Commercial Loans and Fun Blog

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!

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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.

This morning I received a commercial loan solicitation flier (email) from an old friend of mine.  My buddy, Paul, also owns a hard money commercial loan company, and I have realized that he is one of the wisest guru's in the commercial loan business.

This flier contained so much wisdom about investing in commercial real estate and about commercial mortgage underwriting that I am sharing it with you almost in its entirety.  It is definitely worth a read.

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HOW TO FALL IN LOVE WITH AND FUND
AN ABSOLUTELY IMPOSSIBLE APARTMENT PURCHASE DEAL

The scenario:

• Purchase of 60 run-down, low-rent apartments in South Carolina
• 70% vacant!
• Major deferred maintenance!

We (Paul's company) closed the loan and funded 97% of the purchase price !!!!!

Why would we make a 97% loan on such difficult property?   Simple: We have incredible faith in the borrowers.   We identified one factor in particular that our “maverick” underwriting found compelling.

The borrowers aren’t extraordinarily wealthy, but they earned every dime themselves, and they have superb credit.   They also have an admirable “self-made” business and investment history.   They had previously bought low-rent apartments and personally, “hands-on”, did all the renovation and property management.  All their other income properties are now 100% occupied, and they pledged these properties as additional security for our 97% loan.

BUT HERE IS WHAT WE FOUND IRRESISTIBLY COMPELLING:  

They have a history of consistently pre-paying their mortgage loans.

In fact, they now own several properties free and clear, having paid down the purchase mortgages on an accelerated basis.  Instead of continually leveraging and over-leveraging and insanely taking on more debt, they took things slowly.

They did all their own work.  They paid down their mortgages aggressively and have no personal debt.   When I did our lender’s inspection of their current assets, I was impressed to find that all their tenants knew them on a first name basis – and smiled at them.  Our borrowers are young, hungry, possess great judgment . . . and energy.  What rare judgment, skill and self-discipline!

These are the kind of young (immigrant [are you listening, Washington?]) borrowers with whom you instinctively want to build a relationship.   I wouldn’t be surprised if we wind up “partnering” with them one of these days.

Do you now understand why I respect Paul so much?  (That's his picture above. Ha-ha!)  He has the flexibility to blanket additional collateral, even if it means making a loan of 97% loan-to-value on a horrible property.  He has the wisdom to appreciate the importance of the character of the sponsor (borrower/developer).  He spotted and admired the fact that these sponsors use debt cautiously and pay it off quickly.  He saw value in the work ethic and ambition of these young immigrant sponsors.  (Studies have repeatedly shown that, around seven years after a big wave of immigration, the U.S. economy soars.)

"Gee, George, I might have a deal for your friend Paul.  Where can I find him?"

Paul is one of the 750 commercial lenders listed on C-Loans.com.  When you enter your commercial loan into the C-Loans System, you will find Paul listed as one of the very first lenders on the Suggested Lender List.  He ranks near the very top of the Suggested Lender List because he has closed a TON of commercial loans for C-Loans.

Do you guys understand the Lender Diligence Score listed next to the name of each lender on C-Loans?  The hotter the commercial lender - the more deals he closes for C-Loans - the higher his score.  You definitely want to work with the loan officers near the top of the Suggested Lender List.  They are the guys and ladies who are actually closing loans.

Get a free list of 2,000 commercial mortgage lenders.

Are you a commercial mortgage broker?  Does it just kill you when a flakey borrower simply cancels on you after months of work?  Wish there was an economically feasible way to collect your fee without hiring an attorney?

The real money in commercial mortgage banking is in loan servicing fees.  For example, I earn about $60,000 per month for collecting the payments on less than 250 commercial loans - even if I don't close a single new loan that month.  Become a hard money lender yourself.

Wish you understood commercial mortgage underwriting better?  Several thousand successful commercial mortgage brokers owe their success to this course:

You are about to learn that the future of American manufacturing is so bright that you better put on shades.

Training moment:  You will recall that a commercial bank is just a garden variety bank that accepts deposits and makes loans, as opposed to a merchant bank or an investment bank.

Therefore we had millions of extra tenants seeking apartments at the exact same time that new apartment construction hit a brick wall.  It was the perfect recipe for a squeeze.  Rents soared, and apartment owners and apartment lenders made a killing.

Today tens of thousands of new apartment units are under construction.  Always remember this economic principle:  Outrageous profit breeds competition.  Apartment owners have been making outrageous profits, so developers are going to keep building new apartments until there is a glut.  This is as predictable as the sun rising tomorrow.

But there is a new class of real estate that is about to have another day in the sun - industrial.  Why?  First of all, there has been essentially no new commercial construction (other than apartments) since 2007.  In the meantime the U.S. manufacturing sector has been gaining tremendous momentum.

Why is American manufacturing rebounding so strongly?  Here are just four reasons:  (1) Robotics and computers; (2) the trend towards in-sourcing; (3) the productivity of U.S. workers; and (4) low energy costs.

The use of modern robots and computers by American manufacturers has greatly reduced the need for labor.  Cheap but uneducated Chinese workers would find little to do in many modern American manufacturing plants.

You know all of the American manufacturers who moved their plants overseas?  We called the process out-sourcing.   Well, a lot of them now wish they hadn't.  Tens of thousands of formerly out-sourced manufacturing jobs are returning to the U.S. in a process called in-sourcing.

Huh?  What about cheap Chinese labor?  That all sounds great on paper, but having a supply chain that is 4,000 miles long makes it almost impossible to control quality.  Chinese quality is not as good as American quality.  In addition, a 4,000 mile long supply chain makes short production runs very difficult.  A plant in China is great for cranking out 100,000 identical products; but what if you only need 2,000?  And what if you want to make a design change once the run has started?  It's a nightmare.  And this doesn't even take into consideration that the Chinese are stealing American designs, and the Chinese government turns a blind eye.  Manufacturing in China?  Forget about it (said in a New Jersey accent)!

Did you know that American workers - because they use robots, computers, and the latest in industrial equipment - are four times more productive than Chinese workers?  A Chinese worker might work for just 20% of the wage that an American might work, but if the American worker is four times more productive, the wage gap is far less pronounced.

Okay, hold onto your hat.  I am about to hit you with the pièce de résistance - energy costs.  You know all of those new oil wells that they are digging in the U.S. using horizontal drilling and fracking?  These new wells are throwing off enormous amounts of natural gas, almost as a by-product.  The U.S. is ballooning with cheap-cheap-cheap natural gas.

This natural gas is being used to power heavy U.S. manufacturing plants, like steel plants, auto plants, truck plants, tractor plants, aircraft plants, railroad car plants, etc.  Big stuff.  Heavy stuff.  And you know what is the single largest line item cost for most heavy manufacturers? 

You guessed it!  Energy costs.  How cheap is our natural gas?  Would you believe about one-fifth of the cost of Europe, Japan, or China?  The Boston Consulting Group did an important study last year in which they predicted that heavy manufacturers from all over the world will be economically forced to open new plants in America.  We are talking about millions and millions of new job migrating to America.

Folks, this is truly the Golden Age of U.S. Manufacturing.  I live in a tiny town in the cornfields of Northern Indiana, and even here - in the former Rust Belt - a huge percentage of our residents work for small manufacturers who supply parts to the automakers in Detroit.  In other words, wherever you have some large industrial plants, lots and lots of small manufacturing suppliers sprout up around them.

The wise commercial real estate investor will therefore turn his attention to multi-tenant, multi-use industrial buildings, anywhere in a safe, large city in America.  I'm not a big fan of industrial buildings, custom built for some defunct owner-user, in the middle of Bum Flowers, Egypt.  You need to located in, or near, some very large city.  The more well-educated working people in the city, the better.  It is when 27-year-olds from different fields exchange, over lunch, their ideas, experiences, and tales of new products hitting the market that new industries are conceived and created.  (Please re-read that last sentence.)  Therefore you want to invest - or lend - in the largest and most educated cities possible.

The hot investment product for the next seven years (until developers over-build again) is industrial, specifically multi-tenant, multi-use industrial centers.

If you are trying to buy a multi-tenant, multi-use industrial center, Blackburne & Sons would be interested in helping you raise part of the downpayment.

Do you need an "A" quality commercial lender for your "A" quality deal?

Want to deal directly with the bank with no one else's grubby little hands in the pie?

Need a commercial bridge loan for just one point?

In June C-Loans.com closed a sweet $18.5 million commercial construction loan on a mixed use project in Wisconsin.  It's kind of an interesting story.  

This large commercial construction loan was actually made by a syndicate of small commercial banks.  Commercial construction loans have been greatly out of favor since the real estate market crash in 2008, and syndicates of banks are always somewhat rare.  The commercial loan broker who used C-Loans.com to find the lead lender of this syndicate earned a whopping $92,500 commercial loan fee. (A $92,500 commission?!  Wow.  Note to self:  Submit my commercial construction loan requests through C-Loans.com.)

The lead lender of a syndicate is the bank that services the commercial construction loan for the other banks in the syndicate.  The lead lender makes the progress inspections - periodic visits to the property and inspections of the work performed - to make sure that the project is being built according to plans and specifications and to make sure that there is always enough money remaining in the construction budget to complete the project.  For serving as the lead lender, the lead bank usually earns a higher (1/4% to 1/2%) interest rate and a larger loan fee (about 0.5 point on the entire loan amount) than the rest of the banks in the syndicate.

I am convinced that this large commercial construction loan closed because the mortgage broker who used C-Loans.com included the gorgeous architect's rendering shown above. (Please re-read this last sentence.)  This leads us to the whole point of today's article.

Last week a mortgage broker approached me to help him place a $90 million commercial construction loan on a residential condominium project.  The first thing I asked him for was a copy of the architect's rendering (like the picture above).  He didn't have one, so I declined to help him.

Huh?  Just because he didn't have an architect's rendering?  My request for a copy of the architect's rendering was an experience test for the sponsor.  Any sponsor experienced at building large commercial construction projects should know that he will need an architect's rending for any commercial construction loan larger than around $10 million.  The fact that this sponsor or developer did not already have an archtect's rendering suggests that he has never constructed a project of this size; i.e., he lacks the required level of experience.

In addition, an architect cannot draw a rendering of a project with no plans.  If the plans are not yet completed - or at least close to being done - then the time is not yet ripe to seek financing.  The project may still be just a pipedream.

Lastly, architect's renderings are expensive - my best guess is on the order of $5,000 to $10,000.  (Anyone out there have a better idea of the typical cost?)  If the developer is trying to get by without paying for an architect's rendering, he is probably undercapitalized.  That's not a good sign for the chances of the deal closing.

Large commercial construction projects should also include an aerial photograph of the building site, with the outline of the property labeled with a yellow line.  Important landmarks should be marked with an arrow and labeled.

Early in my career I remember taking a helicopter ride over a building site with my boss and mentor, the brilliant and charismatic Bill Oldenburg, to take our aerial photographs.  The doors had been removed from the helicopter, and Bill insisted on leaning far over the edge of the helicopter to take his photo's.  The only thing keeping him alive was me holding onto his belt!  Right now, as I remember this incident twenty-five years later, my hands are dripping with sweat.  OMG!

You also need attractive pictures if you are trying to place a commercial loan on a standing commercial property.  A standing commercial property is merely one that is completely built.  Every commercial loan application should include at least one color photograph of the subject property taken on a sunny day.

Folks, blue sky sells.  In the old days unscrupulous investment promoters would promise unsuspecting investors nothing but sunny days and blue skies.  As a result, each state has its own set of Blue Sky Laws that regulate the sale of investments.  

Make sure that every commercial loan you try to place includes at least one color photograph of the subject property, taken on a sunny day with blue sky.  Good luck trying to place a commercial loan armed only with a dreary, overcast picture like the following:

Got a commercial loan that you want to place?  Want to earn a $92,500 commission?  Just enter your commercial loan into the C-Loans System - NOT using one of the many gray buttons on the site but rather using the six-step process.  Based on the type of loan, the size of the loan, the location of the property, the type of property, and the borrower's credit, the C-Loans System will suggest 20 to 30 commercial lenders.  Put a checkmark next to six lenders at a time and then press submit.  And C-Loans is free!

I never offer a satisfaction guarantee on any of my training courses.  Lazy bums will order the course, open the wrappers, make the package unsaleable to anyone else, and then try to return it when they never get off their fat bums to actually study the course.  We have literally hundreds of thank you e-mails from satisfied students, so there is no question that my commercial real estate finance ("CREF") training courses really are great.

However, I sell one CREF training course that is soooo good that I actually offer a one-year, 100% money back satisfaction guarantee.  This course is entitled, The Practice of Commercial Mortgage Brokerage.  It is designed for both newbies and veterans who want to become one of the top 20% of commercial mortgage brokers who make 80% of the dough.  I guarantee - literally - that you will double your net income as a commercial mortgage broker.

My job at both Blackburne & Sons and C-Loans, Inc. is to bring in the commercial loan applications, and I have been the rainmaker at my companies for over 34 years now.  Imagine soliciting commercial loans for a whopping 34 years.  I have tried everything, including exhibiting at trade shows, newspaper ads (back in the day), magazine ads, ads on Google, direct mail, and countless other strategies.  I have found the Fountain of Commercial Leads.  It's in the courtyard of the Hyatt Hotel in Miami, and you just dip your red solo cup into the water and ...