Commercial Loans and Fun Blog

Last week I wrote a training article entitled, News From the Big Commercial Loan Conference.  This article continues those comments.

Before I get into additional commercial loan lessons, however, please allow me to remind you of another teaching point I shared with you several months ago.  If some borrower or developer comes to you, in your role as a commercial mortgage banker or broker, and he asks you to help him place a large commercial construction loan, the first question out of your mouth should be, "Can you please show me an architect's rendering?"  If he doesn't already have one, the developer is a rookie, and he is wasting your time.

Large commercial construction loans ($10MM+) seldom get funded without an architect's rendering, like the one shown here.  On the other hand, if the developer does have a nice architect's rendering, get excited.  The developer almost certainly has some real skin in the game, and he has some experience.  The reason why I mention this today is that C-Loans.com received a very interesting $45 million commercial construction loan request last night, and the loan application included a handsome color rendering.  My juices get flowing whenever we receive a commercial construction loan request with a rendering.  We successfully closed that $18.5 million construction loan on the mixed use project in Wisconsin shown above, and we earned a very nice fee.  

While we're on the subject of experience, who out there remembers how a developer demonstrates his construction and development experience?  It's a one or two-page document, very similar to a resume, called a curriculum vitae or C.V.  In addition to his educational and employment background, a C.V. lists and describes all of the construction projects that a developer has completed.  Every commercial construction loan package should have a C.V. prominently displayed.

Okay, now let's finally talk more about the big commercial loan conference.  You'll recall that I wrote that three enormous waves of huge commercial loans are coming due in 2015, 2016, and 2017.  These are the 10-year conduit loans written in the Wild West days of 2005, 2006, and 2007.

Surprisingly, many conduit loan borrowers are paying their huge defeasance prepayment penalties and are refinancing early.  They want to take advantage of today's low, fixed, commercial mortgage rates, which are often below 4% on very large CMBS loans (same thing as conduit loans).  They want to lock in rates of, say, 3.875% for the next 10 years.  Obviously, the borrowers doing this are the ones whose commercial loans mature in less than 18 months.  Since the interest rates on short term U.S. Treasuries are so low as to be virtually non-existent, their defeasance prepayment penalties are roughly equal to the 12 to 18 months worth of monthly payments that they had coming due over the next year to a year-and-half.

One of the exhibitors at the MBA CREF show was a defeasance company, a company that assembles the strip of U.S. Treasury securities that replaces the monthly principal and interest payments, plus the balloon payment, for which a CMBS borrower is responsible if he wants to prepay his loan.  Anyway, this defeasance company mentioned that they were busier than a one-armed paper hanger.

I spoke with a commercial loan officer for one of the largest CMBS loan originators in the country - one of the largest investment banks in the country.  (They joined C-Loans.com at the conference.)  He mentioned a type of loan of which I had never heard.

This conduit lender will make full-term interest-only loans!  Really?

In 2005, 2006, and 2007, the competition for CMBS loans was so fierce that conduit lenders starting making loans with the first six-months being interest-only.  Then the next CMBS lender stretched his interest-only period to a year.  Then the greater fool stretched the interest-only portion of his 10-year loan term out to two years.  Finally, the greatest fools started making CMBS loans with the first three years being interest-only!

You can see the problem, right?  Commercial loans are supposed to be amortized over 25 years, and if the property is older than 25-years-old, many experienced commercial lenders insist of a 20-year amortization. The idea is to get some principal paydown over the 10-year term of the loan.  As we have seen recently, commercial real estate does not always increase in value.  If it remains stagnant in value or even depreciates as it gets older, a commercial lender wants to see his principal balance get paid down.  A commercial loan that starts out at 75% loan-to-value should be headed towards 69% loan-to-value after 10 years, assuming the property's value stays stagnant.

So if you allow the borrower to make interest-only payments for the first two or three years, the amount of principal reduction he will have achieved after 10 years will be negligible.  

Suppose the property is worth $10 million originally, and the borrower takes out a $7.5 million conduit loan.  If the $10 million building - because it is wearing out - depreciates in value to $9 million, and the loan is only paid down to $7.2 million over 10 years (because of the interest-only period), the borrower will need an 80.0% LTV new loan to refinance his balloon!  This is essentially impossible.  No CMBS lender is going to make a new loan of 80.0% LTV on an office building.  The borrower won't be able to refinance his balloon payment!  This sort of risk is called refinance risk.

This is why financial authors have been burning up their keyboards writing about the coming crisis in commercial real estate.  Many of the loans written in 2005, 2006, and 2007 had initial interest-only periods of two to three years.  Since then commercial real estate values fell by 45%.  Oh, my goodness!

Fortunately, commercial real estate values have recovered sharply.  They are almost back to where they were at their peak in 2008.  But many of the loans coming due in 2015, 2016, and 2017 had long interest-only periods.  Uh-oh.  There's going to be Big Trouble in River City, and everyone knows it.

So you can imagine my shock when this big conduit lender told me that they were making full-term interest-only loans.  It must have shown on my face because the loan officer explained, "A lot of investors exchange out of one property with a huge amount of equity, and for tax reasons they have put it all down on the new building.  Therefore, if the borrower needs a new loan of just 60% loan-to-value or less, we'll happily make him a ten-year interest-only loan."

Here's another commercial financese term I learned, cap ex.  Cap ex means a capital expenditure.  An apartment building renovator might say,"My cap ex is $12,000 per door."

Apartment investors and multifamily lenders often refer to apartment units as doors.  Hospitality (hotels and motels) investors and lenders will often refer to hotel rooms as keys.  Ths makes sense since many hotel rooms are now suites, with multiple rooms.  The term, keys, eliminates this confusion.

The hottest properties, from the perspective of lenders, are now office buildings and industrial buildings.  This used to be multi-family, but new multi-family construction has allowed supply to catch up with demand.

The willingness of conduits to lend in the oil patch states has declined sharply.  Due to the glut of oil, B-piece buyers (a subject for another day) will no longer allow them in their pools.

B-piece buyers in conduit loan pools are looking to yield around 15%; although after anticipated losses, they expect to net only around 9%.

Banks, in general, are getting hungrier for commercial real estate loans because their business loan volumes are pretty flat.  Business owners are still too shocked and frightened by the Great Recession to take on a lot of additional business debt (inventory loans, equipment loans, accounts receivable loans, etc.).

The last thing I see in my notes from the conference is the term financial engineering.  It is possible to structure a large commercial real estate deal in such a way as to take a marginal deal and make it a really solid one by bringing in the right lenders.  For example, Bank of America recently financed the construction of a large hotel in Aruba, and they felt comfortable in taking the safest $50 million of this $90 million loan deal because the right mezzanine lender took a $20 million senior mezzanine loan piece behind them and the right mezzanine lender took the $20 million junior mezzanine loan piece.

By "right" I mean that the mezzanine lender(s) really-really knew off-shore resort properties.  The mezzanine lenders added value to the deal because by being willing to invest $40 million behind Bank of America, they showed that the investment was a good bet.  They would keep the borrower on the right path, and in a worst case scenario, they had the expertise and the staff to take over the resort and successfully run it, allowing Bank of America to sit back, almost worry-free, and just collect its interest payments.  Bringing in just the right mezzanine and preferred equity lenders / investors is a form of financial engineering.

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Please don't forget that C-Loans now offers business loans, not just commercial real estate loans.

It is very easy for a commercial mortgage broker to slip into the mindset that this business is all about finding the absolute lowest rate.  Please don't forget that the borrower is coming to you for a commercial loan because he needs money.

The smart broker will therefore submit every one of his small commercial real estate loans (less than $2.5 million) to Blackburne & Sons.  We will issue - at no charge - a Loan Approval Letter.  You can then take this LAL to a bank and say, "Look at what this private money lender is offering my client.  You can beat this, right?"

Think back to your dating days.  When you had a pretty girl on your arm, every girl in the bar was checking you out; but when you were alone, the word, "Desperate" was written in invisible ink across your forehead, and every girl in the bar had a black light.  You never had a chance.  You laugh, but there is a lot of truth in what I just wrote.  If you take a free Blackburne & Sons Loan Approval Letter to a bank, suddenly the banker will be "checking out" your borrower.

So get a Loan Approval Letter from Blackburne & Sons first.  Then, if the borrower gets tired of waiting or if the bank leaves you standing at the alter looking stupid, you can always fall back on our loan.  Remember, the borrower needs money, not a rate quote.  

The following is a test.  Would I trade the business card of a banker, making commercial real estate loans only in the three counties surrounding the fifth largest city in Arkansas, for a free directory of 2,000 commercial real estate lenders?  Hmmmm.  Cue the theme song to Jeopardy.

The next three years promise to be the most profitable period for commercial mortgage brokers in the last 50 years ... IF you're properly trained.

This happened about 10 years ago, but a guy named Alan Dunn was sitting in his office one day, when the phone rang.  Alan, do you remember creating a Commercial Loans link on your website and pointing it to C-Loans.com?  Well, guess what?  We just closed a $19 million loan that came from your site, and we're sending you a check for $21,250.

Tons and tons of new commercial lenders joined C-Loans at this big conference, including one of the biggest investment banks in the world.

I just returned from the Mortgage Bankers Association's 23rd Annual Commercial Real Estate Finance Conference, known as the MBA CREF Conference.  This is the Big Kahuna - the biggest trade show of the year for commercial mortgage lenders, commercial mortgage bankers, and their suppliers.  And boy-oh-boy, do I ever have news for you.

First of all, this is a terrific time to be in the commercial mortgage business.  An enormous wave of ten-year commercial real estate loans - commercial loans originated in 2005, 2006, and 2007 - are coming due in 2015, 2016, and 2017.  The years between 2005 and 2007 were the all-time high water marks for CMBS originations, so this growing wave of maturing loans will be a a veritable tsunami.  The next three years will probably be the most profitable 3 years of our 30-year careers in commercial real estate finance.  As my golf buddies would say, "Yeah, baby!"

CMBS stands for commercial mortgage-backed securities, and refers to that part of our industry that originates very large ($3MM- $5MM minimum), very standard, (usually) fixed rate permanent loans on multi-family, office, retail, industrial, and hospitality (hotels and motels) properties.  These big commercial loans get assigned to a special kind of trust that assembles between $1.5 billion and $3.5 billion worth of commercial loans.  Bonds that are backed by these commercial mortgages are then sold to big-time investors, like insurance companies, pension plans, big endowment funds (think of the Harvard or Yale University Endowment Fund), and flthy rich private investors represented by family offices.

There is some question about whether or not the CMBS industry can even process this much volume.  Last year's CMBS volume was around $94 billion.  This tsunami of maturing CMBS loans will add an extra $70 billion to $80 billion per year to last year's CMBS volume.  There are now 36 conduit loan (same as CMBS loan) originators preparing to handle the volume, and each of them is likely to be swamped. Smaller deals of less than $5 million will get passed down the food chain to commercial banks and commercial mortgage bankers, like you and me.  Everyone is going to eat well.

I was amazed at how low interest rates on the very large commercial loans were.  Large multi-family loans (apartment loans) were being quoted at less than 4%.

I learned a few new terms.  Agency loans included multi-family loans insured by FHA (fancy way of saying HUD loans) and multi-family loans made by the GSE's.  A GSE is a government sponsored entity, and usually means Fannie Mae and Freddie Mac, although there are actually one or two other GSE's.

During the Great Recession, the GSE's were in receivership, so FHA-insured multi-family loans were the only game in town.  As a result, it was taking nine months to a year to close a HUD loan.  Remember that FHA is now a part of HUD, so a FHA-insured loan and a HUD loan are the same thing.  The term "FHA-insured loan" is considered more precise and more politically correct than HUD loan; but a HUD lender is a multi-family lender making FHA-insured loan.  Just remember to hold your little finger out when sipping tea or when saying FHA-insured loan.  Ha-ha!

With Fannie Mae and Freddie Mac now profitable again and returning money to the U.S. Treasury, HUD's multi-family loan volume is declining.  Fannie Mae and Freddie Mac compete head-to-head for multi-family loans, and their loan production volumes are pretty close - around $25 billion annually each.  Both Fannie Mae and Freddie Mac now have multi-family loan production caps by the Federal government of around $30 billion and $25 billion annually.

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Fannie Mae has a Delegated Underwriting and Servicing ("DUS") program where an approved DUS mortgage banker can, under certain circumstances, actually approve a loan on its own without taking the loan to Fannie Mae.  That's the good news.  The bad news is that if there is a loss, the DUS lender has to split the loss with Fannie Mae, at least as to the first 30%.  As a result, Fannie Mae DUS lenders distrust appraisers and greatly prefer purchase money loans.  Purchase money loans have values that have been establsihed in the open marketplace, and they have real cash downpayments.  Investors are far less likely to walk away from real cash downpayments.

As a result, you can usually get greater leverage on a purchase money multi-family loan from Fannie Mae.  Freddie Mac, on the other hand, usually offers greater loan proceeds on refinances than Fannie Mae.

I learned other new finance terms this trip.  The Big Boys at the conference used the expression "L plus 350" or "L plus 425" a lot.  I was confused until a kindly banker sitting next to me explained that "L plus 350" meant LIBOR plus 350 basis points (3.5%).

Another guy mentioned that a big loan he did was very granular.  Granular?  I finally raised my hand and asked the nice Chief Lending Officer for Blackstone Capital, "What does granular mean?"  Granular apparently means lots and lots of small income-paying tenants, as opposed to a single-tenant building.  In this case, the gentleman was talking about a $50 million blanket loan he had made on a portfolio of self storage projects.

My last point today is another Wowie-Zowie at how low rates have fallen.  The last panel of the four-day conference contained four guys who headed up High Yield Debt Funds.  The guy from Blackstone, the largest hedge fund in the world ($6 billion in loans last year), a big honcho from Bank of America ($8 billion in loans last year) was there, as well as two other pikers whose high-yield debt funds closed only $2.4 billion and $3.2 billion in commercial loans last year.

Okay, so at what rate were these High Yield Debt Funds closing deals?  Would you believe L plus 375 to L plus 425?  Guys, LIBOR is only around 0.25%!  Do the math.  Wowie-Zowie, huh?

If you feel like you've learned a few things today, I genuinely appreciate Facebook Shares, Twitter Re-Tweets, Linked-In Shares, and Google Plus One's.  Thanks so much.  :-)

Although I am an attorney, the only client I have ever taken on is my own company.  Since getting my law degree 18 years ago, I have collected for my company over $1 million in fees and loan servicing fees from borrowers who tried to cancel.  And I have never sued a borrower who you wouldn't agree just unjustly breached my plain English contract.  And guess what?  I personally haven't been to court in a dozen years. I just send intelligent laymen from my company.  Arbitration is soooo cheap, fast, and easy.

I've gotten a ton of compliments on this course:

A ton of new commercial lenders joined C-Loans.com at the show.

Something extraordinary happened this month.  Interest rates turned negative in Germany, Switzerland, and Japan. In fact, the headline of a recent article in The Telegraph, a British newspaper, read, “Europe's Bond Yields Fall to Their Lowest Level Since the Black Death.”

Suppose you’re the trustee of the endowment fund for a large German university or the trustee of the pension plan for a large German corporation.  Your trust documents require you to keep 15% of your corpus invested in German federal treasury bonds – known as bunds. Since the German national government is almost running a budget surplus, there are a limited number of these bunds.  Other trustees want them for their own funds and plans, so you are forced into a bidding war for them. When the bidding settles, you realize that you have actually paid a huge premium for these bunds. Your yield over the next five years is a negative 0.007% annually. Basically you’re paying the German government to store your money for 5 years.

Italian, Spanish and Portuguese yields have also seen spectacular drops over the past several weeks.  The French state can borrow for five years at an annual rate of 0.13% (much less than 1%), and Ireland can do so at 0.32%.

One reason for these spectacularly low rates is that the European Central Bank (ECB) has just embarked upon its own quantitative easing campaign, in order the head off deflation and to jumpstart the slowing European economy. The ECB will soon be buying massive amounts of European government bonds.

The issue is caused by far more than just a shortage of European government bonds. There is a currency exchange rate issue as well.  The Swiss Central Bank recently removed its peg to the Euro, resulting in a stunning, one-day, 25%+ leap in value for the Swiss franc.  As a result, large Swiss banks, like UBS and Credit Suisse, can now pay a negative 0.75% on deposits, loan it out to hedge funds at 0.50% annually, and still earn a handsome 1.25% spread on their money.

Why would any investor pay a private bank 0.75% annually to store his money? It’s the exchange rate! Sure, you might lose almost 1% on the interest rate, but if the Euro falls another 3% versus the Swiss franc, you are still miles ahead when you convert your Swiss franc deposits back into Euros.

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A banker buddy of mine recently shared this true story on Facebook:  My wife needs a little cheering up, so I would like to share one of our first and funniest memories. After a few months of dating, Amy was kind enough to accompany me to one of my annual poison ivy ER visits. Yep, I needed a shot. Without hesitation, I dropped my pants AND underwear. With my naked butt in the air, I heard the nurse surprisingly say, "Sir, the needle actually goes in your arm."

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Is the ECB making the right decision at this point to embark on another round of quantitative easing?  While I absolutely saluted Ben Benanke’s Quantitative Easing to save the U.S. economy, I wonder if the ECB is not now confusing bad deflation and good deflation.

There are actually two kinds of deflation – bad deflation and good deflation. Bad deflation is typically accompanied by fear and panic.  It is time of money destruction, as debtors go bankrupt and banks stop lending. Often the underlying basis of that fear and panic is the excessive debt accumulation and the poor investments made with the proceeds of that debt in prior years.  Economists from the Austrian School of Economics call investments that fail to pay off malinvestments. A good example of excessive debt and malinvestments were the home purchases made by unqualified subprime borrowers in the decade leading up to 2008.

But deflation is not always bad.  Did you know that during the period between the end of the Civil War and the start of World War I the U.S. economy enjoyed slow deflation and steadily falling prices? This and other periods of slow deflation were the result of scientific discoveries, improvements in production methods, and increased competition.  For example, oil prices today are declining because of advances in oil extraction technology, such as horizontal drilling and fracking.  U.S. producers are now competing with Russia and Saudi Arabia, resulting in falling prices.

One could therefore argue that the ECB may be overreacting to a modest amount of good deflation; but there is no question but that the ECB is indeed acting.  With European investors now desperate for yield, our mortgage bonds and commercial real estate look very, very attractive.  You can therefore expect mortgage rates to stay low for a number of years, and you can expect cap rates on commercial properties to continue to fall.

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“Keynes did not teach us how to perform the ‘miracle of turning a stone into bread’ but the not-at-all miraculous procedure of eating the seed corn.” – Ludwig von Mises, Austrian economist

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I had a very interesting conversation with a CMBS lender this morning.  He said the conduit loan business was fabulous.

Conduits are now regularly making 75% loan-to-value loans on multifamily, office, and retail centers.  This translates to debt yield ratios of 8.0% to 8.5%.  Conduits are also making 70% loans on hospitality properties, which translates to debt yields of 10%.

These leverage levels are much higher than I had expected to hear.  No wonder he is just killing it in conduit loan originations.

If you enjoyed today's article, I sure would appreciate a few Twitter re-Tweets, Facebook Shares, Google+ atta-boys, and Linked-In Shares.  Thanks, guys.  :-)

Please be on the look-out for any bankers making commercial loans.  I'll trade you 2,000 of mine for one of yours.

The commercial mortgage business is about to get hotter than a pistol.  There is over seven years worth of pent up demand.  It would help if you were an expert in the subject.

Need a commercial loan?  Tired of stingy bankers kicking sand in your face?

Got a sweet-sweet commercial loan that is far too good for Blackburne & Sons?

I have gotten a lot of compliments on my new marketing course for commercial mortgage brokers.

Don't forget that you can now place business loans, not secured by real estate, with C-Loans.  The reason why you might want to dabble in business financing is because the deals close in just 10 days.

I have told you for years that the real money in commercial real estate finance is in loan servicing.  Heck, my wife and I serviced our first 50 hard money loans by hand using payment books.  It wasn't that hard.  We now earn a 2% loan servicing fee on about $40 million in hard money loans, so that's a cool $66,000 per month that comes in the door, whether I close a new hard money loan or not.  You can get my course on finding private investors for just $549 or get both my nine-hour course on commercial mortgage brokerage, plus my investor course, for just $849.

Blackburne & Sons, my private money commercial mortgage company, makes a lot of loans on small mobile home parks filled with older single wide trailers.  Often these small coaches are not owned by the residents.  Instead, these coaches are owned by the the park, and the park rents them out like apartment units.

While they are decent collateral, there are some tricky legal issues associated with making loans on older trailer parks.  Today you going to learn a lot about making mobile home park loans, perfecting liens, and bankruptcy law.

Okay, if you are going to make a loan on an apartment building, you simply record a Mortgage and Assignment of Rents against the property, and - voila - you're done.  The same is true with a mobile home park, right?  Maybe ... but maybe not.

Real property is land and that which is affixed to the land. Any property that is not real property is personal property - such as cars, boats, TV sets, stamp collections, and intangible rights, like the right of a famous football player to his own image. For example, you need to pay Peyton Manning if you want to use his likeness in a magazine advertisement.  Years ago such personal property was known as chattel, and a Security Agreement secured by personal property was called a chattel mortgage.

You perfect (accent on the -fect) a lien against real property by recording a mortgage in the County Recorder's office.  You usually perfect a lien on personal property by obtaining a Security Agreement against the collateral and filing a UCC-1 Financing Statement, usually with Secretary of State's office where the debtor either resides or was incorporated.  I didn't know this last part until I looked it up this morning on Wikipedia.  I always thought you filed it in the state where the property was located.  It might depend on the state.

I'll tell you a scary story.  Years ago I made a hard money loan on a small motel in the boonies.  I recorded my mortgage with the County Recorder, and I filed my UCC-1 Financing Statement with the California Secretary of State's office on the motel's beds, furniture, icemakers, washing machines, dryers, etc.  These items of personal property in a motel are known as the funiture, fixtures, and equipment or FF&E's.

The borrower defaulted, and then he declared Chapter 7.  When I got the notice of the bankruptcy filing, I opened the file and looked for the Security Agreement.  OMGoodness!  There wasn't one!  I had put the world and the bankruptcy trustee on notice that I had a lien on the FF&E's, but I had failed to actually obtain a Security Agreement, where the borrower agrees that I get to foreclose on the FF&E's if he fails to pay his loan.  Fortunately the bankrutpcy trustee didn't catch it.  Who would be dumb enough to file a UCC-1 but not obtain a Security Agreement? Uh ... me?  Fortunately the loan paid off in full, and all ended well; but this explains why I had a heart attack at age 50.  Ha-ha!

Anyway, back to mobile home parks with rental coaches.  Are single wide trailers real property or personal property?  Unless they are permanently affixed to a concrete foundation, like modular housing, trailers are personal property!  After all, you can haul a trailer away in an afternoon.

Therefore, you cannot secure your commercial loan on rental coaches with simply a mortgage.  You need to secure your loan like it was personal property; i.e., you need to obtain a Security Agreement and you need to file some sort of financing statement to put the world on notice that you have a lien against the coaches.

So do you file a UCC-1 Financing Statement to secure a chattel mortgage (personal property loan) against a trailer?  No.  Trailers are considered motor vehicles, and they are titled and licensed just like cars and trucks.  Each state department of motor vehicles uses its own motor vehicle lien form, but they are all very similar to the one shown below.

Each trailer is a different motor vehicle, so this form must be filed for each coach.  And don't forget that you still need a blanket Security Agreement (Chattel Mortgage), describing each of the coaches and their VIN numbers, signed by the borrower.  If you fail to get one, you'll be just as foolish as me years ago, when I filed the UCC-1 but failed to get a Security Agreement on that motel.  The Security Agreement grants the lender a security interest in the coaches.  The state DMV form merely puts the world on notice that you have a lien and determines who has the first chattel mortgage and who has the second chattel mortgage.  The first guy to file his state DMV form wins that race.

"Gee, George, why couldn't you just obtain a blanket Security Agreement on all of the coaches."

That would actually work, as long as the borrower didn't file bankruptcy.  When the borrower signs the Security Agreement, he grants to the lender the right to seize and sell the chattel in order to repay the debt. As long as no other lender or bankruptcy trustee had a claim to the property, the lender would be golden.

But what if the borrower declares Chapter 11 Bankruptcy?  In that case, the lender is still fine, even if the lender failed to file the state chattel lien forms with the DMV.  Remember, the purpose of a Chapter 11 Bankruptcy is to give the debtor time to reorganize his finances and pay off his debts.  The lender's lien is still valid, even without filing the state DMV form.  It's only the priority of his lien - whether he has a first chattel mortgage or a second chattel mortgage - that is vulnerable.

But where the lender gets totally toasted is when the debtor files a Chapter 7 Bankruptcy.  In a Chapter 7, all of the debtors assets become the property of the bankruptcy estate.  The instant the debtor files a Chapter 7 Bankruptcy, the bankruptcy trustee instantly has a blanket lien against every asset owned by the debtor.  If the lender hasn't perfected his lien on the coaches with the state DMV, he is truly, utterly, and completely toast.  Now the bankruptcy trustee holds the first chattel mortgage position, and the mobile home trailer lender is in a second chattel mortgage position.  In real life, this means the trailer lender will collect, at most, a few pennies on the dollar.

Morale of the story:  When making loans on older trailer parks, be "absolutely positively" sure you perfect your chattel mortgage on each of the rental coaches!

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We're working on a trailer park loan right now, and the rental coaches already have a personal property loan on them.  It's not a mortgage, but rather just a business loan against the titles of all of the coaches owned by the park (16 out of the total of 20 coaches located in the park).

We called the state DMV office, and they told us to collect all 16 of the original coach titles and send them to the state DMV office, along with 16 completed Manual Title Applications (each asking the State of Kansas to add Blackburne & Sons to the new title as lien holder) and 16 filing fee checks for $11.50 each.

The existing lien holder on the 16 coach titles will send 16 similar Manual Title Application forms to the title company, along with a Demand for Payoff, sixteen checks for $10 each made payable to the State of Kansas, and instructions to the title company to send the forms and the money on to the State of Kansas, as soon as they send him his payoff check. 

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Important Weasel Words:  The guy writing this article is an idiot.  Do not rely on anything I've written.  Instead, be sure to consult an attorney.

If you learned something today, would you kindly share this article using the Twitter, Facebook, Google+, or LinkedIn buttons above?  It means a lot to me.  Thanks!  :-)

Need a commercial loan on an older trailer park?  We love them.

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C-Loans can now help you place business loans - unsecured commercial loans, lines of credit, accounts receivable financing, factoring, equipment loans, equipment leases, inventory financing, and asset-backed lines of credit.  Business loan brokerage is great because these deals often close in just 10 days!

Got an "A" quality commercial loan that is much too good for a private money lender?  You can submit it to 750 banks in just four minutes using C-Loans.

Commercial mortgage brokerage is going to be a hot-hot field for the next few years because banks made very few commercial loans over the past seven years.  Finally really learn this profession.

Okay, so your client buys a vacant office building from a bank that took the property back in foreclosure.  In other words, the vacant office building was an REO of the bank, which stands for "real estate owned".  If you look at a financial statement of a bank, you will often see a line item entitled, "Real Estate Owned".  The term sounds fancy, but an REO is nothing more than a foreclosed property still owned by the bank.  In order to discourage banks from becoming major property owners, federal regulators financially punish banks for keeping REO's on their books for too long.  This punishment is why banks are always so anxious to clear REO's off their books.

Anyway, now your client needs money to renovate this vacant office building.  He will also need money to make his monthly mortgage payments on the property as he tries to lease it out.  Your client will also need money to finish the tenant improvements and to pay for the leasing commissions. The key thing to remember about commercial renovation deals is that the property is usually not generating any rental income, so the property alone cannot initially afford to make regular montly payments.  We therefore need to build in a reserve for the interest payments on the mortgage during the period that the property is being renovated and leased out.

Commercial loans to make major renovations to income property should therefore be structured just like a commercial construction loan.  You will recall that commercial construction loans are structured with an initial interest-only period, during which time the building is built and leased out.  During this interest-only period, the borrower is only required to pay interest based on the amount of his construction loan that he has actually drawn down.  An example will make this clearer.

Suppose the bank loans the borrower $2 million to build a spec office building, in other words, an office building built on speculation without any pre-leases.  In month one the borrower draws down $75,000 to pay his demolition subcontractor to remove an old building and to pay his grading subcontractor to level and compact the ground.  Therefore, at the end of month one, the borrower only has to pay for one month's interest on $75,000.  During month two the borrower draws down another $100,000 on his construction loan to pay the concrete guy for pouring the foundation.  Therefore, at the end of month two, the borrower has to pay for one month's interest on $175,000.  And so on.

This is how construction loans are structured.  At the end of the construction loan term, the entire loan either balloons or rolls into some sort of takeout loan.

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Training reminder:  A permanent loan is just a first mortgage loan, with a term of at least five years and with some sort of amortization, usually based on a 25-year amortization.  In other words, every monthly payment includes at least some repayment of principal.

A two-year or five-year first mortgage loan with interest-only monthly payments is considered a mini-perm.  Most mini-perms have terms of just two or three years.

Interest-only loans with terms of less than two years are called bridge loans. 

A takeout loan is just a permanent loan used to pay off a construction loan.  Every takeout loan is a permanent loan, but not every permanent loan is a takeout loan.  Whaaat?  Think about it.  A permanent loan is only called a takeout loan if it is used to pay off an existing loan that was used to build the property.  What if the existing loan was used to simply buy an already completed building?  A permanent loan used to pay off another permanent loan is just another garden-variety permanent loan.  Got it? 

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Okay, let's try to remember where we were.  Our borrower owns a vacant office building, and he needs a loan to renovate it and lease it out.  We also said it wasn't generating any income right now.  The way to underwrite and finance such a project is to structure it as commercial construction loan.

From the proceeds of the loan, the borrower would obtain the following:

1. Money to pay off the bridge loan used to acquire the REO
2. Hard costs of renovation
3. Interest reserve during the renovation and leasing period
4. Tenant improvement costs
5. Leasing commissions
6. Soft costs of the renovation loan, including loan points, closing costs, building permits, architectural and engineering fees.
7. Very large Contingency Reserve.  The typical renovation costs twice as much as projected!

"That all sounds great and everything, George, but clearly the renovation loan lender (construction lender) is not going to lend 100% of the renovator's costs.  The renovator is going to need some skin in the game, right?"

Exactly.  Here is how you tell if your borrower's renovation loan is likely to get funded.  First, you compute the Total Cost of the project by adding up all of the following costs:

Purchase price of the vacant office building
Original closing costs
Hard renovation costs
Tenant improvement costs (probably a reserve)*
Projected leasing commission*
Interest reserve for renovation and leasing period
Soft costs of the renovation loan
Contingency reserve

*Your leasing agent can help you with these numbers.

Your construction lender (renovation loan lender) will probably limit his loan to 75% to 80% of the total project cost.  This is known as the Loan-to-Cost Ratio.  Your renovator/borrower will have to be able provide cash or proof of prepayment of the rest.

The lender will also subject the deal to a Debt Service Coverage Ratio analysis based on the projected rents and expenses in the Pro Forma Operating Statement, but interest rates are so low today that almost all deals cash flow comfortably.

The Loan-to-Value Ratio must also not exceed 70% to 75%, based on finished and leased value of the property, known as the Stabilized Fair Market Value.  Most REO's, however, sell at such large discounts that the LTV is unlikely to be a problem.

If you want your construction loan (renovation loan) to fund, my advice is to concentrate on documenting the costs that your borrower has pre-paid.  Your deal will turn on whether he can show that he is contributing 20% to 25% of the total cost of the project.

The good news is that the economy is booming, companies are expanding, and banks make a ton of dough on construction loans.  Renovation loans, structured like construction loans, are also far less risky than ground-up construction loans for the bank because the walls and the roof on your property have probably already been errected.

To submit your renovation loan (or any commercial real estate loan) to our 750 hungry commercial lenders, simply click on the button below:

C-Loans, Inc. is also now offering business loans not secured by real estate.  We closed an interesting $300,000 deal last week with a peer-to-peer lending platform, which is just a fancy way of saying a tiny syndicate of private investors.  Just like private investors invest in the hard money commercial loans originated by my hard money mortgage company, Blackburne & Sons, private investors are now making business loans directly to small businesses, in effect cutting out the bank.  We actually closed one such deal last week, and the wonderful thing is that business loans usually close in less than ten days!  

Wow!  Last week I wrote a blog article about Deflation and Negative Interest Rates.  That article was re-Tweeted five times, shared on Facebook twice, and shared on Linked-In a whopping 29 times.  Thanks, guys.  That meant a lot ot me.

Do you feel a little intimidated by C-Loans application process?  If you have a good commercial loan request that you need to place, we'll help you fill out your C-Loans app.

Do you find my training fairly easy to understand?  Wish you could master this profession of commercial real estate finance in a single day?

Don't forget that I consult with commercial mortgage brokers.  Most consultations last just one hour, and they are usually scheduled at 1:30 p.m. Eastern Time on Mondays, Tuesdays, Thursdays, and Fridays.  Maybe I can help you to get back on track.

I did a one-hour consultation yesterday, and I came away knowing I really-really helped this new commercial mortgage broker.  He emailed me afterwards, "Thanks so much for making time to talk with me yesterday... You were very helpful and knowledgeable in answering my questions. You gave me added confidence to move forward in making brokering commercial mortgages a reality for me."

Are you a commercial broker (commercial realtor)?  How would you like to earn a $21,250 referral fee in your sleep?  Simply put a hyperlink to C-Loans.com on your web page.

As I write this post, the Dow Jones Industrial Average is down 323 points on the day.  Oil has fallen to less than $50 a barrel.  The European Central Bank is considering a massive intervention in the European bond market - very much like our own Fed's Quantitative Easing - in order to prevent deflation.

Yields on five-year German Treasury bonds - known as Bunds - have just turned negative.  Hellooo?  I am talking about negative interest rates.  European investors are so frightened of deflation and so distrustful of European banks that they will now pay the German government to store their money for five years.

In other words, its like they are saying, "Hey, German government, here's 10 million Euros.  Don't worry about paying me any interest.  You just hold on to my money for five years, and then you only have to give me back 9.997 million Euros.  You can keep the .003 million Euros for your trouble."

No way!  Yes way.  German bonds are offering the lowest yields since the Black Death.  In fact, since the German government is now running a budget surplus, it isn't even issuing new Bunds.

Here is why central banks and governments fear deflation:

1. When prices (and interest rates) are falling, consumers put off their purchases.  Why buy (a car, a house, etc.) today when the price will only be cheaper tomorrow?  The toughest year I ever suffered in commercial real estate finance was in 1982, when the prime rate fell from 21.5% to 14%.  Interest rates were falling monthly.  Absolutely no one was borrowing.
   
   
2. When consumers put off their purchases, companies fail, workers get laid off, demand falls, more companies fail, more workers are laid off, demand falls even more, and so on.
   
   
3. Debt is much harder to repay when each dollar becomes more valuable.
   
   
4. As debt defaults increase, banks get frightened and stop lending.  This only increases deflation.
   
   
5. Left unchecked, deflation often leads to a full-scale economic depression.
   
   

  

Commercial mortgage rates change daily, and there is no universal source - like Fannie Mae or Freddie Mac - where you can go to see exactly what commercial loan rates that banks are charging today.  If you are a commercial mortgage broker and you get a lead call, what interest rate are you supposed to quote?  If you're a commercial broker (commercial realtor) and your client asks you what commercial mortgage rate he is likely to pay if he buys this commercial-investment property, what do you tell him?  Today we solve your problem.

First of all, it is important to understand the reason why commercial mortgage rates are always going to be higher than the prime residential mortgage rate; i.e., the best rate on a 30-year first mortgage that a strong, perfect credit borrower can get to buy a house.

The reason why commercial loan rates are always going to be higher than the prime residential mortgage rate is because commercial loans are illiquid assets.  There is no organized secondary market for bank commercial loans.

Now if a bank were to make a standard 30-year first mortgage on a house, and then suddenly there was a run on the bank, the bank could almost instantly sell off its standard residential loans to Fannie Mae or Freddie Mac.  Such residential loans are therefore liquid assets.  Demand for liquid assets is almost always much higher than for illiquid assets.  The higher the demand for a loan, the lower the interest rate is driven by competition.  Therefore interest rate on commercial loans is almost always going to be a little higher than the prime residential mortgage rate.

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"Today is the busiest package transporting day of the entire holiday season.  UPS today will handle 585 million packages. They don't deliver them, they just handle them.  By the way, if you don't mail your package today, it will not be destroyed by Christmas." -- Dave Letterman

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But how much higher are commercial loan rates than the prime residential mortgage rate?  Historically the spread between comemrcial loan rates and residential loan rates stays pretty consisently between 50 to 125 basis points (0.50% to 1.25%).  Remember, a basis point is just 1/100th of a percent.

In other words, let's say the prime residential mortgage rate today is 4.125%.  If so, the vast majority of banks will be quoting between 4.625% and 5.375% for a commercial loan.

The typical commercial loan deal will be a 25-year amortized loan, with a due date of either 5 years or 10 years.  If the commercial property is older than 35-years-old, the bank is likely to insist on amortizing the loan over just 20 years, rather than 25 years.  After all, the commercial property, by that point, is getting a little long in the tooth.  If the bank agrees to a 10 year term, the bank will usually insist on readjusting the interest rate - with no floor or ceiling - once at the end of 5 years, according to changes in 5-year Treasury securities.

So when will the interest rate on your commercial loan be just 50 basis points over the prime residential mortgage rate, rather than 125 basis points?  Well, first of all, how desirable is your commercial property?  If its a six-unit apartment building in San Francisco within walking distance of Chinatown (many Chinese investors don't drive, so they want to be within walking distance of their friends), you have a Scarlet-Johansson-quality of commercial property.  You're likely to get the lower rate.

Here's another time you're likely to get the lower rate.  Let's suppose your borrower owns a successful company that keeps large deposits at his bank.   If you could convince the borrower to move his company accounts to a new bank, located conveniently nearby, I guarantee that he'll get the lower rate, as the new bank rolls out the red carpet.

Here's your final Rat Goodie* of the day - a wonderful, wonderful video.  A German grocery store did the equivalent of a flash mob using its cash registers (huh?) for its Christmas customers.  I absolutely guarantee this will bring a warm smile to your face.  :-)  

* Remember, all your marketing pieces need fun stuff - what I call Rat Goodies - to encourage your friends to open and read your sales pitches.

By the way, that Rat Goody lesson is just part of almost 40 such lessons in my Commercial Mortgage Marketing training program.  It's well worth the lousy $199 cost.

Got an "A" quality commercial loan that is way too clean for my stinky 'ole private money commercial mortgage company?  New banks are joining C-Loans daily.

Do you want Blackburne & Sons to issue a backup loan approval letter on that deal you currently have working with the bank?  There is no charge whatsoever for Blackburne & Sons to issue a back-up commitment on a commercial loan.  We're happy to do it because we know that 40% of the time a commercial bank can be counted on to turn down a perfectly good commercial loan at the very last moment.  Do you need a commercial lender that actually wants to make a commercial loan?

I respectfully submit that the following is the best business offer you will receive this decade.

Today's marketing lessons will also be helpful for commercial brokers (commercial real estate salesmen), not just for commercial loan brokers.  I built a $50 million commercial loan company using these simple marketing lessons.  They should work for you as well.

In my prior commercial loan blog articles, I stressed that list advertising - snail mail, fax, and email - is the most effective form of marketing for real estate sales and commercial loan brokerage.  One reason is because  you can crank out a commercial loan newsletter today, rather than waiting for weeks until the next magazine is published.

Your newsletters do NOT have to be fancy.  For 15 years I personally marketed by snail mail using a plain, legal-sized sheet of copy machine paper.  I didn't bother with a logo or with typesetting.  I just typed my company name, address, and phone number at the top.

So why would my commercial loan clients even bother to read such an obviously unprofessional newsletter?  Because it was unprofessional!  Huh?  What???

Have you ever gotten a "professional newsletter" from a CPA?  Have you ever read anything so boring?  Boooooring!  Nobody reads professional newsletters.  Do you know what real people do read?  They read jokes and funny pics sent to them by their buddies.  My first piece of advice, therefore, is to stop trying to be professional.  Instead, be fun.

Now every commercial loan newsletter (or realty investment newsletter) needs these four ingredients:

1. Lots of funny jokes.
2. A training lesson about commercial loans (or commercial-investment real estate).
3. Some brief words from our sponsor; i.e., you pitching your services.
4. One or more funny pictures or cool videos.

I call my jokes, funny pics, cool videos, and training lessons Rat Goodies.  In fact, I invented my own theory of marketing that I call the Rat Goody Theory of Marketing.  It basically says that if I have to bug my buddies and clients with a sales pitch, then I at least owe them some Crackerjack Treats for opening up the box.

"Gee, George, that all sounds great and everything, but where do I get fresh material for my newsletter every ten days?  Your own newsletters contain six to eight jokes, two to three funny pictures, and at least one cool video.  That doesn't even include the training lesson.  Where do you find all of this stuff?"

Here is where you find the Rat Goodies and the content for your own newsletters:

1. You can easily find over 400 cute, clean jokes here.  Feel free to plagerize my materials.
2. Pinterest has a wonderful collection of funny pictures.
3. As for interesting videos, your buddies will send you some.  Just be on the lookout.
4. As for training lessons in your field (commercial loan brokerage, commercial real estate brokerage, etc.), we all learn things every week.  Just be sure to make a note of anything new you learn - like this brand new commercial loan underwriting ratio, the Debt Yield Ratio - and share it with your buddies and clients.

Here is one final thing that I do that has served me very well in marketing over the years.  Any time I meet a high-net-worth investor, be it from a commercial loan lead call, at a conference, or on the golf course, I am religious about adding this investor to my mailing lists.  This may surprise you but I found the wealthy investors that I needed to fund $50 million in hard money commercial loans when they first called my office in search of a commercial loan.  In other words, I turned commercial loan borrowers into commercial loan investors.  Huh.  Go figure.

My thanks go out to Dan Morris of Summit Finance, one of our lead buyers, for closing a $6 million commercial loan for C-Loans on Friday!  If he closes just four more deals, he gets listed permanently on C-Loans as a Proven Broker.  From then on, he no longer has to buy leads.  He will be set for life.

Hey, did you enjoy listening to my audio and Powerpoint training lesson on the Rat Goody Theory of Marketing.  To move between PowerPoint pages, be sure to hit the Play button.  This lesson is just one of about 35 lessons in my wildly popular training course, How To Market For Commercial Loans.

Ninety percent of bankers are downright slothful when it comes to working commercial loans.  Ten percent of them, however, are real go-getters.  That's the thing that C-Loans.com does best - it indentifies those bankers and those Proven Brokers who are ravenous to close commercial loans.  Don't poo-poo using our Proven Brokers because they close a hugely disproportionate share of the commercial loans closed on C-Loans.  Proven Brokers close commercial loans because they have personal relationships with their lenders.  True story:  I had a buddy 30 years ago who made a fortune one year because he brought two hookers and some cocaine to his lender's office, whenever he brought him a new commercial loan package.  (My buddy eventually ended up on Skid Row in San Francisco, a washed out drug addict.)

The real money in commercial real estate finance is in loan servicing fees.  I charge our investors almost 2% per year for servicing their commercial loans.   On a modest-sized deal of $1 million, that's $20,000 per year, just for collecting 12 payments and sending them on to our investors.

Today I am going to share with you an easy way to quickly estimate the value of a commercial property.  It's going to involve a tiny bit of math, but please don't freak out or tune out.  You remember how to divide, right?  Fourth grade math?  You can handle it.  And being able to quickly value commercial property is essential to both commercial brokerage and commercial mortgage banking.

In my prior blog articles about commercial financing, I described a Cap Rate as the return on your money that you would enjoy if you bought a commercial property for all cash.  In other words, what "interest rate" would you earn on your money if you bought an office building or strip center for all cash; i.e., you whipped out hundreds of thousands of dollars from your hidden stash under the floorboards, and you eschewed using any mortgage.  By the way, eschew is just a fancy verb that means to "deliberately avoid using or abstain from."

The formula to compute a Cap Rate is Net Operating Income / Purchase Price = Cap Rate.  If you do the caculation shown in the image above, you actually get 0.0711.  You have to multiply the answer by 100% to get a Cap Rate properly expressed as a percentage.

The following funny pic is a tiny bit naughty.  Read on at your own risk.  :-)

That's enough of a review of Cap Rates.  Remember, the object of todays' training article is to teach you how to quickly value commercial property.

Let's suppose that you are thinking about buying or financing a commercial property, and you want to know what the property is probably worth.   You ask the selling commercial broker for a marketing flier, which usually contains a Pro Forma Operating Statement and the property's net operating income (NOI).

You next make some calls to some local commercial brokers (commercial realtors), and you ask them, "I have a 25-year-old office building in the Kings Town district of Valencia.  What's your best guess at a reasonable cap rate?"  The commercial broker might come back and say, "Depending on the strength of the tenants and the length of the leases, you're probably looking at a cap rate of between 7.25% and 7.75%."  For a quick, desktop valuation, you decide to use a cap rate of 7.5%.

So you now know the property's net operating income (NOI) and the cap rate at which similar buildings are selling.  You can now roughly value the building.  The formula is shown below:

Let's use a NOI on the building we want to value of $237,000 (remember, we got this off the marketng flier) and a 7.5% suitable cap rate (this is the cap rate that the local commercial brokers told us to use).  Plugging and chugging, we have:

$237,000 / 7.5% = $3,160,000

So this commercial building is worth around $3.16 million.

Okay, let's do one more example.  The commercial mortgage borrower submits a commercial financing package that contains a Pro Forma Operating Statement.  You pluck off a NOI  of $657,000.  Local commercial brokers suggest a cap rate of 6.75%.  Now we plug and chug:

$657,000 / 6.75% = $9,733,000

Remember, we started off today to learn a quick and easy way to value commercial buildings.  This was it.

A lof of commercial mortgage brokers starved during the Great Recession because banks were making very few commercial loans.  Today the commercial mortgage market is on fire because of seven years' worth of pent-up demand.  It's a very good time to get in the commercial mortgage brokerage business.

We are now including - at not extra charge - my Intermediate Commercial Mortgage Finance course when you buy for just $549 my famous nine-hour course on commercial mortgage brokerage.

You'll need to know some commercial mortgage lenders.  If you know even one bank that is making commercial loans, you can parlay the contents of that business card into a free directory of 2,000 commercial lenders.

My hard money commercial mortgage company, Blackburne & Sons, was one of the few commercial hard money shops to survive the Great Recession.  You know how we did it?  Loan servicing fees!  I earn $60,000 per month (not per year but rather per month) for collecting the payments on fewer than 250 commercial loans.  Imagine earning $60,000 every month, even if you failed to close a single new loan.  The money in commercial mortgage banking is in loan servicing fees!

Show me any commercial mortgage company in the U.S., and I'll increase their bottom line by at least $200,000 per year.