000 to pay for tenant improvements.
   
   
2. Your borrower's restaurant has been a money-maker for 20 years (proven location), and the borrower needs another $1 million to expand his seating capacity by another 35 tables.

A heavy bridge loan is one involving substantial construction and/or market risk.  If you can even find an interested bridge lender, you may have to pay as much as LIBOR plus 4% or even higher. 

1. You are converting an old hotel to student housing.  All kinds of problems happen when you open the walls of older buildings (termites, asbestos, illegal wiring and/or substandard plumbing).
   
   
2. You need $1.5 million to convert an existing, vacant retail building to a restaurant, and there is no guarantee that the market will appreciate a restaurant in this particular location.  Maybe the people located in the surrounding area don't make enough dough to dine out often.  Maybe the new restaurant has inadequate parking or is hard to negotiate by car.  We have all seen restaurant after restaurant fail in the same location.
   
   
3. You are converting the shell of a failed big box retail store to self storage, a popular adaptive re-use.  That's more than a trifling of construction, plus you have risk that people don't like two-story self-storage buildings.

P.S.  I wonder if the Chinese Communist Party ("CCP") will survive this crisis.  The average Chinese citizen despises the tight control of the CCP, but they tolerate it because the CCP has been improving their lives annually.

What happens when the growth rate in China plummets from 6% to 7% annually to a negative number?  The largely-peaceful protestors in Hong Kong taught the Chinese people how to bring a government to its knees.  Think this is a far-fetched scenario?  Everyone was shocked at the speed at which the Russian Communist Party lost power.  Could beautiful young Chinese girls soon be sticking flowers into the gun barrels of surrounding Chinese soldiers?

Most of you are too young to remember this, but when Russian soldiers and tanks surrounded the Russian pro-democracy protestors in 1991, led by Boris Yeltsin, some beautiful Russian girl started sticked flowers in to the gun barrels of the Russian soldiers.  In less than an hour, the surrounding Russian army brigade changed sides and pointed their guns outwards, protecting the protestors.

Boys are so easy.  :-)

I have not included many funny memes today.  Instead, I need for you to appreciate just how deserted are the streets of Shanghai, a city of 24 million.  Guys, these pictures are NOT of Wuhan.  They're pictures of Shanghai, the biggest city in China!

Obviously, if the coronavirus gets loose in the United States like its already loose in China, the U.S. economy is going to crumble.  A lot of people - especially old 'gomers like me with a bad heart or with bad lungs - will be too afraid to go outside.

Please pay attention!  

If your father and mother are over the age of 55, and they have a fairly serious pre-existing health condition, you may have to ground them for three or four months.  "Go to your room!"  This disease is killing well over 35% (50%?) of these older folks with pre-existing health problems.

This disease starts in the lungs, where it starts killing the cilia - the active little hairs in your lungs that work like oars to stir and to clean out the good mucous that protects your lungs.

In response, the immune system over-reacts (called an Immune System Storm) and floods the lungs with white blood cells.  The patient starts to drown from his own immune system response, and breathing becoming increasingly difficult.

In many cases, the coronavirus also attacks the walls of the blood vessels in the lungs, and blood starts to seep out from the arteries and veins into the lungs, further drowning the patient.

In about twenty percent of cases, this evil virus moves on to attack the liver, and it interrupts the blood cleansing process.  Not good.  Seriously not good.  And if the disease moves on to your father's or mother's kidneys, the fatality rate is over 91%.

The good news is that younger adults seem to survive the infection.  I read today that in China, doctors are collecting plasma from young adult survivors and giving it to the very sick.  It seems to help.  Your own children?  Don't be reckless, but very few young kids are getting the serious version of this disease.  Thank God for that.  Thank you, sir.  Source for all this medical stuff:  Article in the National Geographic.

So, of course, if the coronavirus runs rampant through the United States, the economy is toast; but today I am going to make the argument that even if the coronavirus stays predominantly in China, the U.S. may still suffer another Great Recession.

Pop Quiz:  

Q:  What's the difference between a Great Recession and an outright economic depression?

A:  In a Great Recession, the Fed intervenes and keeps the banks from failing.  That was the huge mistake that bank regulators made in the 1930's.  We let 9,000 banks fail during the Great Depression - 4,000 in just 1933 alone.

Okay, so why would an economic slowdown in China crush the United States?  Once again, it involves the multiplier effect kicking into reverse.  You will recall from earlier articles that the multiplier effect is that virtuous cycle whereby a $100 deposit into a bank increases the country's money supply by a whopping $2,000.

In a world of fractional banking, a bank only has to keep a fraction of its deposits on hand in the form of cash, and it is allowed to lend out the rest.  Therefore, if Bank A takes in a $100 deposit, it only has to keep $5 in reserve.  It can lend out the remaining $95 at a profitable interest rate.

The proceeds of this $95 loan end up eventually as a deposit in Bank B.  Bank B keeps $4.75 in reserve (5%), and lends out $90.25.  This money eventually ends up in Bank C, which keeps 5% in reserve and lends out the rest.  And so on.

The end result is that a whopping $2,000 in new money is created from that single deposit of $100.  Twenty-to-one.  One divided by the Reserve Ratio demanded by the regulators.  1 / .05 = 20.  

Wow.  Pretty cool, huh.  But here's the problem.  The multiplier effect can sometimes work in reverse, thereby destroying vast amounts of a nation's money supply.  

Money then becomes tight, businesses fail, workers are laid off, resulting in fewer consumers, reducing demand, lowering prices as companies desperately try to sell their products at some price.  Lower prices means lower profits, squeezing the budgets of the surviving companies, resulting in more company failures, more layoff's, and a general circling down the economic drain.

Now let's jump to China.  Wong Chiang builds and sells parts for electric scooters.  Fearing an economic slowdown due to the coronavirus, Mr. Wong decides not to replace much of his inventory of scooter parts (they might just collect dust on the shelf), so as existing scooter parts sell out, Mr. Wong stops borrowing more money on his inventory line of credit from the bank.  In fact, he starts to substantially pay down his line of credit.

Shanghai Bank, his bank, receives  a series of loan pay-downs from Mr. Wong totaling $100,000.  Since Mr. Wong refuses to borrow more money, Shanghai Bank looks around for some other borrowers to whom it might lend; but it has no takers.  Every other business owner in the Shanghai area is equally freaked out about taking on new debt.

Guess what happens?  Since the reverse multiplier effect also works at 20:1, Mr. Wong's $100,000 loan pay-down results in the Chinese money supply shrinking by a whopping $2,000,000!

And other Chinese businessmen are also probably paying down their debt right now in anticipation of a recession.  The Chinese money supply has to be contracting right now like the tailpipe of a man about to get a prostate exam.  Hahahaha!  In order to convince older men to get prostate cancer exams, there was once a terrific commercial showing a doctor wearing one rubber glove.  "I have performed 2,332 and a half prostate exams."  Some poor guy apparently ran out screaming from the exam room.  [Oh, my goodness, laughing my tush off.]  

With billions of yuan also flowing back to Chinese banks in the form of normal monthly loan payments, the Chinese money supply must be contracting severely right now (20:1).  This is extremely deflationary.  

Could we see U.S. commercial real estate fall by 45% again?  If this epidemic drags on more than a few more months, then the answer is yes.  

But wait, why does a contracting Chinese economy mean that the U.S. will soon go into a deflationary recession as well?  Think about all of the products that we sell to China.  Our exports to China will definitely be declining. 

And let's talk about U.S. manufacturing.  Parts.  Our factories will not be able to get all of the Chinese parts they need to manufacture their own products.

Millions of Chinese are still not back to work after their Chinese New Year vacation.  The Chinese Communist Party has closed thousands of factories in order to slow the spread of the virus.  Over 50 million Chinese are effectively in quarantine in their own homes.  Travel by private car in Wuhan was just banned today.

Is there any hope?  The coronavirus does not like heat, humidity, or sunlight.  There is some hope that the disease may burn itself out in the Spring; but there is no guarantee.

What can you do?  Avoid taking on new debt.  Stay liquid, including keeping some extra cash at home.  Build up a supply of food.  People are starting to go hungry in Wuhan.  There were food riots at the supermarkets in Shanghai this week, hundreds and hundreds of miles away from Wuhan.  Got a gun?  Should you buy another one for your wife, each of your older kids, and your dog?  I think so.  

Dog and cat food.  Some desperate Chinese people have been forced to hurl their sweet dogs and cats from twenty-story buildings because they were competing for the family's dwindling supply of food (and there was unfortunately an erroneous rumor that dogs and cats were acting as a reservoir of the virus).

Toilet paper.  I kid you not; there was an armed robbery in China yesterday where the perpetrators stole a huge shipment of toilet paper.  "Hey, man, did you get the goods?  Yes, we got ten pallets of toilet paper."

But here is some good news.  I no longer think the Chinese will be starting a war against us in less than four years.  This epidemic must be traumatizing the Chinese people.

The year was 541 A.D.  The Western Roman Empire had already fallen to the Visigoths; but the Eastern Roman Empire, headquartered in Constantinople (modern day Turkey), would survive for another 850 years.  The Bubonic Plague, carried by fleas, was a pandemic that wiped out much of the population of the Byzantine (Eastern Roman) Empire, as well as that of the Persian Empire.

What I never knew until yesterday was that a horrible economic depression followed the Plague of Justinian (the Roman Emperor in 541).  Just sayin'.

We may soon be going through an economic poop storm, and if we do, the banks will quickly exit the market.  Please remember that Blackburne & Sons is NOT a mortgage fund.  If you are invested in a hard money mortgage fund right now, get the heck out immediately.  There is nothing worse than being invested in a hard money fund when the sponsor fails.  You'll be lucky to recover 25 cents on the dollar.  

Instead, Blackburne & Sons quickly assembles a new and different syndicate to fund every deal.  There are always private investors willing to fund a good loan, even when blood is running in the streets.  It's simply a matter of interest rate.

Blackburne & Sons was in the market, making commercial loans, every single day of the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  

Commercial lending is all about relationships.  Were you smart?  When the everything was peachy keen, did you bring your good hard money deals to Blackburne & Sons, or did you foolishly try to establish a relationship with some hard money mortgage fund that will be out of business in the next nine months?  

Most hard money mortgage funds are Ponzi Schemes.  When new deposits stop flowing into the fund, and the sponsors lack the dough to make new loans and earn new loan fees, hard money mortgage funds fold like a cheap suit.  But Blackburne & Sons will still make you a commercial real estate loan - every single day of the Coronavirus Crisis.  We are always in the market.

When a bank makes a commercial construction loan, it is certainly not going to take all of the risk.  A bank will usually require that the developer cover at least 20% to 30% of the total project cost - land cost, hard costs, soft costs, and a contingency reserve equal to 5% of the hard and soft costs.

Usually this takes the form of the developer contributing the land free and clear of any liens, plus having paid much, if not all, of the engineering and architectural fees.

Therefore I was shocked to read a tombstone sent out by my friends at George Smith Partners, one of the oldest commercial mortgage banking companies in the country.  You will recall that a tombstone is a closing announcement designed to show the types of commercial loans that a particular lender makes.

The tombstone boasted of the closing of a $4 million non-recourse land loan in Beverly Hills, at 8% interest for one year.  This land loan was made at 90% loan-to-cost (LTC)!  Ninety percent on a land loan???  I know that Colorado oregano is now legal in California, but 90% LTC on land is an insane amount of leverage.  (In this particular case, the cost was the same as the fair market value.)

So I wrote to my buddy, Bryan Schaffer (a very good man), and asked, "Bryan, I don’t understand.  What is the exit strategy?  Any construction lender is going to expect the developer to contribute the land free and clear, and it might require even more developer’s contribution."

Before I share with you Bryan's answer, I need to explain that, prior to the Great Recession, banks were allowed to give developers credit for the appreciation in the value of their land.  For example, suppose a developer purchased some land for $1 million, and three years later, because he bought shrewdly, the land now appraises for $3 million.  

Back then, the bank was allowed to value that land at $3 million for equity purposes.  Therefore, if the developer only owed $500,000 on this $3 million piece of land, the bank would say that the developer contributed $2.5 million in equity towards the proposed construction loan.

But then the Great Recession hit, and construction lenders took huge losses.  To curb what Federal regulators deemed as reckless commercial construction lending, banks were only allowed to value land at the developer's actual cost - in this case, just $1 million.  This has greatly restricted commercial construction lending over the past decade.

We are now ready to reveal Bryan's answer to the question, "A land loan of 90% loan-to-value?  What the heck have you been smoking?"  Haha!

"George, It is very hard to get the full appreciated value of the land.  On this deal, if you just did a construction loan, most lenders would only give the developer his basis (actual cost), which was $1.4 million."

"With a $4MM land loan and an appraisal at $4.4 million, the bank will give us at least a $4 million value for land - and most likely the full $4.4 million value.  At some banks, if he deposits the $4 million (from the loan proceeds), they will loan him the entire $4 million against it at a very low rate, which he will use to pay off his land loan.  He will get the full $4 million to $4.4 million credit (for the value of the land) and will also show $4 million of liquid assets, but it will be in a restricted account."

"So the hard money loan cost him $200K to $300K, but in exchange he does not have to bring in fresh cash of $2-3 million and likely also looks better for future loans because he has the $4 million in a restricted account.  It is a little bit of a financial game, and it is only good for someone that does not have the cash.  Hope that helps, Bryan."

The hippos imported by Pablo Escobar are breeding like crazy in the wilds of Columbia, and their poop is polluting the local water supplies.  Algae blooms. 

Did you get lost?  It helps to understand that banks only want to lend to developers with lots of cash on hand.  Our developer will take this $4 million in land loan proceeds and stick it into the account of the bank which will make the new construction loan.  It's a restricted account, so the dough can only be used to construct the proposed 12-unit apartment building.  

Because the land has a whopping $4 million loan against it, the bank can't just value the land at the developer's cost of $1.4 million.  It makes no sense, so the bank is forced to value it at least at $4 million.  And since the bank is already breaking the Fed's rule about valuing the land at the developer's actual cost, they will probably cave in and value the land at its $4.4 million appraised value.

So the land loan costs the developer $200,000 to $300,000 in loan fees and interest - but it reduces by $2 million to $3 million the amount of equity the developer has to contribute to the property.

As Bryan explained, its kind of a shell game (1) to make the developer look liquid and rich; and (2) to get around the Fed's rule that bank construction lenders must value the land at the developer's actual cost.  I suspect that there are a lot of parties winking at each other.  Haha!

Google has reported a growing number of searches on the "Corona Beer Virus."  I'm serious.  It got to the point where the makers of Corona Beer had to make a public statement, "No relationship!"  Hahahaha!

I am actually taking this pandemic very seriously.  Although only about 20% of infected people get seriously sick with pneumonia, the ones who are dying are the men, over the age of 55, with heart issues (like me).  Geesch, I just retired, and now I could die in two months.  So, this weekend, during the Super Bowl, be sure to tell your Dad that you love him.  

This is a bona fide pandemic, and the death count among the old and the weak just keeps rising.  I've seen a number of videos this week showing people in Wuhan collapsing and just lying there, either dead or near-death, in the street.

Today I will share what steps I have taken to prepare my family for potentially a year of captivity inside in our home.  Yes, I have lots of funny memes today; but in truth this is no laughing matter.

My buddies and I are going to see the movie, 1917, this weekend.  I couldn't imagine going "over the top" during World War I into the face of machine guns.  What a horrific waste!  In 1916, at the Battle of the Somme, the cream of England went over the top and ran towards the German machine guns.  The week-long artillery barrage was supposed to have taken out the enemy machine gun nests and trenches, but in many cases, it didn't even take out the barbed wire.  The British suffered 60,000 casualties (approximately the same number of people who will be attending the Super Bowl) in the very first day of the attack.

The reason I mention this is because the Spanish Flu killed more people in 1918 than had been killed on both sides in four long years of the war.  Fifty million people people were killed by the Spanish Flu worldwide between 1918 and 1920.  So yes, this coronavirus is potentially serious stuff.

But what can you do?

By now I am sure you have seen the video, recorded by a nurse in Wuhan, detailing how last week they already had 90,000 people stricken with the coronavirus.  Last week, a different nurse, in a heart-wrenching video, suggested there were 100,000 sick.

And this was six days ago.  With the virus spreading almost exponentially, Heaven only knows how many people in China are truly sick.  Clearly the Chinese are grossly understating the number of sick people.  If you think that this disease can still be contained, you've been smoking too much of that Colorado oregano.  The genie is not just out of the bottle, he is flying to every country on earth.  You literally have just four to six days to prepare.

But what on earth can you do?  My advice is next.

The first thing you need to do is to go out and buy a ton of food.  Food-food-food.  Hong Kong announced today that their scientists had developed a possible vaccine; but they warned that it will not be available for over a year.  Not only do they have to do about ten months of testing and clinical trials, but it will take many months after that to produce the vaccine in any serious quantity.

You may therefore need enough food for you and your family to last for at least a year.  Wuhan residents reported yesterday that the city is running out of food.  In the 2011 movie, Contagion, there were food riots.  Of course there were riots.  If your children are hungry, a parent will do anything.  You do NOT want to be out and about, looking for food, when other similarly-desperate people are on the prowl.  

The second thing you will need is face masks.  It is important to understand that normal surgical disposable masks face will NOT protect you against airborne viral particles.  The viral particles are too small, compared to the gaps in the cloth of the mask.  Also, these surgical masks fit poorly, and virus particles simply enter through the gaps around the nose.

So why are two-hundred million Chinese wearing surgical face masks?  Surgical masks prevent you from touching a contaminated surface and then touching your mouth.  Did you know that humans touch their mouth or face three to five times per minute?  Therefore if you can miraculously find any surgical face masks still on some store shelf, you should buy as many as you can.  They're cheap, and I think you're only supposed to use them one time.  If their primary purpose is to keep you from touching your mouth, however, they should still provide important value after twenty uses.

The face mask you really want is the N95 respirator used by painters, available in hardware stores like Lowe's.  These respirators capture as many as 95% of all airborne particles.  I think they are precise enough to screen out the virus.  If you can find one, the N99 respirator is even better because it screens out 99% of all airborne particles.

The next thing you need is weapons.  In the movie, Contagion, there is a scene where the hero, Matt Damon, hears gun shots coming from the house next door.  It is a particularly disturbing scene because all you see are gun flashes coming out of a dark house.  Everything is left to your imagination.  Then you see four guys in ski masks running out of the house with goods in their arms.  Sooo disturbing.

Indiana is a pro-gun state, and we have some of the easiest carry permit laws in the country.  My wife and daughter recently applied for a carry permit, and the permit was granted in less than ten days.  (I was shocked.  Mine took almost a month last year.)  Then I took my wife to the gun shop, filled out a pistol purchase application, and it was approved online in just three minutes.  No waiting.  No cooling off period.  We walked out with an 8-round, 9mm, Smith & Wesson automatic with a grip safety.  In other words, it has no safety switch.  Merely grasping the gun in the normal way depresses a lever in handle and makes the gun capable of firing.  Like I said, that gun flashes scene in Contagion was very disturbing.

Did I mention that you will need lots and lots of food?

Here are some additional items to consider:  Toilet paper!  If the stores are sold out, looted, or boarded up, where are you going to go for toilet paper?  Flashlights, batteries, and candles.  It's not impossible that the power might go out at some point.  Surgical gloves and hand sanitizer.  You will want to sanitize your hands every time you go out.

The hospitals in Wuhan are so overwhelmed with patients that officials are now telling most people to stay home and fight the fever with aspirin and ibuprofen.  (Don't a lot of kids with a fever die if given aspirin?)  You therefore may probably want to stock up on some ibuprofen and aspirin.

Gasoline!  You will need gasoline to get your VERY sick family member to the hospital.  In Wuhan, the gas stations all closed down early in the crisis, and many of its citizens lacked the fuel to rush their loved ones to the hospital.  Therefore, you should keep your cars topped off with gas.

If you look at any of the videos coming out of Wuhan, you will notice that all of the nurses and doctors are wearing some sort of eye protection.  In one video smuggled out of Wuhan, a young man mentioned that the disease can enter the body through the mucus membranes of the eye.   I have no idea if this is true, but I purchased some cheap painter's goggles from Lowe's yesterday.

Dog and cat food!  You don't want to eat Fido and Miss Fuzz Buckets because you are running out of food, and they are eating your declining supplies.

I fear that a global pandemic is inevitable.  I suspect that it will be nowhere near as bad as the Spanish Flu; but we could still lose a few million people worldwide.  More importantly, however, your life is almost certainly going to be interrupted.  There may be a shortage of food.  Stores and gas stations may close.  Hopefully the power and water stay turned on.  (Yikes, what do you do with all of the poop if the water stays off?)

I urge you not to wait until the last minute to do your emergency shopping.  Even if you start today, many of you will be unable to find face masks.  And the food stores may be cleared out in an afternoon once the panic starts.  The Chinese stock markets have been closed for several days already, and the U.S. stock market is down 400 points right now.  The country is waking up to the risk that we are going to lose some old people, and life for the rest of you is going to become quite inconvenient.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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