Commercial Loans and Fun Blog

I am going to teach you a cool Google trick today.  I'll use a commercial loan broker as our example, but this Google trick can be used in all walks of life.

If a commercial loan broker needs leads, his single best source - by far - is bankers.  The first place that a commercial loan applicant calls is his own bank.  As a result, the typical commercial real estate loan officer working for a bank receives calls for at least ten commercial loans every week.

The good news is that this commercial loan officer is going to turn down nine out of ten of these commercial loan applications.  Why?  The loan may be too small or too large.  The property might be located too far away from any of the bank's branches.  The property might be a restaurant, and maybe the bank doesn't like commercial loans on restaurants.

Perhaps the property is located in a poorer side of town.  Perhaps the borrower lacks sufficient liquidity to qualify for a commercial loan from this bank.  Perhaps the borrower's net worth is not larger than his requested commercial loan amount.  See the Net-Worth-to-Loan-Size Ratio.  Maybe the bank has just taken a loss on a self storage project, and they have no desire to add another self storage commercial loan to their portfolio.  

There are hundreds of reasons why banks turn down commercial loans, and the banks invent new reasons every day.  This is wonderful news!  The banker has to refer these commercial loan applicants somewhere, so why not to you?

The wise commercial loan broker will therefore build a list of bankers located close to his office, and he will solicit these bankers regularly for their commercial loan turndowns.  He should strive to eventual build a list of 1,000 bankers.  This sounds impossible, but if he adds just five bankers per day, he will soon reach his goal.

But where does a hard-working commercial loan broker find these bankers?  Remember, he doesn't just want any 'ole banker.  He specifically wants only  commercial real estate loan officers working for banks or credit unions.  

Don't forget about credit unions!  Modernly, credit unions make commercial loans just like banks, and they are often loose-goosier.   Remember, banks only want to make commercial loans to borrowers who have the potential to become a good bank customer.  

This is an important point.  A good bank customer is someone who maintains large cash balances at the bank.  Remember this term of art from the banking world - good bank customer.  This is the game that banks play.  They make short term loans to wealthy depositors in hopes that the depositor maintains lots of cash in the long run at the bank.

My own commercial bank loves Blackburne & Sons because we maintain large loan servicing trust accounts.  The bank pays no interest on these deposits, and because we are servicing around $45 million in private money loans, our loan servicing trust accounts have an average daily balance of $250,000.

But credit unions are different when it comes to commercial loans.  Credit unions are very flush with cash these days, so they make commercial loans because they simply need the interest income.  Your commercial borrower does NOT have to be rich.  He does NOT have to maintain large cash balances at the credit union.  He just has to be a good, potential borrower.  As a result, it's fair to say that it's easier to get a commercial loan from a credit union than from a bank.

Okay, so you have to build a huge list of commercial real estate loan officers working at banks or credit unions.  But where do you find 1,000 of these bankers?

Cool Google Trick:

Go to Google Maps and type in the address of your office.  Then click on the Nearby icon.  Type in Banks and voila!  Banks galore.  Need more?  Just zoom out.

This cool Google trick works for thousands of different businesses - contractors, title companies, etc.

Example:

You are a commercial loan broker, and you just found a bank that is ravenous for construction loans.  You therefore want to contact all of the real estate developers in your town.  Simply go to Google Maps and enter your office address.  Then press the "Nearby" icon.  Instantly, dozens of nearby real estate developers will appear on your map, complete with telephone numbers.

But remember, you don't want just any bank employee.  You specifically want the commercial real estate loan officer at the bank for your area.  In the old days, bank loan officers were taught to be experts on all sorts of loans - personal loans, car loans, equipment leasing, home loans, construction loans, and commercial real estate loans.  

Nowadays bank loan officers have become specialized.  The commercial real estate loan officer at the bank will only handle commercial real estate lending and no other type of lending.  There will usually be just one commercial real estate loan officer handling all of the commercial loans for five or six bank branches.  When I tell you to market to bankers for commercial loans, this is the guy - and only this guy - should be the target of your marketing.

Starving Commercial Loan Broker Campaign:

Now if I were a starving commercial mortgage broker, I would build a list of 200 of these commercial loan officers located near my office.  Just 200.  Before I started this Starving Broker Campaign, I would have some cheap business cards printed up with the words, "Commercial Loans" (and only commercial loans) PROMINENTLY displayed across the cards.  

Then I would send a snail mail envelope to these 200 (and only 200) commercial loan officers, along with THREE of my cheap business cards that scream "Commercial Loans".  In the envelope I would enclose a meme - which is just a funny picture with a caption - printed on cheap copy machine paper.  Then I would write by hand in red ink the following, "Sure would appreciate any commercial loan referrals."

Why did I limit you to just 200 commercial loan officers?  Answer:  The banker will ignore your first three or four envelopes.  [Sob]  But around the 6th mailing, you will get some nice referrals.  I limited you to just 200 bankers because you can't afford SIX mailings to 500 bankers.

Trade Your Bankers For Some Goodies:

You're going to be calling and identifying commercial real estate loan officers at banks.  You might as well parley them for some training materials.  If you provide me with a commercial real estate loan officer working at a FDIC-insured bank or a NCUIF-insured credit union, I will trade you for ONE of the following:

1.  Income Property Underwriting Manual

2.  Commercial Mortgage Marketing Course

3.  Regional copy of The Blackburne List (750 commercial lenders near you)

4.  Copy of my famous Mortgage Broker Fee Agreement

For 20 bankers, I will send you a copy of my famous 9-hour video course, How To Broker Commercial Loans.  Just last week, a commercial loan broker named Greg Rice made this trade with me.  Helluva deal.

Make Sure You Use CommercialMortgage.com:

CommercialMortgage.com is totally free, and we have almost 4,000 commercial banks located all across the country.  We add ten to fifteen new banks per week.  Helloooo?  It's free!!  We make our dough when my hard money shop cherry-picks a few leads.

Developers, we have been adding hungry construction lenders like crazy this month.

You may recall from an earlier blog article that I am putting together a $2,000,000 syndicate of equity investors to help a developer build a brand new Marriott Fairfield Inn in Roseburg, Oregon.  Our investors are projected to earn a 25.4% annual simple interest return.  Are you an accredited investor?  Here is a one page summary of the offering.

Now I made a mistake.  I have been marketing this deal to stress that it is only 60% of cost.  Dumb.  I should have been marketing it as an opportunity to own a beautiful, brand new hotel whose takeout loan is only about 50% loan-to-value.

So how did I jump from a deal where the mortgage was just 60% of cost to one where the first mortgage was just 50% loan-to-value?  

Answer:  When a developer builds a commercial property, that property is almost always worth materially more than it costs to build; otherwise, why built it?  Why would you spend $15 million to build a hotel that was only worth $14 million?  That makes no sense.

In fact, the bank will insist that the deal have some profit built into it.  The bank does this by applying the Profit Ratio.  The Profit Ratio takes the increase in the value of the property upon completion and divides it by the Total Cost.  That profit over the cost of construction must usually be around 20% of the Total Cost.

Example:

A hotel costs $15 million to build.  While the bank is underwriting the construction loan, it will hire an appraiser to estimate the value of the hotel upon completion and stabilization.  Stabilization means that the hotel has been operating awhile, and its  occupancy rate and average daily rate ("ADR") have leveled off.

Let's suppose the appraiser values there hotel at $17.5 million upon completion and stabilization.  What is the Profit Ratio?

Profit Ratio = (FMV - Total Cost) / Total Cost

Profit Ratio = ($17.5 million - $15 million) / $15 million

Profit Ratio = $2.5 million / $15 million

Profit Ratio = .167 x 100% = 16.7%

Now a Profit Ratio of 16.7% is slightly less than the desired 20% indicated above, but the bank is still likely to approve this construction loan.  Why?  Because the construction loan is only 60% of cost.  The developer has plenty of skin in the game.

Here is what happens when the Profit Ratio is not high enough:

Example:

Billy Bad-Timing is a real estate developer.  At the top of the market, he unwisely bought some land to serve as the site of his next apartment building.  He overpaid for the land.  By the time he got ready to develop the land, apartment rents had stopped climbing and construction costs had risen by 7%.

When Billy the Developer applied to the bank for a $4 million construction loan, the bank looked at and used his actual cost of the land; i.e., $1 million in cash.  In truth, the apartment building site was now only worth $600,000; but neither the bank nor the appraiser caught it.

The appraiser did notice, however, that the apartment building was only going to be worth $5.1 million upon completion, but it would cost $5 million too build.  Loan Committee looked at the $1 million in cash that the developer had contributed to the project (the cost of the land) and figured that Billy would never walk away from a half-completed project when he had $1 million invested.  Loan Committee approved the $4 million construction loan request and construction got underway.

During construction Billy noticed his costs kept increasing over budget.  Finally Billy took a step back and asked himself, “Why am I busting my chops every day to finish this apartment building?  I am not going to make a penny of profit.  With the recent cost overruns, my total cost is going to be $5.8 million, not the $5 million that I had projected. 

"That means," Billy thought, "I am going to have to contribute another $800,000 of my own dough just to finish the project.  The most I can get for the building upon completion is $5.1 million, and after selling costs of 6% and closing costs of 2%, the most I can walk away with is just $692,000 after paying off the bank."

"I have to work hard every day for another six months, contribute another $800,000 of my own cash, and then I have to walk away from my $1.8 million investment with just $692,000???  Forget this!  I’m outa here.  I’m going to take my last $800,000 down to Texas, where the construction business is booming.  If the bank wants to sue me, they’ll have to come chase me there, where the bankruptcy laws are very favorable to debtors.”

Now the bank really has a problem.  The project is half-completed, and the developer has left the state hauling away much of the construction supplies.  No one can find the latest copy of the plans, and the subcontractors are screaming to get paid.  The rainy season is coming soon too.  Looks like big trouble in River City.

The bank should have caught this dangerous situation in underwriting.  Remember, the Profit Ratio is supposed to exceed 20%.  What was Billy Bad-Timing’s Profit Ratio?  Remember, his projected profit was only $100,000 -- $5.1MM value upon completion minus his $5 million projected Total Construction Cost.

Profit Ratio = ($100,000 / $5,000,000 ) x 100% = 2%  (Just 2%!!!)

Oops.  Somebody at the bank goofed up.

Now I am hoping to catch with this article a few more wealthy investors who are attracted to the idea of earning 25.4% and owning a brand new Marriott Fairfield Inn with a mortgage that is only around 50% loan-to-value.  For a development equity deal, this is a fairly low-leveraged deal, which greatly reduces the risk.  Remember, our developer on this deal is a general contractor who has specialized over the past 23 years in building franchise hotels.  He has already completed 60 hotels.

Once again, here is the deal.

This month I am syndicating a fantastic deal.  Please do not interpret my enthusiasm as any sort of guaranty of success or safety; however, let's face it.  Some investment deals are better than others.  

I predict that this syndication will be the single best investment offering we have ever made in almost 40 years.  The projected return to our accredited investors, over seven years, is projected to be 25.4% annually.  Here is a link to the offering.

Here is what is happening.  A very experienced hotel builder is building a Marriott Fairfield Inn in Roseburg, Oregon.  The Fairfield Inn is a very popular hotel franchise, with over 900 of these hotels worldwide.  The proposed hotel is adjacent to Interstate 5, which runs from the Canadian border to the Mexican border, through central Washington, central Oregon, and Central California.

The reason this opportunity is so promising is because our builder-developer has built sixty (60!!) hotels over the past 23 years.  Wow.

This is also a low-leverage investment.  The construction and takeout loan will only cover 60% of the total cost of the project.  This helps to assure that there will be plenty of cash flow left over after making the mortgage payment.  Obviously numbers like this assume that the hotel gets built on-time and on-budget, and that the hotel will meet its projections for occupancy and average daily rate.

If this was a newbie builder, the construction cost issue would be a source of serious concern; but after building sixty hotels, most of them flagged hotels, it's reasonable to believe that our builder knows what he is doing.  In addition, Fairfield Inns are proven franchises with large followings.  For example, when I used to travel with Culver Military Academy's fencing team, we always stayed in Fairfield Inn's.  They were everywhere.  

In the old days, banks would provide construction loans of 80% loan-to-cost to finance flagged hotels.  Then the Great Recession hit, and commercial construction lenders got slaughtered.  Nowadays, most banks limit their commercial construction loans on hotels to just 60% of cost.

Since the total cost of the project is around $15 million, this means that the developer has to raise almost $6 million in equity.  Our investors will be contributing about $2 million of this required equity.

The 25.4% deal is about half-subscribed as of today.  If you happen to be an accredited investor, and the idea of earning 25.4% annually sounds interesting, please contact Angela Vannucci at 916-338-3232.  You may be reassured to know that Blackburne & Sons has been in business since 1980.

The above deal will soon be sold out, and we will be looking for our next equity investment deal.  Please be on the look-out for deals.

We are looking for development deals, and our maximum equity investment is $2 million.  We want the developer to have plenty of skin in the game, so we really don't want to contribute more than 40% of the required equity.  We like the four major food groups - multifamily, office, retail, and industrial - plus self storage and hospitality. 

If you have a potential deal, please do NOT call or send me some huge package.  Just please send me three sentences.  "I am building a 46-unit apartment building in Des Moines, with a total cost of $12 million.  The bank will only make an $8 million construction loan.  I am short $1.6 million in equity."

Please make the subject line of this email to be exactly, "Equity Contribution Request".  The reason it has to be exact is that I get 1,200+ emails per day.  Please write to me at george@blackburne.com.

Different subject:

You can still get our nine-hour video training course, How to Broker Commercial Loans, for free by assembling a list for me of 20 commercial loan officers making commercial real estate loans.  Each of these loan officers must work at a bank or a credit union.  Sorry, but we do NOT want anyone other than bank loan officers or credit union loan officers.  Here is how.

The Commercial Loans Blog now has over 300 training articles on the subject of commercial real estate finance ("CREF").  I have covered so much material in my blog that I often have trouble thinking of new topics to write about regarding the commercial loan business.  If my goal was to write down everything that I had learned in my 40 years in the commercial loan business before I died, well, I've largely succeeded.

Therefore the C-Loans Commercial Loans Blog is a pretty decent research tool.

Let's suppose the term "cap rate" comes up during your negotiations on a commercial loan.  You kinda know what the term means, but maybe you could use a quick refresher course on cap rates.  

Assuming you like the way that I train - using everyday words, lots of examples, and lots of funny pics, you could use Google to search my vast library of blog articles.  In the Google search field, you would simply type:

"C-Loans blog cap rates"

Voila!  A half-dozen of my commercial loan training articles on the subject of cap rates will appear.

Perhaps you are trying to place a $6 million permanent loan on an older office building in Detroit, and you are working with a conduit.  Suddenly the conduit commercial loan officer throws out a ratio that is Greek to you - the debt yield ratio.  Clearly this new debt yield ratio is different from the debt service coverage ratio.  How do you learn about this new ratio without looking like an idiot?

Simply go to Google and type in -

"C-Loans blog debt yield ratio"

By the way, what is a conduit?

"C-Loans blog conduit"

Okay, so you're trying to place an apartment loan, and the commercial loan officer says, "Your operating expense ratio is too low."  Operating expense ratio?  What the heck is an operating expense ratio?

Simply go to Google and type in -

"C-Loans blog operating expense ratio"

And if you ever search my blog, and you do NOT find an article on your subject, please write to me at george@blackburne.com.

Are you building a small apartment building, office building, or flagged hotel?  Is the bank demanding that you contribute an insane amount of equity to your deal?  We may be able to help.

Blackburne & Sons Realty Capital Corporation can raise relatively small amounts of equity for new construction deals.  We are looking to invest in fairly standard property types - the four major food groups (multifamily, office, retail, and industrial), plus self-storage and hospitality.

Sorry, but we will NOT consider residential development projects at this time.  It is too late in the economic cycle.  Homes will be slow to sell during a recession.

Example:

Davey Developer wants to develop a small apartment building in Indianapolis.  The total cost is $10 million.  Davey has contributed $2 million to the project, and normally that would be enough.  Two million dollars is 20% of the total cost of the project.  Historically banks have been happy to make construction loans of 80% loan-to-cost.

But when Davey Developer sits down with Louie the Loan Officer for Nearby Bank*, Louie says, "I'm sorry, Davey, you've been a great customer of the bank for years.  Your two deals, for which we provided the construction loan, went off without a hitch.  Your new buildings were gorgeous, and the quality was obvious."

"However, like a great many banks, Nearby Bank got seriously hurt in construction lending during the Great Recession.  In fact, Davey, we almost went under.  Yikes.  As a result of pressure from regulators, we can now only make construction loans if the developer contributes 35% of the total cost of the project.  Every other bank in Central Indiana is subject to the same bank regulations, so it will do you little good to try to find another bank."

"In this case," continues Louie the Loan Officer, "the total cost of your project is $10 million.  You'll need a total of $3,500,000 in equity.  You only have $2 million to contribute to the project, so you'll need to somehow raise another $1,500,000."

*For training purposes, I have used the name of Nearby Bank for the construction lender.  Remember, commercial construction loans are almost always made by commercial banks, and the closer the bank is located to the proposed project, the more likely it is that the bank will approve the deal.

Davey's deal is just what Blackburne & Sons is seeking.  The fact that he has built two prior projects shows that he has experience, and the need for $1.5 million in additional equity is right in our sweet spot.

Our sweet spot is to contribute up to $2 million in equity.  Raising equity is a lot harder than raising hard money loan dollars because the investment is immensely riskier.  An equity investor can easily lose 100% of his dough if the construction lender forecloses.  

On the other hand, equity investors have a chance to earn much higher yields, on the order of 18% to 30% annualized return on their investment (ROI).

Think about this from a developer's point of view.  The bank will loan him capital at just 6.5% interest, but an equity investor will want a 18% to 30% ROI.  Obviously, the developer will want as many loan dollars as the bank is willing to give him.

Mortgage brokers, if you are trying to place a construction loan, and the developer is short a little equity, you should bring in Blackburne & Sons to provide the last piece of equity.

We are not going to provide 100% of the equity in a commercial construction deal.  We want the developer to have a ton of his own skin in the game.  We certainly don't  want him walking away.  As a result, we will not contribute more than 40% of the required equity.

Got a deal?  Please do NOT call me.  Please do NOT send me a package.  I probably won't even look at it (too long).  Instead, please just send me, George Blackburne III (the old man and father of George IV) a ONE paragraph pitch that mirrors the following:

Sample Equity Contribution Request:

George,

I am building a spec office building in Billings, Montana, where nearby oil exploration has driven the office vacancy rate down to below 5% (give me a little sizzle here).  The total cost of the project is $8 million, and my construction lender will only go 60% of cost.  I need a total $3.2 million in equity, and I am short $1.3 million in equity.

Love,

Donny Developer (no relation to Davey)

Important Note:

I get 1,500 emails every single day, so it is critical that the subject line read exactly, "Equity Contribution Request"; otherwise, it will be too easy for me to miss your important email.  

If your deal looks like a good fit, I'll ask for your package, and I'll send you my phone number.  Thanks! 

Are you a wealthy and accredited investor?  Does the idea of earning 18% to 25% on your money sound attractive?  Blackburne & Sons (est. 1980) started out as a hard money lender that recently expanded into syndication.  Our accredited investors (about 2,000 of them) receive both first mortgage investment opportunities AND equity investment opportunities from us.  If you fill out the form below, we'll add you to our investment distribution list.  We are actually going out for sale on an equity deal that is projected to yield 25.4% to our investors, and the builder has built SIXTY hotels.  Wow.  Yum.

Today we are going to talk about equity, a concept that may be a little confusing to you.  Of course you understand the concept of the equity in your house, but there is far more to the concept of equity.

Those of you who have been following Blackburne & Sons Realty Capital Corporation for a long time probably remember when the company used to be called Blackburne & Brown Mortgage Company, Inc.  When my sons joined the company, we also changed the second half of the company name to Realty Capital Corporation.

As it pertains to real estate, capital includes debt, equity, and certain hybrids of the two, like mezzanine loans and preferred equity.  When we changed the second half of the company name to Realty Capital Corporation, we were sending a signal that we were now providing more than just mortgage loans.  We were now also providing equity.

Right now the staff of Blackburne & Sons is mobilizing to raise $2 million in development equity for the developer of a hotel in Oregon.  The hotel will cost $15 million, and the construction lender will only go 60% of cost.  This means that the developer will have to raise a whopping $6 million in equity - 40% of the total cost.  Yikes!  

Such is life in the post-Great-Recession era in which we live.  Banks got crushed in construction lending during the Great Recession, so they now require developers to put up vast amounts of equity.

Okay, so what is equity?  It depends on the context.  In everyday life, it means the difference between value of your house and the total amount of the mortgages.  "I have $150,000 in equity in my house."

In the context of the capital markets, equities means investments in stocks, as opposed to investments in bonds, gold, or other commodities.

In the context of the development of real estate, equity refers to how much money the developer has contributed to the project.  It consists of the actual cost of the land, any legal fees the developer spent in changing the zoning, any property appreciation resulting form that zoning change, any additional value created when the developer successfully assembled several adjoining parcels into a prime building site (called assemblage); any prepaid expenses, like toxic reports, title reports, and surveys; any pre-construction costs, such as clearing the land or demolishing structures; and any cash that the developer is prepared to bring to the construction loan closing.

Equity is often called the developer's skin in the game.  It is a measure of how much of the developer's blood will the banker find pooled on the doorstep, if the bank is forced to foreclose.  

What about any appreciation in the value of the land?  The developer bought the land years ago and since then the land has appreciated by 75%.  Nope.  Banks will no longer consider that appreciation, unless it has been almost a decade.  Bank regulators now forbid it, and banks make 98% of all construction loans.   Thank you, Mr. Great Recession.

Here is how we define equity to our own private investors:

"An equity investment is not a loan.  There is no promise to pay, there is no interest rate, and there are no monthly payments.  Instead, an equity investment is the purchase of a share of the ownership of the business, in this case a very popular hotel franchise called the Fairfield Inn and Suites...

"The reward to the equity investor for the success of this construction venture is a share of the distributed positive cash flow, a share of the principal reduction on the underlying first mortgage, and a share of the net sales proceeds when the property is sold.."

Almost done.  In the context of a hotel, what is the difference between rooms and keys?  In the days before hotels with suites, it was customary to refer to an 80-room hotel.

But many 80-unit hotels these days have 120 rooms because the suites have a sitting room, where a lady businesswoman might meet a client, and a separate bedroom, where mom and dad might quietly kiss at night, while the kids slept on a fold-out bed in the other room.  The unit still only has one entrance, and therefore is has become commonplace to refer to these hotel units as keys.

Development equity historically offers yields to private investors much higher than first mortgage investments.  Are you an accredited investor?  Please contact Angela Vannucci at 916-338-3232.  Blackburne & Sons - Since 1980.

This article is more about economics than than commercial loan training.  I hope that you investors will find it interesting.

The US bull market has now lasted for over nine years.  The big question on the minds of many investors is therefore, "Is a recession imminent?"  Ryan Detrick, a senior market strategist at LPL Financial, commented a few months ago on CNBC's "Trading Nation", "Bull markets do not die of old age. They die of excess — overspending, over-leverage, overconfidence."

In other words, this bull market does not have to end, as long as consumers and corporations don't overload themselves with debt and as long as speculators stick to only modest, carefully-considered bets.

By the way, there is a short, easy-to-read book that every investor and every real estate broker should read.  The book, Extraordinary Popular Delusions and the Madness of Crowds, was written way back in 1841 by a Scottish journalist named Charles Mackay.

The author described three huge investment bubbles, Tulipmania (when simple tulip bulbs in Holland skyrocketed to thousands of dollars apiece), the Mississippi Scheme (a paper money bubble that led to the French Revolution and the guillotine), and the South Sea Bubble (when the stock of the British East India Company went to Amazon-like levels).

Is this 1841 book still relevant? Ha-ha!  If Charles Mackay was alive today, he would simply expand his book to include the Dot-Com Mania and the Sub-Prime Bubble.

Now back to the question at hand, "Is a recession imminent?"  We can state the question differently.  Are consumers, corporations, and investors taking financial matters to excess?  Are consumers and corporations overspending?  Are they borrowing too much money?  Are investors overconfident?

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.  Black swan events are typically random, unexpected, and material.  According to Nassim Taleb, the author who first coined the term, "black swan event", examples of black swan events include the rise of the Internet, the personal computer, World War I, and the September 11, 2001 terrorist attacks.  No investor can be blamed for not foreseeing these black swan events.

But gray rhino events are different.  Gray rhinos are obvious dangers that are often ignored.  Don't feel bad if you've never heard of the term, "gray rhino."  The term wasn't used much before a 2016 book by Michele Wucker entitled, "The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore."  It uses examples of threats that were highly probable but neglected, such as Hurricane Katrina and the fall of the Soviet Union.  Relatively recently, just back in 2017, Chinese authorities actually used the term, "gray rhino", when they warned of the build-up of non-bank debt in China.

Last month, Jack Bogle, the beloved founder of Vanguard Investments, passed away.  In his final interview, Mr. Bogle warned of a new gray rhino stalking the financial markets. U.S. corporations have been binging on cheap credit since 2009.  Corporate debt levels in the US alone have doubled to more than $9 trillion since 2009.

(How many times I have told you guys?  It's the loan servicing income, sillies.)

Right now most highly-leveraged U.S. corporations can service their debt because the interest rate on their debt is very, very low.  But corporations cannot borrow for 30 years, like the U.S. Treasury.  Much of their debt has a maturity of less than five years, and when they have to roll over this debt, they will have to pay considerably higher interest rates.  "Aye, there's the rub."

Arguably, the biggest, baddest gray rhino is that quite a few large U.S. corporations may find themselves unable to service their debts at today's higher interest rates.  Yikes!

Bottom line:  There is a gray rhino heading our way, folks, and his name is higher interest rates.  He is obvious, and he is being ignored.  Perhaps President Trump has pressured the Fed enough to slow down interest rate increases.  If so, this bull market may not yet be ready to die.

As for my personal portfolio, I intend to invest in a short fund (make a bet that stocks will decline) shortly after President Trump announces a positive outcome in his trade negotiations with China.  "Buy the rumor, and sell the news."

I also just invested a big portion of my own portfolio into a 8.5% first trust deed.  I'll let the "brilliant" speculators invest in double-digit first trust deeds, deals yielding 10% or more.  I am quite content to be a 8.5% coupon clipper.  Back in the old days, bond holders would take their bonds to the bank, which would pay the investor his monthly interest payment and then clip off a piece of the bond, called a coupon.  Hence the term, coupon clipper.

You business owners are reminded that a declining stock market does not guarantee a recession.  Remember, I am predicting a declining stock market but a booming economy.  You would be foolish to stop expanding your own business, just because the stock market is declining.  A recession will only come after investors and business owners make a ton of malinvestments.

A malinvestment is a bonehead investment that does not generate enough return to service the debt taken on in order to make the investment.  Examples of malinvestments include the failed dot-com investments and sub-prime mortgages.

The reason I don't see an imminent recession is because I just don't see a lot of malinvestments being made right now.  I do see the FAANG stocks falling for a decade.  I also see some over-leveraged corporations staggering from excess debt.  I see the stock market falling; but I just don't see Main Street faltering.  Bazillions of Americans are working overtime these days, and unemployment claims last month were at their lowest levels since 1969.  Main Street is cooking with gas.

Therefore I urge you to keep investing in your own business.  My own business,  CommercialMortgage.com, has been producing giddy results recently.  We are constantly trading our commercial real estate training courses for new, hungry bankers to add to the portal.

And folks, CommercialMortgage.com ("CMDC") truly is 100% free.  In other words, if you go onto CMDC and close deal, we here at C-Loans.com don't make a dime.  Our banks are NOT jacking up their interest rates and points to pay us some sort of backend fee.

Using CommercialMortgage.com does not cost you a dime.  You would therefore be crazy not to use the portal if you needed a commercial loan.  We boast of 3,159 commercial real estate lenders on CommercialMortgage.com, but the truth is that the actual number is much higher.  

Lastly, here are a couple of practice tips:  (1) Always have at least three banks looking at your commercial loan at all times.  Banks are notoriously unpredictable, based on their liquidity and their recent commercial loan loss experiences.  (2)  The closer a bank is located to your property, the more likely that your commercial loan will be approved.  Using CommercialMortagage.com, it's easy to find 30 banks located close to your property.

My own hard money shop, Blackburne & Sons, does NOT make private money construction loans.  One more time:  Blackburne & Sons does NOT make private money construction loans.  Watch, I'll still get a bunch of applications for construction loans.  Ha-ha!

Very few other hard money commercial lenders make ground-up commercial construction loans either.  The problem is that construction loans have to be funded in a series of draws or invoice payments.  Funded does not mean that the loan closed.  Funded means that the loan proceeds are actually released to the borrower.

Example:

Billy "White Nose" Johnson is a developer, who also has a penchant for fast cars, pretty girls, and cocaine.  Billy applied to Rookie Bank for a $2 million construction loan to build a small apartment building in Indianapolis.  At the closing of the construction loan, Rookie Bank gave Billy a $1.8 million check to go build the apartment building.  The bank held back $200,000 for the interest reserve.

One year later, when the interest reserve had run out, the bank called Billy to ask that he start making monthly payments.  After the bank had left a dozen messages, many of them threatening, the bank sent an inspector out to look at the apartment building.  There was no apartment building, just an empty field.

Six months later, a private investigator from the bank located Billy in a local homeless shelter, suffering horribly from withdrawal symptoms.  Apparently Billy had gone on a partying binge with the loan proceeds.  Almost $1.8 million had gone up Billy's nose.

By the way, while a commercial property is under construction, it's not generating any rental income.  Therefore most construction lenders will hold back nine-months' or one-years' worth of monthly interest payments in an interest reserve, out of which the construction lender pays itself a monthly interest payment.

Obviously construction lenders must therefore never release the construction loan proceeds entirely to the developer.  Instead, construction loan proceeds are released using either a five-draw system or the bank pays the invoices of the subcontractors directly, after the developer has signed off on their work and after a progress inspector from the bank has inspected the work.

The five-draw system of funding construction loans is an older, almost obsolete method of controlling the loan proceeds.  The proposed work is divided up into five, roughly equal phases.  At the closing, the construction lender funds the first draw, and the developer cannot get at draw number two until he has completed the first phase.  The problem with the five-draw system is that the construction lender still has to release $400,000 to the developer and to pray that he doesn't have a drug problem.

Progress inspections are site visits by the commercial loan officer or by a progress inspector, hired by the construction lender, to verify that the work is being completed according to the plans and specifications.  A progress inspector might charge $200 to $350 per inspection, and the the cost of these progress inspections is paid for by the developer.

It is now time to get to the point of today's training article:

Very few private money (hard money) lenders make ground-up construction loans.  There are several reasons.  First of all, private money loans are much more expensive than bank loans, so few good developers will pay their prices.

I am actually pro-Trump, but in the interests of equal opportunity humor...

The second problem is that construction loans need to be made by local lenders.  Pay attention here.  This is important:  Construction loans are almost always made by local lenders because the bank needs to go out and drive by the project on a regular basis to make sure that work is progressing.

The smart developer or commercial loan broker will immediately see that in order to find a construction lender, he needs to find a bank located close to his project.  How? Go to Google Maps and type in the address of the property.  Then hit the "Nearby" icon and type in "Banks".  In most areas, he will find scores of different banks.

It's the servicing income, guys!

The second reason is because private money lenders are usually one-office lenders.  Few have offices located across a state or region.  Therefore they are very limited geographically in their construction lending area.

A buddy of mine, Mike Cleaver of Emerald Creek Capital, makes construction loans and renovation loans of over $2 million in New York City.  Brooklyn is hot right now.  Even though he is limited to New York City (guys, I really mean NYC only), he still gets to make a fair number of these loans because of the population.  You can reach Mike with your NYC construction loans and renovation loans of over $2 million at 212-239-6845.  Did I mention New York City only?

The third reason why few private money lenders make construction loans is because many private money lenders raise their lending capital by syndicating private investors.  A private money lender might have 50 private investors in a single deal.  If the lender is using an invoice system of funding his construction loans, it is very awkward to fund a $2,000 invoice by asking for $400 from each of 50 private investors.  My buddy, Mike Cleaver, solves this problem by using his mortgage fund.

Okay, now I need your help.  Between C-Loans.com and CommercialMortgage.com, I have given you guys access to over 4,000 commercial real estate lenders for free.  Free!    

So this is my appeal.  Do you know of a private money lender who makes commercial construction loans?  Won't you please-please share him with me by sending me his contact information at george@blackburne.com?  Thanks so much!.

Before I get into the subject of placing a commercial loan with a bank, I have two great TV show recommendations.

As you know, Netflix is now producing its own movies, and it just released the movie, Bird Box, starring Sandra Bullock.  What a fantastic movie!  It creates the same kind of eerie suspense as Signs and A Quiet Place.  I was squirming like a worm on a hot sidewalk - but it was an exciting and fun discomfort.  "Oh, my goodness, Cisca, I can't look," as I buried my head under a blanket.  Ha-ha!

Also on Netflix is the TV series, Damnation.  In the 1920's in America, many business owners treated their workers heartlessly.  And if the workers dared to organize and strike, the cigar-smoking robber barons would simply bring in strike-breakers.  These strike-breakers were not just club-wielding thugs.  They carried firearms and committed the outright murder of the leaders of the strike.  This is the fascinating story of a reformed strike-breaker who discovers Jesus - but who does NOT forget how to shoot a gun.  It's a shoot 'em up, bang-bang kind of show that offers a fascinating glimpse into the dark chapter of America's past.  My wife and I binge-watched it.

Okay, now onto some training in the commercial loan business.  Placing a commercial loan with a bank should be easy.  If it's not, you simply need to move onto a new bank.

Commercial banks are moody and unpredictable.  For example, one moment they might love loans on self-storage facilities, and the next moment - usually after taking a loss - they wouldn't touch a loan on a self-storage facility with a ten-foot pole.  

Another reason for the wild mood swings of a bank is liquidity.  If a bank is fully-invested, even the tiniest black hair is a deal-killer.  A black hair is a flaw in a commercial loan.  There is no such thing as a perfect commercial loan.  Every commercial loan ever funded had some black hairs.

But if a bank has gotten a ton of pay-off's, and it is sitting on a pile of uninvested cash, the pressure to lend is tremendous.  If you catch the right bank at the right time - a bank that is loaded with liquidity - you can even finance an ax murderer. 

Now there is no way for an investor or a commercial loan broker to know a bank's mood in advance.  Therefore the trick to closing near-bankable commercial loans is to present your loan to at least 15 banks, three at a time.  Only if all 15 banks turn you down should you give up on the sweet interest rates offered by banks.

"But George, where am I going to find 15 banks?  I only know two or three."

Finding banks making commercial loan is easy!  The Blackburne List - freshly scrubbed and updated - contains a list of 2,500 commercial real estate lenders.  You also have free access to C-Loans.com and CommercialMortgage.com.  A blind, cripple could find 15 banks for any commercial loan request.

I use a similar business plan when placing my hard money commercial loans with our private investors.  We prepare a one-page Mortgage Investment Bulletin, and then we blast it out to about 1,200 wealthy private investors.  On any given day, at least 50 of them have dough that they looking to place.

You commercial loan brokers, if you are not working daily to get into the hard money business, you're a dummy.  Imagine being Loan Committee and having the authority to approve or decline your own loans.  (You still have to be very prudent and responsible.)  And once you become a hard money lender, you can earn loan servicing fees, which provide crucial cash flow during recessions.

"Oh, my goodness, George.  I could never service loans.  That's much too hard!"

Absolute nonsense!  You can hire a sub-servicing company to service your first 30 performing loans for just a handful of dollars per loan per month.  And once you become a hard money lender, you'll have plenty of dough to later buy your own loan servicing software.

Quick summary:  Plan on submitting your near-bankable commercial loans to fifteen banks, three at a time.  To find these banks, consider The Blackburne List - freshly scrubbed and updated.

Every two-and-a-half years, I suck it up and write a check for thousands of dollars to my staff to update The Blackburne List.  The Blackburne List is a huge list of commercial real estate lenders.  

It's a Herculean task to update a list of 2,500 commercial lenders, and it takes weeks.  If you need a commercial loan, this is the tool for you!  The list contains the name of the commercial loan officer, the name of commercial loan company, their address, the commercial loan officer's phone number, and his email address.

It used to be that most bank branches had their own commercial loan officer, someone trained in both commercial finance and commercial real estate finance.  Commercial finance includes secured and unsecured lines of credit, equipment loans and leases, inventory loans, and accounts receivable financing.

Commercial real estate finance includes commercial loans on income properties, mezzanine loans (banks very seldom ever make them), and preferred equity investments (banks never make such investments).

Modernly, banks typically assign a single commercial real estate loan officer to cover four or five branches.  The modern commercial real estate loan officer, working for a bank, seldom comes into the office; but rather he is usually out in the field calling on good bank customers and prospective customers.  A good bank customer - a very important term of art for us in the commercial loan business - is someone who regularly maintains large cash balances at the bank.

A very good way to get your commercial loan closed is to tell the commercial loan officer that your borrower is willing to transfer all of his bank accounts to the bank.  Please read this last sentence again.  It is hugely important.

This offer to create a deposit relationship works great with community banks and regional banks.  The larger money center banks, however, couldn't give a hoot.  They have more than enough money to lend and a severe shortage of good borrowers.

A community bank is a commercial bank that derives funds from, and lends, to the community where it operates, and it is not affiliated with a multi-bank holding company.

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.

A money center bank is similar in structure to a common bank; however, its borrowing and lending activities are with governments, large corporations, and regular banks. These types of financial institutions (or designated branches of these institutions) generally do not borrow from or lend to consumers.

I was talking with my own commercial loan officers this week, and I made the point that a commercial loan broker will often submit his deal to as many as fifteen different commercial lenders.  Armed with The Blackburne List, you will never again have any more trouble finding fifteen commercial lenders to whom to submit your deal.