Commercial Loans and Fun Blog

Have you ever gone snow skiing and rented for your family a gorgeous ski chalet near the slopes for a week?  What about the beach or the shore of some big, beautiful lake?  Did you ever rent a big, gorgeous home on the water for a week?

Often these ski chalets and waterfront homes are of fairly new construction, and they were built with five, six, and sometimes even seven bedrooms.  These giant homes are perfect for extended families, say, three brothers, their wives, and their children.  This is not just a happy coincidence.  These homes were built exactly for this use - to be rented out on a weekly basis to extended families.

Sometimes these gorgeous vacation mansions are owned by a single, filthy-rich guy.  I don't even know the guy, but I hate him.  I'm so jealous.  Ha-ha!

Many times, however, these vacation mansions are owned by four to ten families in a concept known as fractional ownership.  Each family will own, say, a one-eighth of the mansion, giving them the right to six or seven weeks of the year in which to live in the property.

In real life, the family owning one-eighth of the property will usually only stay in the property for one or two weeks per year.  The rest of the unused weeks owned by the eight families will all be rented out to vacationing families, typically a week at a time.

Essentially these vacation mansions will be run as hotel units - rented out and cleaned weekly by a management company originally selected by the developer-sponsor of the of the fractional vacation mansions.  The developer-sponsor will often develop a half-dozen to a dozen similar properties nearby, giving him enough fractional ownership units to sell to justify a decent-sized marketing budget, much like a large timeshare project.  In plain English, there may be ten of these beautiful vacation mansions right next to each other, all managed by the same management company.

Now do you remember that filthy-rich guy that I hated?  He owned this entire vacation mansion by himself, so he would have no problem getting the property financed as a second home or as a rental home.  Remember, home loan rates are always much lower than commercial loan rates, so he wants this property characterized by his lender as a home, not as a commercial property.  He wants a garden-variety conventional home loan, NOT a commercial loan.

But to those eight families who own their vacation mansion as fractional ownership units, financing may prove to be problematic.  First of all, each of them does not own the entire property by himself.  Unless all eight families miraculously agreed that they wanted to finance the property, they would never be able to get a conventional loan.  And who wants to guaranty a $1.8 million loan when he only owns 1/8th of the property???  The other owners could easily walk away in a financial pinch.

Secondly, the property is essentially a tiny hotel, with tenants coming and going every week.  Such a property would be viewed as a nightmare by most banks considering the property as a commercial loan.  Yikes!

Is it therefore possible to even get a loan on a fractional ownership unit?  Blackburne & Sons, my own private money lending company, will make a 15-year fully-amortized commercial loan on fractional ownership interests.  Our loans have no prepayment penalty.  We have done several such loans, and they have performed well.

Are you ready for a commercial loan right now?  You can't close your deal until you actually apply for it.

I started out writing these commercial real estate finance training (CREF) articles to train my sons and my staff in the business.  Now over 5,200 commercial real estate professionals follow this blog.  And why not?  It's free training in commercial real estate finance, and I try to write two articles per week.

Before I get into how to meet bankers, let me first explain why you want to meet bankers.

The first thing that most borrowers do to get a commercial loan is to call the commercial real estate loan officer working at their own bank.  Underwriting a commercial real estate loan is fairly sophisticated, so the profile of a typical bank commercial loan officer is a sleepy, white male between 48 and 60-years-old.  Unfortunately this guy (or lady) is not usually on commission.  As a result, a great many of these mature, salaried, commercial loan officers really don't care if they make another commercial real estate loan or not.

I think that its a mistake that banks don't give their commercial loan officers more of a financial incentive to close commercial loans. Just about every bank in America would benefit from a few more good, commercial real estate loans in its portfolio. After all, commercial real estate loans are among the most profitable loans that a bank can make. But I've said it before, "Banks are lousy capitalists."

So why do you want to meet bankers? If you are commercial real estate investor, and you are thrifty by nature, you may not want to pay some commercial mortgage broker a one-point fee to find you a bank willing to make you a commercial loan. You will want your own Rolodex of six to ten bankers located close to your income property. Remember, you can't just rely on your own bank.

Bankers are notoriously moody and unpredictable when it comes to commercial real estate lending. One moment they love self storage loans, and the next moment, usually after a big loss, they wouldn't touch a self storage loan with a ten-foot pole. One moment the bank is as tight as a drum, and the next moment the bank will make a commercial loan on a so-so property to a recent bankrupt, all because the bank got a big commercial loan payoff, and they are flush with cash. As an income property investor, you need multiple (6-10) bankers to whom to offer your deal.

If you are a commercial mortgage broker, you want bank turn-downs. Bankers get first crack at most commercial real estate loans, and they turn down the vast majority of their commercial loan applicants. Remember, the typical bank loan officer is not on commission, so he has little incentive to say yes. Bankers are therefore the absolute, very best source of referrals. If your mailing list (email or snail mail) does not consist of 60% bankers, you have some work to do.

Now before I explain how to find bankers, let me give you a quick refresher on where to find bankers.  A bank is three-times more likely to approve a commercial loan if the property is located close to one of its branches.  This lesson alone is worth the price of today's admission.  A bank is three-time more likely to approve a commercial loan if the property is located close to one of its branches.

Therefore you want to meet all of the bankers located close to your commercial mortgage brokerage office or close to your income property.  Its easy to find nearby bankers.  Simply go to maps.google.com.  In the upper-left-hand corner, you will type in the address of your office or your commercial property.  Lastly, click on the "Nearby" icon and then type, "banks."  Voila!  You have just identitified every bank located close to your office or the commercial property that you are trying to finance.  Good stuff, huh?

Now, finally, we will explain how to find bankers.  Simply call up the nearby bank branch that you identified using Google.  Be sure to ask the receptionist for a loan officer who handles commercial real estate loans.  If you just ask for a commercial loan officer, you might get the wrong guy.  Normally there will be one commercial real estate loan officer, usually working out of a different branch, who handles all of the commercial real estate loan requests for five or six branches.

Once you reach the guy, make sure that the first words out of your mouth are the following, "Hi, Bob.  My name is John Smith, a commercial mortgage broker (or a commercial real estate investor).  Did I catch you at a good time?"  Those eight words are the keys to the kingdom.

Unless you have a specific deal to present, you really only need to know a few things:

1.  Minumum loan?

2. Maximum loan?

3. Lending area?

4.  Do you make SBA loans or USDA loans?

Why don't you need to know any more?  Because banks all quote pretty much the same commercial loan.

Perhaps the most important thing to retrieve from a new banker is his email address.  Bankers can sometimes be freaky-deaky about giving out their email address because they get a ton of unsolicited email.  The way I like to handle it - at the very end - is to ask, "If I have a commercial loan that I want to show to you, to what email address should I send it?"  That seems to work for me.  Asking the question at the end seems to imply that the entire seven-minute phone call will have been wasted if the banker doesn't give up his email address.

Did you learn something today?  This is how I teach.  I use a ton of humor, and I try to weave in lots of verbal proof stories - real life stories that prove a point.  I strongly encourage you to order this course about how to become a commercial mortgage broker.  Trever Cole Commercial - who just closed their 50th loan for C-Loans, Inc. this month - uses this video course to train all of their new commercial loan officers.

Nobody ever listens to me, but the real money in commercial real estate finance is in loan servicing fees. My little eleven-person commercial hard money firm now brings in over $83,000 per month, whether we close any new loans that month or not. When Cisca and I were first married, we dreamt of the day when our loan servicing income would exceed $2,000 per month. Then our mortgage and utilities would always be paid. Today this number is $83,333 per month. The real money in commercial real estate finance is in loan servicing fees.

This is your best deal.

When we physically shop these days, there are apparently two different ways to shop for physical goods that you can take home immediately, as opposed to waiting for Amazon Prime to deliver them.  The first way to physically shop is that you can go to some big box store, walk the acres of concrete flooring, and buy your stuff quite cheaply.  

But there is now an alternate way to shop, where perhaps you pay a little more, but the whole outing becomes an enjoyable and stimulating experience.  This is called experience-based retail.  I stole the following paragraph from an interesting article on the subject:

"A customer’s shopping experience is affected by a myriad of factors, but we would place the greatest emphasis on a retailer’s ability to offer unique products and deliver a high level of customer service. Apple’s stylish devices are sold by knowledgeable staff able to help customers navigate sometimes complicated electronics, and their numbers ensure that service is rapid. Sales staff at lululemon athletica offer personalized and attentive service to consumers of the store’s versatile athletic apparel, while the friendly and eccentric staff of Trader Joe’s keep check-out lines flowing and add as much character to the aisles as the grocer’s self branded offerings. Upscale department stores like Nordstrom’s and Bloomingdales offer free personal shopping services to all consumers, and fellow mall tenant Lush, a seller of organically produced cosmetics, offers private events and makeup consultations."

Millennials actually spend materially more money on "shopping experiences" than they do on plain 'ole shopping.  For Millennials, the experience-to-stuff ratio (yes, there actually is such a ratio!) is 1.14.  For Baby Boomers and Generation Y, that ratio is closer to just 1.0.

Experience-based retailers can be found in malls and lifestyle centers, and in terms of retail success, such retail centers are far more successful these days than retailers in strip centers or power centers.  Do you remember what a lifestyle center is?  Think of a lifestyle center as a mall for fat people who are too lazy to walk an enclosed mall.  Ha-ha!  You can drive right up to each store.  Most lifestyle centers also enjoy several popular restaurants that add importantly to the experience.

I used the term "power center" above.  A power center is a huge shopping center consisting of six to twelve big box retail stores.  Examples of big box retailers include Abercrombie & Fitch, Barnes & Noble, Bed Bath & Beyond, Best Buy, Costco, Dicks Sporting Goods, Dollar Tree, GAP, Home Depot, JC Penney, Kohls, Lowes, Macys, Michaels, Nordstrom, Office Depot, Office Max, Old Navy, 
Rite Aid, Saks Fifth Avenue, Sears, Staples, Target, Trader Joes, Walgreens, and Wal-Mart.

Don't forget, however, that power centers are not doing nearly as well as the experience-based retailers found in malls and lifestyle centers.  As I was compiling the above list of big box retailers, I had to delete one-third of the names because the companies had already gone bankrupt.   

Now if you own a shopping center, you definitely want more experience-based retailers in your center.  Experience-based retailers bring in far more money per square foot than normal retailers, so such stores can afford a higher rent.  In addition, they are less likely to go bankrupt, like so many of the big box retailers (think: Toys R Us.).  

"The attractiveness of malls and lifestyle centers is further compounded by their defensive positioning against e-commerce. The experienced based nature of the goods and services their tenants offer are extremely difficult to replicate online, and thus their competitive advantages over other brick-and-mortar retailers transfer to online retailers as well. Dining establishments lack online competition and live entertainment by its very nature cannot be replicated digitally, nor can the ability to meld shopping, dining, and entertainment into a series of cohesive and related experiences."

Today we learned about experience-based retail, lifestyle centers, and power centers.  I write these training articles to train my sons and my staff in commercial real estate finance.  By subscribing to this blog, you can effectively audit these training classes for free.

One day Sammy Shopper, a thrifty and tight-fisted Scottish American, called every bank within 50 miles to find the best commercial loan for his office building.  Guess what he found?  Just about every bank quoted him the same rates and terms:

• 3.97% to 4.81 fixed for the first five years
• 25 years amortized
• 10 years due
• Rate readjusted at the beginning of year 6
• Modest prepayment penalty of either 3-2-1 or 1 point.

Commercial bankers are herd animals.  They enter and leave markets with the herd (invariably much too late), and they all quote just about the same commercial loan.  If you know what a community bank in White Plains, New York is quoting on a commercial loan, you pretty much know what a community bank in Fresno, California is quoting on a similar commercial loan.

If you ever need to know what banks are quoting on commercial loans, simply go to our web site devoted solely to what banks are quoting on commercial loans, CommercialMortgageRates.co.  We update these commercial mortgage rates every week, so be sure to bookmark this page.  Please note that the extension is ".co" rather than ".com".  I had the chance to buy the ".com" version of this domain name, but the seller wanted $20,000; and one of my many web pages was already #1 on page 1 of Google for "commercial mortgage rates."

We often get calls from commercial borrowers trying to beat the rate quoted to them by their own bank.  I have a saying, "The only commercial lender who can beat a borrower's own bank is his mother."  It therefore seldom pays to spend hours and hours calling different banks in search of a lower rate.  Banks are all going to be about the same.

Where banks will differ, however, is in the amortization and the loan amount.  The typical amortization for a commercial loan is 25 years; but due in 10 years.  Twenty-five years is to commercial loans what 30 years is to residential loans.  Its the typical amortization.  Let's suppose, however, that your commercial building is 45 years-old, and it is showing signs of deferred maintenance.  Many banks will shorten their amortization schedule to just 20 years, thereby increasing your monthly payments and reducing the size of the loan for which you can qualify.  In a case like this, it pays to shop for a different bank who will use a 25-year amortization.

Another reason to shop banks for the best commercial loan is the loan amount.  Banks can vary significantly as to how much they will loan you.  Some banks today are still stuck in a Great Recession mentality, and they will only loan up to 60% to 65% loan-to-value.  Other, hungrier banks, will loan up to 70% to 72% LTV; but unfortunately few of them ever reach 75% LTV.

If you ever absolutely need a commercial loan of a full 75% loan-to-value, consider submitting your deal to Blackburne & Sons.  Because we use private investors to make our loans, we cannot possibly compete with the banks on rates.  Therefore Blackburne & Sons has to compete on the basis of giving the borrower more loan proceeds.  In other words, Blackburne & Sons regularly wins deals because we actually make loans up to 75% LTV.  We might even consider a non-SBA commercial loan of 80% LTV on the right purchase-money deal.  A purchase money loan is a mortgage loan used to purchase the property

Every one you - including commercial property investors and commercial brokers - needs at least a small Rolodex of six to eight bank commercial real estate loan officers.  You commercial mortgage brokers need a Rolodex of at least 30 to 50 bankers.  Now CommercialMortgage.com - our commercial lender search engine - can serve as your actual Rolodex; but you still need to develop a personal relationship with each of your bankers.  

The reason why you need a personal relationship with lots of different bankers is because bankers are fickle, moody, and totally unpredictable.  One moment a bank will love loans on self storage projects, and the next moment - usually after a loss - the bank wouldn't touch a self storage loan with a fifty-foot pole.

Therefore you need to have a bunch of different bankers to whom you can show your commercial loan, in hopes of finding that one bank who is in the mood to lend today.  A bank will often feel pressure to lend after some big commercial loan in their portfolio pays off.

It's easy to start adding bankers to your Rolodex.  There are 6,799 commercial banks in the U.S. today, and just about every bank in the country is in the market right now to make commercial real estate loans.  Remember, bankers move in herds.  Just call up the bank down the street and ask for a commercial real estate loan officer.  Ask for his direct phone number, his address, and his email address.  Lastly, you'll need to know his minimum and maximum commercial loan size and his lending area.  Voila! That's all you need to ask.  You don't need his rates (see above), nor do you need to know what types of properties the bank will finance (see below).

If the borrower is strong, and there is a potential for a continuing business relationship, most banks will finance most of the property types listed below.  The only qualification is that banks will only finance business properties if the business is making money.

Multifamily
Office Buildings
Retail buildings, Strip Centers, and Shopping Centers (and such condos)
Industrial Buildings and Warehouses (and such condos)
Hotels and Motels*
Self Storage (aka Miniwarehouses)
Auto Repair
Restaurants and Bars*
Gas Stations*
Residential Subdivisions and Land**

* If they are making good money.
** If the developer has a high net worth, lots of experience, and a ton of cash in the deal.

As to loan type, most banks usually have a good appetite for both permanent loans and commercial construction loans.  A permanent loan is a garden-variety first mortgage on a commercial property with a loan term of at least five years and at least some principal paydown (usually 25-years amortized).

So in conclusion, we know right off the bat that -

1. Almost every one of the 6,799 banks in the country is now making commercial loans.
2. Most of these banks will consider both permanent loans and construction loans.
3. The typical bank will consider almost all commercial property types, as long as the business owner is making good money.
4. The rate is going to be between 3.87% and 4.91%.
5. The loan will have a 25-year amortization
6. The loan will have a term of 10 years, with a rate readjustment after 5 years.
7. A modest prepayment penalty of 3-2-1 or 1 point is common.
8. Therefore all you really need to know from your bank loan officer is his mimimum loan, his maximum loan, and his lending area.
9. You need a rolodex of bank loan officers, but these guys (or gals) are easy to meet.  Just call the bank and ask for a commercial real estate loan officer.

Today I am going to teach you how to convince a bank to close a commercial loan on a building where part of the space is vacant.  Before we get into this discussion, however, please allow me to pitch a private money loan from Blackburne & Sons.  We regularly finance partially-vacant and wholly-vacant commercial buildings.  Click here to apply for a fast, easy private money commercial loan.

But now let's assume your commercial loan request is pretty strong.  Its bankable.  The only black hair on this otherwise bankable deal is the fact that about 8,000 sf of the total 65,000 sf of space is vacant.  Your borrower needs the income from that vacant space in order to qualify for a commercial loan large enough to pay off his balloon payment. "Quick, Jack, what do you do?"  (Dennis Hopper to Keanu Reeve in the movie, Speed.)

The good news is that banks are so hungry for commercial loans these days that they will listen to a good argument and a special structuring of the deal.  Here is what you do:  Tell the bank that they can hold back, out of the proceeds of the loan, enough money to pay for the anticipated tenant improvements and leasing commission to lease that last 8,000 square feet worth of space.  If the borrower is pretty wealthy - in order words he has plenty of global income - this should be enough of a fix to get Loan Committee comfortable enough to approve the loan.

Global income is the totality of the borrower's income, including his employment income, interest income, dividend income, and other net rental income.  If, in the above example, the borrower is a heart surgeon pulling down $600,000 per year, you can be sure that some bank would refinance his entire balloon payment.

Tenant improvements are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant.  For example, a tenant might insist on two handicap-accessible bathrooms, a reception area up-front, and a number of private offices in the back.  The lessor pays for these specialized improvements in order to attract the tenant.

What if the borrower is not a heart-surgeon, but rather he is just a real estate investor with a decent, but not huge, amount of outside income.  Now what do you do?  You could have the lender hold back the anticipated rent of the vacant 8,000 sf of space for, say, six months, out of the proceeds of the loan, in order to give the borrower time to rent that vacant space.  This reassures the lender that the borrower will have enough dough to make his payments during the lease-up period.  Remember, banks want to make commercial loans today.  This structure gives them an excuse to approve the loan.

There is another way to structure your deal.  Your lender could give you an earn-out.  An earn-out is defined as a provision in a commercial real estate loan where the commercial lender agrees to release more money to you upon the happening of a certain event; e.g., the leasing of more space or a major tenant renewing its existing lease.

Example:

Jones Development recently completed construction of an 800,000 sf lifestyle center in Houston.  The $32 million construction loan from Choppy Bank is now due.  Snoopy Life Insurance Company has approved a $34 million takeout loan, but Jones Development is not satisfied with the loan size.   The developer complains that when the last 85,000 sf of space is leased that they could qualify for a $40 million loan.  Snoopy Life therefore records a $40 million first mortgage, but it only releases $34 million.  When the last of the 85,000 sf has been leased out, Snoopy Life will release the remaining $6 million.

A lifestyle center is a huge mall for fat people.  Huh?  I'm kidding, of course, well... I'm only half-kidding. Americans have packed on a lot of pounds over the past two decades (me included), and we no longer like to hike two miles around malls.  Its too much walking and too much exercise.  Therefore lifestyle centers are huge malls where we can drive right up to the door of the particular store in which we want to shop.

Two paragraphs above I used the term, "takeout loan".  A takeout loan is just a garden-variety permanent loan on a commercial property that is used to pay off the construction loan.

I just love the funny pic below.  This is such good marketing:

C-Loans.com has closed over 1,000 commercial real estate loans totaling over $1 billion.  And we did it without venture capital.  Stay close to the Blackburne family over the years, especially now George IV (32) and Tom (30).  We'll make you money and save your bacon when the whole world is crashing down around you.  We may be the ONLY commercial real estate lender who was actively in the market every single day of the Great Recession.  Since 1980, we have survived three commercial real estate crashes of 45%.  Our investor clients made a killing during the S&L Crisis by buying up those RTC foreclosures.  You really-really want a relationship with the next generation of Blackburne's.

Every commercial real estate broker should also be a commercial mortgage broker.  Why?  There is no better way to meet wealthy commercial real estate investors than to advertise that you make commercial real estate loans.

I try to write two blogs articles every week to train my sons in commercial real estate finance.  You get to audit this training for free by subscribing to my blog.

Once upon a time, Mary Flakey bought an apartment building for $1 million from Mr. and Mrs. Jones, an elderly couple.  Mary put down $150,000.  She then took title to the apartment building "subject to" the existing $550,000 first mortgage from Choppy Bank, and Mr. and Mrs. Jones carried back a $300,000 second mortgage at just 6% interest.

For the first 18 months, all went well.  Then both Mary Flakey and the Joneses got a certified letter from the loan servicing department of Choppy Bank demanding to know why the payments were coming from Mary Flakey and not the Joneses.  When the story of the sale of the property came out, Choppy Bank accelerated its loan and demanded to be paid off in full.

An acceleration clause is a provision in a mortgage that gives the lender the right to stop accepting monthly payments and to demand that the loan immediately be paid off in full.  There are a number of triggers for a lender to use its acceleration clause.  Waste is one of them.  For example, if a borrower starts to intentionally demolish the property - the lender's security for its loan - the lender can accelerate its loan.

Now back to our story of Mary Flakey and the Joneses.  Sounds like a rock group from the 1970's - Eric Burton and the Animals, Paul Revere and the Raiders, Mary Flakey and the Joneses...  Ha-ha!  The reason why Choppy Bank accelerated its loan was because Mary Flakey failed to assume its loan, and the bank exercised the alienation clause in its mortgage.

An alienation clause is a provision in a mortgage that says that the lender can accelerate its loan if the borrower alienates (transfer) title in any way.  In our story, the bank actually had TWO grounds to exercise its alienation clause.  Can you guess them?  Well, first of all, the Joneses transferred title to a new buyer.  That one was easy, but there's one more.  The Joneses put a second mortgage on the property!  Mortgaging a property constitutes a transfer of some of the ownership rights to a property.  This is why commercial second mortgages are exceedingly rare these day.  Almost all bank first mortgages prohibit placing additional financing (second mortgages or mezzaine loans) on the property.

When Choppy Bank demanded that its full $550,000 first mortgage be immediately paid off, Mary Flakey simply didn't have the money, nor did the elderly Joneses.  The bank foreclosed, and the second mortgage owned by the Joneses was completely wiped out.  Not surprisingly, Mary Flakey stopped making payments on the old second mortgage.  It was a brutal blow.  That $1,500 per month in income was crucial to the budget of these poor retired folks.  

After Choppy Bank foreclosed, the building fell on hard times.  The tenants moved out, and the building was boarded up.  It sat there unoccupied for months, slowly falling apart.  Then Mary Flakey borrowed some money her parents and cut a deal to buy the neglected REO from Choppy Bank for just $100,000!  The term, "REO", stands for real estate owned, which is what banks must call their foreclosed properties.  Under banking regulations, banks are under tremendous economic pressure to get rid of their REO's quickly - which explains why Mary was able to get such a great deal.

So Mary Flakey is sitting there feeling pretty good about the situation.  She now owned a $1 million apartment building free and clear, and she had only $250,000 invested in the deal - her initial $150,000 down payment and her additional $100,000 investment to buy the REO.

But then an attorney for the Joneses came knock - knock - knocking on Heaven's door.  "Ms. Flakey, you need to start making payments again to the Joneses.  Under the After-Acquired Title Doctrine, the mortgage in favor of the Joneses has re-attached itself to the property, and if you don't make up the past due payments and keep them current, the Joneses will foreclose on their mortgage."

Well, that visit from the attorney certainly was a Buzz Kill for Mary Flakey.  What happened?  Weren't the Joneses wiped out by the foreclosure?  Well, they were; but then Mary Flakey reacquired the property.  The After-Acquired Title Doctrine says that if you give someone a mortgage or lien on a property that you do not own, but you later acquire it, that mortgage or lien immediately attaches to the property.

I write this blog to two teach my two sons, George and Tom, the business of commercial real estate finance.  By subscribing to this blog, you get to "audit the class" for free.  I try to write two training classes per week.

If you are in the commercial loan business, be sure to carefully study this article.  If not, enjoy my funny pictures and move on with your day.  Today's blog article is just a specialized sales training lesson for commercial loan brokers.

Yesterday one of my commercial loan officers responded to an email commercial loan inquiry by sending an email in response.  An email?  An email?  I threw an enormous hissy fit.  See my picture above.   As a commercial loan officer (or broker), you are never going to make a sale by email.  Never.  Ever.  Not once.  Nada.  Zip.  Zero.  Zilch.  You've got to pick up the telephone and make a call.  Never try to solicit a commercial loan package by email.  Instead, you need to get on the phone and sell.

Why?  The documentation requirements for a typical commercial loan are pretty lengthy, so no borrower is going to assemble a thick commercial loan package without verbal assurances from his commercial loan officer that the black hairs sprouting out of his deal are not deal-killers.  Please re-read this last sentence.

A black hair is a flaw in the deal.  Examples of black hairs include vacancies in the building, a major lease that is close to expiration, a divorce and bankruptcy of the borrower six years ago, or a net worth less than the size of the loan.  A comprehensive list of possible black hairs would stretch for hundreds of yards.

"George, I understand that some commercial loans have black hairs, but what if the subject deal doesn't have a black hair?"

Every commercial loan ever written had a least two or three black hairs.  No commercial loan request is ever perfect.  The art of underwriting commercial loans is not the elimination of those deals with flaws, but rather the wise judgment of which black hairs are irrelevant.

Your borrower knows that his deal has flaws.  Before he will go to all of the work to compile a commercial loan package for you, he needs to hear your cultured, confident voice reassuring him that his particular black hairs are not deal-killers.  This is why merely sending an email will almost never fetch you a commercial loan package.  Lesson point:  Call-call-call.

We all remember the old joke about how two bulls trot to the top of a hill and look down over a herd of gorgeous, fertile cows.  The young bull turns to the old bull and says, "Hey, Pops, let's run down and kiss one of those cows."  To which the older, wiser bull replies, "Son, let's walk down and kiss them all."  Yeah-yeah, you've heard that joke a thousand times before; but that joke has a very important moral for commercial loan originators.

The newbie commercial loan officer - the young bull - figures that since he cannot close his commercial loan until he gets a complete package, he might as well ask for every document right away.  "Hey, the sooner the borrower starts working on all of these documents, the sooner he can close his loan, right?"

 Hmmm..., let's look at just some of the documents required in a complete, bank-quality commercial loan package:

1. Updated Personal Financial Statement (2 hours of work)
2. 2016 Personal Tax Return (35 pages to copy)
3. 2015 Personal Tax Return (35 pages to copy)
4. Actual Income and Expense Statement For the Past 12 Months (one hour to prepare)
5. Schedule of Leases (one to two hours to prepare)
6. Copies of all Leases (100+ pages to copy)
7. Updated Financial Statement on the Borrowers Business (two weeks for accountant to prepare)
8. 2016 Tax Return on the Borrower's Business (45 pages to copy)
9. 2015 Tax Return on the Borrower's Business (45 pages to copy)
10. Updated Financial Statementon the LLC that owns the Property (one hour to prepare)

And so on...   

You can bet the farm that the borrower is going to procrastninate; and as the borrower is procrastinating, he will receive 37 competing commercial loan offers.  The foolish young bull failed to "get the loan off the street."

The young bull was a flipping idiot for requesting all of those documents in one shot.  The work load is impossibly intimidating.  No borrower, after just speaking with a commercial loan agent one time, is going to prepare such a huge commercial loan package.  In my joke, the young bull gets kissed once.  The newbie commercial loan officer won't even receive a single package if he requests a complete package.  Not one!  What an flipping idiot!  I have often told my sons, "The commercial loan agent who initially asks for the least number of documents usually gets the deal."

Okay, so how should a wise, old bull ask for a commercial loan package?  "The deal sounds good, Mr. Borrower.  Please send me a package.  Here's my email address..."

Notice that the wise, old bull did NOT give the borrower an extensive laundry list of documents to gather.  Instead, he just asked for an amorphous (without a clear definition) "package".  He never actually defines the documents that go into a "package".  If the borrower tries to pin him down as to what documents should be in the package, the wise, old bull will flip the question around, "What documents can you immediately send me?"

In school we all studied the concept of inertia.  A body at rest tends to stay at rest.  A body in motion tends to stay in motion.  Here the body is the loan package.  It's much easier to get a small boulder rolling than a large one, so let's ask for the smallest loan package (boulder) possible.  Let's get this loan package rolling in our direction, even if the speed of the roll is slow, because a body in motion tends to stay in motion.

Once the borrower chooses you to receive his package, he is usually very loathe to start all over with some competitor.  Let me make this VERY important point again in a different way.  Once a borrower starts starts sending documents (that small, emorphous "package"), to Loan Officer A, he almost never stops and starts sending his documents to Loan Officer B.  Yeah, a few borrowers are "whores", but for the most part, borrowers choose just one commercial loan officer.  Note to self:  Be that guy who first gets the package.

The other day I caught one of my loan officers asking for the borrower's tax returns right out of the box.  It was the first thing he requested.  My head exploded.  WTFudge???  Why didn't he just ask for the broomstick of the Wicked Witch of the West too?  Only ask for tax returns after the borrower has already submitted his original package, and you have been able to reassure him that all is well.  By then the borrower has an investment of time in using you as his commercial loan agent.

Do you need a high-LTV commercial loan?  My hard money shop, Blackburne & Sons, will gladly lend up to 75% LTV on standard commercial properties of less than 35 years of age.  Will your bank only lend you 68% LTV on your apartment building, office building, retail center, or industrial building?  We'll give you the extra dollars you need.

Are you pretty wealthy?  You surely have dough set aside for your retirement in your IRA and in your pension plan.  You may also have monies that you're saving for your kid's college.  You could be earning 8% to 12% in first mortgages.  This is our 37th year in business.  I'm an Eagle Scout, and so are my two sons.  Come camp on our accredited investor list and look at six or so first mortgage offerings every month.  Feel free to just watch for years.  No one will ever call you to sell you a $20,000 first mortgage investment.  We sell exclusively by email.  Since 1980.

According to one expert, the U.S. could easily lose a war with North Korea.  If the war broke out, you and your family would most likely be fatalities, even if you lived 100 miles from the nearest big city.  This is not sensationalism. I am deadly serious.  Sometime in the next two weeks the U.S. stock market may wake up to this danger and fall off a cliff.  Here is how - according to an expert so respected that he was recently asked to testify before a Congressional hearing - the U.S. could lose a war against North Korea:

Unbeknownst to most Americans, North Korea already possesses at least two satellites that orbit directly over North America. Conceivably, those satellites could already be carrying nuclear warheads and re-entry shielding, allowing North Korea to “drop” nukes into the atmosphere over North America. By detonating those nukes at altitude (perhaps 150 – 500 miles high), an electromagnetic pulse (EMP) attack would be initiated that could take down the entire national power grid.  A grid down scenario could kill 90% of the American people in the aftermath of a broken society.  (I recently wondered why North Korea was so busy launching satellites.)

On May 8th, the House Homeland Security Subcommittee on Infrastructure conducted a hearing entitled, “Electromagnetic Pulse (EMP): Threat to Critical Infrastructure.”  Testifying at the hearing was Dr. Peter Pry, a member of the Congressional EMP Commission and executive director of the Task Force on National and Homeland Security, told the Subcommittee that the issue is urgent because an EMP event could wipe out nine-tenths of the nation’s population through starvation, disease, and societal collapse.

In an op-ed to The Hill, Dr. Pry recently wrote:

North Korea has nuclear-armed missiles and satellites potentially capable of electromagnetic pulse (EMP) attack. EMP is considered by many the most politically acceptable use of a nuclear weapon, because the high-altitude detonation (above 30 kilometers) produces no blast, thermal, or radioactive fallout effects harmful to people.

EMP itself is harmless to people, destroying only electronics. But by destroying electric grids and other life-sustaining critical infrastructures, the indirect effects of EMP can kill far more people in the long-run than nuclear blasting a city.

In this scenario, North Korea makes an EMP attack on Japan and South Korea to achieve its three most important foreign policy goals: reunification with South Korea, revenge upon Japan for World War II, and recognition of North Korea as a world power.

Revenge against Tokyo is a convenient rationale for someday attacking Japan. War against Japan will be necessary for the North to conquer South Korea, as Japan is an indispensable staging area for U.S. and allied forces defending South Korea.

North Korea's dictator, Kim Jong Un, is the scion of three generations of totalitarian rule, a megalomaniac and ruthless murderer described by state media as a demigod having supernatural powers.

Kim’s strategy is to sever U.S. security guarantees to South Korea and Japan by raising the stakes too high—raising the specter of nuclear war—and through "nuclear diplomacy" to cow the U.S. and its allies into submission. 

In this scenario, North Korea detonates a nuclear weapon at 96 kilometers HOB (height of burst) over Tokyo. The EMP field extends from the Japanese capital to a radius of 1,080 kilometers, covering all of Japan's major home islands. 

Virtually all of Japan's major military bases and seaports are covered by the EMP field, rendering them inoperable. Traffic control towers and systems are damaged and blacked-out stopping air and rail traffic. Highways are jammed with stalled vehicles. Communications systems are damaged or destroyed or in blackout.

Worse, Japan's population of 126 million people is at risk because suddenly there is no running water or food coming into the cities. EMP induced industrial accidents are happening everywhere. Gas pipelines are exploding and turning into firestorms in towns and cities. Refineries and chemical plants are exploding, releasing toxic clouds and poisonous spills. Tokyo knows from the experience of Fukushima that as the nationwide blackout becomes protracted, within days Japan's nuclear reactors will exhaust their emergency power supplies and begin exploding, contaminating the home islands with radioactivity. 

As a consequence of the EMP attack, Japan's critical infrastructures are paralyzed and incapable of transporting U.S. forces to aid South Korea. Indeed, with Japan's survival at risk, Tokyo would probably oppose any effort to help South Korea by U.S. forces staging from Japan, fearing another North Korean EMP attack. 

The EMP field also covers the eastern half of South Korea, including the vital seaport of Busan (the key to South Korea's survival and U.S. victory in the last Korean War). All the eastern coastal seaports, and all military bases and airfields in the eastern half of South Korea (nearest Japan) are under the EMP field. 

The EMP field does not extend to North Korea.

Left uncovered by the EMP field are the western half of South Korea, including Seoul, the capital, and the major highway systems radiating around and from Seoul southward—the best invasion routes. Stalled traffic from the EMP will not be blocking Seoul or the highways.

U.S. and South Korean forces covering the Demilitarized Zone (DMZ) will not be covered by the EMP field. The EMP field, in their immediate rear area, will cause cascading failures of the electric grid throughout the DMZ and the entirety of South Korea. 

Thus, even those U.S. and South Korean forces not covered by the EMP field will be in a paralyzing protracted blackout that will cripple or deny allied forces communications, transportation, food and water, supplies and reinforcements from South Korean bases or from overseas.

The EMP attack creates conditions for North Korea's conquest of South Korea that are ideal.

North Korean armor and infantry pours across the DMZ, thrusting through and around Seoul and down the coastal highways, flanking U.S. and allied forces paralyzed by EMP and unable to maneuver.

U.S. nuclear missiles and bombers start blasting North Korea’s nuclear forces and underground bunkers where the Dear Leader may be hiding. Now Kim Jong Un knows he has miscalculated. The U.S. is no paper tiger.

In a final act of vengeance, Kim detonates the super-EMP warhead in his KMS-4 satellite, blacking out the United States. 

Airliners crash. Communications and transportation stop. Natural gas pipelines explode, causing firestorms in cities. In seven days, 100 U.S. nuclear reactors go Fukushima. In a year, most Americans are dead from starvation.

The United States, Japan, South Korea, and North Korea are in ruins.

Russia and China are the winners.

Dr. Pry ends with this admonition:  "Mr. President, harden the U.S. electrical grid to defend against an EMP attack, and shoot down those North Korean satellites!"

When you get an adjustable rate home loan, the Promissory Note is always very, very precise about any interest rate readjustments.  For example, "Every six months the Rate will readjust to 3.57% over the weekly average yield on 12-month constant maturity Treasuries."

When most banks write a 10-year, fixed rate commercial loan, there is almost always a provision that calls for one rate readjustment or "reset" at the end of five years.  The rate is then fixed for the next five years.  This is as close as you're likely to ever get to a 10-year, fixed rate commercial loan on an office building or industrial building.

What has always amazed me is that the language surrounding the rate readjustment is often very loosey-goosey.  Instead of saying that the rate will adjust to so many basis points over some index, the language will effectively look like this:  "At the end of five years, the loan will readjust to whatever rate the bank is charging on similar loans at that time."

Really?  That loosey-goosey?  Yup.  Often these fixed rate commercial loans from banks are larger than $2 million, but no one seems to care that the borrower is completely at the mercy of the bank.    Legally the bank could raise the rate from 5.5% to 7.5%, even though other banks are quoting just 6.0% at the time.  Later I will explain why this is not really an issue.

A rate reset is more than just a rate readjustment.  The amortization of the loan is also accelerated.  For example, the typical bank permanent loan on an office building is a fixed rate, ten-year loan with a rate reset at the end of year five.  Most bank permanent loans start out with a 25-year amortization, but when the monthly payments are re-computed at the rate reset, we are five years into the loan.  Therefore the remaining loan balance is reamortized over just 20 years (although it is still all due and payable at the end the the next five-year period) at that time.

So why don't commercial borrowers freak out over the loosey-goosey language of the rate reset?  For some reason commercial bankers don't believe in capitalism.  They don't believe in charging whatever interest rate the market will bear.  Bankers think it is a sin to charge a higher interest rate than the bank down the street.  

As a result, banks across the country almost always charge about the same interest rate for commercial real estate loans.  Remember, a banker would consider himself a sinner if he charged a higher interest rate than his competitor, as if he was some sort of filthy capitalist.

Now you might find a 0.25% to 0.50% difference between banks on commercial real estate loans, but you will almost never see one bank quoting 5.5% and another bank 7.5%.

Okay, let's review what you've learned today:

1.  Rate readjustments are called resets in commercial mortgage-ese.

2.  Most commercial loans have a 25-year amortization.

3.  Ten years is usually the longest term available on a fixed rate, commercial loan.

4.  The rate will reset at the end of year five to whatever rate the bank is then charging.

5.  The interest rate reset language is usually surprisingly loosey goosey.

6.  Banks around the country charge almost same the same rate on commercial loans.

7.  Banks do not charge whatever the market will bear.  Capitalism is bad.

8.  It is a sin for a banker to charge a higher interest rate than a bank down the street.

9.  Therefore borrowers rarely get hit with an above-market rate increase at the reset.

Are you an accredited investor?  Please focus on this for a moment.  You have money set aside for your retirement.  You have more dough set aside for your kids' college educations.  The stock market is booming right now, and I personally think that it will continue to boom; but its danegerous to have all of your eggs in just one investment basket.

You really need to consider investing in first mortgages.  Private money (hard money) first mortgages from Blackburne & Sons are yielding 8% to 12% today - although I urge you in the strongest terms to stick with our less-risky, lower-yielding ones.  Make no mistake:  You can easily lose most or all of your investment in first mortgages.  Investing in first mortgages involves substantial risk, and this blog article is not intended to be a solicitation to invest in our securities.  Such an solictation will always be accompanied by a Private Placement Memorandum.  We're just talking about the concept - the idea - of hard money first mortgage investments today.

I am about to surprise you.  Blackburne & Sons has been in the hard money business for thirty-seven years now.  Are we the oldest surviving hard money shop?  Not quite.  I am an attorney, licensed in both California and Indiana.  To some this may sound corny, but my two sons and I are cadet graduates of Culver Military Academy (Honor System), and all three of us are Eagle Scouts.  Okay, maybe a little corny.  Ha-ha!

If you click on the maroon button below, no one is ever going to call you and try to sell you first mortgages.  We sell exclusively by email, and once you start nibbling on our offerings, you will probably miss out on your first few deals because you waited too long.  We have well over 1,000 (1,500?) private investors in our various loans.  My point is not that we are wonderful.  My point is that no one is ever going to call you to hard-sell an investment.  Please feel free to camp out on our investor email list for five years before you make your first investment move.  We're like Christmas tree farmers, planting a half-decade ahead.

You can invest with incredibly small amounts - $5,000 - but you absolutely, positively must be an accredited investor - a $1 million net worth exclusive of your personal residence.  First mortgage investing is HUGE in California, but the new JOBS Act makes it possible for accredited investors residing outside of the State of California to now invest with us.  Do this - and then just watch our investments for a few years.

Investopedia defines a core asset as follows:  A core asset is an essential, important or valuable property of a business without which a company cannot carry on with its profit-making activities. A business would dissolve without its core assets, and companies that sell off core assets are usually liquidating and on the verge of bankruptcy.

In the context of super-wealthy real estate investors, I would argue that the term has a slightly different meaning.  When the wealthy speak of their core real estate assets, they are usually speaking about their multifamily, office, retail and industrial properties.  These four major commercial property types are known in commercial real estate finance as the four basic food groups.

A wealthy investor's core assets are typically under-leveraged; often less than 45% loan-to-value.  Have you ever been frustrated when a life company refused to loan higher than 55% loan-to-value?  Have you ever asked yourself, "Who on Earth could be satisfied with a loan of only 55%?"  Well, its these supper-wealthy investors who intentionally keep their core assets under-leveraged.

Lastly, core assets are usually very attractive properties in their class.  For example, if the the core asset is an office building, it will be one of the most attractive and best-located office buildings in town.  The thing about a core asset is that the property is usually so desirable that it will remain leased, even in a bad recession.

I was in New York City twenty years ago, trying to place a $25 million commercial construction loan, when I found myself walking in front of Jackie Onassis' (JFK's widow) apartment building, directly across from Central Park.  It was a stunningly beautiful and desirable location.

As rich as Jackie O was - she inherited the Onassis shipping fortune - did you know that she did NOT own the building or even the $50 million apartment in which she resided?  She was forced to just lease it for a very long time (thirty years?) from the SUPER-wealthy family that owned the building.  When people talk about old money, the family that owned this incredibly valuable building were probably really-really old money.  

I would not fall off my chair in surprise if this primest-of-prime buildings was owned by the descendants of the famous Rothchild banking family.  The Rothschild family is a wealthy family descending from Mayer Amschel Rothschild, a court Jew in the Free City of Frankfurt, who established his banking business in the 1760s.  Unlike most previous court Jews, Rothschild managed to bequeath his wealth and established an international banking family through his five sons, who established themselves in London, Paris, Frankfurt, Vienna, and Naples.

Guys, each one of these five Rothchild sons went on to grow their banks to be one of the very largest in each country.  They made the equivalent of tens of billions of dollars by financing wars between each other; e.g., one brother in Paris might loan Napoleon enough dough to wage war against England, which borrowed money from N.M. Rothchild & Sons in London.  What a racket!  Ha-ha.  Jeff Bezos, Bill Gates, and Warren Buffet are poor peasants compared to the very secretive Rothchild family.  And yes, the Rothchild family, if they actually owned it, would surely have considered Jackie's building a core asset. 

So I was walking in front of Jackie's building when a epiphany hit me:  There are some pieces of commercial real estate that are so desirable that they will stay leased, even in the most severe of recessions.  The rich always have money, and they simply want this quality space.  In my own mind - and I teach this concept to my sons and staff - I consider properties like this to be top 40% properties.  The wise investor will strive to invest in top 40% properties.

One final thought about core assets:  The wealthy do not churn core assets.  Core assets are keepers.  Think of the Rothchild family and Jackie O's apartment building.  If the Rothchild's actually  do own that building, they might have bought that building when it was built 60 years ago.  Even if Jackie O tried to buy it at 20% over its appraised value, I could easily see the trustee of the Rothchild Trust saying, "Thank you, Madam, for your very generous offer, but this building is one of our core assets."

Stay close to the Blackburne family.  Blackburne & Sons Realty Capital Corporation (est. 1980) stayed in the market making commercial real estate loans every day of the Great Recession.

Cisca, my  lovely bride of 34 years, and I recently moved from Northern Indiana to Indianapolis.  Our daughter, Jordi, just graduated from Culver Girls Academy, so we were free to leave our home near the campus of the prestigious Culver Military Academy to be closer to my son, Tom, and our granddaughter.  If you get a chance, be sure to click on that Culver link above.  You'll quickly see why Cisca and I lived in the cornfields of Indiana for 18 years to send our kids to this very special academy.  Jordi recently rode in President Trump's Innaugural Parade.  George IV and Tom rode in George W. Bush's Innaugural Parade, and I rode in Nixon's Parade in 1971.

It's wonderful to work alongside my son, Tom, here in Indy.  Anyway, I write this blog to teach my two sons the business of commercial real estate finance (CREF).  It's my legacy to them, so I try to teach them "good stuff" at least twice a week.  By subscribing to this blog, you get to enjoy that same training for free.