Commercial Loans and Fun Blog

Everybody gets some wonderful free commercial loan goodies today.  Nobody spends a penny.  The first freebie is our wonderful commercial loan calculator developed by my son, George IV.  Guys, a commercial loan calculator is NOT about computing the monthly payments on a commercial loan.  That's kid's play.  There must be 10,000 commercial loan payment calculators available on the internet.

But sizing a commercial loan is different.  The term of art, sizing a commercial loan, is the process of computing several different financial ratios and then determining the maximum loan size that a lender will permit.  The lender will almost always choose the lowest loan size produced by the debt service coverage ratio, the debt yield ratio, and, in the event of a construction loan, the loan-to-cost ratio.

Our commercial loan calculator instantly computes these ratios for you and tips you off where you are likely to have a fight with your commercial lender.  Forewarned is forearmed.

Sliding around in your pencil drawer is the business card of a banker who makes commercial real estate loans.  We'll trade you the contents of that one business card for a free regional copy of The Blackburne List, a list of 750 commercial real estate lenders.  Seven-hundred-and fifty for one - not a bad trade.  If you give us three bankers, you can get all three regions, 2,500 for 3.

Our main commercial mortgage portal, C-Loans.com, is a fabulous free tool.  It takes just four minutes for an investor or a broker to enter his commercial loan request.  Then the site filters out hundreds of unsuitable commercial lenders - based on the loan amount, the loan type, the property location, the property type, etc. - and produces a list of 30 or so commercial lenders who are perfect for your particular commercial loan.

But we here at C-Loans, Inc. have a problem.  We can't get investors and brokers to register on the site.  If we could get them pre-registered on C-Loans.com, investors and brokers could come back later and enter a new commercial loan request in moments.  Geez, guys, we're just talking about filling out your name, address, phone, and email so our lenders can contact you.  We're not asking you to clean out the Augean Stables.  Okay, then we'll BRIBE you to pre-register on C-Loans.com.

When you come back to CommercialMortgage.com ("CMDC"), you are going to note some huge changes.  When your custom-created Commercial Lender List is now created, you will find it divided into three sections.  The top section contains our Recommended Lenders.  These are the commercial banks so hungry to close your commercial deal that they are willing to pay for advertising.

Next you will find the Hungry Lenders section, which are those commercial lenders who have recently taken advantage of our free listing on CMDC for direct lenders servicing (collecting montly payments, folks) on at least $20 million in commercial loans.  Lastly you will find our Other Lenders section; but the point is moot. Our Recommended Lenders and our Hungry Lenders will devour your deal long before you get to the bottom of the list.

"George, I'm confused.  What's the difference between CommercialMortgage.com and C-Loans.com?"

C-Loans.com is a portal, where you invest four minutes in creating an online commercial loan application, something that looks good and includes some nice pics, and then shop that single mini-app to scores of different commercial lenders.  CommercialMortgage.com is NOT a portal.  It's just a commercial lender search engine.  It just gives you the contact information of suitable commercial lenders.  You can't submit your deal online through CMDC.  

Want to learn commercial real estate finance (CREF) for free?  I write at least two CREF training articles every week.

You will recall that an exit fee is just like a prepayment penalty, except that the borrower owes the exit fee whether he pays the loan off early, exactly on time, or late.  

I was reading one of George Smith Partners' tombstones last night, when I ran into this description of a $7.4 million bridge loan that they had just closed:

"The loan is structured with an increasing exit fee in lieu of an upfront lender origination fee to minimize upfront costs and incentivize the Borrower to execute the business plan in a timely manner... After an initial 12 month spread maintenance period, the exit fee is 1.33% for months 13 through 24, increasing to 1.66% for months 25 through 30 and 2.00% for months 31 through 36."

Huh.  I had never heard of an increasing exit fee before.  It makes sense.  It lights a fire under the borrower's tush to hurry up and pay off the loan.

By the way, a tombstone is an annoucement of the successful closing of some financial deal, like the taking a company public or the closing some large loan or bond issue.

Do you need a commercial loan?  Banks offer the best rates on commercial real estate loans.

Do you work as a commercial real estate loan officer for a bank or credit union?  You can now list your bank on CommercialMortgage.com ("CMDC") and enjoy three to five commercial loan leads every week at no cost.  CMDC is truly free to banks, with no strings attached.  We make our dough by working the commercial loan leads generated by this new commercial lender search engine.

Get a free list of 750 commercial lenders.

Are you a mortgage broker?  Been cheated out of a big loan fee recently?  I'm not just talking about a borrower closing a deal and not paying you.  I am talking about a borrower totally lying to you about his qualifications.  For example, "Sure, the second mortgage lender will subordinate."  After you have worked 20 hours on the loan, the truth comes out.

Do you own a real estate website?  C-Loans, Inc. once paid a $21,250 referral fee to Alan Dunn of Spydercube.com for placing a link, "Commercial Loans", on his web site that pointed to C-Loans.com.  That's it.  Create a link on your website that says, "Commercial Mortgages" and point it to C-Loans.com.  Our software captures the fact that the lead came from you.

As you get into the very large commercial loans, especially in California, the issue of earthquake risk looms large.  When lending on large commercial properties constructed prior to 1980, commercial lenders will sometimes require a PML Report.

A PML Report is an earthquake damage report completed by a civil engineer. The report asks the question, “How badly damaged would this building be if there was a really big earthquake?” Is the building going to completely collapse, like those unreinforced masonry buildings in San Francisco did in 1989 during the Loma Prieta earthquake?

My old friend, Mike Thurman, was actually at Candlestick Park for game three of the World Series when the Loma Prieta earthquake hit. Fortunately the stadium was well-designed to absorb earthquake shock, and everyone was able to calmly leave the stadium to drive home.

Unfortunately those driving home to the East Bay discovered that the central strand of the Oakland Bay Bridge had collapsed, hurtling several passengers and their cars to their death hundreds of feet below. Interesting note: When a section of the upper-deck freeway in Oakland collapsed onto a lower deck, sadly crushing and killing 60 drivers below, among the victims was a car thief attempting to make his getaway.

More specifically a PML Report seeks to quantify the Probable Maximum Loss. The Probable Maximum Loss (PML) is a tool used to evaluate the seismic risk of a building and identify assets with high seismic risk. The Probable Maximum Loss report identifies the PML value, expressed as a percentage of the building's replacement cost and estimates the potential damage during a 475-year earthquake - the lower the percentage, the lower the expected damage. The PML value can be expressed either as the Scenario Expected Loss (SEL) or the Scenario Upper Loss (SUL). They mean the same thing.

If the Maximum Probable Loss is too high – let’s say greater than 45% - a lender making a large commercial loan might require earthquake insurance. Earthquake insurance is phenomenally expensive, on the order of 2% to 3% of the value of the building annually!

To make matter worse, the earthquake insurance deductibles are huge – on the order of 15% to 20% of the value of the property.

Example:

Let’s suppose you own a $15 million commercial building in Los Angeles. The land is worth is worth $5 million, so you only insure the $10 million building. Suddenly an 8.2 earthquake hits L.A., the building collapses, and the loss is total. Even if you had the entire building insured, your insurance company might only pay you $8.5 million, rather than your entire $10 million loss.

And to make matters worse, the insurance company probably wouldn’t survive to pay the claim anyway.

Need a commercial real estate loan?  Try our commercial mortgage lender search engine:

Are you a loan officer working for a commercial bank or a credit union?  Do you want to meet more high-net-worth investors and close more commercial loans?  You can add your bank to CommercialMortgage.com at absolutely no cost to you or the bank.  It really is completely free.  My hard money shop pays for the site by working the commercial loan leads it generates.

Are you ready to finally learn commercial real estate finance? It’s funny. People pay $100,000 for a liberal arts college education and then seldom get a starting job in their field. Using this nine hour video program, an intelligent, articulate, and sales-oriented high school graduate can learn a better-paying profession in one long weekend for just $549.

For just $79.95 you can buy a copy of The Blackburne List, a list of over 2,500 commercial lenders nationwide.  Is money tight?  For just $39.95 you can buy the Regional Blackburne List for the area in which the subject property is located.

For forty years accredited investors residing in California have been able to earn 8% to 12% interest by investing in first trust deeds.  Unfortunately out-of-state investors could not legally participate.  A recent law change - the JOBS Act - now allows a resident of Illinois, for example, to invest in fractionalized first mortgage; i.e., he can take a $20,000 piece of a $400,000 loan on an apartment building in Chicago.  Blackburne & Sons has been doing this now for 37 years.  Sorry, but you must be very accredited to be suitable.

Do you need a commercial lender who will actually lend up to 75% loan-to-value on the purchase of a commercial building?

Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national?

Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a loan against a portfolio of single family homes?

Get two new training lessons in commercial real estate finance every week for free!

Got a friend or co-worker who would benefit from learning commercial real estate finance (CREF)?

Today we are going to teach you how to underwrite a $50 million commercial construction loan.

C-Loans.com recently closed an $18.5 million commercial construction loan on a mixed-use project in Wisconsin.  The lucky broker who brought that deal to C-Loans earned a whopping $92,500 loan fee.  Wow.  I'll betcha that fee paid some bills.  Note to self:  Submit my commercial construction loans through C-Loans.com.

I recently wrote in one of my newsletters that for the past six years commercial banks have had a zero appetite for conventional commercial construction loans.  By conventional I mean a non-SBA, non-USDA, non-EB-5 loan.  In fact I described conventional commercial construction loan requests as being about as welcome as a male stripper at a (hetereosexual) bachelor party.  Ha-ha!

As a result, there has been very little commercial construction in the U.S. for the past six years.  In the meantime, many vacant and neglected commercial buildings have had their water pipes burst during a cold winter, making them essentially now almost worthless.  Other vacant commercial buildings have been vandalized and stripped of their copper wiring.  The roofs of other vacant commercial buildings have leaked, leading to dangerous black mold.  A great many productive commercial buildings are now unusable.

At the same time, the population of the U.S. has grown.  Workers are finally getting back to work.  The auto industry in America is booming again, leading to the return of many manufacturing jobs in the Midwest.  Shale oil discoveries have caused a significant migration of workers to North Dakota, Wyoming, Texas, and other oil-patch states.  All of these areas need new commercial buildings.

Therefore the hot new commercial loan product for the end of 2014 and for 2015 will be conventional commercial construction loans.  And where do you find hundreds of commercial banks hungry to make conventional commercial construction loans?  C-Loans.com.

But how do you know if the commercial construction loan lead in your hand is a hottie or a complete waste of your time?  You need to know how to underwrite commercial construction loans.  This article will serve as a primer.

Conventional commercial construction loans are underwritten using six financial ratios.  The most important of these ratios is the loan-to-cost ratio.  The loan-to-cost ratio must not be confused with the loan-to-value ratio.

The loan-to-cost ratio is the construction loan amount divided by the total cost of the project.  Traditionally this ratio should not exceed 80%.  In other words, the developer is responsible for contributing at least 20% of the total cost of the project - usually in the form of free-and-clear and entitled land, with most of the architectural and engineering costs prepaid for by the developer.  Since many commercial banks are still licking their wounds from the Great Recession, many banks are limiting their loan-to-cost ratios to just 70% to 75%.  This means that the developer must modernly cover 25% to 30% of the total cost of the project.

The next ratio is the loan-to-value ratio.  The loan-to-value ratio on a commercial construction loan request is computed by taking the construction loan amount and dividing it by value of the commercial property, when it is completed and fully-leased.  The bank's appraiser will compute this value for you.  The loan-to-value ratio on a commercial construction loan request should not exceed today around 70%.

The third ratio is look at when underwriting a commercial construction loan is the debt service coverage ratio.  The debt service coverage ratio is the property's Net Operating Income (NOI), upon completion and leasing, divided by the annual debt service (P&I payments) on the proposed takeout loan.  A takeout loan is just a permanent loan used to pay off a construction loan.  This ratio should exceed 1.25.  The good news is that with interest rates so low today, most commercial properties easily pass this test.

The next ratio to look at when underwriting a commercial construction loan is the profit ratio.  The profit ratio is the difference between the fair market value of the property, upon completion and leasing, and the total cost of the project, all divided by the total cost of the project.  What we are trying to determine here is whether the developer stands to earn any profit by building this commercial building.  If not, he might be tempted to just walk away at the first appearance of a cost overrun.  The profit ratio should exceed 20% to 22%.  In other words, the commercial property should be worth at least 20% to 22% more than it costs to build.

The next ratio to look at when underwriting a commercial construction loan is the net-worth-to-loan-size ratio.  The developer's net worth should be at least as large as the construction loan he is requesting.  A guy with a $1.5 million net worth should not be requesting a $6 million commercial construction loan.  This ratio needs to be at least 1.0.

The last ratio to look at when underwriting a commercial construction loan is the debt yield ratio.  The debt yield ratio is a brand new ratio developed after the huge losses in commercial mortgage-backed securities suffered by CMBS bond investors during the Great Recession.  The debt yield ratio is computed by taking the property's net operating income (NOI) and dividing it by the construction loan amount.  This ratio should not be less than 8.5% to 9% today.

Please note that the debt yield ratio is different from the debt service coverage ratio.  It does not look at today's low commercial mortgage interest rates at all.  In fact, this ratio was invented to rein in the excessive leverage that can occur in commercial mortgage finance when interest rates and cap rates are low.

Do you need a commercial construction loan or any other type of commercial real estate loan?  If so, please click the maroon button below.

In addition to the 750 hungry commercial lenders you'll find on C-Loans, we also give away a free list of 2,000 commercial lenders.  The lenders on The Blackburne List are different from the 750 commercial lenders you'll find on C-Loans.

On Friday, March 17, 2087, the Federal government in Washington, D.C. will order the State of California to levy a duty on the import of sophisticated android robots from Mexico.  California will simply ignore this order, and by this act the de facto succession of the former Southwestern States from the U.S. will have been finalized.

The states of California, Arizona, and New Mexico had long since developed closer ties to Mexico City than to Washington, D.C.  By the year 2040, Spanish had become the official language of the Southwestern States.  Just a decade later, trade with Mexico exceeded the trade between the Southwest and the rest of the union.

Restrained by a birthrate far less than replacement, innovation and the economic vibrancy of the United States had at first waned and then plummeted.

Mexico, a Catholic country, had long enjoyed a birthrate that was more than twice that of the United States. By the 2050's Mexico was turning out far more young, hungry engineers, mathematicians, computer programmers, and scientists than the U.S.  By 2075 Mexico even surpassed China - itself a country suffering from a declining birthrate - as the world's economic engine and the largest producer of the world's most sophisticated computers and androids.

Fanciful you say?  These are not my original ideas.  I recommend to you the landmark 2010 book, The Next 100 Years: A Forecast For the 21st Century, by George Friedman.  Many of his earlier predictions have already come true.

What the heck does Mexico have to do with commercial loans on cannabis facilities?  If the Southwest ever does secede from the U.S. and join Mexico, according to George Friedman, there will probably be no civil war.  The three states may simply stop listening to Washington.

Hmmm, hasn't this already been happening recently?  Sanctuary cities?  Governor Brown of California refusing to cooperate with INS?  States permitting medicinal marijuana?  Now more and more states are legalizing pot.

Hellooo?  Marijuana is illegal under Federal law, and the Federal govermnent cannot allow the states to continue to flaunt Federal law (see paragraph one above).  President Trump made a brief comment at the end of a press conference in February, "Marijuana is still illegal under Federal law."  What worries me was his tone, which seemed to imply that he was just waiting for a good time to lower the boom.

To those of us in the hard money business making loans on cannabis facilities:  Its still illegal.  If Trump decides to fight this war, some decent people may be imprisoned to serve as an example.

Most commercial real estate loans - other than apartment loans - have a balloon payment due in just 5 or 10 years.  If you're a commercial mortgage broker or a lender, this is a very wonderful happenstance.

If you're a commercial real estate investor, however, this balloon payment can be an object of absolute terror.  What if your commercial loan balloons during a horrible recession?  It's like the only watering hole in 50 miles being infested with hungry crocodiles.  Sooner or later you have to drink.

C-Loans.com recently closed a $6.5 million refinance on a health club.  The loan was funded by one of the many, voracious (notice the poor gazelle in the above picture) credit unions participating in our free commercial mortgage portal. The good news was that commercial real estate right now is enjoying a bull market.  Phew.  The bad news was that the holder of just a 5% membership in the LLC that owned the property had filed a lis pendens against the property.

A lis pendens (pronounced: lis pendenz) is a formal notice, filed in the county where the property is located, that a legal action action is pending against the property.  Because a lis pendens appears as a lien against the title of the property, the existence of a lis pendens effectively makes it impossible to sell the property or refinance it.

Example:  

Grandpa and Grandma Blackburne identify a lovely 3,500 ranch style house within walking distance of their son and granddaughter.  They love-love-love this house, so they put in an offer.  The seller accepts the offer in writing.  The market is hot, and a week later the seller receives another offer to buy the same house for $35,000 more.  The seller notifies the Blackburne's that he is repudiating their earlier contract.  He offers to give the Blackburne's $7,000 for their trouble.

But the Blackburne don't want more money.  They want this particular house because it is only one block from their son and granddaughter.  Spoiling their granddaugher is far more important than money.

Therefore the Blackburne's file a lawsuit for specific performance against the seller, and they file a lis pendens against the property.  Specific performance is an order by the court to perform some contractual duty, in cases where money damages would not be adequate remedy.  In this case, the Blackburne's were seeking a judge to order the seller to sell the property to the Blackburne's and not to the other buyer.

Displayed only for its humor value.  :-)  My next funny pic will roast Donald Trump.  Now back to the Blackburne's attempt to become Raymond's parents, as in Everybody Loves Raymond.

The second buyer is a wealthy Chinese national wishing to buy a home for his son and daughter-in-law.  He is an all-cash buyer, and he figures that the Blackburne's will eventually tire and settle their suit for some cash.  Therefore the seller completes the sale of the house in question to the Chinese dad, subject to the the lis pendens lien.

Unfortunately for the Chinese father, the Blackburne's are insistent of being able to walk over, appear at Tom's house uninvited, and then criticize Tom's cooking.  The Blackburne's refuse to settle, the case goes to trial, and the Chinese family is ordered to hand over both title and possession of the house to the Blackburne's.  Before you feel sorry for the Chinese dad and the young Chinese couple, the lis pendens put them on notice of the Blackburne's lawsuit.  They chose to ignore it.

There!  Now people on both sides of the aisle hate me.  Ha-ha!

Back to the health club story:

The holder of that 5% ownership of the health club was unhappy with his return on his investment.  He figured that by filing the lis pendens, just when the LLC desperately needed to refinance its past-due balloon payment, he could squeeze a preferential return or a buyout from his "partners".   

Now here is what shocked me.  The other members of the LLC filed a countersuit and a motion to expunge the lis pendens; i.e., make the lis pendens disappear from the title!  I've been a real estate attorney for twenty-five years, and I had no idea that a lis pendens could be expunged; ie., peeled away, in this manner.  Hooray for the good judge!

You can search our database of 3,159 commercial lenders for free.

Do you have a complicated title issue?  Do you need a commercial lender that will work with you?

Do you need a purchase money lender who will actually go to 75% loan-to-value? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? 

Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other invest-ments, etc.? Do you need a loan against a portfolio of single family homes?

Buy a list of 2,500 commercial lenders:

Is money tight?  We'll trade you a list of 750 commercial lenders for just one banker who is making commercial loans.

Banks and credit unions are getting hot to make commercial real estate loans again.  This is a superb time to learn commercial real estate finance and make your living as a commercial mortgage banker.  You can pay $120,000 for a liberal arts degree or just $549 to learn how to become a commercial mortgage banking professional.  No college degree is required.

No one ever listens to me, but I have been telling my readers that the real commercial in commercial real estate finance is in loan servicing fees.  My company currently enjoys $1,040,000 in loan servicing fees annually.  The fastest and easiest way to build a loan servicing portfolio is to become a hard money lender.

You can get both programs for just $849.  

Get two free training lessons in commercial real estate finance every week.