Commercial Loans and Fun Blog

Commercial Loan Tidbit:  I learned today that you cannot use an SBA loan to refinance an existing SBA loan.

Most commercial real estate loan officers working for banks have six to ten "best brokers".  Between these best brokers, the typical commercial loan officer closes 60% of his commercial real estate loan production for the entire year.

In other words, the typical commercial loan officer working at a bank with decent interest rates really doesn't care that much about you or your particular commercial loan. You're not one of this best brokers.  You're just a one-off commercial loan broker.  One-off means just a one-time deal.  There is little chance of a continuing relationship and future deals.

My son, George IV, competes against Alicia Gandy, our Loan Goddess, for the title of biggest commercial loan producer in the company.  Alicia wipes the floor with him.  Ha-ha!  How come?

Putting aside the growing consensus that women are simply better, Alicia has about a dozen or so "best brokers" who constantly keep her rockin'. After all, Alicia has been originating commercial loans for Blackburne & Sons and C-Loans, Inc. for over twenty years.  Many of her best brokers have been with her for over a decade, and they know exactly what kind of commercial loans that Blackburne & Sons prefers to originate.

What types of commercial loans does Blackburne & Sons prefer to originate?  Blackburne & Sons specializes in small permanent commercial loans in the heartland of the United States.

We are NOT a bridge lender, although our loans have no prepayment penalty and make superb bridge loans.  We like long-term loans because we make our dough from loan servicing fees.  Helloooo?  How many times have you heard me say that the real money in commercial real estate finance ("CREF") is in loan servicing fees?

Does our preference for commercial loans in the heartland mean that Blackburne & Sons would never make a commercial permanent loan on the coast of California, New York, or Florida?  Of course not!  The problem is that the coastal areas are often very expensive, and our preferred maximum loan is $1 million.

Now you know enough to become a best broker for Blackburne & Sons.  You understand our mindset.  We like small deals with small payments because the default rate is 70% less, and we like long-term loans so we can earn our delicious loan servicing fees for a long time.  Do you want your relaxing, supermodel massage to last for ten minutes or an hour?  Uh, is this a trick question? 

But enough about Blackburne & Sons.  The $10,000 question, how do you become some commercial lender's best broker.

Part of it is luck.  If you happen, by chance, to bring a perfect deal to just the right lender, and the deal closes, that commercial loan officer will pay much closer attention to the next commercial loan that you bring him.  He will look for a way to make the deal work.  Samuel Goldwyn once said, "The harder I work, the luckier I get."  So work hard, generate a lot of commercial loans, and eventually you'll get lucky.

The second way to become some commercial lender's best commercial loan broker is to listen very hard when he tells you his preferences.  If he is not doing land development loans, don't keep bringing him land development loans.  Listen to him!

The third way is to focus your commercial mortgage marketing in an area close to your office, and then bring your local commercial loans to local commercial banks.  Banks like to make their commercial loans close to their branches.

Here's a clever trick.  Suppose your office is in Maine, and you get a chance to work on a commercial loan in South Carolina.  How do you find a bank willing to make a commercial loan in South Carolina?  Just open Google Maps and type in the address of the commercial property that you are trying to finance.  Then hit the "Nearby" icon to find banks located close to the property.  Voila!

The last way to become a commercial lender's best broker is to become his friend.  Invite him over to a BBQ and watch a football game with him.  Bring his administrative assistant a box of chocolates or some flowers.  Drop off some extra tickets to a game.  Develop a personal relationship with your commercial loan officer.

I once knew a fabulously successful commercial loan broker who always brought cocaine and two hookers whenever he delivered an apartment loan package to his favorite savings and loan association commercial loan officer.  Later that S&L went bankrupt, and my old buddy ended up on Skid Row in San Francisco; but for several years he made more dough than any other commercial loan broker I knew.

As for me, I'm content to earn $1,583 per month in loan servicing income for the next fifteen years on the $1 million pot loan that we just closed yesterday.  Geez, guys, the real money in CREF is in loan servicing fees!

Suppose you're a commercial loan broker, and you have have four commercial loans in process.  Three of them are commercial construction loans.  The doctor says you're gonna die.  (Old joke about the snake venom and the need to suck it out.)

How come?  The banks are making commercial construction loans again, and banks close 95% of all commercial construction loans.  That sounds positive.  So why can't a commercial loan broker ever close a commercial construction loan?

Your chances of EVER closing an international commercial loan are definitely zero.  (I'll be blogging on international loans again in a few months.)  Your chances of closing a commercial construction loan are NOT zero; but your chances are very low.  Today's training will explain why.

Banks love-love-love to make good construction loans, assuming the developer enough equity in the deal.  (Aye, there's the rub.)  Assuming that the financial world is not melting down, it has always been easy for qualified developers to simply trot down to a local bank and get a construction loan.

As a result, only the unqualified developers ever called commercial mortgage brokers for a commercial construction loan of less than, say, $7 million.

One way a developer could be unqualified is because he has very little construction experience.  His CV is very unimpressive.  A CV stands for curriculum vitae, which, in practice, means his construction resume.  If a developer is seeking a commercial construction loan to build a 20-unit apartment complex, ideally this developer has already built a four-flex and then an eight-unit apartment building.

More commonly, a developer is unqualified because he can't contribute 30% to 35% of the total cost of the project in cash or in equity in his land.  In the past, banks usually only required the developer to contribute 20% of the total cost of a project.  Since the Great Recession, however, commercial banks will rarely be satisfied with the developer contributing less than 30% to 35% of the total cost of the project.  That's a whole lot of equity.

Twice in the preceding paragraph I have used the term of art, "total cost". The Total Cost of a commercial construction project is the sum of the Land Costs (usually the actual purchase price of the land), the Hard Costs (bricks and mortar), the Soft Costs (fees, reports, points, etc.), and the Contingency Reserve (5% of hard and soft costs).

As a commercial loan broker, you will find that 95% of your commercial construction loan applicants lack the required 30% to 35% equity.  In other words, your developer doesn't have enough skin in the deal.

If a developer was wealthy enough to contribute 30% to 35% of the total project cost in cash, you can bet that he has tons of contacts directly with banks.  He doesn't need you.

Therefore, if you want to feed your family, don't waste time working on commercial construction loans or residential subdivision construction loans right now.

Does this mean that there are absolutely no commercial construction loans that make sense?

No.  The deals that still make sense in today's market are the small commercial construction loans, made to owner-users, from SBA lenders, typically under the 504 Program.  You can apply to dozens of SBA 504 construction lenders using C-Loans.com.

Are you a commercial loan broker?  Do you absolutely, positively want to starve?  If so, then be sure to only work on large commercial loans.  You will quickly lose that pesky 50 pounds.

By large, I mean commercial loans of $5 million or larger.  For the reasons listed below, large commercial loans seldom close for commercial loan brokers.  This is especially true for commercial loan brokers with less than five years of experience.

1. In order for a commercial real estate lender to be willing to make a huge commercial loan, the borrower must usually have a net worth at least as large as the loan amount. So if you're trying to place a $20 million commercial loan, your borrower better have a net worth of at least $20 million.
   
   
2. Why on earth would a borrower with a $20 million net worth apply to you - the typical commercial loan broker?  He won't.  Sophisticated, high-net-worth real estate investors will quickly spot that you're not an expert on large commercial loans.  Heck, the top real estate investors and developers probably know far more about commercial real estate finance than you do.  Therefore the types of large commercial deals you will usually get will be borrowers and developers with $3 million net worths trying to borrow $20 million.  It's a pipe dream!  The loan will never close.
   
   
3. If your borrower has a $20 million net worth, you can be sure that scores of bank loan officers calling on him regularly.  Therefore even if you someday got lucky and got a chance to work for an investor or developer with a huge net worth, you can bet that your client has also contacted his own bank and a half-dozen other direct bankers, many of whom have been calling on him for years.  As a result, even if you deliver a delicious term sheet from a bona fide mega-bank, you will have to add your half-point fee to the mega-bank's one point fee.  Guess what? The direct lenders who are also working on the deal will almost always be able to match your interest rate and offer a term sheet at only one point because there is no broker involved in the deal.
   
   
4. But you probably won't be successful in delivering a delicious term sheet from some mega-bank or life company.  Why?  The top loan officers who work at those mega-banks and life companies are constantly in demand, and they will rarely waste their time working with some newbie or even an intermediate-level commercial mortgage broker.  These top-of-the-food-chain loan officers usually have a stable of about a dozen top commercial mortgage bankers who supply them with 95% of their loans - and you aren't one of them!  These top commercial loan officers will probably just blow you off the phone, even if your deal was perfect.
   
   
5. Should you ever work on large commercial loans? The only time it might sense to take on such a deal would be if the borrower was a returning customer.  Maybe you closed a $3 million commercial loan for him seven years ago and then a $7 million loan three years ago.  Now he is trading up to a larger commercial property and needs a $13 million deal.  Sure, in this case, you should absolutely take on the commercial loan request.
   
   
6. But absent a track record or some other personal relationship with this high-net-worth investor (maybe he's your father-in-law), you should not take on these large commercial loans.  Well, maybe you can take the deal on and try to close it, but you must not expect to feed your family with your efforts.

Instead, stick to small commercial permanent loans, the types of deals that will actually close and feed your family.

In a recent blog article, I wrote to you extensively on the subject of permanent loans.  You will recall that a permanent commercial real estate loan is a first mortgage on a commercial property with a term of at least five years.  Commercial loans with shorter terms are considered either mini-perms (1-2 years) or bridge loans (1-3 years).

As to construction lending, banks are perfectly happy to make commercial construction loans, as long as the developer contributes a whopping 35% of the total cost of the project.  What developer can contribute $3.5 million into a $10 million project?  Why not also ask for the broomstick of the Wicked Witch of the West, while they're at it?

As to banks making commercial bridge loans, they are simply too slow.

Since commercial banks have the money to lend, it therefore makes sense to give them what they want.  You should therefore be focusing exclusively on small commercial permanent loans.  If you work on any other type of commercial real estate loan, the loan probably will not close, and you will not get paid.

Why am I recommending that you only work of small commercial permanent's?  By "small" I mean commercial loans under $3 million.  Small commercial permanent loans have by far the highest closing rate.

Why is the closing rate on small commercial deals so much higher than on the larger ones?  First of all, the typical small commercial loan borrower is a small business owner who is busy running his tool and die shop or his auto repair facility.  He really needs the help of a commercial mortgage broker, and he appreciates you.

While this small business owner may be worth a one or two million dollars, he is not so rich that banks are beating down his door.  He therefore doesn't have some local bank quote in his back pocket that he can pull out to beat your best offer.

Because he is a business owner, as opposed to a professional real estate investor or developer, he is not terribly sophisticated about commercial lending.  You know far more about commercial mortgage finance than he does.  Because this small businessman doesn't know where to go to get the best quote on a commercial real estate loan, squeeky-clean and do-able deals often end up being submitted to commercial mortgage brokers, just like you.

In contrast, the real estate investors who own the large commercial properties and need large commercial loans are usually very wealthy and sophisticated.  Some bank is almost certainly knocking on their door every month trying to sell them a loan.  If you try to broker a large commercial deal, and the deal is clean, almost every time the borrower will reject your best offer because he has a quote directly from a bank, without a mortgage broker fee.

In fact, if a large commercial real estate loan does end up being submitted to a mortgage broker, there is usually something wrong with the deal. Perhaps there are too many vacancies, the deal doesn't cash flow, or the property is in a bad location.  You can easily waste months working on a large commercial loan that was never do-able.  In the meantime, you start to death.

So be smart.  Stick to small commercial permanent loans for your first five years in this business.

If you want to get into the commercial loan brokerage business, you first need to learn how to underwrite commercial loans.  It is a surprisingly straight-forward process.  You'll need to learn about a dozen ratios and about 200 terms of art specific to commercial real estate finance; but you can master most of these in a single, very long day.

One of the tools that I use when I teach brokers the commercial loan business is my Commercial Mortgage Underwriting Manual.  We are in the process right now of adding our entire commercial loan training manual to the free Knowledge Base section our flagship website, C-Loans.com.

Today I am going to give you links to the first ten pages of our commercial loan underwriting manual, so you can begin your study today.

1. The Table of Contents lists which lessons have so far been published.
   
   
2. We start with a short introduction.
   
   
3. Much of the underwriting of commercial loans can be boiled down to the results of three main ratios.
   
   
4. First we discuss the Loan-to-Value Ratio, as it pertains to commercial loans.
   
   
5. Next we talk about the Debt Ratios of the particular borrowers.
   
   
6. We finish with a discussion of the Debt Service Coverage Ratio, perhaps the single most important ratio in all of commercial real estate finance.
   
   
7. What is a Loan Constant?  Without knowing the loan constant, the Debt Service Coverage Ratio calculation is meaningless.
   
   
8. The big question for the borrower is, "How large of a commercial loan can I get?"
   
   
9. The purpose of the Operating Expense Ratio is to catch cheaters trying to get a commercial loan larger than they deserve.
   
   
10. You need to understand the different types of commercial leases.

Apart from construction loans, there are three types of commercial loans in first position - the permanent commercial loan, the mini-perm, and the bridge loan.

A permanent loan is a first mortgage on a commercial property with a term of at least five years.  A permanent loan will have some amortization.  While a permanent loan may have a term as short as five years, the payments will be collected as if the commercial loan had a 25-year term.  A twenty-five year amortization is the normal amortization schedule for commercial loans.  If the property is older than 20 years, a bank might even require a 20-year amortization.

Commercial loans with shorter terms are considered either mini-perms (2 years) or bridge loans (1-3 years).  What is the difference between a mini-perm and a bridge loan?

Mini-perms are first mortgage loans on brand-new commercial property that are typically given by the bank to give the sponsor time to develop an operating history.

Example:

Suppose Alpha Bank makes John Hotelier a $10 million construction loan to build a brand new Quality Comfort Inn.  The term of the construction loan was 12 months, and the developer (John Hotelier) finishes on time and on budget.  Alpha Bank would prefer to get paid off promptly at maturity, but the bank is wise enough to know that it is very difficult for a business property, like a hotel or RV park, to obtain a takeout loan until its has a two-year operating history.  (This being said, the SBA might possibly finance a brand new hotel?)

A takeout loan is just a special type of permanent loan.  It looks exactly the same as any other permanent loan, except for the fact that a takeout loan is a permanent loan on a brand new commercial property used to pay off a construction loan.  Therefore every takeout loan is a permanent loan, but very few permanent loans are takeout loans.

By the way, commercial construction loans are almost always made by commercial banks.  The rare exception is that some life insurance companies will sometimes make huge construction construction loans ($20MM+) on trophy properties, like office towers or huge shopping centers. In general, commercial banks like to make commercial construction loans because the loan term on a construction loan is short (12 to 18 months), and the bank gets to earn its points up-front.

Okay, so John Hotelier has just completed his hotel, but in order to qualify for a takeout loan, he needs to establish a two-year operating history.  Fortunately, John had negotiated with Alpha Bank for a two-year mini-perm at the conclusion of his construction loan.

The forward takeout commitment - a mini-perm is a form of forward takeout commitment - cost John one point.  If he chooses to exercise the forward takeout commitment, he has to pay Alpha Bank an additional half-point or one-point fee at the time that the mini-perm funds.

The typical terms of a mini-perm are prime plus 1% to prime plus 2%, twenty-five years amortized, two years due, and no prepayment penalty.

What is a forward takeout commitment?  A forward takeout commitment is just a letter from a bankable lender promising to deliver a takeout loan at some time in the future, assuming the developer has achieved certain things.  In John's case, those conditions were that he complete the project according to plans and specifications.  What was NOT a condition was the requirement that the hotel achieve a certain occupancy rate.  That's the whole purpose of the mini-perm commitment - for John to have time to open the hotel and start to increase his average occupancy rate.

Now third type of first mortgage (quite possibly a second mortgage) is the bridge loan.  A bridge loan is a commercial loan, usually with interest-only monthly payments, with a term of one to three years, which gives the borrower time to accomplish certain things, such as leasing out the property, renovating the property, or selling it.

So what the difference between a mini-perm and a bridge loan?  Mini-perms are almost always secured by brand new commercial property, and their interest rates are bank rates.  Even the cheapest bridge lender has rates that are 2% to 3% higher than those of the bank.

If you are an investor or a commercial property owner, you can skip down to the "Weaponizing the Yuan" section below.  Commercial loan brokers and commercial lenders will want to read this top section.

Last week I announced the opportunity for commercial lenders and commercial loan brokers to advertise on CommercialMortgage.com.  This opportunity should be especially attractive for commercial hard money / bridge lenders.

CommercialMortgage.com ("CMDC") is a commercial loan portal that competes against C-Loans.com.  I just happen to own both portals.  The advantage of CMDC is that is is far easier and faster to use, and it offers far more commercial lenders - 4,000 commercial lenders versus 750.  The advantage of C-Loans.com is that a commercial loan broker or commercial property owner can enter his commercial loan request and then submit it to all 750 commercial lenders, six lenders at a time.

Here's the deal.  For just $1,000 per year, a direct commercial lender can be listed near the very top of the Lender List and receive a copy of every loan that enters CMDC that fits its profile.  If you close a deal from CMDC, you do not owe C-Loans, Inc. a dime.

If you want to advertise on CMDC as well, you will NOT be listed in the absolute top spot because Red Star Mortgage, a huge C-Loans producer, has already sent in their dough and reserved that top spot.  The next direct commercial lender - it should be another commercial hard money shop - will be listed third, after Blackburne & Sons (my own commercial loan company) and Red Star Mortgage.

I make some dough from C-Loans.com and CommercialMortgage.com, but my biggest payoff for owning these commercial loan portals is that they generate leads for my private money commercial mortgage company.  Therefore bridge lenders, sub-prime, non-prime, and hard money lenders cannot be listed on CMDC for commercial loans of less than $1 million.  I am saving these leads for Blackburne & Sons.

I have been telling you guys for years that the real money in the commercial loan business is in loan servicing rights.  We charge our investors 1.9% per year to service our loans.  If you think this is excessive, keep in mind that we need to make enough dough to keep our doors open during the 45% slumps that appear every 12 years or so.  Therefore, if Blackburne & Sons syndicates a single commercial loan of $1 million, we typically earn 3 points up-front and roughly 2% per year for servicing.  If the loan stays outstanding for five years, that's roughly $130,000 in loan fees and servicing income for syndicating a single loan.

Now you can see why we won't sell leads for less than $1 million (our preferred maximum).

But if you work for a hard money shop that regularly closes commercial loans greater than $1 million, you would be absolutely crazy-nutso not to jump on this offer.  Just $1,000?  Really?  Write to Tom Blackburne.

WEAPONIZING THE YUAN

If you have been following my blog for the past two weeks, you will recall that I have written extensively about the trade war between the U.S. and China.  This trade war is NOT going well.

I have pointed out that because the Chinese import far less from the U.S., they are running out of goods upon which to levy a tariff.  Their companies are losing their best customer, the United States.

China had pipe dreams of making the yuan a competing world currency, but since the start of the trade war, the yuan has fallen around 8%.  Their stock market is off 25% since earlier in the year.  

Lastly, the Chinese current account is down to breakeven; i.e., they are importing just as much as they are exporting.  They are no longer adding to their $3 trillion of foreign reserves.  This war chest was $4 trillion just a few years ago.

But the Chinese refuse to cave.  Jack Ma, the Chinese billionaire founder of Alibaba (much like our Amazon.com) said last week that he thinks that the trade negotiations will fail and that this trade war will last for 20 years.  The world will end up getting divided up into two huge trading blocks.

We also discussed how the Chinese have actually been propping up their currency, the exact opposite of the currency manipulation charged by President Trump.  The market is selling yuan because foreign investors are not in the mood to buy Chinese stocks.  As a result, the yuan has fallen 8% or so in recent days, and the Chinese allowed this to happen.

This week the Chinese announced that they had no intention of "weaponizing the yuan."  If the Chinese allowed their currency to fall 25%, the decline would wipe out the effect of Trump's tariff's.  It would also send our stock market crashing down because suddenly Chinese products would be 25% cheaper than American prices in world markets.  U.S. companies selling internationally would get hammered.  Profits would fall dramatically, and so would the U.S. stock market.  (I have sold 100% of my stocks.)

To me, the statement that, "We're not going to weaponize the yuan," is like saying, "We're not going to release a virus this week that would wipe out every English-based computer in the world."

Weaponizing the yuan.  Yikes.

In a moment I am going to introduce you to three self-directed IRA custodians, but first I have some disturbing news coming out of China.

Alibaba is China's largest internet retailer.  You can think of Alibaba as the Amazon.com of China.  Jack Ma is their President, and he is very much the peer of our Jeff Bezos.  Jack Ma is a very smart guy.

Mr. Ma said today that there is no solution to the trade war taking place between China and the U.S.  The trade negotiators will be unsuccessful, and this trade war will last for 20 years.  It will still continue long after President Trump has left office.  In Jack Ma's opinion, the world will end up getting divided up into two huge trading blocs.  

Also disturbing was an announcement by China that it would indeed be retaliating against the U.S. for this latest round of tariffs.  Okay, we knew that; but what sent a chill down my spine was the comment, "... at a time of our own choosing."

In my last blog article, I explained that China's last remaining economic bullet was to suddenly devalue the yuan by 25%.  This would almost completely neutralize the 25% tariff that Trump has promised to impose on Chinese goods in about three weeks.  

Such a sudden and dramatic devaluation of the yuan would likely lead to a  crash in the U.S. stock markets.  Why?  Suddenly, across the globe, Chinese goods would be 25% cheaper.  U.S. companies selling overseas would see their sales and profits crumble.

"... at a time of our own choosing.  How about one week before the elections in November?  There is nothing like 20% to 30% sell-off in the stock market to ensure that the Republicans lose both houses.  Impeachment suddenly has the votes.

You will recall that I have sold every penny of equities in our company pension plan, my 401k, and my IRA.

Now let's talk about using your IRA to make investments other than those sold by stock brokers.  If you have a self-directed IRA, you can invest in real estate, partnerships, trust deeds, coin collections, physical gold and silver, and even art.

An IRA is, by definition, a bank account.  A number of banks have therefore set up fee-based custodial trust accounts, and the bank, as custodian for your IRA, holds title to the assets.  If you want to invest in first trust deeds, the following three self-directed IRA custodians will serve you very well:

PENSCO Trust Company
http://www.pensco.com
866-818-4472

Mail to:
PENSCO Trust Company
P.O. Box 173859
Denver, CO 80217-3859

Overnight/Express Shipping:
PENSCO Trust Company
1560 Broadway, Suite 400
Denver, CO 80202-3308

IRA Services

http://www.iraservices.com
(800) 248-8447
Fax:  (605) 385-0050

Mailing Address:
IRA Services
PO Box 7080
San Carlos, CA 94070-7080

Express Delivery Address:
IRA Services
1160 Industrial Road, Suite 1
San Carlos, CA 94070-4128

Polycomp

http://www.polycomp.net
800-952-8800

6400 Canoga Avenue, Ste. 250
Woodland Hills, CA 91367

You would be wise to immediately lessen your exposure to U.S. equities.  Two weeks ago I sold every penny of stocks in our company's pension plan, in my personal 401k, and in my IRA.  This article explains why.

In a recent article, Commercial Loans and China is Getting Financially Slapped Around, I wrote that China is suffering mightily in this trade war.

Do you remember the days when China was exporting far more to the outside world than it was importing?  For decades, China was amassing vast hoards of foreign reserves, as it exported far more than it imported.  At one point (2014), China's foreign reserves reached a staggering $4 trillion.

Those days are over.  Several years ago China was forced to spent over a trillion dollars to prop up the yuan.  China had pipe dreams of having the yuan challenge the U.S. dollar as the world's preferred currency for international financial transactions.  Uh, huh.  In the past three years, the yuan's share of international financial transactions has fallen from 2.8% to just 1.8%.  China's trove of foreign reserves has fallen to a "mere" $3 trillion.

The gag is that Catmando is the biggest city in Nepal.

Since the start of the trade war, China's current account is lucky to stay at breakeven.  In plain English, China is lucky these days to export as much as it imports.  China still has to import vast quantities of commodities to fuel its manufacturing industry, but it is losing its biggest customer, the United States.  As a result, Shanghai Composite Index of Chinese stocks, is down 25%, since its high in early 2018.

Today President Trump levied a 10% tariff on over $267 billion on Chinese goods.  The only reason why these tariffs were limited to just 10% was to give U.S. manufacturers time to find alternative sources of supply.  In November, those tariffs increase to a whopping 25%.

China, of course, retaliated by increasing tariffs on... a whopping $60 billion in U.S. exports.  Huh?  China is running out of imports upon which to levy a tariff!  Remember, China exports far more to the U.S. than we export to China.

To make matters worse, the yuan is tumbling in value.  After all, who wants to buy yuan in order to buy Chinese stocks, when the Chinese stock market is taking such a drubbing?  (Actually some brave value investors might find the Shanghai Composite Index an interesting speculation.  The Chinese are first and foremost businessmen, not world hegemonists.  This trade war is bad for business, and reason will probably prevail over the personal pride of China's dictator-for-life, President Xi.)

Do you guys remember in the late-1980's, when Japan was kicking our butts?  Seven of the world's ten largest commercial banks were Japanese.  "I think I'm turning Japanese, I really think so."  Uh, huh.  Japan was nothing but a big-time financial bubble.  Forty years later and Japan has  still has not recovered.

Okay, we're finally getting to the point of today's article.  President Xi of China is not just going to roll over to the pressure being exerted by President Trump.  He is going to find some way to retaliate against America, and the last remaining bullet in Chinese President Xi's financial arsenal is to suddenly, massively devalue the Chinese yuan.

Bam!  If the Chinese were to suddenly devalue the Chinese yuan by 25%, the 25%, U.S. tariffs would be completely offset.  It is ironic that President Trump has criticized the Chinese as being "currency manipulators", when the truth is that they have been spending unimaginable amounts of their foreign reserves propping up their currency!!!  

And here is the downside for the U.S. stock market.  China competes against the U.S. to sell products in most of the countries of the world.  If China were to suddenly say, "Forget this!" and allowed their currency to freely float, American manufacturers would suddenly find themselves priced out of many markets.  International sales would plummet.  The profits of S&P 500 companies would plummet, and so would the U.S. stock market.

I've still got it!

I'm out of U.S. stocks for the moment, thank you very much.

Today we're going to talk about using an IRA to either buy real estate or to invest in 7% to 12% commercial loans.  There are some pitfalls that can get a commercial loan broker sued or get an IRA investor totally screwed.

First of all, is it legal for an investor to buy real estate with his IRA? Absolutely!  Tens of thousands investors nationwide legally do so.

But the investor must be absolutely sure not to personally guaranty any mortgage on the property!

If the investor personally guarantees a mortgage secured by a property owned by his IRA, the IRS will declare the personal guaranty to be an illegal contribution to the IRA.  It is the position of the IRS that personally guaranteeing the loan produces a lower interest rate from the bank.  The entire IRA will be declared invalid, and the investor will pay billions and billions of dollars in income taxes, penalties and interest to the IRS.  (Who remembers old Carl Sagan, the astronomer?  He popularized the term when he told us about the billions and billions of stars in the galaxy.)

Commercial loan brokers, you need to know this stuff.  If you arranged a commercial loan for an IRA to buy a property, and that commercial loan required a personal guaranty, you can bet that the borrower is going to come after you for the billions and billions of dollars in penalties that he will have to pay.

But the IRA investor can simply get a non-recourse commercial loan, right?  'Rots of ruck with that challenge.  After the Great Recession, very few banks will make non-recourse commercial loans.

My own hard money shop, Blackburne & Sons, however, will gladly make non-recourse commercial loans for your IRA.

You may have noticed that Blackburne & Sons has recently been pitching the idea of 9% first trust deeds to the wealthy investors who use C-Loans.com.  We have been doing this for over 30 years - turning former commercial property borrowers into trust deed investors.  It's an easy sell.  These wealthy guys are already comfortable with commercial real estate.

One of our private clients called the office this week asked if he could use his IRA to invest in first trust deeds.  The answer, of course, was yes; but he has to set up a self-directed IRA first.  He can't just hold title to a first trust deed as "Bob Smith's IRA".

An IRA is, by definition, an account at a bank.  The operative words here are,"at a bank."  Your investment has to be in a type of bank account.  Self-directed IRA accounts, where some bank serves as the custodian, have been existence for over 30 years.  "Bank of Colorado, as custodian for the IRA of Bob Smith" would be the proper vesting.

You guys know that I am an attorney, and I have to take Continuing Legal Education classes to maintain my license.  I took a CLE class this week about retirement accounts, and our instructor told us this story.

Are you going to eat that last piece of cake?

An investor bought a commercial property using his IRA, but he ordered his IRA custodian to just send a check to the title company for the purchase price.  Title to the property was vested as "Bob Smith's IRA".  At the end of year, the IRA custodian reported to the IRS a withdrawal of $900,000.  Oopsie.  The buyer didn't use a self-directed IRA to serve as the custodian for his IRA's purchase of the property.

The IRS then socked this poor guy with income taxes, penalties, and interest amount to - all together, class:

Billions and billions of dollars.