Commercial Loans and Fun Blog

The vast majority of all large commercial real estate loans today are made to single asset, bankruptcy remote entities.  This article will explain why.

About 30 years ago a lowlife scumbag was climbing on the roof of a retail building in New York City, looking for a way to break in and steal some of the inventory.  The roof was old, and this poor-poor lowlife scumbag fell through the roof and was severely injured.  This lowlife scumbag then had the audacity to sue the property owner for $6 million for negligently having an older roof and not warning him of the danger of collapse.  The brain dead jury found for the the lowlife scumbag!

The property was not sufficiently insured for this kind of personal injury, and the older couple who owned the building held title in their personal names.  The lowlife scumbag was therefore able to seize the life's savings of this honest, hard-working, older couple.

After this astounding case, most commercial real estate investors transferred title to their properties into some sort of entity that had a corporate shield, initially a Subchapter-S corporation and later, after the limited liability company was adopted by the states in 1978, an LLC.

However, it wasn't enough to have title vested in an entity with a corporate shield, as the following imaginary story will explain.

Peter Printer owned the world's largest illustrated Bible printing business in the world.  His Bibles contained scores of full color illustrations, far more pictures than his nearest competitor.  Customers loved his Bibles, especially parents who read the Bible to their young children at night.  For thirty years Peter Printer made a wonderful income, and he invested his millions into a series of office buildings in Los Angeles.  He held title to both his successful printing business and his latest office building (he sold his smaller buildings and traded up) in the name Peter Printer Enterprises, LLC.

In 2017 Amazon came out with the Kindle VII, which allowed book printers to embed numerous short videos right into their e-books.  Clever Printing, LLC was the first Bible printer to embed short videos, scenes culled from scores of old Biblical movies, into their Bibles.  Their new Bibles were a smash hit, and Peter Printer's Bible sales plummeted.  Suffering from immense losses, Peter was even forced to use the rents from his investment property, the big office building, to prop up his Bible printing business.  He stopped making payments on his $8 million first mortgage from Statewide Regional Bank.

When Statewide Regional Bank stopped receiving payments, it filed foreclosure.  Ten days before the foreclosure sale, Peter Printer Enterprises, LLC filed a Chapter 11 (Reorganization) Bankruptcy.  For sixty days, Statewide Regional Bank was not allowed by the automatic stay of bankruptcy to do anything; but when the sixty days had run, the bank immediately filed a motion for relief of stay or, in the alternative, for the immediate appointment of a receiver to collect the $75,000 in rent generated by the beautiful, big office building.

To the bank's absolute horror, Peter's bankruptcy attorney was able to convince the bankruptcy court that the $75,000 per month in rent generated by the big office building was absolutely essential to Peter's plan of reorganization.  The company needed that $75,000 per month to pay the salaries of the printing company's employees while the company developed its own video-embedded Bible.  

For three years the bankruptcy court forbade the bank from foreclosing, during which time the leases of 70% of the tenants came up for renewal.  With no money to pay for repairs and upgrades to the office suites and no money to pay for leasing commissions, a Biblical Exodus of tenants ensued.  By the time the bank was finally granted relief from the stay, the building was severely rundown and almost empty.  The bank had originally made an $8 million loan.  It lost all of its interest income and limped home with just $5.25 million of its original principal.

Are you learning anything today?  This is how I teach commercial real estate finance.  I try to use lots and lots of "real-life" stories.  In the 200-year history of the industry, this year is the single best year to becomes a commercial mortgage broker.  More commercial loans are ballooning this year than any year in history.

What mistake did Statewide Regional Bank make?  They made a large commercial loan to an entity that that owned more than one asset.  They got caught up in the bankruptcy troubles of Peter's printing business.  The bank did not make a loan to a single asset, bankruptcy remote entity.  Had Peter, as a condition of the loan, transferred title to the large office building into a stand-alone LLC with no other assets, the troubles of Peter's printing business would not have delayed the bank's foreclosure.  The bank would not have taken a financial bath.

It amazes me that more people don't take advantage of the following offer.  Give us the contact info of a banker making commercial loans, and we'll give you a list of 2,000+ commercial real estate lenders.  2,000+ for one.  Helloooo?

Life insurance companies offer by far the lowest interest rates on large commercial permanent loans. You will recall that a permanent loan is just a garden variety first mortgage on a commercial property, with a term of at least 5 years and with at least some amortization, typically 25 years.

Interest rates on commercial real estate loans from life insurance companies are typically 25 to 37.5 basis points lower than those offered by conduits, and they are often only 25 basis points higher than the prime residential mortgage rate.  In other words, if an A-quality borrower can obtain a conforming, 30-year, fixed rate loan of 3.5% on his home today, a life company might make a 10-year, fixed rate, commercial permanent loan at around 3.75%.

In most cases, a borrower will NOT be able to obtain a new permanent loan from a life insurance company by applying directly to the life insurance company.

When you are the prettiest girl at the dance, lots and lots of guys want to ask you to dance. Screening twenty loan requests per day takes a lot of time. In addition, it doesn't make sense for most life insurance companies to open regional offices throughout the country, especially when the typical life company makes fewer than 30 loans per year.  Please note, however, that when a life insurance does make a new commercial permanent loan, it is usually a very large loan.

Therefore most life companies employ correspondents. A correspondent is a commercial mortgage company that has the exclusive right to make commercial loans in a given region for a particular life company. The correspondent does all of the site inspections for prospective loans in that region for that life company.

The correspondent then services the loan (collects the payments and handles any foreclosures) for that life company.  The amount of the loan servicing fee is tiny - typically just 12.5 basis points per year - but life insurance company loans are typically huge.  For example, 12.5 basis points on a $20 million loan is a healthy $25,000 per year.

As I mentioned in another recent blog article about life insurance companies, most borrowers and brokers could live three life times and never have a commercial loan attractive enough for a life insurance company.  Life insurance companies are looking for the following types of commercial loans:

1. The commercial loan must be secured by one of the four major food groups - which is just commercial mortgage lingo for (1) Multifamily; (2) Office; (3) Retail; or (4) Industrial.
   
   
2. The property should be either brand new or in pristine condition.
   
   
3. The property needs to be located in a primary location.  A primary location is one of the very best locations in a gateway city in terms of traffic count, accessibility, and affluence of the neighborhood.  In other words, a lot of Lexus'es, Mercedes, and BMW's need to be driving by.  You will rarely find a life company lending in a city of less than 400,000 residents.
   
   
4. The loan amount must usually exceed $5 million.  You will occassionally see life companies making commercial real estate loans as small as $3 million, but these small deals are usually made on properties leased on a triple net basis to some incredibly strong tenant, like Walgreens, CVS, Rite Aid, or some other national credit tenant.  A national credit tenant is a company rated BBB or better by Standard & Poor's.
   
   
5. Life company loans rarely exceed 55% to 58% loan-to-value.  They are designed for deals where the buyer is exchanging into the property with an enormous down payment.

Remember, if you were to call a life insurance company directly, the company receptionist will usually ask you for the location of the property and then refer you to the appropriate correspondent. Don't get a broken nose over this.  This is just how life companies originate their commercial loans.  They almost always use exclusive correspondents.

You can apply to a dozen different life company correspondents using C-Loans.com.

Commercial loans from life insurance companies typically offer the lowest interest rates and the best terms in all of commercial real estate finance.  Most commercial real estate loans from life insurance companies have a fixed rate, and these wonderful loans typically have a term of either 5, 7, or 10 years.  The interest rate is usually 25 to 37.5 basis points cheaper than those from any CMBS lender (conduit) or major bank.

Pop Quiz:  What is a basis point?  Answer:  A basis point is 1/100th of 1%.  Therefore 25 basis points is one-quarter of one percent.

By the way, in the lingo of commercial real estate finance, a life insurance company is known as a life company.

Life insurance companies insist on fixed rate loans because they need to know exactly what they will earn during the term of the investment.  They need these precise numbers because they need to be sure they can meet the death benefits promised in their life insurance policies, based on their actuarial projections.

Therefore most life company loans have a lock-out clause for the first half of the loan (the first five years of a ten-year loan).  A lock-out clause is defined as an absolute prohibition against prepayment.  Suppose you win the lottery.  You walk into the life insurance company's office, overturn a wheelbarrow containing $5.2 million in cash, and then proudly march out.  Three days later you get a certified check in the mail for $5.2 million (less this month's payment).  "Sorry, sir, but you are NOT allowed to pay this loan off early."

For the remaining half of the loan term almost all life company loans have a defeasance prepayment penalty.  A defeasance prepayment penalty is defined as one where the borrower is required to go out and buy a series of Treasury bills and bonds that will provide the lender with the exact same stream of incoming payments, plus any balloon payment.  There are defeasance companies which will buy and assemble these securities for you.  The thing to remember about defeasance prepayment penalties is that they are HUGE.  Think of the largest prepayment penalty that you have ever encountered and then multiply by twenty.  Ouch!!!

Life insurance companies are looking for the following types of commercial loans:

1. The commercial loan must be secured by one of the four major food groups - which is just commercial mortgage lingo for (1) Multifamily; (2) Office; (3) Retail; or (4) Industrial.
   
   
2. The property should be either brand new or in pristine condition.
   
   
3. The property needs to be located in a primary location.  A primary location is one of the very best locations in a gateway city in terms of traffic count, accessibility, and affluence of the neighborhood.  You will rarely find a life company lending in a city of less than 200,000 residents.
   
   
4. The loan amount must usually exceed $5 million.  You will occassionally see life companies making commercial real estate loans as small as $3 million, but these small deals are usually made on properties leased on a triple net basis to some incredibly strong tenant, like Walgreens, CVS, Rite Aid, or some other national credit tenant.  A national credit tenant is a company rated BBB or better by Standard & Poor's.
   
   
5. Life company loans rarely exceed 55% to 58% loan-to-value.  They are designed for deals where the buyer is exchanging into the property with an enormous down payment.

"Gee, George, those are some pretty tough requirements to meet."

Most of us could live three lifetimes and never run across a commercial real estate deal suitable for a life company.

But don't panic.  If you use C-Loans.com to apply for a commercial real estate loan, you can apply to a dozen conduits and banks at the same time you apply to a half-dozen life insurance companies.  If the life companies all turn you down, the conduits will probably do your deal at just a slightly higher rate.

A bank is never going to finance a gentlemen's club, which is just a fancy term for a nudie bar.  Nor would a bank finance an adult bookstore or a lingerie and marital aid store.  Can you just visualize the headlines?  First Neighborhood Bank Forecloses on the Pink Feather Lounge!  Bank Vice President seen collecting the cover charge at the door.  This is NOT gonna happen.  Ha-ha!

The owners of such establishments, along with the owners of medicinal marijuana facilities, will usually be forced to borrow from private money (hard money) lending companies.

For those of you who think that I am some depraved sinner, it is important you appreciate that over the past 35 years, we have financed six churches.  Every one of these loans defaulted, and we took a huge loss on each one.  Actually that's incorrect.  We once made a $1.5 million loan on a free and clear church in a nice area of Texas.  When this loan defaulted as well, it turned out that the pastor had stolen the money to originally buy the church from his former church in Detroit.  Our private investors were in litigation for three years, but they eventually came out whole.  Needless to say, we are not a big fan of church loans.

At Blackburne & Sons, we actually prefer loans secured by gentlemen's clubs, adult bookstores, and other politically incorrect properties.  We have made twenty such loans over the years, and we have never taken a loss on one of them.  Usually they are cash cows.

We are actively looking for new loans on politically-incorrect properties right now.  We just put a $1.1 million loan on a gentlemen's club in Detroit (scary area) out for sale to our private investors, and the entire loan sold out in a day and a half.  Our private investors understood the concept that boys will probably always enjoy looking at pretty girls.  They absolutely ate this loan up.

Now if you were reading carefully, you probably noticed something.  Blackburne & Sons does NOT use a mortgage fund to fund its deals.  Instead, we syndicate every loan.  On a $1.1 million loan, we might have as many as 30 different private investors, and the group of private investors in each deal will be different.

"But George, if you have to syndicate every loan, doesn't that mean you will take longer to fund a new loan than a competing hard money lender?"

Yes, it does.  It might take us a week longer to fund our loans because each participating private investor has to send in his check.  It can be a pain in the tail sometimes.

Blackburne & Sons actually has its own mortgage fund, but I absolutely hate the concept.  Huh?  Why?  Every ten to fifteen years commercial real estate is hit by a depression, where commercial real estate falls by 45%.  When commercial real estate values are crashing, every hard money mortgage fund in the country is absolutely swamped with withdrawals.  They are forced to stop making new loans because they have no liquidity.  Every penny of liquidity is spent returning money to panicky investors.  They are completely out of the market.

Sons, please remember this.  During commercial real estate depressions, real estate falls by almost exactly 45%.  Certainly it has every time in my lifetime.  (Confused?  I write this blog to teach my two sons everything I have learned in my 35 years in the business.  I have a bad heart, and I was in the cardiac intensive care unit of the hospital twice in the past two weeks.  These wonderful blog training articles cannot continue forever.  I'm just sayin'...)

Everyone, here is why this matters to you.  Here is why you want to be the best friend of my two sons.  Blackburne & Sons was the ONLY commercial hard money lender to be in the market to make new commercial loans every day of every year of the Great Recession.

We can always find first mortgage money from our filthy rich private investors - even when blood is running in the streets.  It's just a matter or price.  And if you can find commercial mortgage money during a horrible depression, you can charge a huge loan brokerage fee.

So if you are a surviving veteran of the commercial mortgage brokerage industry, you definitely want to develop a relationship with Alicia Gandy (our biggest producer who is affectionately known as the Loan Goddess), my son George IV, or my son Tom.

Why are relationships so important?  The most important lesson about commercial real estate finance that I ever taught my sons was that commercial lenders make loans for their friends.

In late 2014 I wrote a blog article suggesting that industrial real estate was heating up, and I gave my reasons.  Apartments have enjoyed sensational appreciation for the past several years, but an investor looking to invest in commercial real estate in 2015 doesn't want last year's winner.  He wants to invest in that type of commercial real estate which is going to perform the best in the next 12 months.

This week I flew to Las Vegas for the California Mortgage Association's semi-annual training session for hard money mortgage companies.  The conference had a number of speakers, but by far the most entertaining and informative speaker was Luis A. Belmonte, the gentleman who gave the economic outlook for the upcoming year.  Mr. Belmonte is a former partner in Lincoln Properties and formerly the Executive Vice President of AMB Institutional Realty Advisors, the asset manager for 15,000,000 square feet of industrial property throughout the United States.

Mr. Belmonte made some very interesting points.  First of all, he remains bullish on multifamily due to the fact that leading edge of the children of the Echo Boom generation - the grandsons and granddaughters of the Baby Boomers - have reached the age of sixteen.  Soon these 80 million Americans will be forming new households, and they will need apartments.

Office space, in his opinion, is still greatly overbuilt.  The office space vacancy rate in most cities remains in the mid-teens.  Rents are going nowhere.  Retail space - he wouldn't touch it with a ten foot pole.  Amazon.com is eating retail's lunch.

But then he got to industrial space.  "Industrial space is the best type of commercial real estate in which to be invested today."  He gave a number of reasons:

1. There has been almost no new construction of industrial space for eight years.
   
   
2. Absorption of industrial space is outpacing new construction in almost every major city.
   
   
3. Wages in China have increased dramatically in recent years.  It's not that much cheaper to manufacture goods in China anymore.  [George's note:  The Boston Consulting Group maintains a cost index for the various counties, and China is only 4.5% cheaper than the U.S. right now, mainly because our natural gas / energy costs are tiny compared to the rest of the world.]
   
   
4. But then he gave a reason that rocked my world.  "For every two square feet of retail space that the internet makes unnecessary, the U.S. needs one square foot of warehouse space" (for internet retailers to store their products).

End of article.

If a potential commercial mortgage borrower or broker is pre-registered on C-Loans, he is far more likely to enter a commercial loan request into the portal.  Therefore we are going to bribe you to pre-register (fill in your name, address, etc.).

Need a commercial mortgage loan?  Submit your mini-app to 750 different commercial lenders in just four minutes for free.  C-Loans is paid by its participating lenders.

Do you know one banker making commercial real estate loans?  We'll trade his contact information for our list of 2,000 commercial lenders.

Do you enjoy my "everyman's language" style of teaching commercial real estate finance, where I use lots of examples and war stories?  Why not become a near-expert in commercial real estate finance? 

A joint venture is a sort of a "partnership" between a developer and one or more passive investors to build a commercial property.  The developer brings to the partnership the project; his expertise, as described in detail in his CV or curriculum vitae; and some prepaid expenses, such as architectural fees, engineering fees, and his down payment on the land.  The investor brings to the "partnership" the majority of the equity required by the construction lender.  I've used the term "partnership" throughout this article, but these business entities are almost always set up as limited liability companies ("LLC's").

Almost all commercial construction loans are made by banks.  Banks today are not going to take all of the risk of a construction project by loaning to the developer 100% of the total cost of the project.  Usually the bank will only cover part of the total cost of construction, and the developer will have to cover the rest.  How much of the total cost of the project that the bank will cover is determined by their loan-to-cost ratio.

Example:

Doug Developer wants to build six town homes.  The total cost of the project - including land costs, hard costs, soft costs, and the contingency reserve - is $2,500,000.  This is a relatively small project, so his construction loan request will be small.  He therefore wisely applies to a small bank located close to the subject property.  (George's note:  Doug did two smart things here.  First he matched the size of the loan to the size of the bank to which he applied.  Secondly, he applied to a bank with a branch located just down the street.  Construction lenders greatly prefer local projects.)

Nearby Neighborhood Bank NT&SA has a bank policy that it will only make commercial construction loans today up to 70% loan-to-cost.  Remember, the total cost of the project is $2.5 million.  Seventy percent of $2.5 million is $1,750,000.  This is the largest construction loan that Nearby Neighborhood Bank will make.  Doug Developer will be expected to come up with the remaining $750,000.

Doug paid $500,000 for the land, and he put down $125,000.  The seller carried back a short term first mortgage of $375,000.  Doug also paid $65,000 for all of the architectural plans and another $22,000 for the engineering work.  He therefore has $212,000 in equity into the project.  He is short $538,000.  

$750,000 required equity - $212,000 in developer contributions = $538,000 shortfall

Where is Doug going to come up with the missing $538,000 in cash?

Doug approaches Dr. Dan Deeppockets, a retired neurosurgeon, and invited Dr. Dan to enter into a joint venture with him.  Doug Developer and Dr. Dan negotiate the following deal:

Dr. Dan will contribute the needed $538,000 in additional equity.  If the project is successful and the condo's are sold off, Dr. Dan first gets his $538,000 investment back.  Then, if there is any money left over, Doug Developer gets back his $212,000 cash contribution.  If there any money left over, Dr. Dan gets a preferred return (before Doug Developer) of 15%.  If there is still any money left over, Doug Developer earns a 15% return on his $212,000 cash contribution to the project.  Any money left over?  Dr. Dan and Doug developer agree to split any remaining profit 50-50.  This repayment schedule is known as a waterfall.

End of example.

Who can qualify for a joint venture?  In order to qualify for a joint venture, a developer needs one heck of a curriculum vitae (construction experience resume).  After all, the developer is saying, "With my brains and your money, we are going to make a fortune together."  I don't know about you, but if I were the guy putting up the dough, that developer's brain would have to be pretty darned impressive.

In real life, almost no one ever qualifies for an institutional joint venture - a JV with some huge fund.  If you are an average commercial mortgage broker, I strongly urge you never to work on a joint venture.  You'll never get paid.  Personally I have come to the conclusion that the only developers who can convince a life insurance company, a REIT, or some wealth fund to JV with them are developers who are rich enough to build the project for cash using their own dough.  You and I, as commercial mortgage brokers, will never get to represent one of these guys.  Helloooo?  You will never get paid.  The guys we as brokers get are the developers who spend their last dimes on the architectural and engineering fees.

But what about private joint ventures - joint ventures with wealthy private investors?  Many years ago, scores of broker-dealers raised money for development deals.  Then the rolling commercial real estate depression hit in the early 1990's, and all of these broker-dealers were sued into oblivion.  For 25 years developers found it extremely difficult to raise equity dollars from private investors.

Then something changed.  During the Great Recession, President Obama signed the JOBS Act, which now allows real estate developers and entrepreneurs to publicly advertise to accredited investors for investments, just like hedge funds have been allowed to do for decades.  This is huge.  

Thirty years ago the syndication business was enormous, far larger than the hard money business nationwide.  The syndication industry is not back yet, but I predict that it will return over the next five to seven years.  My own hard money commercial mortgage company, Blackburne & Sons, is looking at a relatively tiny ($1.8 million) joint venture in California.  In fact, we just issued a  Letter of Interest.  Risky-risky-risky, but I remain very bullish (after 20 years of being a perma-bear) on the future of the U.S. economy.

A hypothecation is defined, at least in the context of commercial real estate finance, as a loan secured, not by a piece of commercial real estate, but rather by a mortgage note owned by the borrower, which is itself secured by a piece of commercial real estate.  In short, its a loan to a guy who owns a mortgage note.  He pledges his mortgage note receivable for a smaller loan.

It is normally far-far better for a note holder to hypothecate his mortgage note rather than to sell it at a huge discount.  Normally when an investor sells a mortgage note, he is forced to take an enormous haircut (loss).  If he simply borrows against his mortgage note receivable (hypothecates it), he can pay back the hypothecation loan and regain title to the full value of his mortgage note.  An example will make this much more clear.

Example:

Once upon a time Billy Whiteshoes (he wears plaid pants and a matching white belt) owned an 80-unit apartment building in Naples, Florida free and clear.  He was 68-years-old, and it was finally time for his bride of 55 years and him to retire.  He sold his apartment building for $4.2 million and carried back, for tax reasons, a $3,700,000 first mortgage at 6% interest for 20 years, a wonderful return considering that banks are only paying 0.50% for deposits right now.

Sadly his beloved bride is snatched by an alligator while feeding the ducks in a pond near their Florida retirement community.  Billy Whiteshoes is devastated and realizes that life is short.  He resolves to live his last remaining years with gusto.  That's when he meets Lola La Boom-Boom, a 42-year-old retired stripper, working as a bartender in a nearby watering hole.  It's love at first sight (of Billy's assets).  Lola convinces Billy to take her on an expensive cruise and to buy her an enormous diamond engagement ring ($120,000).

Needing $150,000 in cash for the rock and the cruise, Billy contacts a mortgage note broker, who offers him just $2,250,000 for his $3.7 million first mortgage note.  "This is a 20-year mortgage, Billy, and while 6% may sound like a great yield today, in five years it may be well below market.  Then my investors will be stuck with a below-market yield for 15 more years.  In any case, we buy our mortgage notes discounted to yield at least 13%."  Outraged, Billy calls a half-dozen more mortgage note brokers, but the offers he receives are all about the same.

Billy is inflamed with desire for Lola, but he is not a complete idiot.  He keeps calling commercial mortgage brokers, until he reaches a subscriber to George's blog.  "You know, Billy," the wise commercial mortgage broker explains, "there is another way.  I can arrange for a $170,000 loan, secured by your first mortgage note receivable.  You don't have to sell the note at a discount.  You can just borrow against it.  This is a private money lender, so you are going to pay 12.9% and 4 points, plus my loan brokerage commission.  But when you pay off this hypothecation loan, you'll still own the entire $3.7 million first mortgage note.  Your cash flow from his mortgage note receivable is large, so I recommend that you triple up on your monthly payments.  Billy, you would be an idiot to sell your $3.7 million note for just $2.25 million!"

My private money commercial mortgage company, Blackburne & Sons, will hypothecate commercial first mortgage notes.

How much can you borrow against a commercial first mortgage note?  For how much can you hypothecate it?  Most lenders (there are very few of us) who hypothecate commercial first mortgage notes will lend up to 80% of the discounted present value of the note.  Without trying to teach a whole college-level course in business finance, most hypothecation lenders will discount the monthly payments and the balloon payment back to present value.  Blackburne and Sons will use a discount rate of 13%, the yield required by our private investors.  Since we charge a 4-point loan origination fee on hypothecations, we would use as our value of the note 96% of its discounted present value.  Just like we are not going to lend 100% of the value of a property, we will lend up to 80% of the value of that note (to us).

So how do you package a hypothecation loan?  If you are a commercial mortgage broker, what documents do you ask for?  One of our newer loan officers recently ran across a hypothecation loan request, and our brilliant EVP, Angelica Gardner, sent this to him:

Good Morning, (New Loan Officer),

I received your voicemail message regarding a hypothecation loan. I figured it would be better to send you the details so you can review (the deal) first, then we can discuss details or questions.

First, the definition of a hypothecation: The established practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the assets and enjoying the benefits therefrom. With a hypothecation, the lender has the right to seize the asset if the borrower cannot service the loan as stipulated by the terms in the loan agreement.

Below is a list of the documents that I would want to see. It is unlikely that you will be able to gather all of the documents listed below, but try to get as many of them as possible.

1. Color photos of the property.
   
   
2. Copy of Promissory Note and Mortgage*
   
   
3. Original title insurance policy (or fresh prelim)*
   
   
4. Something showing the payment history*
   
   
5. Closing statement from when note was created*
   
   
6. Financial statement on the maker/borrower (when the note was created)
   
   
7. Credit report on the maker/borrower (when the note was created)
   
   
8. Two years’ tax returns on the maker/borrower (when the note was created)
   
   
9. Appraisal - an old one is very helpful and a new one is blissful
   
   
10. Rent roll and/or commercial leases (when the note was created)
    
    
11. Current financial statement of the Maker (hypothecation borrower), current credit report on the Maker, last two years tax returns on the Maker, current Rent Roll, current commercial leases.

* Very, very important.

Find out early who has possession of the original Promissory Note and Mortgage. It is legally impossible to properly assign a note and mortgage to the assignee (buyer of, or lender against, the discounted commercial loan) without delivering the original promissory note.  In fact, if the assignee (buyer of, or lender against, a discounted commercial loan) fails to take physical delivery of the original promissory note, and if the assignor (the seller of, or borrower against, the discounted commercial loan) later files Chapter 7 bankruptcy, the promissory note becomes the asset of the bankruptcy estate!  (In real life) the intended assignee is completely wiped out.

Another important note: We will require that the underlying borrower makes his payments directly to us. We want to always make sure that the payment on our loan is covered by the payments from the underlying borrower. Please let me know if you have any questions.

Sincerely,

Angelica D. Gardner
Executive Vice President

Today's article is far more important than a mere training lesson about some archane financial ratio.  The gold-to-silver ratio actually explains much of the history of the modern world.  Prepare to learn a ton.

The gold-to-silver ratio is the amount of silver it takes to purchase one ounce of gold.  Today the gold-to-silver ratio stands at approximately 50 to 1.  That means, at the current price, it would take around 50 ounces of silver to buy 1 ounce of gold.  (By the way, this ratio should really be called the silver-to-gold ratio because the number of silver ounces required to buy one gold ounce is, by custom, listed first; e.g., "The gold-to-silver ratio in the year 1425 was 24:1.")

Since 1687, which is as far back as the records reach, the gold-to-silver ratio has varied between roughly 14 and 100.  Beginning around 1900, the ratio steadied and remained relatively flat at around 16 because many countries were using gold-and-silver-backed currencies. The United States, France, and several other countries actually assigned statutory limits on what the ratio could be.  The U.S. Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, which is another reason why the pre-1900 gold-to-silver ratio usually stayed between roughly 14 and 100.

"I'm falling asleep here, George.  Why do I care?"

Did you know that Venice was once the financial capital of the modern world?  Venice?  Venice was just a medium-sized city!  It did not have some huge standing army.  Nevertheless, if you were a king in 1425, and you wanted to finance a war, you would probably have to borrow from a Venetian bank.  If you were a merchant, and you wanted to open a trading office on Cypress, your representative (maybe one of your precious sons) wouldn't carry a huge sack of gold.  He would be quickly robbed and murdered.  Instead, you would go to a Venetian bank and obtain a letter of credit.

Here's why such a relatively small city could become the center of the financial world:  In ancient times the gold-to-silver ratio was dramatically different in China and India than it was in Western Europe.  For example, the gold-to-silver ratio in Italy might be 25:1, but the gold-to-silver ratio in India might be just 8:1.  In other words, a European merchant could buy an ounce of gold in India for just 8 ounces of silver.

Why was silver so relatively precious in India and China?  Why was gold valued so relatively little?  The average person in India and China in the old days was dirt poor.  There was no way on Earth that the average person in India would ever be able to save up enough wealth to own a gold coin or to ever conduct a trade in gold.  Silver was the currency of the people, and the demand for it in India and China was immense.  

Arbitrage is the process of spotting a price differential in two different markets for the exact same product and then buying in one of the markets and selling it in the other.  

The gold-silver trade is one gigantic arbitrage effort.  Merchants would buy cheap silver in Europe and sell it for big handfuls of gold in India.  Whichever power controlled the gold-silver trade became the economic powerhouse of the world, the center of lending and investment.  

Before a sailing route to India was discovered around the Cape of Good Hope - the southern tip of Africa - Western trade with India was conducted across the Silk Road.  

The Silk Road was a dangerous caravan trek over the mountains of Afghanistan and across the deserts of Iran and Iraq.  Bandits, sandstorms, and dehydration took an enormous toll.

As soon as possible, trade goods were transferred aboard ship and (relatively) quickly sailed across the Mediterranean Sea to their final destination.  In the days of the early Pharaohs, Egypt controlled the Mediterranean Sea.  The opportunity to control and profit from the gold-silver trade with India made Egypt the center of the civilized world for hundreds of years.

Later the Phoenicians (Lebannon) and the Carthaginians (North Africa), who were famous sailors and sea trading nations, controlled the Mediterranean Sea.  The Carthaginian traders made an enormous profit carrying the East-West trade, with which they could build fighting ships and hire huge land armies.

For fifteen years the famous Carthaginian general, Hannibal, terrorized Rome and the Italian peninsula.  Hannibal led an army of Spanish mercenaries and elephants over the Alps in winter and surprised the Romans.  At the battle of Cannae, Hannibal surrounded 70,000 Roman legionaires and then squeezed them so tightly that they couldn't even lift their arms to defend themselves.  All but 10,000 were slaughtered.

But then Rome got smart.  Rome built a fleet of its own and destroyed the fleet of Carthage.  By doing so, Rome claimed lordship of the seas and the East-West trade.

"Delenda est Carthago," said Cato the Elder after every speech.  "Cathage must be destroyed."  Rome and Carthage fought three long wars before Rome finally burned Carthage to the ground and slew almost all of its inhabitants.  Rome tore down every building in Carthage and sowed the ground with salt, so that nothing would ever grow there.  

Now it was Rome's turn to control the seas and rake in huge profits from the East-West trade.  In 284 AD, for easier administration, the Roman Empire split in two, with Byzantium (later renamed Constantinople) serving as capitol of the Eastern Roman Empire (Byzantine Empire).  The Western Roman Empire fell to the Visigoths in 475 AD.  (As I am writing this article, I just realized that when the Empire split, the Western Roman Empire lost all of the riches that came from controlling the East-West trade.  Hmmmm.)

While the Western Roman Empire was overrun by migrating German tribes, the Byzantine Empire endured for another 1,000 years.  Because the Byzantine fleet controlled the Mediterranean Sea, and hence the East-West trade, including the profitable gold-silver trade, Constantinople became the largest and richest city in the Western world.

But the Venetians were envious.  They too were a sea faring power, and they coveted the East-West trade.  When the knights and soldiers of Fourth Crusade (booty seekers, in reality) needed transport to the Holy Land, only Venice possessed a sufficiently large fleet.  "We'll transport your army to the Holy Land, if you do us a little favor.  There is an irritating little city (little?) along the way that we would like for you to sack.  They have lots of booty inside."  So the Christian crusaders stormed the Christian city of Constantinople and slew all of the inhabitants.  Now unbelievably rich with booty, the noble crusaders decided not to bother with the Holy Land, and they went home.  In the process, little Venice became the uncontested master of the Mediterranean Sea and the financial capital of the world.

What goes around, comes around.  For hundreds of years, the Byzantines had protected Venice (the ungrateful bums) and the rest of Europe from the Ottoman Turks.  While Constantinople eventually recovered from the sack by the Crusaders and repopulated, it was never able to regain its former strength.  In 1453 Constantinople fell for a second and final time to the Ottomans, and Venice would spend the next 200+ years fighting the Ottomans for control of the Mediterranean all by themselves.  When the Venetians were devastated by two plagues, the Ottoman Turks destroyed the last of Venetian fleets and took over control of the Mediterranean Sea, along with the gold-silver trade.  This control of the East-West trade was a high-water mark in Muslim history.

In 1488, a Portugese explorer became the first modern explorer to round the southern tip of Africa in hopes of finding a sea route to India.  The Portugese founded trading colonies in India, and the wealth of this tiny Eurpean nation soared.

But it was the Dutch who had the foresight to build trading colonies along the west coast of Africa, and they founded Johannesburg in South Africa.  Soon the Dutch controlled the Indian Ocean and the East-West trade.  Amsterdam in tiny little Holland became the financial capital of the world.  If you wanted to take a company public or if you wanted to borrow a huge sum of money - perhaps to fight a war - your most likely first stop was a Dutch bank.

Holland, unfortunately, was a small country, and her small land army was no match for invading powers.  Her navy, on the other hand, was powerful.  The Dutch even won the Second Anglo-Dutch War against the British with victories at sea.  (Until I researched this article, I never knew anyone could stand up to British sea power.)

Eventually, however, the British Navy was able to wear down the Dutch Navy and gain control of the seas and the East-West trade - one time by sailing into Holland's chief harbor and sinking the entire Dutch fleet before war had even been declared.  The huge profits of the gold-silver trade moved to London, and London became the financial capital of the world until the end of World War I.  London's investments banks (they were called merchant banks in those days) became the bankers for the world.

After World War I, the U.S. Navy took over control of the seas, and, not surprisingly, New York became the financial and banking capital of the world.  China is becoming wealthier, but until she controls the seas, New York will remain the banking capital.