Commercial Loans and Fun Blog

This is the fifth article in my series on commercial second mortgages, and it will be the hardest article in the series to understand.  Just try to get through it.

Rest assured that I am leading you to a warm, profitable place; but first you have to understand commercial second mortgages (done), mezzanine loans (done), structured finance (today's subject), preferred equity, and finally equity.  I promise that you will be well-rewarded for following along.

 

What is structured finance?  According to Wikipedia, structured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid laws using complex legal and corporate entities.  In commercial real estate finance, the risk to be avoided is any default risk, and the law to be avoided is any income taxes.  Are your eyes glossing over?  Perhaps an example will help.

Wall Street investment bankers are considered to be using structured finance when they securitize credit card debt, scratch-and-dent home loans, auto loans, and sub-prime commercial mortgages into mixed pools.  These pools are a real hodge-podge of assets.  The loans in this giant pool are held by a pass-through trust (a special kind of trust that doesn't have to pay income taxes).

The trust then issues bonds backed by the loans in the pool.  These bonds are called asset-backed securities (ABS) or collateralized debt obligations (CDO's).  Please don't give up on me.  All we are doing is making soup.  We have a great, big pool of water, and we are sprinkling in some car loans, some credit card loans, and some poorer-quality home loans and commercial loans.  We are calling the soup a C.D.O., and the bonds that will be issued by the pool are simply called asset-backed securities.

Different classes of bonds would have different levels of risk, called tranches.  The entire CDO would be rated by some rating agency, and each tranche would be assigned its own risk-rating and yield.  Investors could then choose the tranche that they wanted to invest in, according to how much risk they were willing to accept.  The more risk they accepted, the higher the yield they could earn.

By breaking a debt offering into tranches and giving investors the chance to choose their risk level, investment bankers discovered that they could get far more money for the pool of loans.  A single buyer of the entire pool of loans might only pay $250 million; but if the bonds were broken up into tranches and rated, the investment bankers might get a whopping $290 million for the same pool of loans.  (CDO pools are typically much smaller than CMBS pools.)

"Gee, George, these fancy structured finance securitizations you described above sound just like garden-variety mortgage-backed securities."  Fannie Mae and Freddie Mac have been securitizing residential mortgages for forty years.  Conduits have been securitizing commercial mortgage-backed securities (CMBS) for over a decade.  Tell me something I didn't know."

Asset-backed securities (ABS) are very similar to mortgage-backed securities, except that some of the loans in the pool are not mortgages.  Remember, we have lots of auto loans and credit card loans in the pool.

Hey, we're almost done for the day, and the following is possibly the most important point:

When investment bankers, commercial bankers, and mortgage originators use the term, structured finance, in the context of commercial real estate finance, they usually just mean the making of mezzanine loans, preferred equity investments, and equity investments.

"Geez, George, couldn't you have just said that in the first place?  My brain feels like its gonna explode!"  :-)

This article is the fourth in my series on commercial second mortgages.  In my first article I pointed out that commercial second mortgages are rare because most commercial second mortgage lenders got wiped out in the real estate depression of 1987 to 1991.

In my second article I pointed out that most bank commercial first mortgage loans have a due-on-the encumbrance clause, making it very risky for commercial lenders to make commercial second mortgages.  In my third article I pointed out even mezzanine loans were difficult because modernly most bank commercial loan documents contained an alienation clause, which forbids even mezzanine loans.

In this article we will talk about the relative size of the second mortgage compared to the first mortgage.  For the reasons I will outline here, it is imprudent for a commercial lender to make a second mortgage that is too much smaller than the underlying first mortgage. 

The New-Money-to-Old-Money Ratio holds that the ratio of the second mortgage to the first mortgage should never be smaller than 1:3.  In this ratio, the new second mortgage is the "new money", and the existing first mortgage is the "old money".

Why?  Suppose a second mortgage lender made a $200,000 commercial second mortgage behind a $1.5 million first mortgage.  Remember, if a borrower defaults on his first mortgage, the second mortgage holder has to keep the first mortgage current while he forecloses; otherwise, the second mortgage holder risks being wiped out by a foreclosure of the underlying first mortgage.

Now suppose the borrower defaults on both the first and second mortgages.  The second mortgage lender would have to keep the first mortgage current.  For this example, let's suppose the monthly payments on the underlying first mortgage were $15,000 per month.  If the foreclosure took 18 months*, the second mortgage holder would have to advance 18 monthly payments of $15,000 or a whopping $270,000 - just to protect a tiny $200,000 second mortgage.  Yikes!  In real life, most second mortgage lenders would just walk away.

So what would be a more reasonable second mortgage?  The New-Money-to-Old-Money Ratio suggests that the first mortgage should never be more than three times larger than the proposed first mortgage.  In our example, the first mortgage is $1.5 million.  Therefore the smallest second mortgage that would be economically justifiable would be $500,000.  Most lenders would advance $270,000 to protect $500,000.

*  Above I mentioned that the foreclosure might take 18 months.  Many states use mortgages, rather than deeds of trust.  In a mortgage foreclosure, the process has to take place in court.  Courts can often be backed up and extremely slow.  If the subject property is located in a trust deed state - like California or Arizona - the foreclosure process does not involve the courts and is usually much faster.

In addition, many times a second mortgage lender doesn't realize that the borrower has defaulted on the underlying first mortgage until the borrower is four to five months behind on the first mortgage.  The second mortgage holder would have to cure the first mortgage before he even starts his foreclosure, if he wants to keep the first mortgage lender's late charges, default interest, and legal fees to a minimum.  Yikes!

Lastly, if the property enjoys protective equity, a great many borrowers will file a Chapter 11 Bankruptcy to delay the foreclosure sale.  This means even more months of keeping the first mortgage current.

Later in the week we will talk about preferred equity and then later equity, a fairly sophisicated subject.

If you are enjoying this series of articles, how about giving your old buddy a "Like" above?  Thanks!

My private money commercial mortgage company, Blackburne & Sons, once had to foreclose on a commercial first mortgage loan on an office building in the State of New York.   Even though the borrower didn't fight us very much, because New York is a mortgage state, as opposed to a trust deed state, it still took us well over 18 months.  The process through the New York courts was very, very slow.

Now imagine if we had a made a $200,000 commercial second mortgage behind a $1.5 million first mortgage.  Remember, if a borrower defaults on his first mortgage, the second mortgage holder has to keep the first mortgage current while he forecloses; otherwise, the second mortgage holder risks being wiped out by a foreclosure of the underlying first mortgage.

It doesn't really matter how much equity the property enjoys.  The property in the above example could have been worth $4 million, and the second mortgage holder would still be wiped out 99% of the time.  Why?  In real life almost no one ever bids at commercial foreclosure sales.

The reason why is because the bidder has to show up at the foreclosure sale with enough cash to pay off the entire foreclosing first mortgage.  If the first mortgage was was originally $1.5 million, with accrued interest, late charges, penalties, legal fees, and foreclosure costs, the bidder would probably have to bring a cashier's check to the foreclosure sale of almost $2 million!  This just doesn't happen in real life.

Okay, so in our example, we made a $200,000 second mortgage behind a $1.5 million first mortgage.  We have to keep the first mortgage current, and let's suppose the monthly payments on the underlying first mortgage were $15,000 per month.  If the foreclosure took 18 months, the second mortgage holder would have to advance 18 payments of $15,000 or $270,000 - just to protect a tiny $200,000 second mortgage.  Yikes!

Clearly commercial second mortgages behind large first mortgages are darned risky.  Therefore smart financiers came up with the idea of mezzanine loans.

You will recall that a mezzanine loan is loan secured by the stock of the corporation that owns the property.  (More precisely, since most real estate investors use LLC's, rather than corporations, a mezzanine loan is a loan secured by the membership interests of the LLC that owns the property.  For ease of understanding throughout this article, however, I will continue to use stock and corporations, rather than membership interests and LLC's.)  If you own all of the stock of the corporation that owns the commercial property, you own the commercial property.

What's the big advantage of a mezzanine loan over a commercial second mortgage loan?  Stock is personal property, not real property.  A foreclosing lender does not have to go through the long mortgage foreclosure process.  Instead, he can simply advertise the foreclosure sale of the stock in a commercially reasonable way and then hold the sale in some attorney's office.  Since no courts are involved, a mezzanine loan foreclosure can happen in just 60 to 70 days!

So far, so good.  But there is a problem.  The alienation clauses of most standard commercial first mortgages prohibit the hypothecation (the pledging of an asset as security for a loan) of the stock of the corporation that owns the property and which borrowed the underlying mortgage loan.  Banks and conduits do this because they don't want some idiot-rookie taking over the management and control of a some multi-million-dollar commercial property.

So how then are mezzanine loans ever made?  The mezzanine lender signs an intercreditor agreement with the underlying first mortgage holder, whereby the first mortgage holder agrees not to disturb the mezzanine lender, if the mezzanine lender forecloses, as long as the mezzanine lender keeps the first mortgage current.

But good luck ever getting a bank to sign an intercreditor agreement.  The vast majority of the time, the bank will refuse to sign an intercreditor agreement; and if they ever do agree to sign one, it takes months of negotiations and thousands of dollars in legal fees.

Commercial second mortgage loans and mezzanine loans are therefore very, very rare.  Monday we will talk about the ratio of new money to old money and preferred equity.

Want to receive free commercial real estate finance training several times per week?  Remember, every chapter in every one of my expensive training courses started out first as a blog article.  Just find my ugly face in the upper-right-hand corner of this blog and fill in your email address below.

Yesterday I explained that the most important reason why commercial second mortgages are so rare these days is because all of the commercial second mortgage lenders got wiped out in the commercial real estate depression of 1987 to 1991.  Today I will explain a number of legal barriers facing commercial lenders wishing to make commercial second mortgages.

Most modern commercial mortgages contain a due-on-encumbrance clause.  This means that if the borrower places any junior financing on the property, the underlying first mortgage lender has the right to declare the borrower in default and to accelerate his loan; i.e., demand that the borrower immediately repay the loan in full.

It gets worse.  Most modern commercial mortgages also contain a provision whereby any alienation of title without the first mortgage lender's permission is grounds to accelerate the mortgage.  Alienation of title means the transfer of any legal or equitable ownership right in the property.  In this context the word "alienation" means "to make foreign" or "to send away".  When you alienate your wife's affection by yelling at her, you send her love for you to a foreign planet.

Okay, let's not forget where we are.  We are talking about the legal obstacles to making commercial second mortgages.  Placing a second mortgage on a commercial property constitutes a form of alienation of title.  You better get the lender's permission first because further encumbering the property is grounds for accelerating the bank's first mortgage.

"Mr. Borrower, this is Bob Smith, the loan officer at the bank.  I see that you recently placed a $200,000 second mortgage on your apartment building.  It is my duty to tell you, Mr. Borrower, that because you did not first get our permission, you are now in default on our $3.4 million first mortgage.  We are hereby accelerating it.  Would you please pay off our entire $3.4 million commercial loan by 5:00 p.m. tomorrow?  If you fail to do so, we will be forced to start seizing your assets (like all of the cash in your checking and savings account).  Have a pleasant day."

Have a pleasant day?

Tomorrow we'll talk about prohibitions against mezzanine loans, preferred equity, and springing personal guarantees.

 

Later in the week I will share with you the ratio known as the Old-Money-to-New-Money Ratio.  Today, however, I will explain why very few commercial lenders make commercial second mortgages.

Perhaps the the most important reason why so few commercial second mortgages are getting made is because virtually all of the largest commercial second mortgage lenders were wiped out in the commercial real estate recession of 1987 to 1991.

Prior to 1987, high-income-earners, like doctors, could shelter much of their employment income by using passsive losses (depreciation) from commercial real estate.  In late 1986, Congress completed a major tax overhaul that eliminated the advantages of passive losses from commercial real estate.

Suddenly commercial real estate lost much of its appeal, and commercial real estate values plummeted by a whopping 45%.  (Note to my sons:  That number - 45% - is an important historical number.  Commercial real estate tends to fall no more than 45%, even in the absolute worst of recessions / slumps.  The next time commercial real estate falls more than 38%, syndicate our investors and start buying back into the commercial real estate market.)

The commercial real estate recession (heck, it was a depression) lasted for five long years.  Wonderful, old commercial hard money lenders took painful losses in second mortgages.  In most cases the second mortgage holders were completely wiped out, as they ran out of money with which to keep the first mortgage current.  A great many commercial second mortgage companies - companies run by honest, competent men that had been in business for decades - simply went out of business.

The commercial second mortgage industry never recovered.  It's been well over 25 years since more than one commercial lender out of hundreds would consier a commercial second mortgage.  Commercial second mortgages are so rare today that its easier to think of them as if they no longer existed.

Tomorrow I will write about some serious legal problems facing commercial second mortgage lenders - things like the due-on-encumbrance clauses and prohibitions against alienating title in any way; e.g. mezzanine loans and preferred equity.

But for now you can simplify your understanding by remembering that the reason why commercial second mortgages are so rare is that all of the commercial second mortgage lenders got wiped out between 1987 and 1991.  The commercial second mortgage industry never recovered.

Our hard money commercial mortgage company, Blackburne & Sons, is working on a $2 million loan this week; and we have run into an interesting situation.  Our borrowers originally purchased a foreclosed apartment building from a bank, subject to an unpaid water bill.

As we proceeded further into the underwriting, we discovered that the unpaid water bill was a whopping $400,000 - plus it was a senior lien on the apartment building!

Obviously this water bill will have to be paid in full before we close our new loan; otherwise, the water company could foreclose on the building and wipe out our mortgage.  But at least the unpaid water bill was a recorded lien.  The water company was playing fair.

We once foreclosed on an apartment building near Kansas City, Missouri.  When we went to put the water bill in our name, we discovered to our horror that the water company was owed $70,000 by the prior owner.  Before the water company would turn the water back on, we, the innocent purchasers for value (foreclosure), had to pay the former owner's water bill!  The water company was a monopoly, and the city had passed a local ordinance authorizing the water company to withhold services until the buyer paid off the prior owner's bill.  Nothing was recorded on title.  

I'm not sure that such an obviously corrupt scam would survive a legal challenge; but the reality is that the city could withhold water services for years while the case made its way through the courts.

Is there a lesson to be learned here?  I dunno.  Perhaps its this, "There are all kinds of ways to lose money in commercial real estate."  Yikes.

This is an immensely important blog article for you.  If you can make the leap from just arranging commercial real estate loans (debt) to arranging both commercial real estate debt and real estate equity, you will have truly become a commercial real estate financier.

The first step to becoming a true financier is to understand the concept of equity.   The link above is an article that you should read first before going any further.  I please mean it.  Equity has about a dozen different definitions, depending on the situation.  Please read this article first before going any further.

Okay, now that we understand the concept of equity, let's talk about the cost of equity.

Equity is the first-loss piece.  It's kind of like that old joke:  What do a divorce and a tornado have in common?  Answer:  Somebody is going to lose a trailer.  If anyone is going to take a loss in a real estate deal, its going to be the holder or the contributor of the equity.

For example, let's suppose four yuppies pool their savings to buy a rental duplex in Council Bluffs, Iowa.  Between the four yuppies, they put 30% down on a $200,000 purchase price.  Crop prices suddenly fall, over-leveraged farmers across the country start losing their farms in foreclosure, and John Deere closes the nearby manufacturing plant.  Ten thousand workers are laid off in Council Bluffs, and rents plummet.

The yuppies can no longer find tenants for their rental duplex, they fall behind in their mortgage payments, and eventually the house sells at the foreclosure sale for $150,000.  After the $10,000 selling costs (foreclosure trustee, title policy, closing costs, etc.), the bank nets $140,000 - enough money to be repaid in full.

All is well, right?  Not if you contributed the equity!  The first people - and in this case, the only people - to lose money in this failed investment were the contributers of the equity.  They lost their entire $60,000 downpayment.  Equity is always the first-loss piece.

Remember, we're talking about the cost of equity.  Investing in equity is very, very risky, and in order to attract investors, the potential return has to be higher than what they can receive in competing real estate investments.

Well, banks are making commercial first mortgages at around 5.5%.  Their loans are pretty safe, typically just 65% LTV to good credit borrowers.  Hard money lenders are offering investments in commercial first and second mortgages at rates of between 10% and 14% (and they charge their borrowers 3 to 5 points as well).  Even hard money second mortgage investments are far safer than equity investments.

Therefore, you should not be surprised to learn that equity investors want to earn at least 16% to 20%.  In addition, the broker syndicating the investors is going to charge at least 6 to 10 points.  This isn't just what Blackburne & Sons is charging.  This is the market.  Equity is expensive.

Equity money is also very difficult to raise because of the risk.  Therefore, Blackburne & Sons can only raise equity for commercial real estate projects in amounts of between $150,000 and $600,000.  In other words, we play only in the minnow pond when it comes to equity.

Here are some sample scenarios:

1. The owner of a company has a balloon payment coming due on his industrial building.  He owes $2 million.  The property was once worth $3 million, but after the Great Recession it has fallen to just $1.9 million.  The bank has offered to accept a discounted pay-off (DPO) of just $1.35 million, but the largest new mortgage he can find is $1.1 million.  He is $250,000 short, and he doesn't have the dough to make up the difference.  Blackburne & Sons may be able to raise the $250,000 short-fall.
2. An experienced commercial real estate investor spots the deal of a lifetime - a partially leased office building in an affluent part of town that would cost $3 million to rebuild.  The seller has accepted a $2 million purchase offer, and the buyer has 25% ($500,000) to put down.  The buyer approaches every bank in town, but none of them (the big sissies) will lend more than $1.1 million because of the vacancies.  Blackburne & Sons may be able to raise the $400,000 short-fall for him.

We will pay referring brokers a finder's fee of 2 points on the net amount ($250,000 and $400,000 in the examples above) of the equity we raise.

Got a potential equity deal?  Please call or write Angela Vannucci, Vice President and the General Manager of our Equity Department, at 916-338-3232 or email her at angelav@blackburne.com.

                            ----------------------------------------------------------------------------

You can rely on C-Loans to keep you apprised on the latest developments and products in commercial real estate finance.  If you have not already subscribed to this blog, please do so by typing your email address into the field directly below my ugly face.

Advertising directly to the public for commercial loans simply does not work ... at all.  What does work is sending out a newsletter regularly to a small list of referral sources - folks who, because of their jobs, see lots of commercial loan requests coming across their desk every week.

Bankers and commercial real estate brokers are, by far, the best referral sources.   The next best referral sources of commercial loans, with the better ones listed first, include property managers, residential mortgage brokers (on a name and number referral basis ONLY), residential real estate brokers, other commercial lenders, attorneys, CPA's, and financial planners (life insurance agents).

So we all now know WHAT to do to attract more commercial financing requests; but too few of you commercial mortgage brokers are regularly sending out newsletters.  I think the problem is that you think you have to make your newsletters too long and fancy.

For twenty years I used snail mail to send out my newsletters.  I wrote these newsletters on the front and back side of a legal-sized sheet of copy paper.  I used no fancy fonts, and the newsletters contained no color.  They were simply black and white.  These newsletters worked just fine - better than fine, actually.

Today email is much faster and cheaper than snail mail.  If you get slow, you can write a commercial mortgage newsletter in an hour and blast it out immediately to your contacts.  It does not have to be fancy!  You should start with a plain-text email newsletter.  Just make sure that it is jammed full of fun stuff - jokes, interesting stories you've recently heard, movie reviews, book reviews, cool things that you have seen or heard recently, and stories about your family.

"But George, where am I going to get jokes for my commercial loan newsletter?"  Just steal mine from here.  You'll find hundreds of cute, clean jokes.

The lesson I want to drive home to you today is this:  Start sending out commercial mortgage newsletter every ten to 21 days, even if it is very short and very simple.  Stop making excuses, and get it done.  All you are really trying to do is keep your name and contact information in front of your referral sources.

I recently wrote a commercial real estate loan newsletter to my commercial mortgage brokers of which I was very proud.  Come take a peak at my recent newsletter.  Yours does not have to be anywhere near this fancy.  Remember, I have been writing newsletters for thirty years.

Just make SURE your commercial mortgage newsletters are jammed full of Rat Goodies.  Think of your newsletter as an hour-long TV show.  There are 48 minutes of the actual TV show - the cops chasing the bad guys - and every twelve minutes there is a BRIEF word from the sponsor.  Therefore, most of your commercial mortgage newsletter should be devoted to entertainment.  When you do mention your commercial real estate loan services, it should be done quickly and just in passing.

Be sure to review this five-slide lesson on Rat Goodies.

America needs more jobs for its citizens.  Many wealthy foreign investors wish to immigrate to the United States.  Why not make a deal?  If a foreign investor starts a company here in the U.S. that creates enough new jobs for Americans, the foreign investor can immigrate to the U.S.

This is exactly what Congress has done.  It has created the United Sates Citizenship and Immigration  Services’  EB-5  Immigrant  Investor  Pilot  Program  (the  “EB-5 Program”).  The program has been very successful in creating good-paying jobs here in the U.S.  Last year $1.2 billion worth of EB-5 loans were closed.

The program is also very popular among wealthy foreign investors wishing to emigrate.  The entire quota of 7,500 visas were issued last year.  There is talk of increasing the quota to 10,000 visas soon.

Basically these foreign investors are paying to jump to the head of the line for a visa.  These investors do care about the success or failure of their investments; but the return on their investment is secondary to gaining the right to move to the U.S.

The entire process of EB-5 funding is a program developed by the United States Citizenship  Immigration Service (USCIS) known as EB-5 Pilot program.  USCIS is a division of Homeland Security.

The EB-5 process can offer foreign immigrants a fast track path to obtaining US Visas for their "entire family". Simply said, by investing $545,000 into an approved United States Citizenship and Immigration Services (SCIS) project under the EB-5 Pilot Program that will successfully create 10 U.S. jobs for every $545,000 invested, an entire  family can obtain Visas into the U.S. within 6 to 8 months.

Potential EB-5 investments (usually structured as mezzanine loans) are not usually sold on a one-off basis to individual foreign investors.  The paperwork is far too extensive for small deals.  Instead, specialized investment bankers in China (and other countries) raise around $30 million to $35 million per offering in units of $545,000 per investor.

Therefore EB-5 commercial loans are very, very large, and most EB-5 loans are structured as multifamily or commercial construction loans.  However, EB-5 loans have been successfully used to finance solar power facilities, convention centers, student housing, corporate headquarters, residential communities, mixed use properties, county sheriff's offices,  chemical plants, stadiums, dental schools, and roadways.

Usually the total project cost is at least $20 million, and ideally in excess of $100 million.  In the hypotheical case of a $100 million commercial construction project, the borrower-developer usually obtains a $55 million conventional construction loan.  The EB-5 loan regional office provides a mezzanine loan of, say, $30 to $35 million, and the borrower-developer contributes $10 million to $15 million in cash and equity.  Smaller EB-5 loans have also been done in less populated states, sometimes down to as small as $10 million.

Put another way, developers can now use EB-5 funds as a component of their project capital stack. The EB-5 component can be best described as a typical mezzanine loan that will be secured with the developers interest in the project, subordinated to the senior loan, but fully non-recourse.

The EB-5 loan interest depends on the overall project details, including the experience and strength of the developer; however, the cost of an EB-5 mezzanine loan (8-10%) is considerably less than a typical mezzanine loan (15-18%).  Furthermore, the developer can substitute expensive equity investors with an EB-5 mezzanine loan, whereby the senior lender will accept a portion of the developer's equity from the EB-5 mezzanine loan funding.

The normal breakdown of the capital stack is something like the following:   
 
    Senior Lender (construction and Acquisition)        55%   
    Developer's Equity                                           10-15%
    EB-5 Funding                                                  30-35%

Generally speaking from the time that we receive a confirmation from the developer that they want to proceed by signing the term sheet, we anticipate that within about 6 months time the funds will be available to begin funding the project.

If you have a project that seems to meet these requirements, please send me, George Blackburne III (the old man), an email at george@blackburne.com.  In the subject line, please type, "EB-5 Loan".

And by the way, have you subscribed to this blog yet?  Please find my ugly mug shot above and then insert your email address immediately below it.  At least two to three times per week your understanding of commercial mortgage finance will be advanced.  Remember, every subject in every one of my expensive training courses was covered here first in this free training blog.

If your commercial loan client owns a business - even if his credit is flawed and he owns no commercial real estate - he might be able to borrow between $10,000 and $500,000 based solely on his signature!  Some of the uses can be to bolster liquidity, to pay for third party costs - like appraisals, environmental's, etc. - or for any other need.

Using this program, you can get your business-owner-clients money within just three to five business days without any collateral.  There are no up-front fees to get this loan.

There is no requirement to own commercial real estate either.  Your borrower could just be renting commercial space.  There are no mortgage or UCC costs or liens.   It is strictly a signature loan.  Credit can be as low as a 500 FICO to qualify.

The key issue with this program is that the borrower must own a business.  He can borrow up to 10% of his annual sales / revenue.

Please note, however, that the type of business must be one where a little bit of revenue comes in to the company almost every day.  For example, a beauty salon or a mini-mart would qualify.  An oil change or auto repair shop should qualify.  A manufacturing company with shipments going out almost every day would qualify.  On the other hand, a real estate brokerage (or mortgage brokerage) company would not qualify because their income is commission-based (its hit-or-miss).

Why is the frequency of fresh income so important?  These unsecured business loans are obviously very high-risk loans.  The interest rate is priced accordingly, and the repayment schedule call for very small, daily payments that are automatically deducted.  There needs to be fresh income coming in very frequently to the borrower's business account to ensure there is enough available dough to make the payments.

A buddy of mine used this program to get his client a quick $50,000 when his client's credit deteriorated so badly that his SBA loan was turned down.

This program was also used recently to raise the money for third party reports.  In this case, the borrower owned commercial real estate, and he was trying to borrow almost $500,000 secured by his industrial building.  The problem was that the borrower's cash flow was so overstretched at the the moment that the borrower couldn't come up with the $6,000 he needed for the appraisal and toxic report.  This borrower was able to use this quick, unsecured commercial loan program to borrow the money necessary to eventually obtain a $500,000 commercial real estate loan!

The paperwork requirements are pretty easy too - just a 1003 loan application, a credit report, 12 month's worth of bank statements for the company, and last year's company tax returns.  As I mentioned earlier, there are no application fees, and your client will have an answer within just 3 to 5 days.

Broker's can charge up to two points, which is a really sweet deal considering you'll have a yes or a no within just three to five days.  Remember, these loans are unsecured, so there is no waiting for third party reports.  Bing-bang-boom ... and you'll have a nice commission check in your pocket.

Got a potential deal?  Please send me an email at george@blackburne.com with your contact information and a brief description of the deal.  In the subject line, please type, "George's Special Unsecured Business Loan."  Thanks!