Commercial Loans and Fun Blog

I was speaking with one of my very wealthy private investors about commercial loans last week.  He is an attorney and a very sophisticated investor, so I was shocked when he revealed that he had just made a very large second mortgage on an apartment building in Houston.

If you don't immediately recognize the issue, and if you are not thinking to yourself, "This guy is absolutely nuts," today's training lesson will be very instructive.

You will recall that an acceleration clause is the language in a trust deed or mortgage that gives the lender the right to demand to be repaid in full immediately.  Normally you make monthly payments to your mortgage lender.  If you fall behind, you can usually just bring your past due payments current, pay your late charges, and get back on a regular monthly repayment schedule.

But at some point; like if you fall behind by too many payments; or if you do something horribly wrong; like if you get caught mishandling toxic substances on the property; the lender will no longer allow you to reinstate your loan.  Reinstate means bringing your past due payments currents or curing some defect on the property and then getting back on a monthly payment schedule.

An alienation clause in a trust deed or mortgage is language that gives a mortgage lender the right to accelerate his loan; i.e., to demand to be immediately paid in full.  Alienate? Does that mean peeing on a Martian?  Haha!  No.  Alienate means to transfer any part of the title to the property to any other person or entity.  

"Okaaaay, George, but your wealthy investor didn't buy the apartment building.  He didn't take any ownership interest in the property.  He didn't buy the property subject to the mortgage.  He merely placed a second mortgage on the property."

Mortgage lenders, modernly, define alienation to mean transferring all or part of the title to the property, placing a second mortgage on the property, obtaining a mezzanine loan secured by the membership interests of the LLC that owns the property, or issuing preferred equity to a preferred equity investor, without the lender's permission.

By the way, taking title to a property subject to a mortgage means that you don't notify the lender of the purchase and you don't assume the mortgage.

Now back to my "crazy" mortgage investor who made that second mortgage on the apartment building.  Was he crazy?  If the underlying lender finds out, the lender could demand that the entire commercial loan be repaid in full.

Whether the investor is crazy depends on the size of the underlying first trust deed.  If my investor gets to earn 9% on a $1.5 million second trust deed investment, and if the underlying first trust deed was only $1.1 million, then my investor my investor was crazy like a fox.

By the way, you may have noticed that I used "trust deed" rather than "mortgage".  Texas is a trust deed state, which is a big deal.  It means a lender - especially a second trust deed lender - can foreclose much faster.

Can you imagine making a $1 million second mortgage behind a $6 million first mortgage and then being forced to keep the underlying first mortgage current for the 18 months it takes to foreclose a mortgage in a mortgage state?  The monthly payments on a $6 million commercial loan are in the range of $38,000 per month.  After 18 months, the second mortgage lender would have to shell out $684,000 to protect a $1 million investment.  Yikes!

So if you are ever going to make a second mortgage investment, make sure that you are in a trust deed state, like California or Texas, and that your commercial loan is a second trust deed and not a mortgage.  This way you only have to keep the first trust deed current for five months or so while you foreclose.

In how much danger is my investor?  Even if the underlying bank somehow discovered the new second mortgage and accelerated its loan, my guy is rich enough to simply pay off the first mortgage - assuming it's not insanely large.    And in real life, very few banks ever bother to check the title to property securing their commercial loans for presence of a junior lien (mortgage, mezzanine loan, or preferred equity).

The party who is real danger is the borrower.  Many large commercial loans these days are non-recourse; i.e., if the market goes south and the borrower loses the property in foreclosure, the borrower is NOT personally responsible for any loses the lender suffers after foreclosing.

This assumes, however, that the borrower doesn't commit any Bad Boy Acts.  Voluntarily placing a second mortgage on the property is a Bad Boy Act and will trigger a springing personal guaranty.  A springing personal guaranty is a guaranty that becomes effective upon the occurrence of a certain condition, e.g., a bankruptcy filing, toxically contaminating the property, intentional waste, etc.

Suppose commercial real estate crashes by 45% (a magical number I urge you to remember).  The second mortgage lender decides to simply walk away from his investment.  The first mortgage investor forecloses, and in the chaos of the real estate crash (think the S&L Crisis, the Dot-Com Meltdown, and the Great Recession), the property gets neglected.  The roof leaks, and mold starts to grow.  Vandals break in and steal the copper and appliances.  Squatters poop in the halls.

The result is a huge loss for the first mortgage lender, and because of the springing personal guaranty, the lender can now come back against the borrower for his losses.  Word to the wise.  Don't commit Bad Boy Acts.

We're gonna have some fun today, and it's is not about commercial loans.  There is a good marketing lesson, however, to be learned today, whether you're a commercial broker, a general contractor, a real estate investor, or a commercial loan broker.  

The most successful marketing piece I ever wrote was about the book, The Hot Zone, and how the Ebola virus almost killed us all.  You probably don't know this, but about 25 years ago the Ebola virus dangerously mutated in a lab in Restin, Virginia.  The Ebola virus became transmissible by air.  Holy poop!  No longer did you have to touch the blood.  Just breathing the same air would kill you.

Dozens of monkeys in a research lab in Reston started bleeding out from their eyes, noses, mouths, and tailpipes; and then they would die.  The monkeys were in different rooms, so obviously the pathogen was traveling through the air ducts.  

The scientists doing the autopsies on the monkeys had no clue that the monkeys had been exposed to Ebola, so when their petri dishes started turning purple, they had no reluctance about sniffing the petri dishes for a contaminant that made the petri dishes smell like fermentation.

But when the scientists sniffed the petri dishes, they did NOT smell alcohol.  Hmmm.  What was happening?  So the scientists put the samples under an electron microscope, and - oh, my goodness - there was the Ebola virus.  It was now transmissible by air, and they had been taking big sniffs.

Worse yet, these scientists had been going home every night and kissing their wives and kids.  And then the wives had gone to the grocery store, thumped melons, and handled vegetables.  They had spread the virus all over Restin.

So why didn't every person on earth die?  You'll have to read the book.  Okay, that was mean.  It was true.  The Ebola virus had indeed mutated to make it transmissible by air; but that same mutation made the virus harmless to humans (but still 100% fatal to primates).  The scientists were fine, and after spending three weeks in an isolation chamber, they were released.  

But today we are going to talk about H.G. Wells classic book, The War of the Worlds.  The book is about a Martian invasion of earth, and it was written... get ready for it... in 1898.  The Martians launched scores of huge cylinders from the surface of Mars that plowed into the Earth's crust and then unscrewed themselves back up to the ground.  Then these scary, slug-like creatures emerged, complete with slimy tentacles.

When a peace deputation was sent in to make first contact, the Martians used a heat ray to melt the unfortunate envoys.  Remember, folks, this book was written in 1898, about 80 years before the first laser beam.  When the Army was sent in, they too were melted by the Martians.

Then the Martians unleashed giant, three-legged tripods - war machines that were were four-stories high, armored, and armed with a pivoting heat ray cannon.  The destruction of mankind began in earnest.

And we haven't even gotten to the good stuff yet...  Scroll forward 40 years to the year 1938.  People didn't have TV sets yet, so the whole family would sit in the living room and listen to radio shows.

At the beginning of the one-hour show, Mercury Theater on the Air, the announcer, a 23-year-old Orson Wells, informed the listening audience that the coming show was just a story.  Then the radio began playing ordinary music, which was suddenly interrupted by a new flash from Orson Wells describing a pitiless invasion by creatures from Mars.

Many of the radio audience had been been listening to The Chase and Sanborn Hour with Edgar Bergen and tuned in to "The War of the Worlds" during a musical interlude, thereby missing the clear introduction that the show was a drama.  The urgent, horrified performance by Orson Wells was so believable that almost one-million Americans poured into the streets in terror.

Haha!  The whole reason this came up is because I recently downloaded a modern, well-done performance of the War of the Worlds as an audiobook, complete with sound effects, multiple voice actors, and absolutely eerie music.  What fun!

Recently watched and enjoyed, Mary Poppins Returns.  There was even a cameo where 90-year-old Dick Van Dyke danced on a desktop!  

Be on the Lookout For Real Estate Developers Who Need Equity:

Please be on the lookout for real estate developers of multifamily, office, retail, or industrial projects who are just a little short of construction equity.  Banks will no longer lend up to 80% loan-to-cost.  For some properties, banks are demanding that the developer contribute as much as 35% of the total cost of the project as a condition of their construction loan.

Blackburne & Sons Realty Capital Corporation can raise tiny amounts of equity for such projects - up to $1.5 million to $2 million.  Got a deal that needs less than $1.5 million in additional equity, please call Angela Vannucci at 916-338-3232.

Private Money Commercial Permanent's:

Notice that I did not describe our private loans as bridge loans, but rather as permanent loans.  Blackburne & Sons makes first mortgage loans with a 30-year amortization (essentially interest-only), but with a 15-year term.

This means that your borrower will never have a refinance his loan during a bad recession, when the value of his building might have fallen by 45% in value.  To make our loans even more attractive, there is no prepayment penalty.  In other words, you can use our loan as a bridge loan, with the added reassurance of the extra term.

Got an "A" Quality Commercial Loan Request?

You can find literally thousands of hungry banks using C-Loans.com and our other free commercial loan portal, CommercialMortgage.com.

Wished You Could Have Afforded College?

Is your four-year degree in advanced basket weaving?  If you are well-spoken and a natural salesman, you can earn a handsome income as a commercial mortgage broker.  You can learn the entire profession of commercial mortgage brokerage in one weekend.

Do you own a mortgage company or a real estate brokerage company?  If so, you should have in your library our 9-hour video training course ($549) in commercial real estate finance.  You just sit your new agent in front of a computer, and nine hours later he is in a position to make you money.  You can use our training course again and again.  This is what Les Agisim of Trevor Cole Financial does.  Over the years, he has trained thirty or forty agents using his one copy of our video training course.  

By the way, Trevor Cole Financial just closed yesterday its 55th commercial loan for C-Loans.com.  Are you a commercial lender?  Get carefully-scrubbed commercial or SBA loan leads delivered to your email box at no out-of-pocket cost to you.   We are especially looking for bridge lenders capable of funding commercial loans larger than $1 million.  

Poor kitten was exhaustipated.

In my early years of brokering commercial loans to savings and loan associations (S&L's) - the most active type of commercial real estate lender 35 years ago - the debt service coverage ratio was the bane of my existence.  Arghh!  I hated that darned ratio.  It killed soooo many of my commercial loan deals.

Example:

My client was buying a small office building on the San Francisco peninsula in 1988 for $1,000,000.  His plan was to put down 25%, and I submitted a $750,000 first mortgage request to Bayview Federal Savings.  My loan officer at Bayview went out and drove by the property.  Thumbs up.

Then we went to Loan Committee, and these stingy misers came back and said that at a 1.25 debt service coverage ratio, with an 11.5% interest rate and a 25-year amortization, the property would only carry a $625,000 new loan!!!  Just 62.5% LTV?  On a purchase money loan?  Are you kidding me?  Sometimes the only solution is a warm bath and a sharp razor.

Quick Review of the Debt Service Coverage Ratio:

You will recall that the debt service coverage ratio (DSCR) is the defined as an income property's net operating income divided by the proposed annual loan payments - known as the debt service.  The proper form is:

1.xx

It is customary for the debt service coverage to be expressed as two digits to the right of the decimal point; i.e., out to the hundredths of 1%.

Example:

The Maple Apartments enjoys a net operating income (NOI) of $80,000.  The owner has applied for a $900,000 refinance of the property, and First National Bank is offering a 4.875% loan, amortized over 25 years.  The debt service (annual payments) on this proposed $900,000 loan is $63,252.  Compute the debt service coverage ratio ("DSCR").

DSCR = NOI / Debt Service

DSCR = $80,000 / $63,252 = 1.26

It is important to note that when computing the debt service coverage ratio that you must use annual figures; i.e., the annual NOI and the annual loan payments.  You can't do the calculation using 1/12th of the NOI and just the monthly payment on the loan.  

This is unfortunate because if you were allowed to compute the debt service coverage ratio on a monthly basis, you could qualify for a slightly larger loan amount; e.g., maybe a loan of $1,023,000 rather than just $1,000,000.  Sorry.  Nice try.  But commercial lenders will make you do the calculation on an annual basis.

The Point of Today's Training Article:

Just so that we do not lose sight of our objective here, you will recall that the title of this article suggests that the debt service coverage ratio is now almost irrelevant.

It's arguably true.  Last week ten-year Treasuries plunged 50 basis points.  A basis point is 1/100th of one percent.  Therefore 50 basis points is 50/100th of one percent - or one-half of one percent.

Commercial loans from banks are typically priced at 2.75% to 3.5% over 5-years. Treasuries.  Careful:  It was the yield on ten-year Treasuries, not five-year Treasuries, that briefly plunged 50 basis last week and set off the whole inverted yield curve panic.

By the way, the reason why our bond yields plunged is because the yield on German bunds went negative this month and sent European bonds buyers rushing over to the U.S. for yield.  A bund is a bond issued by the German government.  

As to an inverted yield curve - when three-month Treasury bills have a higher yield than ten-year Treasury bonds - don't freak out.  Inverted yield curves only correlate to a recession within 18 months if the difference in yields stays at 50 basis points for at least three months.

Okay, We are Finally Here:

With ten-year Treasuries plunging, five-year Treasuries have also declined to just 2.18% as of March 29, 2019.  Five-year Treasuries were 2.45% one month ago and 2.58% one year ago.

Since permanent commercial loans from banks are typically priced at 2.75% to 3.5% over five-year Treasuries, we are looking at commercial loans of only 4.93% to 5.68% today.  These loans are fixed for the first five years, readjusted once, and then fixed for five more years.

Wow.  At today's low commercial loan rates, few commercial loans will be constrained by a 1.25 debt service coverage ratio.  Still smarting from the losses they took during the Great Recession, however, commercial banks may still limit their new permanent commercial loans to just 68% to 70% loan-to-value.

Credit unions, on the other hand, are flush with cash.  Look for a few credit unions to close some commercial loans this quarter at a full 75% LTV.

Need a small commercial loan of less than $1 million.  Sometimes small multifamily, office, retail, and industrial buildings - particularly office and industrial condo's - sell at very low cap rates, and they don't cash flow very well.  Blackburne & Sons will gladly lend up to 75% LTV, almost regardless of negative cash flow if your buyer and borrower has good global income.  These are NOT bridge loans but rather permanent loans (30/15) with no prepayment penalty.

Someone applied for a $32 million commercial construction loan on C-Loans.com today, and the commercial loan request was looking pretty good until I got down to the net worth of the borrower.  Arghh!

The broker inputting the deal indicated that the land was worth $13,000,000, but the developer was only worth $1 million to $2 million.  Huh?  What?  And he wants to borrow $32 million?

Guys, you're reminded that the Net-Worth-to-Loan-Size Ratio is supposed to be at least 1.0.  In other words, if a developer is trying to build a $32 million project, the combined net worth of the guarantors should be greater than, or equal to, $32 million.

This brings up an interesting point.  When computing the Net-Worth-to-Loan-Size Ratio, you can combine the net worths of the various developers, if there is more than one.

Example:

Bobbie Builder, Donnie Dentist, and Sandy Saleswoman are trying to build a spec office building.  Spec is short for speculative, meaning that the developers do not have the building pre-leased.

The total cost of the project is $10 million.  The credit union will only lend up to 70% of cost, meaning that the commercial construction loan in our example will only be $7 million.  Note:  Credit unions are now making commercial construction loans.

Bobbie Builder's net worth is $2 million.  Donnie Dentist has a $1.5 million net worth.  Sandy Salesperson also has a net worth of $1.5 million. Their combined net worth is $5 million. Will they qualify for a $7 million commercial construction loan?

Answer:  Probably not because their combined net worth is only $5 million; however, if Donnie Dentist had $1 million in cash and marketable securities; i.e., he had lots of liquid assets, the group might just qualify for their commercial construction loan from a credit union, but probably not from a commercial bank.  Credit unions are desperate for commercial loans these day, so they are very loosey-goosey.

Back to Our $32 Million Commercial Construction Loan:

The maddening thing about this particular commercial loan application is that the commercial loan broker indicated that the land was worth $13 million.

In general, a developer will usually own the land before applying for a commercial construction loan.  Ideally, the bank would prefer that the developer own the land free and clear.  Even if there is still some sort of first mortgage on the land, I suspect that the developer probably had several million dollars in equity just in the land.  Therefore his net worth is almost certainly far more than just $1 million to $2 million.

If this is true, then the commercial loan broker who entered this attractive commercial construction loan into C-Loans.com really blew it!  The bank is going to take one look at the relatively pathetic net worth of the developer and summarily turn the deal down.

Lesson of Today's Article:

Pay attention to the net worth of your borrower.  His net worth must usually be at least as large as the loan amount; otherwise, you are probably wasting your time.  The ratio is not written in stone, so if your ratio is 0.92, you're probably still okay.  Every commercial loan ever made had a few black hairs; i.e., imperfections.

One day a lawyer was riding in his limosine when he saw a guy eating grass. He told the driver to stop. He got out and asked him, "Why are you eating grass".

The man replied, "I'm so poor, I can't afford anything to eat." So the lawyer said, "Poor guy, come back to my house." The guy then said, "But I have a wife and three kids." The lawyer told him to bring them along.

When they were all in the car, the poor man said, "Thank you so much for taking us back to your house. It is very kind."  "You're going to love it there," said the attorney. "The grass is over a foot tall."

I just learned a new commercial loan and commercial real estate term today - the junior box.  We have all heard of big box stores like Wal-Mart, Target, and Home Depot.

A junior box is a type of big box store, just the smaller variety.  It is a retail space containing 20,000 to 40,000 square feet.  Common examples of junior box tenants are Hobby Lobby, Goodwill, and PetSmart.  Junior boxes actually make up the largest portion of overall net-leased big-box stores on the market.

Big boxes are larger than 80,000 square feet, while the mid box is a retail unit of 40,000 to 80,000 square feet.

Need a commercial loan?  We just fixed a programming bug that prevented more than 500 of our newest commercial lenders from appearing on CommercialMortgage.com.  The next time you need a commercial loan, please be sure to take a fresh look at this now-repaired commercial loan portal.  That programming bug?  Arghhh.

Dear Abby:  I think I need to see a specialist, but my doctor insists he can handle my problem.  Can a general practitioner really perform a heart transplant right in his office?

A.   Hard to say, but considering that all you're risking is the $20 co-payment, there's no harm in giving him a shot at it.

The LAPD, The FBI, and the CIA are all trying to prove that they are the best at apprehending criminals. The President decides to give them a test. He releases a rabbit into a forest and has each of them try to catch it.

The CIA goes in. They place animal informants throughout the forest.  They question all plant and mineral witnesses. After three months of extensive investigations they conclude that rabbits do not exist.

Then the FBI goes in.  After two weeks with no leads they burn the forest, killing everything in it, including the rabbit, and they make no apologies.  The rabbit had it coming.

Then the LAPD goes in. They come out two hours later with a badly beaten raccoon. The raccoon is yelling: "Okay!  Okay!  I'm a rabbit!  I'm a rabbit!"

Are you an accredited investor?  Interested in earning 26.2%?  My wife's cousin, Alex, specializes in hotel construction, and over the past 23 years I have watched him, as a hotel general contractor, build 60 hotels, most of them flagged.  On a personal level, Alex is a true gentleman, with a lovely wife and fine children.  If you ever met him, you would admire his gentlemanly ways.

Alex is now building for his own portfolio his second flagged hotel, a Marriott Fairfield Inn located on I-5 in Oregon.  The equity investors in his first hotel earned well in excess of 25%.  I begged him to allow me to help raise equity for him.

Folks, I am an attorney.  I am an Eagle Scout (like both of my sons).  I have faithfully managed $50 million of my investor's money for 39 years.  I am telling you, this is the most promising investment I have ever seen.  This equity investment opportunity is sold out on paper, but there is always some shrinkage as we approach the closing.  Some of the backups will almost certainly get in on the deal.  I urge you to call Angela Vannucci at 916-338-3232 and get on the list of backups.

A few moments ago a guy named Alan made one of the best deals of his life.  He traded me a list of 20 bankers making commercial real estate loans.  In return, I am sending him our 9-hour video training course, How to Broker Commercial Loans.

This course is absolutely fantastic!  We teach our students an entire profession in one, long exhausting day; and those of our students who are natural salespeople will earn incomes rivaling those of a physician.  

We sell it elsewhere on C-Loans.com for $549 - not the $250,000 in tuition that some liberal arts colleges charge.  Haha!  The course teaches you everything from marketing for commercial loans, underwriting commercial loans, packaging the commercial loan, finding the right commercial lender, and lastly, fee collection.

But let's suppose you are a starving commercial mortgage broker. You would love-love-love to own this course, but you don't have $549.  I will give you this 9-hour commercial mortgage brokerage training course course for free, if you will compile a list for me of twenty bankers making commercial loans.  These are DVD's, so you will have to pay $30 or so for the shipping.

I will please need the name of the loan officer, the bank, the address, the phone number, and his email address. And guys, these commercial real estate loan officers must work at either a FDIC-insured bank or a NCUSIF-insured credit union. I will not accept commercial real estate loan officers working for any other type of commercial lender. I just want bankers.

You will probably want to call the twenty closest banks to your office and ask for a commercial real estate loan officer. Sometimes getting the banker's email address can be tricky. They don't like giving it out. I like to ask, "If I wanted to send you a commercial loan package, to what email address would I send it?"

Please send your list to me by email, george@blackburne.com. Please insert in the subject line, "Trade for 20 Bankers." Don't forget your own own address and phone number. Obviously this is George Blackburne III (the old man). Guys, I get 1,300 emails every single day, so it will be very easy for me to miss your email. Right after emailing me your list of bankers making commercial loans, please send me a text to 574-360-2486, "George, I just sent you a list of 20 bankers."

 Guys, I Please Need Your Help

I have a problem.  Between C-Loans.com and CommercialMortgage.com, I am generating a half-dozen large ($1 million+) bridge loan requests every single day, and I don't have enough Big-Boy bridge lenders to work them.

Now I have given you free, searchable access to almost 4,000 commercial lenders (mostly banks) on CommercialMortgage.com.  Would you kindly please-please-please return the favor by sharing with me some bridge loan lenders that can comfortably handle commercial loans of over $1 million.  I am really looking for the proven guys who do deals of $1 million to $10 million or $2 million to $20 million. 

Please write to me at george@blackburne.com.  So I don't miss it, would you please make the Subject Line, "Bridge Lender(s) For You."

A lady was picking through the frozen turkeys at the grocery store, but couldn't find one big enough for her family.  She asked a butcher, "Do these turkeys get any bigger?"  The butcher replied, "No, ma'am, they're dead."

Where to Find Bankers

It's easy to find 20 bona fide bankers to trade to C-Loans, Inc. for our wonderful, 9-hour video training course, How to Broker Commercial Loans.

Before I explain how, there is an even more important reason why you want to build your own list of bankers. The single best way to market for commercial loans is to advertise to commercial bankers.

Why? The first place a potential commercial mortgage borrower calls is his own banker, so the typical commercial real estate loan officer, working for a bank, gets two or three such calls per day. He turns down 80% of these commercial loan requests. There is no reason why he can't refer them to you.

Okay, so how do you find these these bankers? I recommend that you start with those banks that are located close to your office. These banks are very easy to find. Simply go to Google Maps and type in the address of your office. Then click the "Nearby" icon and type in, "Banks." Every bank within 50 miles of your office will pop up.

Then call the bank and ask to speak with a commercial real estate loan officer. The typical bank has a single commercial real estate loan officer covering five or six branches, so he will likely work out of a different branch. Then work with the loan officer or receptionist to obtain his phone number (try to get both work and mobile), address, and email address.

The email address is critical, and sometimes bankers are a little freaky-deaky about giving it out. They are worried about being spammed. The best way to ask for a banker's email address is to ask, "If I wanted to send you a commercial loan summary, to which email address should I send it?"

A white-haired old man walked into a jewelry store on a Friday, with a beautiful young lady at his side.  "I'm looking for a special ring for my girlfriend," he said. Our jeweler looked through our stock and took out an outstanding ring priced at $5,000.  "I don't think you understand.  I want something very unique," the man said.  At that, our now very excited jeweler went and fetched our special stock from the safe. "Here's one stunning ring at $40,000."

The girls eyes sparkled, and the man said that he would take it.  How are you paying?" asked our jeweler.  “I'll pay by check; but of course the bank will want to make sure that everything is in order, so I'll write a check and you can phone the bank tomorrow, and then I'll fetch the ring on Monday," replied the old man.

Monday morning, our very disappointed jeweler phoned the man. "You lied, there's no money in that account."  "I know - sorry - but can you imagine what a FANTASTIC weekend I had?!"

Twenty years ago, if you wanted a commercial loan, you might have applied to a savings and loan association, a thrift and loan association, or even a credit company.  None of these company types are making many commercial loans today; so I am not even going to bother to describe them.  They have gone the way of the buffalo.

All new commercial lenders have entered the commercial loan market.  I will describe each type of commercial lender active in the market today, starting with the ones with the lowest interest rates.

Life Companies:

The term, life company, is short for life insurance company.  For the last 50 years, life companies have always offered the absolute lowest commercial loan interest rates.

Life companies offer fixed interest rates for up to ten years at rates as low as 175 to 200 basis points (1.75% to 2%) over ten-year Treasuries.  That's the good news about life companies.  The bad news is that life companies do not lend to mortals like you and me.

In order the qualify for a commercial loan from a life company, the loan must usually be larger than $5 million, the property must usually be less than ten years old, it must usually be located in a primary location in a football team city, and the property must usually be office, retail, or industrial.  The property also has to be gorgeous, and the maximum loan-to-value ratio that you are likely to achieve is 55% to 58% LTV.

Like I said, life companies do not lend to folks like you and me.  They lend to investors so stinking wealthy that they don't want a lot of leverage.  They want the cash flow.

Conduits:

A conduit is short for Real Estate Mortgage Investment Conduit ("REMIC").  A conduit is a specialized commercial mortgage company that originates large commercial real estate loans for their eventual placement in the Commercial Mortgage-Backed Securities ("CMBS") market.

These conduit loans are aggregated in a giant pool of $2 billion or so, and then bonds, backed by the commercial mortgages in the pool, are issued and sold off by Wall Street-like investment bankers to life companies, pension plans, family trusts, bond funds, and other institutional investors.

The good news about conduit lenders is that their interest rates are only about 75 basis points (0.75%) higher than those offered by life companies.  Conduits will also lend in secondary locations in fairly large cities not quite large enough to have a football team.  In addition, the property does NOT need to look like a color, glossy postcard.

The bad news about conduits is that their minimum loan size is large - typically $4 million+.  In addition, their loan-to-value ratios are pretty low.  CMBS investors got hammered during the Great Recession, so conduit lenders now use a commercial loan underwriting ratio that few other commercial lenders use.  This ratio is the Debt Yield Ratio.

Ever feel useless?

A Debt Yield Ratio of 9% limits many conduit loans to a maximum loan-to-value ratio of around 65% to 68%.  This is not the the kind leverage that most investors are seeking.  As a result, conduit loan originations in the past several years have been no more than 40% of their pre-2008 loan volume.

We will cover Commercial Banks, Credit Unions, Wall Street Non-Prime Lenders, Bridge Lenders, and Hard Money Lenders in coming blog articles.

Imagine the following fanciful scenario. Beto O’Rourke wins the Democratic nomination, and the presidential campaign for President in 2020 is hard fought and bitter. O’Rourke loses in a close race, and then Trump sets out to ruin O’Rourke’s most important supporters and donors.

Eighty-one subpoenas go out to O’Rourke’s key supporters seeking evidence of bribery by Mexican drug lords of top Democratic Senators and Congressmen to prevent the construction of the Wall. “They must have been bribed,” Trump declares, “otherwise, why would the Democratic leadership allow 137 Americans per day to die from drug overdoses from drugs smuggled across the border from Mexico?” Remember, folks, this is just a fanciful scenario I have created to make a point. The facts are nonsense, of course, but please stay with me.

By the end, a dozen top O’Rourke supporters and donors are arrested for either perjury, obstruction of justice, or totally unrelated crimes uncovered by this giant fishing expedition. Trump declares, “The Rule of Law must be followed.” The surviving O’Rourke supporters are cowed and pledge to themselves to stay forever out of politics. Never again will they contribute.

These attacks were like a proscription on key Democratic supporters and donors.  Proscription?  What on earth is a proscription?

In the generation right before Julius Caesar, the Italians cities under Roman rule rebelled against Rome. They paid taxes to Rome, and they provided soldiers for the Roman army; but they were treated like second class citizens. They wanted Roman citizenship.

During the Social War that followed, two different Roman generals rose to prominence, Gaius Marius, the old veteran, and Lucius Cornelius Sulla, the younger, quite brilliant general. Marius and Sulla absolutely hated each other. They competed to be the leader of Rome.

As the Social War was winding down, Marius returned to Rome and was declared First Consul. He managed to convince the Senate at sword point to declare Sulla an outlaw. Then Marius systematically rounded up all of Sulla’s supporters and murdered them. He killed thousands. In the meantime, Sulla took his six legions and conquered a neighboring empire, Pontes.

Marius was old during the Social War, and he soon died of natural causes. Sulla then marched back to Rome with the vast treasures of the Pontes Empire, thousands of prisoners to be sold as slaves, and his six loyal legions. The Senate had no choice but to declare Sulla First Consul.

"A proscription is a posted notice listing Roman citizens who had been declared outlaws and whose goods are to be confiscated. Rewards were offered to anyone killing or betraying the proscribed, and severe penalties were inflicted on anyone harboring them. Their properties were confiscated, and their sons and grandsons were forever barred from public office and from the Senate.”

“Proscription was first used by the dictator Sulla in 82 or 81 BC to avenge the massacres by Gaius Marius and his son. Accounts differ, but between 520 to 4,700 wealthy opponents of Sulla were proscribed and their property given to Sulla’s veterans. Julius Caesar in 49 BC emphasized his own clemency after his victory in the Roman civil wars by avoiding proscriptions and restoring the sons and grandsons of those proscribed by Sulla to full citizen rights.”

“After Caesar’s assassination, his clemency was used as an excuse for the proscriptions of the triumvirs, Mark Antony, Octavian, and Lepidus (43–42 BC). They used proscriptions to rid themselves of their enemies and to acquire land for their legions and funds for themselves. (One unfortunate Senator was proscribed because the people in power wanted the natural hot springs on his land. When the Senator saw his name posted on the proscription list, he moaned, “My hot springs have killed me.” About 300 senators and knights were proscribed, including Cicero. Many of the proscribed escaped, and more than a few were later restored to their privileges.”

You can now see what happened in ancient Rome. As soon as one side (Marius) came to power, they murdered the supporters of their opponents. Then the other side (Sulla) would do the same when they returned to power.

Since the start of Mueller’s investigation, government forces have gone after about a dozen of Trump’s supporters, including Paul Manafort, Michael Cohen, Michael Flynn, Rick Gates, George Papadopoulos, Roger Stone, and, to a lesser degree or with lesser success, Jared Kushner, Ivanka Trump, Donald Trump Jr., and Eric Trump. This month eighty-one additional subpoenas have been served on other Trump supporters and organizations.

                         “Elections have consequences.” – Barack Obama

Do you doubt that the Republicans will someday return the favor? Welcome to the Age of Proscriptions. I wonder how soon it will be before some billionaire refuses to go to jail just because he supported the wrong candidate.

Before the Great Recession, there were about 300 hard money mortgage companies making commercial loans across the country.  By the end of the Great Recession, fewer than 20 of them survived.

I can only imagine how badly their private investors must have fared when their hard money broker failed.  No one was left to make collection calls to the borrowers.  No one was left to keep fire insurance in force.  No one was left to make sure the real estate taxes got paid.  No one was left to hire an attorney to foreclose on the property.  No one was left to rekey the property after the foreclosure and to install an alarm system and a security fence.  No one was left to winterize the property.  Think broken pipes and tens of thousands of dollars in water damage and mold.  No one was left to start the renovation.  Every foreclosed commercial property needs to be renovated before it is offered for sale.

The only party left to do all this was a sleepy bankruptcy trustee, appointed by the court.  As a general rule, bankruptcy trustees are either overworked or they are indifferent.  They seldom, if ever, return phone calls.

I have often said that the single most important decision that a trust deed investor can make is to choose a hard money broker who is likely to survive the next bad recession.  About every fifteen years commercial real estate values seems to fall by exactly 45% before recovering to new highs.

If you get nothing else out of today's training article, you would be wise to remember that magic number - 45%.  During the S&L Crisis, the Dot-Com Meltdown, and the Great Recession, commercial real estate fell by almost exactly 45%.  Therefore, during the next real estate depression, you should start buying real estate like crazy when the collapse has reached about 40%.

But after the Great Recession, interest rates on bank C.D.'s fell to less than 1%.  Private investors were desperate for yield.  A blind, cripple could hang out his shingle as a hard money broker, advertise that his trust deeds were yielding 10% interest, and hungry trust deed investors would flock to his banner.  As a result, thousands of new commercial hard money lenders have sprung up in the past four years.

One of the good effects of this flood of new commercial hard money brokers is that the interest rates charged by hard money brokers have plummeted.  There is so much competition among hard money brokers, on behalf of their ravenous private investors, for good loans that they have all been forced to lower their interest rates significantly.  The vast majority of hard money loans are written today at single-digit interest rates.  Before the Great Recession, commercial hard money shops used to charge 12% to 13%.

Blackburne & Sons recently did a small apartment loan in California at just 7.9%.  We sold it off to our private investors at a net yield of just 6%.  Wow!  Just 6% net.  And our investors clamored for even more of these 6% deals.  "Now this is one I have been waiting for.  Send me more," wrote one of our 6% investors.  

If you have not started your own hard money shop, a good argument can be made that you are a dummy.  The average hard money broker makes TEN TIMES more than the average desk-and-a-phone mortgage broker.  Why?  Hellooo? Because you get to approve your own loans!!!!   Click here to learn How to Find Your Own Private Mortgage Investors.

Do you already own your own commercial hard money shop?  Do you need more commercial loan applications?  Blackburne & Sons is not crazy about commercial loans larger than $1 million.  We greatly prefer junky little commercial permanent loans in the heartland of America.  Click here to submit a smallish deal to Blackburne & Sons.

At the same time, Blackburne & Sons and C-Loans, Inc. do a massive amount of marketing for commercial loans, and a great many of the leads generated are for commercial bridge loan requests of larger than $1 million. 

If you own a hard money shop, and you regularly close bridge loan requests larger than $1 million, you should join C-Loans.com as a lender.  The only requirement is that you must service at least $20 million in commercial loans.  It costs nothing to join.  There is no monthly fee.  You only pay a software licensing fee of 50 bps. when you close a deal.

Another way to get more more commercial loan applications is to buy leads from CommercialMortgage.com.  The cost is just $1,000 per year per Loan Type.

I'm sorry, but the type of commercial leads called, "First Mortgage Requests Larger Than $1 Million", is fully-subscribed.  We are now creating a waiting list.  You would be VERY wise to get on the waiting list.  Email or call Tom Blackburne at 574-210-6686.

But you can still buy for just $1,000 per year commercial leads in the following loan type categories:  "Bridge Loan Requests Larger Than $1 Million", "SBA Loan Requests (any size)", USDA Loan Requests (any size)", "Construction Loan Requests (any size)", and "Second Mortgage Requests (any size)."  We do NOT sell first mortgage and bridge loan requests smaller than $1 million.  We save these for ourselves.  For more information.

Important:

The most important lesson that I teach in any of my training courses is that commercial lenders approve loans for their friends.  Every commercial loan ever made had black hairs, but if the lender is your friend, he will ignore a bunch of them.  Therefore, the key to making BIG money in commercial mortgage brokerage is to make a bunch of commercial lenders your friend.

Now every commercial lender in the country has six to eight "Best Brokers" - guys for whom he has closed a number of deals.  When a Best Broker calls or brings in a new commercial loan to a lender, you can bet that this Best Broker gets the lender's most diligent service.  This what you want to become, the Best Broker for about eight commercial lenders - maybe four banks, two conduits, and a couple of hard money lenders.

For example, in our office we call Alicia Gandy our "Loan Goddess" because she originates well over 60% of our loans.  Alicia has about eight Best Brokers who, in turn, bring her about 60% of all of her business.

You really-really want to become a Best Broker for either Alicia or George Blackburne IV (my oldest son, age 34) because my loan officers will crank out a Term Sheet in just hours for their Best Brokers, allowing them to quickly get the borrower off the street (to stop their further loan shopping). 

But here's the thing.  There are now sooo many competing commercial hard money lenders that you may be tempted to submit the deal to one of these relatively new competitors.  Don't.

Why?  Most (90%+) of these new hard money funds will be out of business during the next real estate depression.  How can be I be so cocksure?  During bad recessions, everyone withdraws from hard money mortgage money funds, so the hard money shop has no money with which to lend.  If the fund isn't making new loans, the fund manager isn't earning the fee income he needs to keep his doors open.  That friendship you developed with that newbie-hard money lender?  In the coming crunch, it will be worthless because he will be out of business.

That no-brainer hard money deal on your desk?  Don't waste it on a hard money company that has not budgeted for the next real estate depression.  Use it to build a friendship with Alicia or George.  Become one of their Best Brokers.

Blackburne & Sons was in the market, making new commercial loans, every single day of the S&L Crisis (45% decline in real estate ), the Dot-Com Meltdown (45% decline) and the Great Recession (45% decline).  I do not know of a single competitor who can make that claim.  If you have a special relationship with a perennial lender during the next real estate depression, you will make a fortune.

So don't waste your good hard money loans on hard money brokers who will not be able to help you in return when you need them the most!  Just sayin'.

Before we get into the subject of syndicated commercial construction loans and where to get your large commercial construction project funded, we have an important announcement.

Important Announcement:

We here at C-Loans, Inc. just discovered a HUGE bug in our newest commercial mortgage portal, CommercialMortgage.com.  Arghhh!  Queue the "Agony of Defeat" scene where that downhill skier takes a horrible biff.

Our computer programmers made one single digit error.  As a result, none of the 500 new banks we have added in the past six months have been appearing on the Lender List!  Picture old man Blackburne careening and tumbling down a steep slope in a giant ball of snow, broken skis, broken bones, and blood.

Therefore, if you have recently tried CommercialMortgage.com, viewed the Lender List for your particular deal, and went, "Meh", I don't blame you.  But this wonderful commercial loan portal is fixed now.  I urge you (heck, I beg you) to come back and try it again.  Because our 500 latest banks will now show up, you will love-love-love the repaired version of CommercialMortgage.com.  

Back to the Syndication of Large Commercial Construction Loans:

Commercial construction loans over $10 million are often made by a syndicate of community banks and mid-sized commercial banks.  A community bank is one with less than $2 billion in assets (cash, bonds, and loans outstanding).  A mid-sized bank is one with $2 billion to $20 billion in assets.

A regional bank is a depository institution, i.e. a bank, savings and loan, or credit union, which is larger than a community bank, which operates below the state level, but smaller than a money center bank, which operates either nationally or internationally.  The asset size of a regional bank is normally $20 billion to, say, $75 billion.  

Even larger than regional banks are money center banks.  Did you know that there are approximately 5,000 commercial banks in the US?  The word "commercial" simply means "business", as opposed to investment banks and merchant banks.  When you and I think of a bank, you are thinking of a commercial bank.

Therefore, when I train you to submit your "A" quality commercial loan to at least 15 different commercial banks, you will only be scratching the surface of available banks.  There are also approximately 6,000 credit unions in the U.S.

You may recall that I sent you an announcement about a syndicate I was putting together to build a Marriott Fairfield Inn in Oregon.  Well, you may be shocked to hear that the lender making the $15 million construction loan is a credit union!  By the way, that $2 million syndicate is fully-subscribed; but if you are a very wealthy, accredited investor interested in earning a yield of over 25%, you should call Angela Vannucci at 916-338-3232 and get on the backup list, just in case anyone cancels.

Now Back to Our Syndication Discussion:

Typically these commercial construction loan syndicates will consist of three or four community banks located reasonably close to the subject property, and often the bank presidents are golfing buddies.

Here is how these syndicated commercial construction loans get originated.  Suppose a commercial bank gets a $15 million commercial construction loan request from a commercial property developer who is important to the bank.  Fifteen million dollars, however, is a pretty large commercial construction loan for a community bank with just $2 billion in assets, but let's say the commercial construction loan request is a good one.

What might happen is that our first community bank might lead a small syndicate of friendly competitors to make the $15 million commercial construction loan.  Most commercial construction loans are priced at WSJ Prime plus 1%, and the bank would charge a one-point loan origination fee.  The Wall Street Journal Prime Rate today is 5.5%, so if a larger bank were to make the entire $15 million loan itself, the interest rate to the developer would be 6.5%.

The interest rate on a syndicated loan, however, may be priced at WSJ Prime plus 1.5% floating (one-half of a percent higher), with a 7.0% floor and a loan origination fee of 1.5 points (an extra half-point). The lead bank might then sell off participations to other banks at prime plus 1% floating with a 6.5% floor and a loan fee of 1 point.  

The lead bank might take a $3 million piece of the $15 million deal.  The lead bank would then earn prime plus 1% floating and 1 point on its $3 million portion, and it would also earn a lead lender's fee of 1/2% interest and 1/2 point on the entire $15 million.  The lead lender would then be responsible for making the progress inspections, disbursing the progress payments, and handling any foreclosure on the commercial construction loan.

Attention Developers.  Do You Need More Equity?

We have largely finished our money raise on the Oregon Marriott Fairfield Inn, so we are looking for the next deal.  Our sweet spot is raising between $750,000 to $2 million in equity for experienced developers of apartment buildings, retail properties, office buildings, industrial buildings, and hospitality properties nationwide.  We are not going to raise more than 40% of the total equity required by the bank because we want our developer to have tons of skin in the game.  

Need equity?  Please do NOT send me some huge package.  Please instead - to see if we have a fit - call me at 574-360-2486 (mobile) or just send me, George Blackburne III, a one-paragraph summary of what you are trying to do.  Please make the subject line exactly, "Equity Contribution Request."  Thanks!

Training Tips:

1. Whenever you are trying to place a commercial construction loan request, you should immediately think of either a commercial bank or a credit union.  Banks and credit unions make 99% of all commercial construction loans.
   
2. You are NOT going to be able to get a New York bank to make a commercial construction loan in Virginia.  Commercial construction loans are almost always made by a local lender, a bank or credit union located within 15 or so miles from the property.  The reason why is that the construction lender has to make numerous progress inspections to check on the progress of the construction.
   
   
3. Generally you should match the size of your commercial construction loan request to the size of the bank.  Need a loan of just $1.5 million?  You should take this small deal to the nearest community bank.  Need a $15 million loan?  Take it to a nearby regional bank.  Need a $50 million commercial construction loan?  Take your loan to a money center bank, a bank with more than $75 billion in assets - one of the "Big Boys."
   
   
4. Notwithstanding the above, a community bank located close to the property may sometimes lead a syndicate of other nearby community banks to make the loan.

Do you need a commercial construction loan?  My first recommendation is to enter your loan into C-Loans.com.  The advantage of C-Loans.com is that you create a simple mini-app, and then you can actually submit your deal to bank after bank, six at a time, until you find one in the mood to lend.  C-Loans.com is also free!

If you just don't find a ravenous lender on C-Loans.com, then you should move onto CommercialMortgage.com (CMDC").   Now CMDC is just a list of suitable potential lenders, along with their contact information.  You cannot actually submit an executive summary of your commercial loan to the lender.  You have to do that by hand. However, there are close to 4,000 commercial lenders on CommercialMortgage.com, far more than on C-Loans.com.  And like C-Loans, CMDC is also 100% free!  (Plus our 500 newest banks will finally now appear.  Arghhh.)

The secret to success in commercial mortgage brokerage is to present your loan to bank after bank until you find a hungry one.  Fifteen banks is the magic number.  If all fifteen banks turn your deal down, your loan may not be do-able; but until you have submitted your commercial loan to fifteen banks, you are still in the early innings.

Using commercial mortgage portals like C-Loans.com and CommercialMortgage.com, finding 15 banks is easy-peasy.