Commercial Loans and Fun Blog

Our commercial hard money mortgage company, Blackburne & Sons, is making a really interesting commercial loan this month.  We are making a $1.6 million loan to the owner of two large apartment buildings so that the owner can take advantage of a discounted pay-off (DPO) being offered by the bank.

Now the really interesting thing about the deal is that the bank would not discount the four existing  commercial loans that it has with the borrower ... directly to the borrower.  They agreed to sell the four notes and mortgages to Blackburne & Sons at a discount, but not to the borrower.  Huh.  Kinda odd ... but whatever.  We get to make a nice loan fee on the deal.

So this complicated escrow will go as follows:  Blackburne & Sons, in escrow, will buy the four mortgages.  Then we will simultaneously sell these four mortgages to the borrower at a discount (they total around $2.3 million) using a brand new blanket loan of $1.6 million on both apartment buildings.

This deal is what is known as a brainer deal, as opposed to a no-brainer deal.  A no-brainer deal is a commercial loan that is so obviously good that the lender doesn't even have to think about it.  You should make a note that Blackburne & Sons is owned by a real estate attorney with 34 years experience in commercial mortgage finance.  If your commercial loan is fundamentally excellent, but the deal is just a little complicated (a brainer deal), we may be the perfect commercial lender for you.

Now we finally get to the point of today's article.  One of the four mortgages that we are buying in escrow is an open-ended mortgage.  An open-ended mortgage is a commercial loan with no fixed loan amount.  The bank might loan the borrower $600,000 to start with and then increase its loan amount to $2 million at a later date.  Junior lenders are put on notice, by the language in the mortgage, that the senior lender could increase its loan amount to $17 bazzillion without losing its seniority position.

Open-ended commercial mortgages are extremely rare.  I haven't seen one in almost two decades.  Open-ended mortgages are a lot like commercial lines of credit.  A line of credit is a form of debt where the borrower can borrow a certain amount of money, pay some or all of it back, and then, as the borrower needs it, borrow the money right back again, up to a certain loan amount.

The difference between a line of credit and an open-ended mortgage is that a line of credit has a fixed, maximum loan amount.  For example, the borrower might be authorized to draw down as much as $200,000 - but no more than that.  On an open-ended mortgage, the bank - at the bank's option - can increase its loan amount to $17 bazzillion, without recording a new mortgage and while maintaining its senior position.

But now let's talk about commercial lines of credit.  In home loan finance, home equity lines of credit are as common as dirt.  Surprisingly, in my 34 years in commercial real estate finance (CREF), I have never seen a bank offer commercial real estate lines of credit to the public.

Now a bank might offer a business line of credit, partially secured by a second mortgage on the borrower's owner-user commercial property, but banks almost never make such loans for anyone other than good bank customers.

A good bank customer is a company that keeps large deposits at the bank.  For example, Blackburne & Sons is a good bank customer because we service about $50 million in hard money commercial loans.  Our loan servicing trust account (not our money) contains, on average, well over $400,000.  The bank loves us because it doesn't have to pay a dime in interest for those trust  deposits.  Therefore, if we ever applied for a commercial line of credit, the bank might make us the loan, secured by our little office building in Indiana; however, it would almost never make such a loan to the public.

Bottom line:  If you are a commercial mortgage broker, you're never going to earn a big loan fee trying to broker a commercial real estate line of credit.  Unlike residential lenders, commercial lenders do NOT make commercial real estate equity lines of credit to strangers.

Finding a lender for a commercial loan secured only by land is pretty hard these days.  Many commercial lenders are still sitting on huge portfolios of land upon which they foreclosed during the Great Recession.

There is one kind of land, however, that is infinity financeable.

Actually there are two types of land upon which it is fairly easy to obtain a commercial loan.  The second type is farmland.  Farmland is a hot commodity right now.  Farmland in Indiana, for example, has tripled over the past seven years.  My own commercial loan company, Blackburne & Sons, loves to finance corn farmland.

But the subject of today's lesson is commercial out-parcels or pad sites (same thing).  An out-parcel is a small lot at the outer edge of a shopping center, usually reserved for later sale to a fast-food outlet or a chain restaurant; also called a pad site.

Usually there is a large shopping center on some busy commercial strip (thoroughfare).  Further back from the strip is the grocery store or the Wal-Mart, and well as some inline retail units.  Right on the actual strip, however, are several building pads that are ideal for a fast-food or a chain restaurant.  Please look carefully at the picture above.  The Advanced Auto Parts site and Burger King site are perfect examples of out-parcels.

Lenders love to make commercial loans on out-parcels or pad sites.  While the typical loan-to-value ratio for most land loans is in the range of 25% to 40%, many commercial lenders will happily make purchase money commercial loans of 55% to 65% loan-to-value on out-parcels.

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We're now down to the final 38 weeks of the World Cup.  This morning when France played Nigeria, it was the first time an American referee ever officiated a knockout round match. The French won it by a touchdown.  -- Jimmy Kimmel

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The thing to be careful about when underwriting a commercial loan on a shopping center is NOT to apply the same outrageous price paid per square foot by a fast food chain for an out-parcel to the value of the land underneath the entire shopping center!  No-no-no.  The success of a fast food restaurant is very dependent on street visibility and easy street access.  A fast food franchise owner might pay five times the price per square foot for the convenient out-parcel on the left compared to the difficult-to-reach out-parcel on the right.

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I used another fancy term above - inline retail.  Inline retail is another word for a store.  The term inline came about as malls were developed in the 60's because the stores were literally all in a line in the mall.

Inline tenants are smaller tenants than anchor tenants.  Inline tenants pay higher rental rates and sign shorter leases.  These stores benefit from the foot traffic that anchor tenants bring to a retail center, and inline tenants account for the majority of the scheduled rents at most retail centers.

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There was a huge blowout at the World Cup yesterday when Germany beat Brazil 7-1 in the semifinals.  It got so bad that the refs told Brazil, “You know what? Go ahead and use your hands.” -- Jimmy Fallon

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Be on the look-out for an old, dog-eared business card of a banker that you know who makes commercial loans.  You can trade the contents of that one business card for a free directory of 2,000 commercial real estate lenders.

Do you need commercial mortgage leads?  Most lead sellers ask a small fortune per lead ($20 to $50 apiece), and they often post the same lead again and again.  C-Loans.com sells commercial leads for just $1 to $9 apiece, plus 37.5 bps. if you close the deal.  We have one former lead buyer who has closed 40 loans for us!

After 34 years of marketing for commercial loans, I have learned a few things - like what utterly fails and what works like turning on a spigot.

I am about to really tick you off, but its for your own good.  If you don't invest a lousy $199 for my Practice Course, you are a flipping idiot.  This five-hour audio course contains 67 separate lessons on how to fix your commercial mortgage business.

Now if you're netting $120,000+ per year (not gross but net) from your commercial mortgage business, maybe you could argue that you don't need this course.  But the truth is that even you heavy-weights, you natural born salesmen, could learn a ton from a guy who has been in commercial real estate finance (CREF) for 34 years.

Now here's why you are a flipping idiot if you fail to buy this course - I guarantee that will double your net income as a commercial mortgage broker within 12 months - or I will refund 100% of your cost.  I have never guaranteed any other training product.

You've been reading my blog articles.  I hope you'll agree that my training is practical, do-able, down-to-earth kind of stuff.  I am promising to double your net income as a commercial mortgage broker within 12 months.  All for a lousy $199?  Guys, this is far more about making you a loyal supplier of loans to Blackburne & Sons and C-Loans.com than making a lousy $199.  If I turn your economic life around, in appreciation you will still be bringing business to my sons twenty years from now.  Don't be a flipping idiot.

The new Dodd-Frank Regulations have driven a ton of former residential loan agents into the commercial loan business.  I have never seen so many guys chasing commercial loan leads.  In a market flooded with commercial loan agents, the wise commercial mortgage broker will adjust his marketing strategy.  Commercial loan brokers need to market for commercial loans more directly, rather than just marketing to residential loan agents.

In the past, my own commercial hard money mortgage company, Blackburne & Sons, would advertise almost exclusively to mortgage brokers.  Historically only about 10% of mortgage brokers worked commercial mortgage leads, and we could be sure of a good volume of commercial loan referrals by offering a 20% referral fee.

Nowadays, however, most mortgage brokers can't afford to just refer out their commercial loan leads.  They need to work these commercial loan requests themselves.  When they do work the leads themselves, they don't necessarily bring these commercial loans to us.

In response, Blackburne & Sons is starting to bypass commercial loan brokers in favor advertising to other sources of commercial loans, which is a more direct approach to the end-borrower.

Enough work.  Time for a little fun:

As a general rule, you seldom want to advertise directly to commercial real estate investors for commercial loans.  The reason why is because refinancing a commercial loan is very expensive.  There is the $3,500 appraisal fee and then the $2,300 toxic report fee.  Then the closing attorneys need to be paid their thousands.  Since closing commercial loans is so expensive, most investors only refinance their commercial buildings when they are forced to.  In contrast, I have refinanced my home four times in the past six years.  In many cases, there was no cost to me.

The reason it makes little sense to market directly to commercial real estate investors is that the chances of your advertisement arriving at the exact time that an investor plans to refinance his commercial property is very, very low.  Six times over the past 34 years I have sent out more than 10,000 direct mail pieces to commercial real estate investors.  These costly snail mailings have never produced a closing.

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From a passenger ship, everyone can see a bearded man on a small island who is shouting and desperately waving his hands. "Who is it?" a passenger asks the captain.  "I've no idea. Every year when we pass, he goes nuts.”

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So how does a commercial loan broker find commercial loans to place, especially when the market is flooded with competion?  You will find commercial loan leads by soliciting referrals from workers who see commercial real estate transactions cross their desk on a weekly basis.  Let me give you some examples:

1. Commercial bankers (you solicit their turndowns)
2. Commercial real estate brokers
3. Property managers
4. Other lenders, like credit unions or hard money lenders
5. Residential mortgage brokers (on a name and number basis only)
6. Residential real estate agents
7. Real estate and bankruptcy attorneys
8. CPA's and accountants
9. Insurance agents and estate planners
10. Investors who own 3+ commercial-investment properties

In my opinion, purchase money commercial loans are much safer for a commercial lender than refinances.  The reason this is important to you is because soon wealthy real estate investors will be returning to the commercial-investment market, and you will be working on a ton of purchase money commercial loans.  This article, among other things, will help you sell the bank on making you - or your client - the required commercial loan.

Since the start of the Great Recession in 2008, the commercial real estate market has seen a huge decline in the number of commercial loans made for commercial-investment purposes.  A commercial-investment property is a business property that is owned for the primary purpose of generating net rental income.  Commercial-investment properties are usually purchased by wealthy investors wishing to receive a cash flow from their investment greater than what they can earn in CD's, bonds, or dividend-paying stocks.

It is easier to understand the concept of a commercial-investment property if you contrast it with an owner-user business property, like a bowling alley, a restaurant, or a hotel.  Commercial-investment properties, in comparison, are far more passive.  The investor earns his return from rental income, rather than from business income.  Examples of commercial-investment properties include multifamily, office, retail, industrial, and mobilehome parks.

The U.S. economy is rebounding strongly.  American companies cut a lot of waste during the Great Recession.  Sophisticated robots in American factories are replacing cheap Chinese workers (who have reached almost full-employment and who are not as cheap any more).  On-shoring (as opposed to off-shoring) is the new trend, as American companies realize that domestic manufacturing gives them better quality-control and faster response times.

Fracking and horizontal drilling here in the U.S. are generating many new high-paying American jobs, and these new wells have greatly reduced our reliance on foreign oil.  But there is another, even more important, benefit of fracking.  These wells are producing vast amounts of dirt-cheap natural gas.

Dirt-cheap natural gas give the U.S. a huge economic advantage in heavy manufacturing.  Millions of heavy manufacturing jobs will be migrating from Europe and Asia to the U.S. because of our dirt-cheap energy (Source:  Boston Consulting Group).  Housing is also recovering.

Bottom line:  The U.S. economy is recovering strongly, and commercial real estate will benefit.  Commercial real estate investors will soon be snapping up decent commercial buildings almost everywhere, and you will get to finance them.

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Married for 25 years, I took a look at my wife one day and said, "Honey, 25 years ago we had a cheap apartment, a cheap car, slept on a sofa bed and watched a 10 inch black and white TV, but I got to sleep every night with a hot 25-year-old blonde.

Now, we have a nice house, nice car, big bed, and plasma screen TV, but I'm sleeping with a 50-year-old woman. It seems to me that you are not holding up your side of things."

My wife is a very reasonable woman. She told me to go out and find a hot 25 year-old-blonde, and she would make sure that I would once again be living in a cheap apartment, driving a cheap car, sleeping on a sofa bed.

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No matter how sweet your purchase-money commercial loan, the bank is likely to push back over the idea of making a non-government-insured commercial loan, i.e., the loan is guaranteed by neither the SBA nor the USDA.  When the bank does push back, remind them that purchase money commercial loans are much safer than refinances because:

1. The fair market value of the collateral has been established in the open market.  The commercial lender does not have to rely on just the opinion of a fallible and/or potentially crooked appraiser.  The fair market value has been established by the arm's length negotiations between the seller and the buyer.
    
2. The buyer of the commercial property is putting down cold, hard cash.  Some commercial lenders call this down payment "skin in the game".  I call it "blood money", and it represents the buyer's blood on the porch that the lender will step over when he forecloses.
    
3. No matter how well a commercial lender underwrites, there is always the possibility that the borrower's business has suddenly taken a downward spiral.  Borrowers with financial trouble seldom rush out to put a large down payment on a commercial property.  Investors who go out and buy commercial-investment property are usually very sound and solvent financially.

One of the problems you will quickly discover trying to make commercial loans on commercial-investment property is that the bank will only want to finance 60% of the purchase price, and the bank will NOT allow a second mortgage.  This means that your buyer has to put a whopping 40% down. 

Blackburne & Sons has introduced a new preferred equity program where we will add our fresh equity dollars to your buyer's 25% downpayment to create the 40% downpayment required by the bank.

Unlike the bank, our hard money commercial mortgage company, Blackburne & Sons, WILL allow the seller to carry back a second mortgage behind one of our new first mortgages.

We will make a 75-0-25, a 70-10-20, a 70-15-15, or a 65-25-10, where the final number is the size of the buyer's downpayment.  "But George, the SBA will make a loan of 90% LTV."  Those are owner-user commercial loans, not commercial-investment properties.

I have a full-time employee who calls banks and credit unions all day long, where he invites them to join C-Loans.com.  Most of these banks are scarety-cats, and they decline.  I have assembled these banks into The Blackburne List, a huge list of 2,000 commercial lenders, organized by state, that I sell for $39.95.  If you are loathe to invest $39.95, its easy to get The Blackburne List for free.

"But, George, my borrrower has perfect credit and big tax returns.  He will never pay Blackburne & Sons' hard money rates."  Then submit your "A" quality commercial loan using C-Loans.com.  It takes only four minutes.  You can submit your commercial loan to 750 different commercial lenders, six lenders at a time.

 "But George, commercial mortgage portals don't really work."  Oh, yeah?  C-Loans just (6/7/14) closed an $18.5 million construction loan on a mixed-use project in Wisconsin.  The broker earned a $92,500 commission.  What would you do with a $92,500 commission?

Most borrowers, when exercising a lease-option on a commercial property, will use an SBA loan.  There are times, however, when an SBA loan won't work, and a private money commercial loan from Blackburne & Sons can help.  Today we cover those situations, but first, some background:

A lease-option-to-buy is an agreement between a landlord and his tenant, whereby the tenant agrees to lease the real estate, but only if the tenant is also granted the right to buy the property for a certain price during the term of the lease.  In the typical lease-option agreement, the tenant pays a monthly rent that is more than than fair market rent of the property.  The amount in excess of fair market rent is credited towards the buyer's eventual downpayment.  If the tenant decides not to exercise his option-to-buy, the landlord keeps the excess rent as his option fee.

When a commercial tenant chooses to exercise his option to buy, he will need a commercial loan.  Most of the time commercial borrowers, with a lease-option-to-buy, are eligible for an SBA loan because the property is owner-used.  By the way, the expression, owner-used, is actually more precise than owner-occupied because a commercial tenant does not actually live in the property.

By the way, did you know that all SBA lenders are not the same?  Even though the SBA guarantees 70% to 90% of an SBA loan, the bank originating the SBA loan still has to retain the risk of loss on the remaining 10% to 30% of the loan.  Therefore, because commercial lending is subjective (determined by the judgement, experience, economic optimism, and prejudices of Loan Committee), one SBA lender might turn you down, while another SBA lender might approve the exact same loan.  The first bank just might not be willing to take the risk of loss on the 10% to 30% portion that the bank has to retain.

Therefore just because one SBA lender turns you down doesn't automatically mean that you do not qualify for an SBA loan.  It could very well be that the SBA lender who turned you down was pessimistic about the widgets industry (your industry) or recently took a loss in your area of the city.  Another SBA lender might be wildly optimistic about the widgets industry or may enjoy three other performing loans in your neightborhood.

If you are exercising a lease-option, be sure to submit your commercial loan application to several different SBA lenders.  You can submit your commercial loan to over 200 different SBA lenders in just four minutes by using C-Loans.com.

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"A slipping gear could let your M203 grenade launcher fire when you least expect it. That would make you quite unpopular in what's left of your unit." -- Army's magazine of preventative maintenance 

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Okay, so when would it make sense to use a private money lender, like Blackburne & Sons, rather than an SBA lender?

1. Maybe the buyer's credit is spotty because he went through a divorce.
2. Maybe the buyer's company really got beat up financially during the Great Recession.
3. Maybe the seller has offered to carry back a second mortgage.  SBA lenders won't allow a second mortgage.
4. Maybe the buyer's downpayment is a little light.  By taking additional collateral (or not), Blackburne & Sons can often make the deal work.
5. We see the following situation a lot:  The tenant pours $125,000 into upgrading the property, but when it comes time to buy the property, he lacks the 10% downpayment in cash needed to satisfy the SBA.  The smart private money lender will still make this deal.  The purpose of a downpayment is to make sure than the buyer has some skin in the game.  In this situation, the buyer has clearly made a serious economic commitment to the property.
6. Commercial real estate fell by 45% during the Great Recession.  Suppose a lease-optionee (the tenant) executed his lease-option during the nadir (lowest point) of the Great Recession.  Since then commercial real estate has recovered significantly (but far from all of the way).  An SBA lender is not going to give the lease-optionee any credit whatsoever for that appreciation, while Blackburne & Sons will strongly consider it.

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"If you see a bomb technician running, try to keep up with him." -- USAF Ammo Troop

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Blackburne & Sons is extremely bullish on commercial real estate right now.  The Great Recession is over, and in my opinion the United States is facing the largest and most wonderful economic expansion in its 230-year history.  I genuinely believe the future is so bright, we gotta wear shades.

A lot of good things happen when banks are willing to make loans to businesses.  To a very large extent, the Great Recession was so cataclysmic because banks stopped making new business loans.  See my 2006 book, The Reverse Multiplier Effect. 

That's why I felt like dancing when I read the following:  Bank loans and private-sector credit grew "very slowly" until January, he explains. "Since then the Fed's weekly data show that bank loans to private businesses have accelerated sharply and are on track to grow by $700 billion in 2014 after only growing $140 billion in 2013."  Folks, this is immensely bullish news for the economy.

It also helps to explains why Blackburne & Sons is so bullish on commercial real estate and is currently willing to consider new commercial loans that we would never have considered during the Great Recession.

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"When the pin is pulled, Mr. Grenade is not our friend."  -- U.S. Marine Corps

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If you need a private money commercial loan, please be sure to submit your deal to Blackburne & Sons.

If you need an SBA loan, you can submit your commercial loan mini-app to over 200 different SBA lenders using C-Loans.

We have an employee whose full-time job is to call commercial lenders and to invite them to join C-Loans.com.  Those that decline are added to The Blackburne List.  You can either buy The Blackburne List for $39.95 or trade us one banker and get the entire list for free.

I have often said, "There is no better way to meet high-net-worth investors than to be a commercial mortgage broker."

Even if you are a commercial real estate broker (aka "commercial broker"), you should open a commercial mortgage company and broker some commercial loans on the side, when sales are slow - just for the opportunity to meet wealthy investment property investors.  In my role as a commercial mortgage lender, today I met the investment manager of a family office.  Folks, this is a huge deal!  This could potentially be a very important contact.

A family office is usually a small company of three or four employees that manages the investments and the business affairs of a single, extremely wealthy family.  Usually we're talking about investment portfolios in excess of $30 million, and some family offices manage investment portfolios as large as $500 million or more.

A family office does far more than merely manage the family's investment portfolio.  A family office will also provide for tax compliance work, access to private banking and private trust services, document management and recordkeeping services, expense management, bill paying, bookkeeping services, family member financial education, family support services, and family governance.

Whether you are a commercial broker or a commercial mortgage banker, you need to develop a fun newsletter with which you can stay in touch with your clients.  At Blackburne & Sons, we use iContact.com as our newsletter service.  I think it costs less than $60 per month to send out 4,000 email newsletters every business day.

I will try to stay in contact with this family office investment manager by sending him lots of folksy, fun, down-to-earth, opposite-of-professional newsletters.  In every newsletter I will include lots of jokes, funny pics, and cool videos.  I will also try to reach him with a newsletter every three weeks for decades.

I call these the fun treats in my newsletters "Rat Goodies".  Back in the 1960's a famous psychologist, B.F. Skinner, conditioned rats to press a lever to get a rat goody.  If we can condition rats to press a lever to get a rat goody, we should be able to encourage our friends, clients, and pen pals to look forward to our newsletters (and blog articles) because they always include fun treats.

"Gee, George, are you trying to condition me?"  Yes, I am, but its for a noble purpose - so we can make money together and have fun doing it.

Last year I started selling The Blackburne List, a list of 2,000 commercial real estate lenders who said, "No," when we asked them to join C-Loans.com.  We would sell maybe two or three copies of the list every week at $39.95.

Then we added the opportunity to get The Blackburne List for free, merely for trading us the name and the contact information of one banker making commercial loans.  It's a helluva deal for the guy making the trade - 2,000+ bankers for just one.  Not surprisingly we're making one to two such trades per day.

But the thing that is blowing my mind is that outright sales of The Blackburne List have tripled.  For some reason many guys would prefer to pay the $39.95 rather than give up the name of one of their bankers.  Go figure.  We're happy either way.

We're still dancing in the aisles here at C-Loans over our closing this week of an $18.5 million construction loan on a mixed-use project in Wisconsin.  If you had brokered that deal and charged the borrower 50 basis points, your commission would have been a whopping $92,500.  What would you do with $92,500?

By the way, a basis point, often abbreviated "bps." and pronounced bips, is just 1/100th of a point.  Therefore 50 basis points is 50/100ths of a point ... or one-half point.

C-Loans.com has closed over 1,000 different commercial real estate loans totaling over $1 billion.  "Yeah, yeah, George, I 've heard you say that a dozen times."

But here's the thing that you need to understand:  The Suggested Lender List for every commercial loan search is different.  Different lenders make different size and types of commercial loans.  Just because you have a disappointing response to one commercial loan - say, a $275,000 loan on a bar in the ghetto to a guy with poor credit - doesn't mean that you won't meet tons of dreamy lenders on a different deal - say, a $3 million loan on an apartment building in Austin, Texas.

Here's your final treat for the day:

Stop the presses!  Jeff Smith of StarFury Capital Management just asked me, "Ok, George, that sounds great.  Now how can we mere mortals meet the high execs of family offices?"

The answer is to broker commercial loans!  The larger the loans that you broker, the wealthier your borrowers will be.  Remember the Net-Worth-To-Loan-Size Ratio says that the borrower's net worth should be at least as large as the loan size requested (1.0 ratio).  If you work only on $10 million loans, you should meet plenty of guys with a net worth of $10+ million.

And when you "meet" a wealthy investor - even if its only over the phone and even if you only quote him a loan - keep marketing to him for years.  That's how I built my $50 million hard money shop.  Every time I met a high-net-worth commercial borrower, for the four years leading up to when I started selling trust deed investments, I saved his contact information and kept my name in front of him with my newsletters.

This investor was special.  I had met him in the legitimate course of business.  With him, I had legitimacy.  I earn 2% per year for loan servicing.  Do the math on $50 million in servicing.

Grasp this concept:  Every one of my early trust deed investors was a former borrower!  It's a strange notion, but an investor is an investor.  The same guy who invests in large apartment buildings, and hence needs a big apartment loan, is also the guy who buys stocks and trust deeds.  An investor is an investor.

Mick Carlson, General Manager of C-Loans, Inc., is pleased to announce that C-Loans has just closed an $18.5 million commercial construction loan on a mixed use project in Monona, Wisconsin.  Who says no one is making commercial construction loans these days?

Mixed-use is not the same as mixed-commercial.  A mixed-use property combines residential income units (usually apartments) with commercial space (usually, but not always, retail).  

There was an issue with mixed-use properties that scared away many lenders in the 1970's - noise.  In the 1970's there were a number of court cases that penalized lenders which had foreclosed on mixed-use properties.  The residential tenants sued the lenders for a breach of their right of quiet enjoyment to their apartments.

Apparently the prior owners of these mixed-use properties had rented the ground floor commercial units to noisy bars or loud disco's.  The poor residential tenants couldn't sleep at night, but they didn't want to move out because of the cost of moving or because they had rent-controlled apartments with below-market rents.  The foreclosing lenders had to either buy out the successful disco with a ten-year lease or buy out the residential tenants.  For several decades afterwards, mixed-use properties were shunned by most lenders.

In contrast, a mixed-commercial property is one that mixes two different classes of commercial property, like offices over ground-floor retail or retail in front of self-storage units.

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A lady tells the story:  Waiting for our aerobics class to begin, several of us were standing around in our leotards chatting about fitness and diets. One woman said that her brother-in-law had quit smoking, gone on a diet, and lost weight - all at the same time. 

Thinking to myself that no human being could possibly do this without acquiring at least one other undesirable habit for compensation, I jokingly asked her, "What did he start doing instead of these things?" 

After a slight pause, she smiled and said, "Well, my sister is pregnant now."

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This huge $18.5 million closing is an important milestone for C-Loans.  Even though we have closed over 1,000 different commercial real estate loans totaling over $1 billion, many of the large-loan lenders refused to believe that it was possible to close large commercial loans over the internet.  On top of a $17 million closing, this new $18.5 million closing finally puts this prejudice to bed.

Commercial construction lending is poised to come roaring back, as new commercial construction was almost non-existent during the Great Recession.  C-Loans, Inc. is so bullish on commercial construction lending that we just went out and paid a small fortune for the domain, CommercialConstructionLoans.com. 

Ultimately all of our loan requests get funneled into C-Loans.com.  If you need a large commercial construction loan - or any type of commercial real estate loan - please enter it into C-Loans.com.  Remember, it takes only four minutes, and C-Loans.com is free!

Somewhere in your pencil drawer is the business card of a banker who makes commercial loans.  It's probably stained and dog-eared, and you probably haven't even looked at in months.  You can trade the contents of this stinky 'ole business card for a free, written directory of 2,000+ commercial real estate lenders.

Sooner or later you will be trying to get a commercial loan so that either you, or your investor client, can buy a commercial-investment property (as opposed to an owner-user property).  You will be very frustrated to learn that your bank will not lend up to 75% loan-to-value.  The bank will want you to put down a whopping 40% of the purchase price.  Blackburne & Son's will invest preferred equity in your project to make your down payment large enough.

A commercial loan, if secured by deed of trust, can be foreclosed much faster and much more cheaply than a commercial loan secured by a mortgage.  California, like most of the states in the West, is a deed of trust state. This is why the trust deed investment business (hard money mortgage business) is so large in California.

So what is the difference between a mortgage and a deed of trust?  A mortgage has two parties - the mortgagor and the mortgagee.  The mortgagor is the party who gives away a mortgage to his property.  In other words, the mortgagor is the borrower.  By the way, any time you see a legal word ending in "or", that is the party giving away something.

The lender is the mortgagee.  He is the party receiving the mortgage as security for his loan.  Any time you see a legal word ending in "ee", that is the party receeeeiving something.  In this case the mortgageeeeeee is receeeeeiving a mortgage as security for his loan.  If the mortgag-OR (borrower) doesn't make his payments, the mortgag-EE can foreclose the mortgage.

In order to foreclose a mortgage, the mortgagee (lender) must use the courts.  In most states, the courts are backed up for months and months.  This can be a very slow process.  It once took Blackburne & Sons over 17 months to foreclose a mortgage in the state of New York.

Many of the states East of the Mississippi are mortgage states; i.e., a commercial lender has to foreclose his commercial mortgage loan using the very slow courts.  If only there was a way to bypass the slow-pokey court system ...

A deed of trust is a three-party document (trustor, trustee, beneficiary), rather than a two-party document (mortgagor, mortgagee).  A deed of trust bypasses the need to use the courts to foreclose a commercial loan.  Therefore it is much faster to foreclose a deed of trust than a mortgage.

What's the difference between trust deed and a deed of trust?  Nothing.  They're identical.

Here's the way a deed of trust works.  The trustor (borrower) gives away bare legal title to the property to the trustee.  The trustee is a neutral, private intermediary, trusted by both sides of the contract, who holds the bare legal title to the property for the benefit of the beneficiary (lender).

Think of the trustee like a stakeholder.  Suppose my son, Tom, and I wanted to bet $50 over who was going to win the NBA championship.  Let's suppose that neither of us trusted the other.  We could give the money to Mickey, a mutual friend, to hold until the NBA Championship was over.  We would each give Mickey instructions, "Here is $50 from each of us.  Please give the winner the entire $100."  (And then I would fire Mickey when he fails to give me the $100, even though I lost.  No wonder my son doesn't trust me!)

Please note that the trustee is NOT some court, although he is often either an attorney or a title company.  He's just a private guy or a private company, not some slow-pokey governmental official.

The trustee holds bare legal title for the benefit of the beneficiary (lender) until the debt is repaid.  If the borrower fails to make his payments, the beneficiary notifies the trustee, who then schedules a PRIVATE foreclosure sale (Trustee's Sale) about four months later.  I screamed the word "private" because there is no slow-pokey court or government official involved.  Without any involvement of the courts, the trustee can conduct a trustee's sale, and, if no one bids at the sale, issue a Trustee's Deed in favor of the beneficiary.

Several times I used the expression, "bare legal title".  Bare legal title is just the right to hold title to the property until a deed of trust or mortgage loan is paid.  It's called "bare" legal title because the trustee does not own any of the other rights of ownership - like the right to occupy the property, the right to exclude others, the right of quiet enjoyment (stop bugging me on my property!!!), and the right to collect rents.

The year was 2010.  Real estate had collapsed due to the Great Recession.  Commercial real estate had fallen by 45%.  Residential real estate had fallen almost as far.  Professor Robert Shiller of Yale was warning of further declines in real estate, as the tens of thousands of foreclosures-in-process (the homes in the so-called shadow inventory) were released onto the market.  And then ...

Nothin'.  The washout never happened.  Enormous opportunity funds, like Blackstone, had figured out that they could buy these foreclosures for all cash and rent them out for a 7% to 9% cash-on-cash return.  That was a huge return, considering that Treasuries were paying only 2%.

Stories began to circulate of hedge fund executives driving by hundreds of foreclosed homes in a single week ... and then making aggressive offers on them all.  Suddenly young couples could no longer find entry level houses to buy.  Home values stopped declining, stabilized, and then started to march back upwards.

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A little old man shuffled slowly into the "Orange Dipper", an ice cream parlor in Naples, Florida, and pulled himself slowly, painfully, up onto a stool.  After catching his breath, he ordered a banana split.  The waitress asked kindly, "Crushed nuts?"  "No," he replied, "hemorrhoids."

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When commercial real estate plunged by 45% during the Great Recession, most commercial lenders got crushed.  They took enormous losses.  As a result, for the past five years, the only types of commercial real estate loans sought by the banks were either SBA loans and USDA loans, which were mostly guaranteed by the government.  The key issue to grasp here is that most of the properties receiving commercial loans for the past five years were owner-user buildings.  This is about to change.

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A daddy teased his little daughter by suggesting she liked a certain boy in her kindergarten class.  The little girl was quite indignant. "No, daddy, I don't like him!" she stated. "He's only interested in one thing."  Shocked, the daddy cautiously asked what that one thing might be.  "Power Rangers, of course," said the toddler.

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Commercial real estate rents are about to start increasing.  The U.S. economy is building up tremendous strength due our plummeting reliance on imported oil, the thousands of new jobs being created in the oil fields, dirt cheap natural gas to power our power plants, our enormous cost advantage in heavy manufacturing (in heavy manufacturing energy is by far the largest line item expense), an improving housing market, the use of robots to replace cheap labor in Asia, and the growing trend of on-shoring, which allows a manufacturer greater quality control and flexibility.

Folks, I was right about the Great Recession, and I am right about this.  Our economy is already the King Kong of the world, and we will continue to pull even further ahead.  The next few decades will be the Golden Age for the United States.  Here in the Midwest, where I personally live, the wealthiest men in town are all in manufacturing.  At my country club, every manufacturer is telling me the same thing - business is booming!

With commercial real estate falling by 45%, there has been very little new commercial real estate construction for six years.  In the meantime, a certain number of older buildings have become economically obsolete and have been either demolished or abandoned.  Now overlay an expanding economy, and you can see how competition to rent existing commercial buildings will almost certainly lead to higher commercial rents this year.

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A pirate walks into a bar wearing a paper towel on his head.  He sits down at the bar and orders some dirty rum.  The bartender asks, "Why are you wearing a paper towel?"  "Arrr..." says the pirate. "I've got a bounty on me head!”

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Do you know what you haven't seen for six years?  Investors buying commercial buildings for income.  This is the point of today's article.  This year will mark the return of income property investors and the commercial-investment loan.  Wealthy investors will be snatching up good rental properties, like multi-tenant office buildings, strip centers, and industrial buildings.

"Gee, George, how can you be so sure?"  With rents increasing, investors will be able to buy good rental buildings at attractive 6% to 7% cap rates, with the excellent prospect of earning 8% to 10% as the economy heats up and the demand for commercial space increases.

What does this mean for you?  More and more of the commercial loans that you'll be seeking this year will be for commercial-investment properties, as opposed to owner-user properties.  The bank may not give you a 75% LTV loan, even if your proposed commercial loan cash flows beautifully.  Banks are still nervous.

If you ever find yourself frustrated because the bank won't make you a large enough commercial loan, please remember our preferred equtiy.  We'll add our equity to your downpayment to create a downpayment large enough to satify the bank.

About 40 commercial mortgage bankers and investors have now swapped one of their bankers for our free directory of 2,000 commercial real estate lenders.

The more expensive the commercial loan quote, the less likely it is to be either BS or some advance fee scheme.  Put another way, the higher the rate and points a lender quotes you, the more likely the commercial loan quote is to be real.

For example, a buddy of mine recently sent me an email saying that he had just funded a $1 million hard money land loan using a single, wealthy investor.  Apparently this investor used to be in the land banking business, and he only invests in land loans.  Here's the comment in his email that convinced me that this investor of his was real:  "This is expensive money - make no mistake about that.  The minimum IRR for him alone is 16-18% annually, before we get paid."

In contrast, an advance fee scammer would quote 5.5% and 2 points.  On a land loan?  Whenever you hear an unusually attractive quote like that, ask yourself, "Who is quoting 5.625% and forced this so-called lender (advance fee scammer?) to drop his rate to 5.5%?"

Lenders only drop their interest rate and points in response to competition.  If a "lender" has no apparent competition, and his rates are deliciously low, be on your guard.  He's out to con a big application fee out of you.  The interest rates here at Blackburne & Sons started out at 5,000% per day (hey, I'm a proud capitalist), until we were forced by competitors to drop our rates.  Now we're quoting just 8.9% to 11.9% annually.  Darned competitors!  :-)

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You know it's time to diet when you dance, and it makes the band skip.

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The new hot commercial lending product out there is a blanket commercial loan against a portfolio of 5 or more rental houses.  More and more lenders are entering this market.  Blackburne & Sons is doing a $1.25 million blanket loan on about 35 homes this month.

I have owned my own hard money commercial mortgage company now almost 34 years.  During those years we have survived three horrible real estate recessions.  The guys that bought commercial real estate at the very bottom of the market made a fortune.  If only I knew when the bottom was the bottom.  I would have loaded up on commercial real estate.

Hey, wait a minute!  I actually DO know.  In all three real estate crashes over the past 34 years, commercial real estate fell by almost exactly 45%.  All three times a 45% decline was the nadir (bottom point) of the collapse.

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You know its time to diet when you are diagnosed with the flesh eating virus, and the doctor gives you 22 more years to live.

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"Gee, George, if commercial real estate fell by almost exactly 45% during the Great Recession, you ought to be loading up on commercial real estate!"

We are!  That's why Blackburne & Sons has just come out with its new preferred equity program.  We add our equity on to your buyer's 25% downpayment to create a cash downpayment large enough to satisfy the bank.  You really-really need to understand this concept of preferred equity.  It will save so many of your commercial real estate loans and property sales.  Preferred equity is NOT a loan.  It's equity!

About two dozen mortgage brokers out there have had the common sense to trade one banker making for commercial loans for the 2,000+ bankers making commercial loans on The Blackburne List.  "Gee, one for two thousand ... is that a good deal?"  You better jump all over this offer before it goes away.  Or you can buy The Blackburne List for $39.95.

While we are on the subject of real estate crashes, did you ever wonder how commercial real estate appraisers find market comparables when nothing is selling?  That is when commercial real estate lenders stop talking about fair market value, and all they want to talk about is cost.  What did you pay for the building originally?  Don't tell me what it once appraised for.  What did you actually pay for it?  Cost-cost-cost.  Marcia-Marcia-Marcia.  All commercial lenders want to talk about during real estate crashes is cost.

This brings up the concept of clearing the market.  For almost all goods (including stocks in a financial panic), there is some price at which an all-cash buyer can be found.  The process is also called liquidation.  The price just has to drop - drop - drop until the asset finally clears the market.  I was reminded today of a Warren Buffet quote:

Be fearful when others are greedy, and be greedy when others are fearful.