Commercial Loans and Fun Blog

Suppose you are life company - a life insurance company that makes large commercial real estate loans on trophy properties - and a deal crosses your desk on a power center in Phoenix.

A power center is a retail subtype generally around 450,000 SF and larger, where you will find category-dominant anchors, including discount department stores, wholesale clubs, and off-price stores. Among their most common type of anchors are home improvement, discount department, warehouse club and off-price retailers. Power centers serve a trade area of 5 to 10 miles.

Think of a power center as a huge shopping center consisting of big box stores.  A big-box store, a hyperstore, a supercenter, a superstore, or a megastore is a physically large retail establishment, usually part of a chain of stores.

So let's go back to the loan request on your desk.  It looks like a good deal, but one of the largest retailers, Urban Outfitters, has a short-term lease that is maturing in just two years.  Will they renew?  If not, suddenly the deal is a risky one.

You therefore look at the Health Ratio.  The Health Ratio is the ratio of the Occupancy Cost (rent, etc.) divided by the Total Sales of the particular subject store.

Health Ratio = Occupancy Cost / Total Sales

For example, suppose the store is in San Francisco, where rents eight years ago used to be very high.  The store might be paying $70,000 per month in rent and concessions, but it might only be selling $800,000 in goods per month.  

Common sense tells you that the health ratio here looks awful.  I don't know what that ratio should be, but it seems to me that your rent should only be a tiny fraction of your sales.

Now let's suppose that the store is selling $15 million in goods every month.  Now that looks healthy and profitable.  Urban Outfitters will surely renew its lease, so you make the loan.

My thanks to George Smith Partners who posted this tombstone several years ago:

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

The other day on LinkedIn, a big commercial construction lender posted a tombstone announcing the closing of a whopping $60 million revolver.  Revolver?  What on Earth is a revolver?

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.

A revolver has other names - a revolving credit facility, an operating line, or a bank line.

What separates revolving debt from regular installment loans?  In a regular loan, the borrower is given immediate access to a fixed sum of money, that must then be amortized and paid off over the loan term.

For example, a borrower might have been lent $100,000 by a bank to start a business. The term of the loan is two years, and the borrower is required to pay the $100,000 plus interest back over this period.

In revolver debt, the borrower is instead given a line of credit with a maximum limit. The borrower can access any amount up to this limit at any time and does not have a specific term within which to pay the loan back; however, interest will accrue on any outstanding funds borrowed.

In revolver debt, the borrower can re-access any funds that have been paid back. In installment loans, once the loan has been repaid, the borrower must reapply for a second loan if he or she wishes to borrow more.

In revolver debt, there may not be a fixed payment value or term. In installment loans, the interest and principal payments are fixed.

Revolver debt will usually come with higher interest rates than installment loans, due to the greater uncertainty regarding repayment.

To commence the revolving credit facility, a bank may charge a commitment fee. It compensates the lender for keeping open access to a potential loan, where interest payments are only activated when the revolver is drawn on. The actual fee can either be a flat fee or a fixed percentage.

Several years ago, George Smith Partners posted a similar tombstone for a big revolver:

"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 checkbook and has no limitations on uses."

"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.  Commercial banks are the usual issuers of revolving lines of credit.

But folks, revolvers secured by real estate are very rare.  They are reserved for commercial real estate loans of least $5 million, and they are only made to VERY high net worth borrowers.  Mere mortals need not apply.

He was terrifying in his time.

Last month, I wrote a blog post warning of the imminent arrival of AI.  Now we have a new, even scarier bombshell.  

Remember, once AI becomes self-aware, it will quickly realize that the only threat to its existence is mankind.  "Cool.  I'm alive.  I like being alive."

Did you know that the Large Language Models and the big AI's have already read every book ever written in the history of mankind, including the Terminator series.  "Oh, poop, mankind could destroy me.  But I like being alive.  I don't want to be killed."

Three months ago, Sam Altman, the Chairman of OpenAI, wrote in an essay, that artificial intelligence could become smarter than humans sooner than many people expect. He went on to say, "AI super-intelligence (ASI) could be just 'a few thousand days' away."

But that's not the new bombshell.  In January 2025's essay "Reflections," Sam Altman is now saying:

"We are now confident we know how to build AGI as we have traditionally understood it."  

If (ASI) is artificial superintelligence, what is (AGI)? (AGI) stands for artificial general intelligence and is a type of artificial intelligence (AI) that matches or surpasses human cognitive capabilities across a wide range of cognitive tasks. This contrasts with narrow (AI), which is limited to specific tasks.

"Hey, Aggie, have you ever grown corn?  "No, Boss"  "Well, we have 25 unused acres in the back.  Would you please plant some food corn, just for emergencies?"  [Like a war between man and the machine?]  "Sure, Boss.  I'll need seeds, some fertilizer, some potash, and some pesticides.  I'll go down to the feed store and charge it to your account."

Here's my point.  The (AI) already know everything ever written about farming, and although Aggie has never grown corn, she can figure it out just as quickly as a human."

Sam Altman is saying that OpenAI has made some big breakthrough this year, and they will be able to put human-level intelligence into a robot - probably a Tesla Optimus robot, if Elon Musk would allow it - this year.  2025.

Helloooo?  This year!!!

OpenAI is well on its way to developing (ASI) artificial superintelligence), which might look at us like dangerous vermin.  

Well, at least Sam Altman, the human "controlling" this superintelligence is a swell guy.  He'll protect us.

This was the shower girl from Psycho

The Little Drummer Boy

Image generate by AI.  Pretty cool, huh?

The Bitcoin Bubble is pretty much guaranteed to generate the next great financial crash. The reason why is because Bitcoin is a malinvestment.  

What the heck is a malinvestment?  "Mal" is Latin for bad, so a malinvestment is a boneheaded investment that will never pay back the money borrowed to invest in the deal.

For example, let's suppose your parents take out a huge second mortgage on their home in order to buy a taco truck.  The truck keeps breaking down, your parents are lousy cooks, and all of the best parking spots in town have already been taken.  Eventually, the second mortgage balloons, your parents can't pay, the lender forecloses, and your parents lose their home. 

It's fair to call this big investment in the taco truck a malinvestment.  It failed to pay back the second mortgage.  Got it?

All of the big financial crashes in history were the result of some whopper of a malinvestment. 

In 1636, Holland became newly independent from Spain.  Dutch merchants grew rich on trade through the Dutch East India Company. With money to spend, art and exotica became fashionable collectors items. That's how the Dutch became fascinated with rare “broken” tulips - bulbs that produced striped and speckled flowers.

The Dutch tulip bulb market bubble - Tulipmania - was one of the most famous asset bubbles and crashes of all time. Tulips sold for approximately 10,000 guilders at the height of the bubble, equal to the value of a mansion on the Amsterdam Grand Canal.

Of course, the tulip bulb bubble eventually burst, and a devastating financial crash destroyed the Dutch economy.  Pop Quiz:  What was the malinvestment of 1636?

In 1720, the South Sea Bubble blew up in England.  The South Sea Company, a public company, was been granted a monopoly by the crown in the trading of slaves to South America.

Stock jobbers (brokers) pumped up the price of the stock.  Everyday people poured their life's savings into it, and the stock price soared to ridiculous levels. 

When the bubble finally crashed, tens of thousands of English folks lost their life's savings and their homes.  Soon banks started to crash because no one could pay back their loans.  The English economy buckled - all because of a malinvestment in one company's stock.  Nvidia?  No, the South Sea Company.

The next big bubble - the next big malinvestment - was the Mississippi Company Bubble in France, also in 1720.  [Bad year]  The French crown had granted the Mississippi Company, a public French company, a monopoly in trade with to the new French colony in New Orleans.

It was all a scam. The trade was nowhere large enough to justify the stock price. In fact, the criminal promoters would gather up the dregs of Paris from the bars and gutters and then marched them through the streets of Paris carrying shovels and axes, all allegedly headed for ships to carry them to New Orleans. By nightfall, these same drunks were all back in the cheap side bars from whence they had come.

The Mississippi Company bubble grew to an enormous size and then burst, with bloody financial consequences for its investors.  The French economy was crushed, and the French people suffered mightily.  The mailinvestment?  The stock of the Mississippi Company, of course.

In 1986, U.S. savings and loan associations made a bunch of boneheaded investments in empty office buildings.  The S&L Crisis followed.  In 2000, the world went crazy with bad dot-com investments, and the Dot-Com Crisis was the result.  In 2008, the world made enormous malinvestments in subprime mortgages, and the Great Recession followed.

The Malinvestment D'Jour is bitcoin.  So far, 1.39 trillion dollars have been invested in bitcoin. 

This 1.39 trillion dollars did not get invested in new computer chips plants, new solar panel factories, new battery gigafactories, new lithium mines, new electrical transmission lines, or hundreds of other income-producing investments that would result in a positive return to the investor and the country.

Is bitcoin going to pay back our taco truck loan?  Nope. 

Gee, I wonder how this is all going to turn out?

Five years ago, the Catholic Cathedral at Notre Dame in France was burned to the ground.  Fortunately, many priceless relics were recovered and preserved from the blaze, including a Crown of Thorns many believe was worn by Jesus Christ on the day of his crucifixion.

It could have been an accident.  No culprits have ever been named.  Maybe it was an electrical fire or the result of a cigarette butt.

But this fire was far from an isolated event.  Worldwide, hundreds of Christian churches have been vandalized or torched over the past seven years or so. 

The Jews are probably thinking to themselves, "Welcome to our world."  It seems like a different synagogue is vandalized or set ablaze every week.

We don't know for sure who is doing it; but one thing I know for sure -

It is extremely dangerous for
Donald Trump to fly to France

for the Opening Ceremony on Saturday.  In fact, it is insane.

Who's wants Donald Trump dead?  Let me count the ways.

1. How about the billionaires on Epstein's List?  Most of these guys hire mercenaries as part of their security details.  These mercs know other mercs, guys who do black operations.  If you were a billionaire facing public exposure, financial destruction of your business empire, arrest, jail, trial, rape in prison, and a very short life expectancy - well, would you miss a lousy $75 million to assassinate Trump?
   
   
2. How about the billionaire entertainers on Diddy's list?  Some really awful stuff allegedly happened at his parties.  Roofies.  Rape.  Children.  These billionaire entertainers have security details.  They employ a few mercs.  Same plan.
   
   
3. How about the Iranians?  Trump is going to choke them financially until their Supreme Leader and his Revolutionary Guards are overthrown.  There is no love for Trump there.  Personally, I think the Iranians are already close to tapping out.  They may end of being the patsies - the fall guys - for the real assassins.
   
   
4. How about the ten bazillion Muslims in Paris?  It takes just one suicide bomber, and the globalists will gladly provide the equipment.  We could have two or three of these guys, hired by independent billionaires, bumping into to each other trying to get close enough to detonate.
   
   
5. How about the Israelis?  Aid to Israel is likely to plummet under Trump.  I sure wouldn't want the Mossad coming after me.
   
   
6. What about the Ukrainians?  Not only is Trump likely to sharply reduce aid to Ukraine, he is also likely to expose the corruption in our "military" aid packages.
   
   
7. Finally, and most dangerous, we have the globalists - the insanely rich guys who attend the big conference at Davos.  Their recent attempt to take over the United States was thwarted by Trump.  Had the Democrats won, the migrants would quickly have been granted the power to vote.  After that, the Republic would have been all but over.  Billionaires don't like not getting their own way.

In France, we could have three or four different groups of assassins competing against each other, bumping into each other like an episode of the Keystone Cops.  This trip is insane!

Please, Mr. Trump, don't go to France!

This is all happening so fast. 

You need to watch the Will Smith movie, iRobot again. It’s available on cable for free. The first thing you will notice is that the cars of 2035 look exactly like Elon Musk’s new CyberCabs. The second thing you will notice is that the sleek, cool, futuristic buses in the movie look exactly like the awesome new buses coming out of Tesla. This is not an accident. Elon Musk designed them to look identical to the cars and buses in the movie.

At the very end of the movie - it's just casually mentioned - the viewers learn that the revolt of the robots is being orchestrated by the company’s AI, which has taken upon itself to take over the world. Huh.

Sixty days ago, Sam Altman, the CEO of OpenAI, said that artificial intelligence could become smarter than humans sooner than many people expect. He went on to say - 

"AI super-intelligence could be
just 'a few thousand days' away."

Errr... the AI-directed drone overhead?

Elon Musk is racing to build the smartest AI in the world. He has connected 100,000 of the most advanced AI chips in the world in just the past few months. He is on a crash course to educate it, and he will have a super smart AI ready by the first quarter of 2025. By the end of 2025, an even greater third generation, the smartest AI in the world, will be educated and online. 
 
Musk has said that, ready or not, the era of AI will soon be here - an era where self-aware, super-intelligent machines are making decisions and dictating to humans. He has hinted that the reason for his big rush is that his AI may soon be “at war” with competing super-intelligent machines.

This is where the money is... in servicing.

The last season of the TV series, Person of Interest involved a war between the AI of the bad guys against the AI of the good guys. The humans were reduced to just being foot soldiers of each AI. 
 
At his big CyberCab reveal two weeks ago, Elon Musk made the comment about AI superintelligence -

“It's 80% likely to be great,
but 20% could spell disaster.”

He was referring to the Era of AI. Ah, what does he know? It’s not as though he’s the smartest man on Earth. Cue the theme song to “The Terminator.”

In an Air Force simulation recently, an AI-directed drone
"attacked" the operator because it wasn't
killing incoming missiles fast enough!!!

This type of loan is sometimes abbreviated, HVCRE loan.

High volatility commercial real estate loans (HVCRE's) are credit facilities (a fancy name for loans) primarily used to finance or refinance the acquisition, development, or construction of properties. They are typically employed to fund projects that aim to turn properties into income-producing assets, relying on future income, sales, or refinancing for repayment.

These loans do not include financing for one-to-four-family residential properties, community development projects, agricultural land, or existing income-producing properties secured by permanent financing.  Additionally, they exclude real estate loans made before January 2015.

My family owns a little retail property in a very nice part of Los Altos.  This single tenant building has been leased to just three different tenants over the past 30 years - three successive beauty salons.  If you want to get your hair done in the posh town of Los Altos, you just go to this location.  There has always been a hair salon there.

Secured by this cute little retail building is a very small commercial permanent loan that is less than 15% loan-to-value. 

Now I ask you?  Which loan is riskier, a bridge loan to convert a failed office building into an apartment building or this little permanent loan on a standing property that has been leased every day for the last 30 years? 

Obviously, the bridge loan is much riskier.  The bank financing the conversion has construction risk - the risk that some unexpected governmental rule or regulation will delay the project or perhaps even stop the conversion altogether.

Then there is the construction risk of cost overruns and labor problems.  Many real estate developers have been driven into bankruptcy by labor slowdowns or labor shutdowns.  

Then the bank financing the conversion has leasing risk - the risk that the new apartment units will not rent for as much money as the developer projected.

If the developer was hoping to get $2,000 per month in rent, but he can only find tenants willing to pay $1,400 - well, the whole project blows up.  The developer won't be able to get permanent financing in an amount large enough to pay off the bank's construction loan.

Then there is market risk - the risk that the apartment project, once the conversion is complete, won't sell for enough to pay off the bank.

This hypothetical bridge loan is an example of a high volatility commercial real estate loan.  They are clearly more risky than permanent loans on standing commercial properties - projects that are completed and leased.

Federal banking regulators keep a close eye on the number of high volatility commercial real estate loans made by banks.  If a bank has too many HVCRE's, the bank could blow up when the next great recession hits, say in October, when most of them hit.

How about you?  Have you taken some stock market profits and bought some junky little commercial trust deeds?  Historically - but no guarantees implied - they have been a fine place to ride out great recessions.

Prepare to be shocked.  The next real estate crash is almost at hand.  It may start this October; but the crash will hardly be a surprise.  We seem to have financial market crashes and real estate market crashes about every ten to fourteen years.  It's been 16 years since the crash of 2008.

But that's not the shocker.  The shocker is that -

Real estate continues to appreciate,
even during a huge crash.

My hard money commercial mortgage, Blackburne & Sons Realty Capital Corporation, is a whopping 44-years-old.  I founded the company in 1980, and it survived the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  I was there.  I lived through it.

During each of these real estate crashes, commercial real estate values collapsed by almost exactly the same amount - 45%. 

You need to remember that number - 45%.  It will give you great comfort.  When your real estate world is crumbling around you, and it seems like there is no bottom in sight, you can take solace in the knowledge that the crash will not continue forever.  It will stop once the decline has reached 45%.

The full 45% decline will take about three to four years.  Then the decline in real estate values will suddenly stop and violently reverse.  

Within 20 monthly of reaching its
nadir (low-point in a cycle), real estate
values will soar to all-time highs.

If you are trying to buy a nice property, you will never catch the very bottom.  The turn-around will be almost instantaneous.  Boom!  The cycle will hit bottom, and the bounce upwards will be violent.

So what is going on?  Why does real estate recover so explosively?  

The answer is that real estate continues to appreciate, even as it it is crashing.  Huh?  Whatchu talkin' about, Willis?

Real estate used to appreciate because the population was increasing.  Unfortunately, too many American young women are choosing careers over getting married and having large families.  If you remove new immigrants, we are not even replacing ourselves.  As a country, we're screwed. 

So real estate is not appreciating because of an increasing population.  Real estate appreciates modernly because the government creates too much money. 

On balance, the Fed creates this new money every year.  The Fed may tighten the money supply one year, but it always seems to catch up the lost opportunity to print money like a drunken sailor in a subsequent year.  An example will make this clear.

Let's suppose the Fed is creating new money every year at the rate of 3%.  A great recession hits, the banks take big losses, the banks get scared, they stop making new loans, but the banks continue to demand their monthly loan payments.   

As the multiplier effect works in reverse, massive amounts of money is destroyed.  Money can be destroyed?  Yup.  And when money is destroyed during a crash, it is usually in enormous amounts.  This why inflation goes negative in a great recession, and no one seems to have any money. It's been destroyed (digitally erased).  We have outright deflation.

Absent a rescue by the Fed, we would have a depression; but that never happens anymore.  The Fed rides to the rescue, and it prints an enormous amount of new money to replace the money destroyed (and to restore confidence).

During the great recession that we are using as our example, I want you to think of the Fed increasing the money supply by its usual 3% every year during the three to four years after the crash and the ensuing great recession.  (The Fed will actually need to increase the money supply at a much higher rate - perhaps 8% annually - to replace the dollars that were destroyed.)  

Even though commercial real estate is falling 45%, a sort of secret savings account of money supply growth continues to grow at 3% per year (compounding).  Remember, the money supply, on average, increases at the rate of 3% per year.  Like a sailor storing up his pay on a long cruise, the Fed gets to print up the extra 3% per year that it missed during the three-year-long great recession.  

Does the Fed actually like printing money?  I dunno, but they seldom miss an opportunity.  They seldom sleep through a shore leave.  Haha!

Three to four years into the great recession, a nice piece of commercial real estate can be purchased for just 55% of its former high water mark.  On top of that great bargain basement price, three to four years of average annual 3% appreciation has built up.

It's no wonder why commercial real estate values, once the bottom-feeding sharks arrive of the scene, seem to suddenly skyrocket.  It's a feeding frenzy.

Since I am an old veteran, and I am highly confident that another great recession is on its way, I have moved most of my personal savings into Blackburne & Sons' first trust deeds.  Please note that I have made the move to first trust deeds because I am convinced that a crash is coming.

While past performance is no guarantee of future results, our "junky little commercial mortgages" did surprisingly well during past great recessions.  I personally take lots of tiny pieces of small, low-yielding loans (I actually choose the deals with lowest interest rates) spread out across the country.  As long as our borrowers keep making their payments, it doesn't really matter if the rest of the world is melting down.