Commercial Loans and Fun Blog

In a few days I am going to write an important blog article that will teach you How to Quote a Commercial Loan.  In that article I will need to refer to Rent Rolls and Schedules of Leases.  This training article will teach you the meaning of those two terms.

It is surprising, but when the typical commercial lender underwrites a commercial real estate loan, he will allow the borrower to use this year's scheduled rents and last year's actual expenses.  This is a surprisingly aggressive position.  Commercial lenders might easiy have underwritten their loans based on last year's actual income and last year's actual expenses.  Using this year's scheduled rents helps the borrower to qualify for a larger loan because this year's scheduled rents are usually higher than last year's actual receipts.

In order to compute this year's scheduled rents, the lender will ask for a Rent Roll if the property is an apartment building, a self storage facility, or a mobile home park.  A Rent Roll is just a list of the tenants by unit number and the amount of each tenant's monthly rent.

If the property is an apartment building, the Rent Roll will also contain the number of bedrooms and bathrooms in each unit and sometimes the square footage of the unit.  Apartment units are sometimes called doors.  "The property is a multifamily project with 138 doors."  If the property is a mobile home park, the Rent Roll will list whether the home on the pad is a single-wide, double-wide, or triple-wide.

If the property is a self storage facility, the Rent Roll will always contain the square footage of the unit.  By the way, mobile home park units are called pads.  After all, the tenant usually owns the mobile home.  The landlord only provides the pad upon which the mobile home sits.  [Hotels units are sometimes called keys.  "The subject property is a hotel with 86 keys."  Hotel units used to be called rooms until hotels started to build units with suites, each of which have multiple rooms.]

On any Rent Roll, it is very important that the Rent Roll contain the name of the tenant in the unit.  This is critical because a good appraiser will perform two or three audit checks of the Rent Roll.  "Good afternoon, Mrs. Rodriquez, my name is John Jones, and I am doing an appraisal of the property for Key Bank.  My Rent Roll here shows that you pay $750 per month in rent for this unit.  Is this correct?  It's not???  You pay only $600 per month??? Hmmmm."  Unfortunately, mortgage fraud like this is fairly common in commercial real estate finance.

Most other types of commercial property - like office buildings, retail buildings, strip centers, shopping centers, malls, power centers, lifestyle centers, industrial buildings, and industrial centers - will have longer term tenants.  To determine the current annual rental income, the typical commercial lender will ask for a Schedule of Leases.

A Schedule of Leases is a summary of the tenants in a commerial building that contains the (1) unit number or letter; (2) the name of the tenant; (3) the square footage of the unit; (4) the amount of the monthly rent; (5) the lease expiration date (and sometimes the starting date of the tenancy); and (6) any rent contribution paid by the tenant.

Important Tip:

The mortgage broker who gets his loan client the largest loan amount usually gets the deal, even though a competing lender's loan might be 0.25% or 0.50% lower.  To get the largest loan amount, be certain to include the market rent of any vacant units.  For example, let's suppose a 50-unit apartment building enjoys 18 2 bedroom-2 bath units rented at $1,500 per month and two 2-bedroom-2 bath units rented at $1,600 per month.  If a third 2 bedroom-2 bath unit is vacant on the rent roll, be sure to list that vacant unit as if rented at $1,600 per month, rather than $1,500 per month.

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 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?

Do you have a real estate or mortgage web site?  If you put a simple hyperlink to C-Loans.com, you could earn a $21,250 referral fee in your sleep.

Do you like the way I teach?  I try to use lots of examples and real life war stories.  Want to learn the entire profession of commercial real estate finance?

Keep looking for contact information (contents of a business card) of any banker making commercial real estate loans.  I'll swap you the contact information of that one banker for a list of over 2,000 commercial real estate lenders.

By subscribing to this blog, you can enjoy free training in commercial real estate finance twice a week.

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This is the second most important training article about commercial real estate finance ("CREF") that I have ever written.  My most important CREF training blog article can be found here.

Most new commercial mortgage brokers start out arranging small balance commercial real estate loans.  These are the commercial loans of less than $5 million ($5MM).

Banks are by far the most active lenders for small balance commercial loans.  Unfortunately most bankers take the position that if a borrower has to hire a mortgage broker to help him get a commercial loan, that deal is proably a stinker.  After all, there are over 6,000 commercial banks in America.  Why couldn't the borrower find a bank on his own?  Why didn't the borrower's own bank make him the loan?  How many banks have already looked at this deal and turned it down?

A great many bankers are therefore highly prejudiced against commercial loans brought to them by commercial mortgage brokers.  Unfortunately this harsh environment is where most newbie commercial mortgage brokers must learn their trade.

By the way, it is the rare trade show that I attend where I am not greeted warmly and appreciatively greeted by at least one or two graduates of my nine-hour training course, How to Broker Commercial Loans.  When I first started out in commercial real estate finance 36 years ago, nobody taught this stuff!  It was all a closely guarded secret.

Okay, so bankers are distrustful of small balance commercial loans brought to them by commercial mortgage brokers.  Got it.  But what about the Big Boys, the commercial lenders who make the major loans, the commercial loans larger than $5MM?  By the way, in my last few blog articles I have been referring to the really large commercial loans - the deals larger than $5MM - as large balance commercial loans.  That is not really the best term.  They are more often called major loans by the lenders themselves.

Two weeks ago my oldest son, George IV, and I flew to Las Vegas to attend the Western States Commercial Real Estate Finance Conference, the biggest trade show of the year for the CREF industry.  At the show, John Hancock Life Insurance Company had a booth soliciting the really large commercial loans - in this case $10MM+.  George IV and I approached the loan officer, coincidentally named John, to pitch our wonderful new web site, CommercialMortgage.com.

After my 90-second pitch, John politely but unapologetically said, "No."  By the way, John Hancock was just about the only lender to say no to us at the conference.  CommercialMortgage.com was a smash hit.

"I'm an old man, George," continued John.  "I don't want to work that hard screening out deals.  My best brokers know what I want.  When one of my best brokers calls me, I know that there is a 50-50 chance that I am going to close a loan if I take that call."  Bam!!  An amazing epiphany hit me upside the head like a can of V8.

Commercial lenders making major loans actually WANT a good commercial mortgage banker involved in the deal in order to screen the deals.  They don't want to field the countless calls from direct borrowers.  They actually want a middle man, a good commercial mortgage banker to screen their deals.  (George IV and Tom, my sons, this is huuuuge!  Confused?  I write this blog mainly to teach my two great sons the family business, and you get to benefit by reading this invaluable training for free!  Make sure you subscribe!)

By the way, when a commercial mortgage broker starts regularly closing major commercial loans - deals over $5 million - he becomes, in the parlance of the industry - a commercial mortgage banker, even though his company doesn't actually service (collects the payments) on the loans he originates.

The vast majority of the major loans originated in the country are, in fact, actually originated by life company correspondents who come across deals not suitable for their stable of life companies.  You will recall that a life insurance company correspondent is a mortgage company that is the exclusive representative for a life insurance company in a particular region of the country and who collects the payments every month for their life company clients.  This is why the lenders making major commercial loans often call their best brokers commercial mortgage bankers, even when the moniker is slightly inaccurate.

So how do you screen a major commercial loan?  In most cases, the large commercial loans that you will be screening will be either construction loans or bridge loans.  Large permanent loans are pretty straight forward.  Pop quiz:  Define a permanent loan.  A permanent loan is a garden-variety first mortgage on a commercial property that has at least some amoritzation (25-years is the most common amortization for commercial loans) and a term of at least five years.

When screening a construction loan or a bridge loan, there are four important questions for which you will need answers:

1. What is the net worth of the borrower?  Remember, according to the Net-Worth-to-Loan-Size Ratio, the net worth of the borrower should be at least at least as large as the loan amount.  In other words, the net-worth-to-loan-size ratio should be at least 1.0.  If the two developers have a combined net worth of just $3 million, and they are trying to get an $8 million construction loan or bridge loan, they are smoking too much of that loco weed.
   
   
2. What experience does the borrower have owning, managing, renovating, and/or building commercial projects of this size?  The answer to this question will be found in the borrower's curriculum vitae ("CV"), which is a fancy term for the borrower's ownership, management, renovation, and/or building experience resume.
   
   
3. The single most important question is how much equity (skin) will the borrower have in the deal?  At an absolute minimum, the borrower will need to be able to cover at least 20% of the total cost of the project, and on the larger deals, 30% is far more likely.  The Total Project Cost includes land/acquisition costs, hard costs, soft costs (including loan points and an interest reserve), and a contingency reserve of 5% of hard and soft costs.
   
   
4. If the loan being sought is a bridge loan, what is the borrower's exit strategy?  The exit strategy is how the borrower intends to pay off a bridge loan, which is of vital importance to any short term lender.  Remember, a bridge lender's yield plummets when a bridge loan goes past maturity.  Will the borrower refinance the property with a permanent lender when the property is stabilized (when every unit is leased at market rates)?  The mere sale of the property is probably the weakest exit strategy that a borrower can propose.

Hey guys, keep looking for the contents of the business card of any commercial banker making commercial real estate loans.  You can trade the contents of that one business card for a free directory of 2,000 commercial real estate lenders.  We have one idiot who stays up every night trying to scrape the contents of our wonderful new commercial loan portal, CommercialMortgage.com.  He is trying to get our list of commercial lenders.  Hellooooo, Mr. Dodd Frank (the name he uses when he scapes our site for hours), you can get the same list by giving us the just one good banker!  Silly.

Guys, if you have not taken a free ride on our wonderful new commercial loan portal, CommercialMortgage.com, you are missing out on a treat.  Feel free to enter an imaginary loan just for your test drive.  C-Loans.com only has about 750 participating commercial lenders.  CommercialMortgage.com has 3,159+ commercial lenders, and there is no overlap!!!

"C'mon, George, you're not a complete idiot.  CommercialMortgage.com gives mortgage brokers a great list of commercial mortgage lenders who will compete against C-Loans.com.  WTFudge are you doing?"

The truth:  Every day two salesmen for C-Loans.com contact banks to invite them to join C-Loans.com.  The grumpy, sleepy old guys who really don't care that much about originating many new commercial loans we add to CommercialMortgage.com.  Need to actually close a commercial loan?  Submit your commercial real estate loan request through C-Loans.com.

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Do you have a commercial real estate web site?  If so, be sure to add a link (or the smarter move is to add 30+ links) back to C-Loans.com to your home and interior pages.  We have boasted for years of paying that one big referral fee of $21,250 to Alun Dunn.  But now there is another web site owner - a regular guy just like you - who referred five years ago a single hot commercial loan broker to C-Loans.com and who just earned his 9th referral fee.  He earned all of these referral fees from from that one hot commercial loan broker who found us from his site, and these referral fees have now totalled almost $19,000!  Guys, in truth, this is a true no-brainer.

Anyone who owns a web site that is related to real estate or which provides services to high net worth individuals (accountants, attorneys, insurance salesmen, financial planners, etc.) should pay close attention to this article.  It is perfectly legal for a commercial mortgage company to pay referral fees for commercial loans, and the recipient does not need to be licensed in any way.  Remember, I am an attorney.  Still doubt me?

"But George, I thought that referral fees were illegal?"

A little history will help.  Many decades ago real estate agents used to steer their home loan clients to particular lenders and to particular settlement companies (escrow companies, title companies, closing attorneys, etc.) in exchange for hefty kickbacks from from those companies.  The home loan lenders then would then charge these unsuspecting borrowers extra points or a higher interest rate.  The title companies would also charge these innocent, trusting folks extra high fees.

Finally in 1974 the Federal government stepped in and passed RESPA, which stands for the Real Estate Settlement Procedures Act, which made it illegal for a residential lender or a settlement provider to pay anything of value for a referral.  The power of the Federal government, however, is not unlimited.  For example, the Federal government could not order the citizens of any state to wear only white shirts and black shirts.

Therefore RESPA only applies to transactions involving a federally-related mortgage loan, which includes most loans secured by a lien (first or subordinate position) on residential property. Residential property includes only one-to-four family dwellings; which, translated into English, means single family homes, condo's, duplexes, triplexes and fourplexes.  Mortgage loans, by definition, includes home purchase loans, refinances, lender approved assumptions, property improvement loans, equity lines of credit, and reverse mortgages.

But note: RESPA only applies to 1-4 family loans.  It does not apply to commercial property.

Now most states do not require a license to broker commercial real estate loans; but even those states that do require a license still allow commercial mortgage companies to pay referral fees, as long as the referral source is not quoting rates and terms and is not playing document fetcher.  It's fine to pay a referral fee for the name and telephone number of a prospective commercial borrower; however, the referral source cannot be running around playing unlicensed mortgage broker. 

Now that we have the legality issue settled, let me tell you a real life story.  By the way, a real life story told to a sales prospect is called a verbal proof story; so let me tell you a verbal proof story about referral fees.

About six years ago, a guy named Wayne owned some sort of real estate web site.  For all I know, Wayne could only have owned a tiny residential real estate brokerage in some small town in the boonies.  Or heck, he could have been a really smart financial planner.  Anyway, Wayne put a link on his website that read, Commercial Loans, and he pointed it to C-Loans.com.  He didn't even tell us about the link.  He didn't need to tell us.  He just did it.

Well, six year ago a very productive mortgage broker named Mario visited Wayne's website.  Mario saw the Commercial Loans link, clicked on it, discovered C-Loans.com, and then entered a commercial loan.  The deal closed!

C-Loans, Inc. then went into its database of loan applciations, found the original digital application on this closed loan, saw printed at the bottom a link to Little Wayne's Bayou Tackle Shop and Real Estate Brokerage, looked up who owned the site, called Wayne, and then gave him the good news!  Wayne was paid an unexpected referral fee of 12.5 basis points, probably around $1,500.

Important note:  On deals larger than $5MM, our referral fee is slightly less (8.33 bps.) because we only earn 25 bps. ourselves. A basis point is 1/100th of one percent.  Therefore a half-point would be 50 bps.

But the story gets even better!  Mario turned out to be a hot agent, and he has already closed a total of 8 deals on C-Loans.  C-Loans pays its referral sources (hyperlink partners) on every subsequent closing as well, until the C-Loans user changes his email address.  After that it becomes economically infeasible for us to track the deals.

So far we have paid Cajun Wayne on 8 closings for a total of $17,798.75!  And the reason this came up is because Super Mario is poised to close his 9th deal for Wayne, a $935,000 commercial loan where Cajun Wayne will earn another $1,168.75 referral fee.  That will be a total of $18,967.50 - all for spending just ten minutes six years ago to put a link to C-Loans.com on his website.

But watch out for the Hyperlink Police!  If you put more than one link to C-Loans.com on your website, ten heavily-armed SWAT guys might kick down your door in the middle of night, drag you out of bed, hogtie you, tickle your wife, and then shoot your dog with a squirt gun!

Helloooo? I'm kidding here.  Do you want to make a little bit of referral fee money or a lot?  We once paid a guy named Alan Dunn a referral fee of $21,250 for the referral of a $17 million land development loan.  

I therefore urge you to put three links to C-Loans on every page on your website.  I would make a Commercial Loans tab at the top, a Commercial Mortgages navigation link along the left side, and a Commercial Mortgage Rates link at the bottom as a footer.  And not just on your home page.  Do it on your interior pages as well.

And remember, you do not have to notify us that you have created these links.  C-Loans.com is programmed to automatically capture the referring URL (website address) and to print it at the bottom on the application.

"But George, how do I know that you won't cheat me?"

Blackburne & Sons manages about $51 million in hard money commercial first mortgages for about 1,500 elderly investors.  On any given day, we might have $2 million or more sitting in our loan servicing trust acccounts.  We are audited every quarter, and we have been in business for over 36 years.

Do you regularly email a newsletter to your clients?  It is possible - and super smart - to put a similar link in your newsletter; but in this case you will need a special partnership code.  To get this partnership code, please call or email Mick Carlson at 574-855-6292.

Got a AAA-quality deal that deserves to be financed by a life company, conduit, or commercial bank?

Continue to be on the lookout for the contact information of any banker making commercial real estate loans.  We'll trade you the contents of just one business card for a free directory of 2,000 commercial lenders.

The ninth largest bank in the world joined C-Loans.com this month.  Their minimum loan is $20 million!  OMGoodness.  Why did they join?  They want to use their ability to fund these huge loans as an entre to meet super-high-net-worth individuals, so they can sell them other services, like wealth management and trust servcies.

Hmmm.  Anybody remember me saying, "There is no easier way to meet high net worth investors than to be a commercial mortgage broker?"  Maybe I've said it TWENTY times.  Sorry.  I got excited.  But every commercial-investment property brokerage should have a one-man desk that arranges commercial financing, in order to meet TONS of filthy rich investors.

My oldest son, George IV, and I have recently returned from the biggest commercial loan conference of the year, the California Mortgage Banker's Association 19th Annual Western States Commercial Real Estate Finance ("CREF") Conference held every year in Las Vegas.  Among the Big Boys, this conference is known as the Western States CREF Conference.

If you are ever going to attend this conference, I urge you to come a day early and play in the annual golf outing.  This golf outing has always proved immensely productive for Blackburne & Sons and C-Loans.com.  This year a commercial mortgage fund making huge bridge loans ($5MM minimum) and a bank making some of the largest commercial construction loans in the country ($15MM minimum) both joined as a result of the friendships we developed playing golf together.  To me, that golf outing alone makes up one-third of the benefit of attending the entire conference.  If you are a decent golfer, this event is a must.  (Tom, my son, let's work on your golf game this year.  You'll accompany me next year to the Western States, and we'll play in this outing in different foursomes.)

The second most important event is the big cocktail party held the night before the opening session of the conference.  The drinks are free, and the conversations are much like speed dating.  Commercial lenders come with business cards, and they are in the mood to meet top-notch commercial loan brokers.  Interesting note:  The Great Recession killed off 85% of the commercial lenders on C-Loans.com.  We therefore had a big meeting at the office and kicked around ideas about how to find the hungriest commercial lenders in the country.  The lovely Angelica Gardner, our Executive Vice President (to you Star Trek fans, my Number 1), made the point, "The hungriest commercial lenders go to trade shows."  She was spot on!  Well done, Angelica.  At the cocktail party, banks and other commercial lenders joined C-Loans in droves.

Are you a highly successful commercial loan agent?  Are you extremely ambitious?  If so, you simply must attend the Western States Conference every year, and if you are a decent golfer, you simply must play in this golf outing.  The conference isn't cheap.  This year the Western States was held at the Wynn.  George and I each had one glass of house wine.  The bill?  $42 before tip.  Ouch!  So while the Western States is open to the public, in real life only the "Big Boys" attend - the top bankers and the most successful commercial loan brokers, the guys who regularly close loans of $5MM to $20MM.

It is important just to be seen at the Western States Conference.  It's almost like joining a fraternity that includes the most important bankers in commercial real estate finance.  "Hey Bob, this is Steve Henderson.  We met last year at the Western States.  I've got a deal I'd like to run by you.  Did I catch you at a good time?"  "Of course, Steve.  Good to hear from you," says the super-important commercial loan officer for the largest bank in America."  (Without the reminder about the Western States, such a heavyweight commercial loan officer would normally rush to kill your deal and get you off the phone).  "What have you got?"

By the way, did you catch my use of the polite inquiry, "Did I catch you at a good time?"  Those may be some of the most important and most magical words that you will ever learn in commercial real estate finance.  If a commercial real estate loan officer is busy, I guarantee you that he will quickly find a reason to kill your commercial loan, just to get you off the phone; and folks, God has never invented a commercial loan that didn't have at least one or two black hairs (flaws).

Now we have all been to mortgage conferences with thirty or so booths on the floor of a large convention room, where hungry lenders and service providers (appraisal companies, title companies, etc.) hawk their products.  The Western States Conference certainly had this.

But then there were the ritsy-looking private meeting rooms - complete with ice cold drinks and fresh fruit - set off to the side of the big convention floor where the top commercial loan officers for the biggest banks and the biggest life insurance companies in country meet only with invited guests.  The entrance to each one of these fancy meeting rooms is usually jealously guarded by an older ice queen, who clearly let's you know that you are not on the carefully-timed schedule.

George IV and I were invited to such a meeting, but this big fund lender had a cabana, instead of a meeting room.  Cabana?  What on earth is a cabana?  I learned at the show that a cabana is a very plush tent off to the side of the hotel swimming pool.  It took George and I an hour to find the right cabana, and it ended up being around the pool for the Encore Hotel and Casino, the sister property to the Wynn Hotel and Casino.  The temperature was 100 degrees, and we were both wearing dark blue wool suits, so after walking around and around each pool, we were sweating like pigs.  That being said, the Wynn is an expensive hotel, where only the very rich and the most successful people congregate.  The ladies around the pool didn't exactly hurt my eyes.  Hey, I'm just sayin'.

The launch of our new commercial mortgage portal, CommercialMortgage.com, was a smash hit.  It is a stunningly beautiful site, and I have to say that the site opened a lot of doors for us.  A full 80% of the lenders we invited to join C-Loans.com ended up joining as commercial lenders.  We were pleasantly suprised when quite a few large balance lenders - lenders whose minimum commercial loan was $5 million or higher - chose to join C-Loans at the show.  One of these commercial lenders had a minimum loan size of $20 million!  If you happen to need a very large commercial loan...

Over my past few blog articles, I have been beating the drum for you commercial brokers (salesmen of commercial-investment real estate) to open a small commercial loan brokerage desk in your commercial real estate offices.  I have told you guys repeatedly that there is no easier to meet high net worth individuals than to be a commercial loan broker.  Sound familiar?

Well, remember that big bank that joined C-Loans at the show whose minimum loan size was $20 million?  Do you know why they said they were joining?  They wanted to use their ability to make these enormous commercial real estate loans as an entre to meeting the wealthiest investors in the country!  Helloooo?  Did I call it or what?  :-)

Today you are going to learn a ton about the securitization of commercial mortgages.  Then I will explain this huge new development in the CMBS industry.  CMBS stands for commercial mortgage-backed securities.

A mortgage-backed security is a bond secured by a portfolio of mortgages.  These could be residential mortgages or commercial mortgages, but usually not both.  Back in the crazy days leading up to the 2008 crash, there were some asset-backed securities that were backed by a mixed collection of car loans, credit card paper, aircraft loans, scratch-and-dent residential loans, and subprime commercial loans.

A scratch-and-dent loan is one that is flawed and has been kicked out of the pool of loans that some sponsor has assembled.  Perhaps the debt ratio was too high.  Perhaps the home lacked a proper foundation.  Back in the day, Bayview Financial used to place some of its subprime commercial loans into such mixed collateral portfolios to raise the average yield and to lower the average loan-to-value ratio.  I once blogged that I thought Bayview's old commercial loans were actually quite good loans.

A bond is just a garden variety promissory note whereby some borrower promises to pay back some money to some investor.  "I, Wells Fargo Bank Commercial Trust #2015-3, promise to pay the little old widow, Francine Investor, the sum of $5 million at 4.25% interest and with monthly payments of $27,086 per month..."  Bonds are typically issued by companies or trusts, as opposed to by individuals.  In this example, the bond was issued by a trust managed by Wells Fargo Bank.

Now in this example, Francine Investor's bond is backed by a portfolio of commercial mortgages.  The typical CMBS portfolio contains $1 billion to $2 billion in commercial first mortgages.  Francine might have invested $100,000 - along with a ton of other investors - into this $2 billion bond.  The trustee of the trust - in this case Wells Fargo Bank - services the 200 or so commercial mortgages in the trust.  If any of the borrowers default, the bank has strict instructions to foreclose on behalf of Francine and the other investors.

But not all investors are created equal.  Some might be little old ladies with almost no tolerance of risk.  Others might be well heeled college endowments, who can afford to take some risk.  Yale University's endowment fund is said to be as rich as Croesus.  Others investors might be go-go investors, like the filthy rich owner of a life insurance company who we will call Billy Life, who love to take big risks for the chance of earning 20%.

Now the big bank or the big mortgage company bringing the offering to the market (peddling the mortgage-backed bonds) is known as the sponsor.  Sponsors securitize these commercial mortgages for a reason; i.e., to make a profit.  The sponsors have learned that they can take a 4.25% average portfolio yield and sell slices of the yield off to different groups of risk-takers and still have a big chunk of the yield still left over for themselves.  These various slices of the yield are called tranches.  

Let's continue with our example to make this tranche concept more clear.  Now Francine Investor, the widow, depends on her bond payment to buy groceries, so she cannot afford any risk.  Therefore Francine, along with other widows like her, cuts a deal with the Sponsor that goes like this:  "Even though the average yield on this CMBS portfolio is 4.25%, I'll accept just 2.75%; but in return for this lower yield, I want to be the first investor paid.  In other words, I get my full 2.75% yield before any riskier investors get a dime."  Francine is the buyer of the AAA-rated tranche.

Now Yale University's endowment fund can afford to take a little bit of risk.  Yale cuts a deal with the sponsor that might go like this, "I will accept just 3.40%, and I agree to the second tranche to be paid.  In other words, Francine and her fellow widows get paid first.  Only if there is interest income left over does Yale get a penny."  We'll call this the BBB-rated tranche, which is still considered investment grade.

Billy Life, the life company owner and gambler, might cut a deal with the sponsor as follows:  "I want a 20% yield, and I'll agree to be the last one paid."  We'll call Billy Life the B-piece buyer.  Securities rated lower than BBB are not considered to be investment grade.  They are very risky.   How can the sponsor afford to pay Billy 20% when its only earning 4.25%?  Answer:  Billy's piece might only be $300 million on a $2 billion offering, and don't forget that the Sponsor is earning an interest rate spread on everyone else's investment.  The sponsor is picking up the difference between 4.25% and 2.75% on Francine's tranche, and it is picking up the difference between 4.25% and 3.40% on Yale's investment. A 1.5% spread on $1.2 billion (the AAA-rated tranche) is a lot of money.

In real life, there may be a dozen different tranches on a $2 billion CMBS offering.  We are finally done with my explanation of the securitization process.

Now let me describe what happened during the Great Recession.  Francine emerged as a genius.  Despite commercial real estate plunging 45%, the holders of Francine's tranche got paid in full - 100% of principal and interest.  Yale lost all of its interest income and took a 20% haircut off of its principal.  And Billy Life?  He got nada.

Lots and lots of elderly investors and pension plans took huge losses.  One of the many reasons was because the originators of commercial mortgages were sticking deals of 80% to 82% loan-to-value into the securitization trust!  Some of these loans were interest-only for the first three years, and others depended on projected rent increases in order to service the loan.  These loans were absurdly risky.

Congress therefore, in the Dodd-Frank Act, changed the rules.  No longer could originators throw risky loans into these pools and then walk away, risk-free and counting their dough.  Beginning in late-2016, CMBS sponsors now have to retain 5% of the mortgage portfolios.  This cast a scary cloud over the CMBS industry, and originations plummeted.  I was therefore thrilled to see the following announcement from Wells Fargo Bank.

"Wells Fargo teamed up with Bank of America and Morgan Stanley to lead the first US Risk Retention compliant conduit transaction (WFCM 2016-BNK1). The new regulations, which do not formally go into effect until December 24, 2016, will require issuers to retain a 5% economic interest in new CMBS transactions."

The good news?  With Wells Fargo Bank, Bank of America, and Morgan Stanley keeping some serious skin the game, this new CMBS offering sold like hotcakes this month and at lower than expected yields.

Have you checked out the brand new CommercialMortgage.com yet?  Here's the best way to understand this competing portal to C-Loans.com.  We have a guy who calls banks every day and invites them to join C-Loans.com.  Those that say no, we add to CommercialMortgage.com.  Because most  bankers are old fuddy-duddies, many more banks say no than yes.  CommercialMortgage.com is therefore packed with four times more lenders than C-Loans.com.

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 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?

Got a squeeky-clean commercial loan request that deserves to be funded by a life company, conduit, or bank?

Just doing some general research on commercial loans?

Want to receive free training in commercial real estate finance?

Got a buddy or a co-worker who would benefit from learning commercial real estate finance?

Today we are going to talk about peer-to-peer lending, crowd-funding, FinTech, and shadow banking. Then I will explain why you should care.

Peer-to-peer lending is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. It is sometimes abbreviated P2P lending. The important thing to understand about peer-to-peer lending is that there is no bank involved. A single private investor is lending money directly to a private borrower.

Crowd-funding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.

The difference between peer-to-peer lending and crowd-funding is that P2P lending typically involves small loan amounts ($5,000 to $50,000), and just one investor lends the entire loan amount. Crowd-funding can sometimes involve much larger amounts, where lots of different investors chip in a little bit to make the loan or the equity investment.

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In the doctor’s office, two patients are talking. "You know, I had an appendectomy last month, and the doctor left a sponge in me by mistake." "A sponge!" exclaims the other. "Does it hurt much?" "No, there’s no pain at all," says the first, "but boy, do I ever get thirsty!"

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FinTech is short for financial technology. FinTech is a line of business based on using software to provide financial services. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software. Peer-to-peer lenders and crowd-funding companies are all examples of FinTech companies.

My own commercial mortgage portal, C-Loans.com, is an example of a FinTech company. This week I launched a new commercial mortgage portal, different from C-Loans.com,  called CommercialMortgage.com. It’s a handsome site and very easy to use.  You should check it out.

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It’s almost football season. Here are some famous and funny quotes:

"Gentlemen, it is better to have died a small boy than to fumble the football." -- John Heisman

"A school without football is in danger of deteriorating into a medieval study hall." -- Frank Leahy / Notre Dame

"I don't expect to win enough games to be put on NCAA probation. I just want to win enough to warrant an investigation." -- Bob Devaney / Nebraska

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Google defines shadow banking as follows: A shadow banking system refers to the financial intermediaries involved in facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight.

When Blackburne & Sons arranges a hard money loan, we are creating credit without banking oversight. (There is plenty of state oversight. Geesch.) When LendingClub.com arranges a $25,000 start-up loan to a recent immigrant wishing to buy and equip a truck to serve lumpia and other fast food at a worksite, this is another example of shadow banking. In a moment I will explain why you should care about peer-to-peer lending, crowd-funding, FinTech, and the shadow banking system.

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"Football is not a contact sport, it is a collision sport. Dancing is a contact sport." -- Duffy Daugherty / Michigan State

After USC lost 51-0 to Notre Dame, his post-game message to his team was, "All those who need showers, take them." -- John McKay / USC

Ohio State's Urban Meyer on one of his players: "He doesn't know the meaning of the word fear. In fact, I just saw his grades, and he doesn't know the meaning of a lot of words.”

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Here’s why you should care about the explosive growth of the shadow banking system: When an economy overheats and inflation begins to soar out of control, the Fed has a number of tools to cool down the banking system. It can raise the reserve requirement. “Hey, you bankers out there, we’re worried about too much credit being created. As of right now, you all have to increase your reserve account at the Fed. This means you will have less dough to lend.”

The Fed can also engage in open market operations, selling off some its enormous hoard ($4.5 trillion?) of government bonds, corporate bonds, and mortgage-backed securities. Investors have to take money out their banks to buy these securities, thereby reducing the liquidity in the system and cooling off the creation of new bank loans. Lastly, the Fed can raise interest rates, thereby making loans less attractive to borrowers.

“Okay, so our fire truck is all set to douse any hyper-inflationary fire, right?” Uh, what about the shadow banking system – those P2P lenders, crowd-funders, and hard money lenders? In 2012, Chinese monetary authorities tried to cool down their economy by raising the reserve requirement and interest rates. The move didn’t work so well. Chinese property speculators just went around the banks and took out private loans to buy their tower apartment units.

My point is this: If inflation were to ever take off again, which is far-far from certain to happen in our lifetimes, inflation could quickly get away from the Fed. Speculators could simply go around the banks using FinTech and keep borrowing. For example, as the owner of Blackburne & Sons, I don’t give a hoot if the Fed raises the reserve requirement for banks. It just means more sweet loans for Blackburne & Sons to make. I have no idea what the exact number is, and I am just pulling a number out of my tush, but I wouldn’t fall off my chair in surprise if global investors didn’t have as much as $75 trillion dollars sitting around under-invested.

The reason I wrote about this subject today is because my instincts are screaming at me to syndicate the purchase of more prime, multi-tenant industrial buildings in California gateway cities – and to buy that property with all cash. No debt. Zip-zilch-zero. Nada.

(I originally wrote this piece as my monthly Investor Letter.)  With zero debt, we are protected either way. If deflation rules the roost, and we only earn 4.5% to 5.0% after operating and organizational expenses (the most likely scenario), we are still earning far more than what CD are yielding. On the other hand, if inflation takes off and/or industrial rents sky rocket, we would be sitting in clover.

It will be interesting to see how the markets react when the Fed finally raises interest rates. The investment world could easily interpret such an action as a sign that the U.S. economy is now completely healed. They could go rushing to buy commercial-investment real estate using today’s low mortgage rates. I’m just sayin’.

This training article actually matters to a great many of you, whether you are arranging commercial loans or selling income property across state lines.

Now as you probably know, I am an attorney, licensed in California and Indiana.  Now let's suppose that I had a long-time Indiana law client who had a contract dispute with an Illinois company, and my client wanted me to represent him in Illinois in a suit against this Illinois company.  There is a legal procedure for me to do this called "appearing pro hoc vice."

Pro hoc vice (pronounced pro-hock-veechey) is a Latin term that means "for this occasion" or "for this event."  It is a legal term usually referring to a practice in common law jurisdictions, whereby a lawyer who has not been admitted to practice in a certain state is allowed to participate in a particular case in that state.  Now I would be required to "associate in" an Illinois attorney to supervise me and to make sure that I complied with Illinois state law and the local rules.

I promise that the relevance of this article to you will be made clear in the next paragraph. The relevance to commercial real estate brokers selling commercial-investment property will be made clear in the paragraph after that.

Okay, now let's suppose that you have a long-time Utah loan client who wants you to arrange a commercial loan for him on a property in Arizona - a state where a commercial loan broker needs an Arizona mortgage broker's license.  Can you legally arrange this loan?  Answer:  Only if you associate in an Arizona mortgage broker (and pay him $500 or so).

Now if you are a commercial real estate broker, legally licensed in Utah, and you have a long-time Utah investor client wishing to buy a commercial-investment property in Arizona, you will need to associate in a legally licensed Arizona real estate broker.  In the parlance of commercial brokerage, you will need to have him serve as your broker of record.  But, if you do it right, I am pretty sure that you may legally help your long-time Utah client buy a commercial-investment property in Arizona.

The reason this subject came to mind today is because I received this week an interesting email from a company advertising to commercial brokers, offering to serve as their broker of record.  Now I had never heard of a broker of record service before, but when I googled, "broker of record services", I found quite a few companies offering this service.

Now this one company charged the higher of $1,500 or 3% of the total commission; e.g., 3% of 6%.  It sounded like a reasonable price to me to pay to keep your tush out of jail.

Keep looking for the contact information (the contents of a business card) of any banker making commercial real estate loans.  We'll trade you that information for a free directory of 2,000 commercial real estate lenders.

Have you created a link to C-Loans.com on your real estate web site yet?  The links should say "Commercial Loans" or "Commercial Mortgages" or "Commercial Real Estate Loans" or "Need a Commercial Mortgage?"

Remember, the home page of C-Loans.com is programmed to automatically capture the referring URL (the address of your web site) and to print it at the bottom of the corresponding C-Loans application.  When the deal closes, we look up the lucky guy who put the link to C-Loans.com on his website and notify him of the big referral fee check waiting for him.  We once paid Alan Dunn of Spydercube.com a $21,250 referral fee on a $17 million land loan application that came from his site.

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 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 you have a squeeky clean commercial mortgage loan that deserves to be financed by a life company, conduit, or a commercial bank?

I keep telling you commercial brokers that there is no easier way to meet high-net-worth investors than to open up a little commercial mortgage brokerage operation (a desk and a phone) in your real estate office.

Want to receive free training in commercial real estate finance?

Got a buddy or a co-worker who would benefit from learning commercial real estate finance?

In addition to owning C-Loans.com, I also own Blackburne & Sons, a $50 million private money commercial mortgage company that makes hard money permanent loans, as well as just bridge loans.  This reduces the APR to your borrowers considerably.

Our best loan officer is Alicia Gandy, a lovely lady who has been with us now for 17 wonderful years.  Alicia is such a big producer and such a diligent go-getter that we call her the Loan Goddess.  Alicia taught me a clever marketing technique this week, a virtually cost-free technique that could be used by a commercial real estate salesman, a leasing agent, a property manager, as well as any commercial mortgage broker.

It's summer time.  Many people are out hiking, biking, boating, or doing some other fun outdoor activity.  The last thing most of us want to do is to work really hard during the final few weeks of the summer.   Therefore business here at Blackburne & Sons is pretty slow.

Instead of goofing off, however, Alicia went out and killed something this week.  Alicia called her twelve best brokers and complained, "Hey, I'm dying here!  I have no business.  If you bring me a commercial loan right now, your deal will be at the top of my stack, and I'll work my tail off on it."  Each of her best brokers complained that they didn't have anything for her... and yet within 24 hours, Alicia had three new deals in the door!

"Gee, George, this is so obvious that its like the moron with the headphones repeating, "Breath in, breath out."  Yeah, yeah... but when was the last time that you made twelve outgoing calls to your best brokers?  That's what I thought.

Here's an idea:  (1) Pull out a file folder right now and label it, "Best Brokers."  (2)  Take out a yellow legal pad and write down the names and phone numbers of your twelve best repeat customers.  (3)  Then, whenever you are slow, maybe you call these twelve special customers and petition for deals.

I have been using the term, "best brokers".  As a lender, commercial loan brokers are one of the best repeat sources for commercial real estate loans.  But if you are a commercial real estate salesman (properly called a commercial broker, even if you are only a salesman and not a broker), your twelve best repeat customers will probably be wealthy commercial real estate investors.  If you are a leasing agent, your best repeat customers may be the owners of rapidly growing companies.  But you get the concept.  All of us have a dozen or so repeat customers who make up a big part of our annual sales, so get off the dime and dial them for dollars.  (How about that for staying consistent with my metaphor - dime and dollar?  Get it?  Ha-ha!)

Have you created a link (or 20 links) to C-Loans.com on your real estate web site yet?  The links should say "Commercial Loans" or "Commercial Mortgages" or "Commercial Real Estate Loans" or "Need a Commercial Mortgage?"

Remember, the home page of C-Loans.com is programmed to automatically capture the referring URL (the address of your web site) and to print it at the bottom of the corresponding C-Loans application.  When the deal closes, we look up the lucky guy who put the link (or - even smarter - 20 links) to C-Loans.com on his website and notify him of the big referral fee check waiting for him.  We once paid Alan Dunn of Spydercube.com a $21,250 referral fee on a $17 million land loan application that came from his site.

Now be sure to note:  You do not need any special partner number.  You do not need to notify us.  You could create this link at 3:00 a.m. tonight, or better yet, create 20 links.  By the way, Alan Dunn was asleep when this $17 million loan application was sent over from his site to C-Loans.com!  "Asleep?  How could you possibly know this, George?"  In truth, I don't; but he certainly could have been asleep, and it makes for a great story.  Ha-ha!  These 20 links work automatically while you're sleeping, playing golf, or cuddled up with your honey.  Notice the subtle upsell to 20 links rather than just one?  Hey Dad, can I have $50?  Twenty dollars???  What do you need $10 for?

Keep looking for the contact information (the contents of a business card) of any banker making commercial real estate loans.  We'll trade you that information for a free directory of 2,000 commercial real estate lenders.

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 have a squeeky clean commercial mortgage loan that deserves to be financed by a life company, conduit, or a commercial bank?

If you are a commercial real estate broker (you sell commercial-investment real estate), and your company does not have a small commercial mortgage brokerage operation (desk and phone), you are missing out on a huge opportunity.  There is no easier way to meet high-net-worth investors than to be a commercial mortgage broker.  Just about every borrower responding to your ads will be a high-net-worth commercial real estate investor.

Want to receive free training in commercial real estate finance?

Got a buddy or a co-worker who would benefit from learning commercial real estate finance?  I write this blog to train my two sons, George IV and Tom, in commercial real estate finance.  Long after I have gone to that huge commercial real estate loan closing in the sky, my sons will be able to review my training on any commercial real estate finance (CREF) subject by going to a search engine and typing, "C-Loans mezzanine loans." 

Today I am going to remind you of a marketing principle that is applicable to many fields of business, not just to commercial real estate finance (CREF).  If you are looking for leads, advertise to the guys who are advertising.

In prior training articles about marketing for commercial loans, I have made the following points:

1. Advertising directly to the public for commercial real estate loans does not work.  It's cheap to refinance your home, so many borrowers do it every few years.  In stark contrast, obtaining a new commercial real estate loan is very, very expensive.  There is the cost of the appraisal, the cost of the toxic report, the loan points, and the legal fees.  Commercial real estate investors therefore refinance their buildings as seldom as possible.  The net result is that the chances of your advertising postcard or snail mail newsletter arriving at the exact moment when a commercial mortgage borrower is looking for a new commercial is less than one in a one hundred thousand (1/100,000).  Be smart.  Read this last paragraph again.
   
   

1. The smart commercial loan marketer therefore advertises to those guys and ladies who, because of their job, are in a position to send you referrals of their turndowns.  Examples includes commercial bankers, commercial real estate brokers, property management companies, other commercial real estate lenders like conduits, credit unions, and hard money lenders; attorneys, accountants, estate planners (life insurance salesmen), residential real estate agents, etc.
   
   
2.  But not every referral source is the same.  Some are better than others.  If your advertising costs money (as opposed to email newsletters), focus your advertising dollars on those guys who are seeing a lot of commercial loan requests.  Makes sense, huh?  As a general rule, I would say that (#1) commercial bankers and (#2) other commercial real estate lenders probably see the most commercial loan requests on a weekly basis.

Now we are getting to the point of today's training session.  The more commercial loans that a referral source has crossing his desk, the more turndowns he can refer your way.  At any given moment, who is seeing the most commercial loan requests?  The company with the most commercial loan turndowns to refer you will usually be the company paying the most for commercial loan advertising at the moment.  Therefore if you see a bank or a commercial mortgage company advertising for commercial loans, be sure to contact them and beg them for their turndowns.

In the old days such commercial loan advertising would appear as a display advertisement in the newspaper or in some glossy real estate magazine, like the National Real Estate Investor.  Modernly, you will see the most commercial loan advertising on Google.  If you do a search for "commercial real estate loans" on Google, you will see four Sponsored Ads at the top of the results page, lead off by an ad from LendingTree.  These are the guys you want to chase for their commercial mortgage turndowns.  There are also commercial real estate e-zines.  If you see an advertisement for commercial loans in one of them, be sure to hit them up for their commercial mortgage turndowns.

But how do you do it?  How do you advertise to some strange loan officer at some strange commercial lender?  (1) Call the lender, introduce yourself and your commercial mortgage brokerage company; and (2) Follow up with a snail mail letter, including two business cards, thanking him for his time and asking for his commercial loan turndowns; and (3) Every week send him a funny joke, an entertaining picture or cartoon, an interesting business article, or a cool random story, along with a hand-written note asking for his commercial loan turndowns, as well as three business cards every time.  Don't expect him to keep your business cards around for more than a couple of days.  The hope here is that he will hand your card out to declined commercial loan applicants.

Bottom line:  Advertise to the guys who are advertising.

Qualified commercial mortgage brokers can now buy commercial mortgage leads for just $1 to $9 apiece upfront, plus a 37.5 basis points if the deal closes.

C-Loans, Inc. once paid Alan Dunn a referral fee of $21,250 for a $17 million commercial loan application that came from his site to C-Loans while Alan was asleep!  All he did was create a "Commercial Loans" link and point it to C-Loans.com.  That's it.  There was no fancy computer code to write or special partnership numbers to imbed.  C-Loans.com is programmed to automatically capture the URL of the last site visited by the borrower before coming to C-Loans.  That URL is printed at the bottom of every loan application.  If the deal closes, we look up who owns that referring site and give them the good news.

Keep looking for the contact information of a commercial banker making commercial real estate loans.  You can trade that information for a database of over 2,000 commercial real estate lenders.

For just $549 you can buy our famous 9-hour video course, How to Broker Commercial Loans.  I say "famous" because a sizeable percentage of all practicing commercial mortgage brokers learned the business from this course.  We also now throw in our 5-hour audio course, Intermediate Commercial Mortgage Finance.  Finally you will understand all of the strange terminology and financial ratios.  Your confidence will soar.

Is your client's company losing money?  Does your commercial mortgage borrower have less-than-stellar credit?  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 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?

Do you have an excellent commercial loan request that deserves to be financed by a life company, conduit, or commercial bank?

Are you a commercial loan officer for a bank or other commercial lender?  Want custom-fitted commercial loan requests delivered directly to your email box?

Want to receive free training in commercial real estate finance?

Got a buddy or a co-worker who would benefit from learning commercial real estate finance?

Below you will find my latest Investor Letter, our monthly newsletter to our 1,000+ private commercial mortgage investors, somewhat similar to Warren Buffet's annual letter to his shareholders.  I hope you enjoy it.

INVESTOR LETTER

July 22, 2016

Nobel Prize-winning economist, Milton Friedman, is known to be the one who coined the term, “helicopter money”, in the now famous paper, “The Optimum Quantity of Money”, where he included the following parable:

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event, which will never be repeated.” -- Milton Friedman

The reason that I am talking about helicopter money today is because I have heard this term, “helicopter money”, used more often by financial commentators in the past thirty days than in the past five years.

Now I have been blessed – truly blessed (thank you sooo much!) – by loyal investors who have stuck with Blackburne & Sons for more than twenty to twenty-five years. If you happen to be one of these old-time investors, I have three comments: (1) God bless you for your loyalty and your trust. The Great Recession was pretty awful, but together we limped through it; and (2) darn, we’re getting old, ha-ha; and (3) you may faintly remember that, long before Ben Bernanke was ever appointed Fed Chairman, I pointed out in one of our Investor Letters perhaps the most important economic speech given in our lifetimes, a speech made by then Fed Governor (but not yet Fed Chairman) Ben Bernanke, in November of 2002 to the National Economist Club in Washington, D.C., entitled “Making Sure ‘It’ Doesn’t Happen Here”:

“… the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation...” -- Ben Bernanke

The “It” in the name of the above speech is deflation, and back in 2002, Japan had recently completed the first of its two Lost Decades. Let me state, for the record, that there are times when I am an absolute idiot. There has also been a few times, however, when I have accidently stumbled upon an observation that, in hindsight, looked pretty prescient. Making a special note of the above speech by a then obscure Fed governor was one of my luckier moments.

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“Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel.” -- John Quinton

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Okay, so why is everyone - especially commentators on the European economy - talking so much these days about “helicopter money”?

The answer is because quantitative easing and negative interest rates have not been enough to jumpstart the economy of the European Union. The economy in Europe is sluggish. The money supply refuses to grow, even with the European Central Bank (“ECB”) buying up trillions of Euros worth of sovereign bonds (a fancy word for bonds issue by a country, like Italy) and even with the ECB buying up trillions of Euros worth AAA and AA-rated corporate bonds. Inflation just won’t stay lit.

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When we take our dog on a car journey, we carry his drinking water in a gin bottle. On one occasion we stopped for lunch and let him out of the car. Pouring some water from the bottle into his bowl, I noticed a man watching with fascination. He came over to me and whispered, "I hope that you're not going to let him drive!"

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Why won’t inflation ignite in Europe? In school we were all taught that when the Fed (or the ECB in the case of Europe) pumps money into the system that inflation was the result. In truth, this lesson is an over-simplification. The money supply only grows if banks are willing to lend and borrowers are willing to borrow.

In the United States, we recapitalized our banks - gave them cash to rebuild their loan loss reserves and their capital (the dough left in the bank to act as a further cushion against losses). Do you remember TARP? That was a $700 billion bailout of U.S. banks. It was pretty controversial at the time, but in hindsight, it was the right move. Most of that money was eventually paid back to the Treasury by the banks and by AIG Life Insurance Company.

Bam! Oh, my goodness, what was that??? That’s the teacher’s yardstick slapping the desktop. “Pay attention,” my professors used to say, “This is on the test.” The European Union did not recapitalize its banks. Hundreds of billions of Euros worth of loan losses from the Great Recession have still not been written off by European banks. Many of the largest banks in Europe – including names like Deutsche Bank and Credit Suisse – are very weak. Weak banks tend not to lend money out like crazy.

In order for inflation to ignite, banks need to be willing to lend.

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Q: What's the difference between a poorly dressed man on a tricycle and a well-dressed man on a bicycle?

A: Attire.

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According to my favorite economist, Ben Bernanke, “The U.S. government has a technology called a printing press… (and) under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” If banks just won’t lend and borrowers just won’t borrow, the ECB can always drop one-hundred Euro bills from a helicopter.

If I were the head of the ECB, I would distribute one-trillion Euros between all of the countries of the European Union and insist that they use this dough to put a solar panel on the roof of every home and every commercial building in the union. This move would be considered a helicopter drop.

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You have a real estate or mortgage web site, right?  Open up your home page, create a link that says, "Commercial Mortgages" or "Commercial Loans", point this link to http://www.C-Loans.com, and Voila, you're done.  Now forget about it.  It may be one year or two years or three years, but if your site enjoys some good traffic from wealthy real estate investors, you might get a call like this (true story!):

"Are you Mr. Alan Dunn?  Guess what, Alan, I have some very good news for you.  I have here a referral fee check for $21,250.  An investor visited your web site while you were sleeping and clicked on your "Commercial Loans" link.  He came to C-Loans.com and filled out a loan application for a $17 million land development loan.  The deal closed!"

Our software is programmed to automatically capture the referring URL (the address of your website), and that URL is printed at the bottom of every C-Loans application that came from your site.  When the deal closes, we look up the owner of the referring URL and pay him a nice fee.

There is nothing more to the process.  You do NOT have to notify us that you have created the link. You do NOT need any special partner code.  Just create the link and point it to C-Loans.com.

"But George, how do I know that you won't cheat me out of my fee?"

There are times - especially after a big loan payoff - when there is over $3 million sitting in our loan servicing trust accounts.  We literally make our living based on trust, and this is the start of our 37th year in business.

And folks, if you are going to the trouble of adding a link to C-Loans.com on your website, why add just one?  If it were me, I would add a "Commercial Financing" tab at the top of the page, a "Commercial Loans" link on the left or right side, and a "Apply For a Commercial Real Estate Loan" link in the footer.  Any new page I added after this first one, I would make sure that it had the same links.  Why not?  Why not increase your chances of catching the idea of a commercial real estate borrower?

Keep looking for the contact information of a banker making commercial real estate loans.  You can trade his contact information for a free directory of 2,000 commercial real estate investors.

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 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?

Got a commercial loan request that deserves a low-rate loan from a life company, commercial bank or conduit?

Are you finally ready to add a commercial mortgage brokerage division to your existing commercial realty brokerage?  All you need is a desk and a phone, and there is no easier way to meet wealthy commercial real estate investors than to be a commercial mortgage broker.  After all, poor people do not own shopping centers.

Want to receive free training lessons in commercial real estate finance ("CREF")?

Got a buddy or a co-worker who would benefit from learning commercial real estate finance?