Commercial Loans and Fun Blog

When the Great Recession first began to bite in late-2007, sales of commercial properties began to plummet.  Investors didn't want to buy commercial properties when they could see the economy headed off a cliff.  For commercial property appraisers, sales comparables became almost impossible to find.

By mid-2008, new commercial mortgage lending fell by 85%; however, between mid-2007 and mid-2008, a few bold commercial lenders stayed in the market.  They did not, however, base their new commercial loans on appraisals.  Instead, most new commercial lending was based on cost and the loan-to-cost ratio.

By the way, if you happen to need a commercial real estate loan, you can submit your commercial loan to 750 different commercial lenders in just four minutes using C-Loans.com.  Simply click the button below.

This proved to be a pretty rational decision by commercial loan underwriters because very few commercial properties were actually selling.  Commercial real estate eventually fell by a whopping 45%.

Therefore we can actually create a new theorem of commercial real estate finance.  During times of economic upheaval, when the stock and bond markets are getting crushed, commercial real estate lending is based more on cost rather than on cap rates, debt service coverage, and estimates of fair market value.

Let me provide an example.  The year is 2021.  Commercial real estate has enjoyed a steady bull market since the depths of 2009.  In fact, the rate of commercial real estate appreciation speeded up so sharply in 2019 and 2020 that old veterans once again began talking about "unsustainable bubbles".  The Young Turks continued to pooh-pooh their fears and poured hundreds of billions of dollars into new commercial real estate construction.

Then the rate of space absorption (new leases) began to slow markedly.  Commercial real estate sales fell by 50%.  The stock market seemed to hit a ceiling.  It just lacked the momentum to climb to new highs.

You're in your late-40's right now, and your job at your commercial mortgage company is to serve as the senior member of Loan Committee.  A wealthy and experienced developer brings in an interesting deal.  He has found a troubled bank willing to sell a near-Class A office building in booming Austin, Texas upon which the toubled bank has foreclosed.  The building enjoys a terrific location.  All it needs is some cosmetic work - say, a new fascade, new signage, and fresh tenant improvements - to restore it to its full Class A potential.

He can buy the REO from the bank for a mere $10 million.  Throw in $2 million for the upgrades, and every appraiser in town would agree that the property would be worth (fair market value) $18 million.  He's willing to contribute $1.5 million to this acquistion and renovation project, leaving your mortgage fund a first mortgage bridge loan of just $10.5 million on a building worth $18 million (58.3% LTV). 

So, do you make this loan?

Maybe not!  During times of economic upheaval, underwriting based on fair market value should go out the window.  During such times, its all about cost-cost-cost. (It's always about Marcia-Marcia-Marcia.) 

Let's look at the deal from a loan-to-cost point of view.  You're being asked to make a bridge loan of $10.5 million on a project that costs just $12 million ($10 million acquisition plus $2 million in renovation).  That's a Loan-to-Cost Ratio of 87.5%.  That's much too high.

The wise commercial mortgage underwriter should cut his bridge loan offer to no more than $9 million (75% loan-to-cost) and make the sponsor bring in $3 million to the closing table.

Okay, we're halfway done discussing the loan-to-cost ratio in commercial mortgage finance.  So far we've discussed how to compute the total cost of a commercial project.  We have also discussed the loan-to-cost ratio in new, from-the-ground-up, commercial construction loan underwriting.

Today we're going to talk about the use of the loan-to-cost ratio while underwriting renovation commercial loans and fix-and-flip commercial loans.

By the way, if you happened to find this article because you were looking for a renovation loan or fix-and-flip commercial loan, you can submit your commercial renovation loan request to hundreds of hungry commercial construction lenders by clicking the button below:

The difference between a renovation deal and a fix-and-flip deal is that the fix-and-flip property will be offered for sale immediately upon completion.  A property that is the subject of a renovation loan may, or may not, be sold upon completion.  It might just be kept in the investor's portfolio and leased out for income.  In either case, renovation deals and fix-and-flip deals are underwritten in exactly the same manner.

Renovation loans and fix-and-flip loans are underwritten just like commercial construction loans (or even residential construction loans).  The only difference is that the Land Cost will include the cost of acquiring both the underlying land and the building in need of renovation.

An example will make this concept more clear.  Suppose a property renovator ("the Flipper") spots an older rental house, zoned commercial, in need of repair on a busy commercial strip in an affluent area of town.  He can buy the old rental house for $130,000, convert it into a cute little office building, and either lease it out or sell it for $325,000.

The house will need a new roof ($14,000), a handicap access ramp ($9,000), new exterior siding ($5,000), new paint ($8,000), new carpet ($6,000), and various repairs totaling another $7,000.  Therefore the Hard Costs of the renovation will total $49,000.

There will also be Soft Costs of $22,000 for the appraisal, toxic report, loan points, title insurance, attorney's fees, closing costs, construction period interest, and leasing commission.

Every new construction loan or renovation loan needs a Contingency Reserve of around 5% of hard and soft costs.  In this example, our Hard Costs are $49,000 plus our Soft Costs of $22,000 total $71,000.  Five percent of $71,000 gives us a Contingency Reserve of $3,550.

Therefore our Total Cost is:

Land and Existing Building (old rental house) ... $130,000
Hard Costs ..................................................    49,000
Soft Costs ...................................................    22,000
Contingency Reserve ....................................      3,550

Total Project Cost ......................................... $204,550

So how much dough (equity) will the Flipper be required to contribute to this fix-and-flip deal? That's up to the lender.  A reasonable loan-to-cost ratio in today's improving real estate market might be as high as 75%.  Therefore a prudent commercial lender might be willing to make a new acquistion and renovation loan of 75% of $204,550 or $153,412.

Okay, so the Total Cost of the project is $204,550.  The "construction lender" will make a loan of $153,412.  Therefore the Flipper will have to cover the difference of $51,138.

This is the second of four blog articles that I will write on the subject of the loan-to-cost ratio in commercial mortgage finance.  You will recall that last week I wrote an article on how to compute total cost.  Later this week I hope to write a blog article on the loan-to-cost ratio in renovation finance and a second blog article on the loan-to-cost ratio during times of economic turmoil.

By the way, if you happened to find this article because you were looking for a commercial construction loan, you can submit your commercial construction loan request to hundreds of hungry commercial construction lenders by clicking the button below:

Today we are going to talk about the loan-to-cost ratio in commercial construction lending.  The Loan-to-Cost Ratio is defined as the (construction) loan amount divided by the Total Cost of the project, times 100%.

Suppose an experienced and reputable developer came up to you and said, "Listen, I want to build a $2 million apartment building.  I almost have enough cash on hand to build it entirely without outside financing.  All I need for you to do is to loan me $800,000.  I'll give you a first mortgage on the apartment building at an attractive interest rate, and before I spend one penny of your money on the project, I will first spend $1.2 million of my own dough getting the property 60% completed.  You can even control your $800,000 so you can be sure your money will be used to complete the project."

So ... would you do that deal?  Heck, yes!  The developer is the one taking most of the risk, and if he doesn't pay you, you can foreclose on a $2 million apartment building.  You kind of knew that intuitively, but how would you know that mathematically?

Well, let's compute the Loan-to-Cost Ratio.  Eight hundred thousand dollars (the construction loan amount) divided by $2 million (the Total Cost) times 100% gives you a Loan-to-Cost Ratio of just 40%!  The developer is covering a whopping 60% of the cost.  This is a wonderful loan!

Okay, but we're dreaming here.  No developer in real life is ever going to cover 60% of the total cost.  So what is a reasonable Loan-to-Cost Ratio?  During normal times, commercial banks - the lenders who make 95% of all commercial construction loans - will usually make commercial construction loans at 80% of cost.

During go-go times, when commercial banks are cutting each other's throats to get business, commercial construction loans of 90% loan-to-cost were not uncommon.  If the developer was VERY wealthy and VERY experienced, the commercial bank might even lend up to 100% loan-to-cost.  Of course, many of those commercial banks who went 90% to 100% loan-to-cost subsequently failed during the next real estate recession that seems to hit every seven to twelve years.

Today we are climbing out of the Great Recession.  Commercial banks caught in commercial construction loans during the Great Recession got mauled, so during the Great Recession almost all commercial construction financing disappeared.  Even today, very few commercial banks are actively competing for construction deals.

Nevertheless, the economy is recovering.  Construction loans are usually very, very profitable for banks, and they are short term loans.  A few commercial banks today are once again dipping a toe into the construction loan waters.

So what is a reasonable Loan-to-Cost Ratio today?  Today few commercial banks will make commercial construction loans in excess of 65% to 70% loan-to-cost.  In other words, the developer has to cover 30% to 35% of the Total Cost. 

The good news is that, as the recovery becomes more convincing, commercial banks will start to compete against each other for good deals.  I predict that within six months commercial construction loans of 75% loan-to-cost will become commonplace.

In my next blog post we are going to talk about the Loan-To-Cost (LTC) Ratio in commercial construction financing; but in order to understand that next article, you must first understand the concept of the Total Cost.

In commercial real estate finance (CREF), the Total Cost of a commercial construction project is the sum of the (1) Land Cost, the (2) Hard Costs, the (3) Soft Costs, and the (4) Contingency Reserve.  By the way, you can submit your commercial construction loan request to several hundred commercial construction lenders by clicking on the button below:

The Total Cost should be at least 20% to 25% less than the completed property's fair market value upon completion; otherwise, why would the developer take on the construction risk of the project?  There has to be some anticipated profit in the deal.

The Land Cost is usually what the developer paid for the land, but not always.  I recently saw a commercial construction loan request in Brooklyn where the developer bought the land in 2005.  Since 2005, land in Brooklyn has skyrocketed because the borough is being gentrified. Due to a material pasaage of time and some major demographic changes to the area, it would be legitimate to use the current fair market value of the land as the land cost in the calculation of Total Cost.

Another example of legitimately using a Land Cost higher than the developer's actual cost is assemblage.  Suppose a developer successfully purchased three adjacent old rental houses on a busy commercial strip.  With the acquisition of the land under all three houses, the developer can now bulldoze the houses and create a VERY valuable future site for a strip center.  When the whole is significantly more valuable than the cost of the parts, this is an example of assemblage.

The Hard Costs are the bricks and mortar - tangible improvements that you can touch and feel.  This includes line items like clearing the land, excavating the pad, grading, installation of underground utilities, the rough and finish carpentry, the rough and finish plumbing, etc.

The Soft Costs are the financial, legal, and/or paper costs of a commercial construction project.  Examples include construction period interest, loan points, appraisals, toxic reports, title insurance premiums, plan check fees, permit fees, sewer hook-up fees, etc.

All commercial construction lenders require a Contingency Reserve of around 5% of the hard costs and soft costs.  This reserve is designed to cover cost over-runs.

Once again, the Total Cost of a commercial construction project is the sum of the following:

1.  Land Cost

2.  Hard Costs

3.  Soft Costs

4.  Contingency Reserve

Despite the recent turmoil in the stock market - Bernanke just announced the tapering of Quantitative Easing III - the U.S. housing and construction industry is recovering.  There has been almost no new residential construction for six years, yet the U.S. population has increased by 236,000 per month since the begiining of the Great Recession in mid-2007.

In the meantime, tens of thousands of home were foreclosed, abandoned, and left to vandals, water damage, broken pipes, and mold.  The bottom line is that the U.S. needs more housing construction.

Normally I discourage commercial mortgage brokers from wasting their time on commercial construction loans; but if a deal fell in your lap today, and you had plenty of small permanent commercial loans in the pipeline, I would not think you were a complete idiot for investing a little time in an apartment construction loan request. 

The reason why I am writing to you today is because I saw a $15 million multifamily construction loan request enter C-Loans.com today.  It looks like a do-able loan, but the broker screwed up big-time when he entered the deal.  Unless he fixes his loan application, it will never get approved.

You will recall that the Total Cost of a commercial construction project is the sum of the Land Cost, the Hard Costs, the Soft Costs, and the Contingency Reserve.  In the old days, commercial banks would regularly make commercial construction loans of 80% (and sometimes 90%) loan-to-cost (Loan-to-Cost Ratio).  In other words, if the Total Cost of the project was $10 million, the developer only had to contribute $2 million (and sometimes just $1 million). 

Today commercial banks are still reeling from their losses in commercial construction loans during the Great Recession.  Therefore few commercial banks will make commercial construction loans higher than 75% loan-to-cost.

So how did this commercial mortgage broker screw up his C-Loans app?  The developer apparently bought this land in Brooklyn in 2005 for $1.5 million.  Since 2005 Brooklyn has undergone a huge positive transformation.  Everywhere you look in Brooklyn the property is being gentrified.  This land that he paid $1.5 million for in 2005 is now worth $5,750,000!

Unfortunately when this broker completed his C-Loans app, he inserted $1.5 million as the cost of the land.  No-no-no! Even though the developer had TONS of equity in the land, the lender won't see it.  All he'll focus on is loan-to-cost ratio of 79.1%.  That ratio is too high, and the deal will be turned down.

What should the commercial mortgage broker have done?  He should have entered the current market value as the cost of the land.  After all, if the developer was buying the land today, that is what he would have to pay.  If we use the correct land value - $5.75 million instead of $1.5 million - the loan-to-cost ratio of this deal is less than 63%.  In other words, the deal will be approved!

Most states in America do not require a commercial mortgage broker to obtain a mortgage broker's license or a real estate broker's license in order to negotiate commercial mortgage loans in their state.  This fact, however, is often not obvious.

When you first look at the licensing scheme of most states, the law will say something like, "A broker must be licensed as a mortgage broker to negotiate a mortgage loan in this state."  Huh.  Sounds like a mortgage broker's license is clearly required, right?

However, when you look up the legal definition for a "mortgage loan" in that state, you will almost always find that a mortgage loan is defined as a loan on a one-to-four family dwelling!  In other words, no mortgage broker's license is required to negotiate a loan on 5+ residential units (five-plex and above), commercial properties, or land.

Be careful about land.  A loan on a single residential lot, purchased to be the future site of the borrower's personal residence, is often considered to be a residential loan.  This means that a mortgage broker's license would be required to negotiate such a loan.

I am not licensed as an attorney, outside of California and Indiana, but my research suggests that a mortgage broker's license may not be required in at least 40 states.

Some states definitely require some sort of licensing, such as California*, Nevada, Arizona, Florida (if the property is not owned by an LLC or corporation), New Jersey*, North Dakota, and Minnesota.  Stop!  Be careful here.  Just because I have not listed any other states does not mean that no license is required.  I'm just saying that I don't know for sure that a license is required for any other states.

* A real estate broker's license is required, rather than a mortgage broker's license.

Vermont is particularly interesting.  I am pretty sure that Vermont has an almost-full-time staff member going around "reminding" any broker who advertises they will arrange mortgage loans nationally that a licese is required to broker loans in Vermont. They use the $1,200 annual licensing fee that they collect from several thousand firms to help finance the Vermont Department of Financial Institutions.  Vermont exacted a $1,200 licensing fee from my own company for four years running, money I could have used to help pay for my daughter's college.  Here's my beef:  They knew we only arranged commercial loans, and I learned recently that no license is required to broker commercial loans in Vermont.  Like most states, Vermont defines a mortgage loan as a loan on a one-to-four family dwelling.  What a racket!

What if you only make a loan in a particular state once every two or three years?  Many states that normally require licensing will allow you to make the occasional commercial loan in their state without a license.  Certainly one loan per year would qualify as occasional.  What about two loans?  I dunno.  It's close.  What about three loans?  A license would probably be required.

Here's another helpful technique.  Let's suppose you want to negotiate a large commercial loan in the imaginary state of Artesia, and Artesia requires a license to negotiate commercial loans within the state.  You seldom make loans in Artesia, so you do not have a mortgage broker's license or a real estate broker's license in Artesia.

The good news is that you can sometimes "associate in" a licensed Artesian mortgage broker or real estate broker.  It's a very similar process to an out-of-state attorney associating in local counsel.  The Artesian mortgage broker would review your work and your loan to make sure that everything complies with Artesian law.  For this service, you would pay the Artesian broker a fee of, say, $750 or 25 to 50 basis points.

You are reminded to be very careful not to rely on this article!  This is just a summary of my best understanding; and the article, almost certainly, contains a number of mistakes.  You must be sure to consult local counsel.

I use this blog to train my two sons and the staff of Blackburne & Sons Realty Capital Corporation, one of the oldest private money commercial mortgage companies in the country.  If you subscribe to my blog, you'll receive two free training lessons in commercial real estate finance (CREF) every week.

I own a commercial mortgage portal called C-Loans.com.  It may be the largest of the commercial mortgage portals.  (I'm being modest here.  We're the Big Kahuna of commercial real estate finance websites.)  C-Loans is free to commercial mortgage brokers, so it makes good sense to always use it.  But people procrastinate.  People forget.  People fail to bookmark.  So I have a proposition for you.  If you just pre-register (fill out your name and address) on C-Loans.com, I'll send you a free copy of my famous Commercial Mortgage Underwriting Manual.  I sell it elsewhere on my site for $199.  Why would I do this?  If you are pre-registered, you are far more likely to input your next commercial loan into C-Loans.

And of course you will need to know some commercial lenders.

The nice thing about my own private money commercial mortgage company ($50 million - est. 1980) is that we are happy to work with new mortgage brokers and you do NOT have to get pre-approved with us.

I have repeatedly urged you to develop a list of referral sources and then to solict these guys regularly for commercial loan applicants.  As my oldest son once wisely said,"It's better to repeatedly touch ten referral sources than to speak with one-hundred referral sources just once."

Today I am going to give you some tips on writing a regular newsletter aimed at generating commercial mortgage leads.

1. Steal my jokes!  I like to always include lots of cute, clean jokes in my newsletters.  These jokes reward your readers for opening your newsletters.  Where can you find hundreds of cute, clean jokes?  Just steal them from me.  You'll find all of my past commercial mortgage newsletters here, and each one contains at least four or five cute, clean jokes.
2. Keep your commercial mortgage newsletters interesting by talking about cool stuff that has nothing to do commercial real estate finance.  For example, the best-selling commercial loan marketing piece of my career was about how the Ebola virus almost killed us all (based on the best-selling book, The Hot Zone).  Today I wrote a fax newsletter entitled, The Most Disgusting Story I Have Ever Told.  I then go on to tell how I stepped in a pool of congealed blood, from a fatal stabbing the night before, while doing a site inspection of a commercial property.
3. The purpose of your newsletters is to entertain and intrigue your readers.  Don't devote too much of your newsletter to plugging your commercial loan products.  To the  reader, that stuff is boring. Think of a one-hour TV show.  Most of the hour is devoted to following some likable cop around while he hunts down a cruel killer.  Then we have BRIEF word from our sponsor.  The key word here is brief.
4. And don't be afraid to write!  You might not have been an English major in college, but I'll bet you can tell a cool story in a bar after work, right?  Just tell cool stories, like you were talking to one of your buddies over a beer.

If you get serious about commercial real estate finance, you may also want to take my wonderful new course, Marketing for Commercial Real Estate Loans.

In commercial mortgage finance, it is customary to name a loan after the name of the income property.  For example, if the name on the monument in front of the apartment building is the "Greenwood Garden Estates", then the loan would be called the Greenwood Garden Estates deal, as opposed to the Smith loan, assuming the property was owned by Mr. and Mrs. Smith.

It is very important that you name your commercial loan with care.  For example, my own private money commercial mortgage company, Blackburne & Sons, just closed a commercial loan on Los Coches Road in Lakeside, California.

We unwisely called the deal, the Los Coches Commercial Building.  Now in Spanish, Los Coches simply means The Cars; but to me, an Anglo, Los Coches sounds too much like "The Roaches".  The name conjures up images in my head of the filthy creatures you might step on at night in the kitchen.  Yuck.  Now if we had named the loan, the Lakeside Commercial Building, that name conjures up in my mind images of cool, clear water, lush green vegetation, and pretty butterflies.

Years ago I was trying to place an apartment loan in East Palo Alto with a savings and loan association.  Now in the mid-1980's East Palo Alto was the murder capital of the world, with drive-by killings a nightly occurance.  Therefore, even though the name painted on the building was the East Palo Alto Apartments, I called the deal the Cypress Street Apartments.  The deal closed.

This subject reminds me of a story.  I was once in San Jose inspecting an apartment building.  As I stood in front of the apartment building, I stepped back to get a wider view.  As I did so, I felt my right heel step in mud.  As I looked down at my shoe, to my utter horror, I realized that it wasn't mud into which I had stepped.  It was a pool of congealed blood!  There had been a knife fight the night before, and bloody handprints marked where the dying victim had slid down a nearby car.  Eeeuuuu, yuck!

So give a dog a good name.  Take great care when naming your commercial loans.

If you're a senior executive wth a bank, this article is pretty important to you.  I've been making commercial real estate loans for 33 years now, and I have a surprising observation:

Commercial bankers often get slaughtered in commercial lending because they are so timid.  By the time most commercial bankers work up the courage to enter a lending market, all of the really safe, high-yielding loans are already gone - leaving only the risky deals and the bank's eventual ruin and destruction.

Let's start in residential lending first, even though this article mainly has to do with commercial mortgage lending.  When Nixon took the U.S. off the gold standard in 1971, he opened the floodgates of inflation.  Homes that the Greatest Generation bought for $15,000 in the 1960's began to appreciate to $40,000 or more.

Smart, entrepreneurial private lenders in California started to make 10% second mortgages (at a time when second mortgages were rare and were considered ridiculously speculative).  These early entrants made a killing.

By the time commercial bankers finally started making residential second mortgages in earnest, many of the safest deals were gone.  Commercial bankers were left in a bidding war a decade later over the tiny handful of borrowers who had not already tapped the equity in their homes.  By then, real estate appreciation had greatly slowed.  Then, in 1986, a major tax overhaul sent real estate into a seven year tailspin.  California commercial bankers, for example, got slaughtered in residential second mortgages when California real estate tumbled by 40% in 1990 and 1991.

Now let's scroll forward to 1986, the year when Regulation Q was repealed.  Regulation Q was a law that limited the interest rate that banks and thrifts (savings and loan associations) could pay on deposits.  Suddenly commercial bankers could pay whatever they wanted to attract deposits.  It was an era when many wealthy developers bought savings and loans associations (S&L's).

At first these clever developer-banker-entrepreneuers make a killing investing in syndicates to make large commercial loans.  After all, they could charge almost any interest rate they wanted.  Who else - other than a syndicate of S&L's - could fund a $40 million construction loan?  And these early entrants made a killing.

But then mainstream commercial bankers (more precisely S&L executives) got in the act.  They too started investing in syndicates to make huge commercial construction loans.  Eventually the world was full of vacant, glass-and-brass office towers (called "see-through buildings"), and the S&L Crisis was upon us.  Hundreds of S&L's were eventually closed.

Scroll forward to the late 1990's.  Congress has created the tax entity, the REMIC, the Real Estate Mortgage Investment Conduit. Early conduit lenders made an absolute killing.  They made a bunch of superb quality, low-LTV commercial mortgages.  They pooled these super-safe commercial loans and then sold them off to Wall Street investment bankers at immense profits.  The bonds backed by these older, high-rate, low-LTV commercial loans surprisingly held their value, even during the bottom of the Great Recession.

But then dozens of large commercial banks got in the conduit loan business.  Competition got so fierce that interest rates plunged, loan-to-value ratios skyrocketed, and when the Great Recession hit, those commercial bankers stuck with commercial mortgage conduit loans in their portfolios got slaughtered. 

Helloooo?  Anyone spot a trend here?  Most commercial bankers are so timid that by the time they enter a lending field, all of the really safe, profitable loans are gone!  Almost inevitably these late-comers get slaughtered.

Right now the commercial real estate lending market is ripe to be picked.  A commercial bank could come into the market, make some super-safe and dreamy commercial loans, and charge an interest rate that is 1.5% higher than the market, say, 6%.  The smart bank would also insert a large prepayment penalty or a lockout clause.  (If your bank wants to see many such super-safe, dreamy commercial loans, be sure to join C-Loans!)

In a year or two, however, most commercial banks will come herding back into the commercial lending market.  The really cherry deals will already be gone, and the herd will get into a price war over average-quality and below-average-quality commercial loans.  I wouldn't fall off my chair in surprise if the herd ended up bidding interest rates on commercial loans back down to just 3.875% (when they could be getting away with 6% today).

I don't know why I am wasting my time today.  Commercial bankers will probably always be timid and foolish.  They equate "herd movement" with prudence and safety.  They couldn't be more wrong.  (Sons, always remember the slow reaction speed of commercial bankers.  When commercial bankers finally adopt a lending product, its time to get Blackburne & Sons out of that market.) 

Here is the lesson from this article:  There has been no commercial construction since 2008.  The economy is recovering.  Many commercial buildings were so neglected during the Great Recession that they need to be bulldozed.  The prognosis for commercial real estate values is superb.  Just look at what has already happened to residential real estate.

Will commercial bankers have the wisdom to be early entrants back into the commercial mortgage market?  Will they have the wisdom to make 6% loans (with a lock-out clause) in a 4.5% commercial mortgage loan market?  I seriously doubt it.  Most commercial bankers will be too timid about commercial lending to re-enter the market before the best part of the recovery has long passed.

Let's suppose you FINALLY (Helloooo?  Is there intelligent life out there?) came to your senses and recognized that the real money in commercial real estate finance is in loan servicing fees.  Therefore you became a commercial hard money broker.

A commercial mortgage borrower comes to you and asks you to help refinance his ballooning commercial loan.  Of course, he comes to you just ten days before the scheduled foreclosure sale, and the speculators who bought the commercial mortgage note from the bank really want to foreclose on and own the commercial property.

You scramble as fast as you can, but it becomes clear that you won't be able to close his new commercial loan in time.  Therefore you send the borrower to a local bankruptcy attorney, who puts the LLC that owns the commercial property into a Chapter 11 (Reorganization) Bankruptcy.  For the next 60 days the note holder's foreclosure is automatically stayed.

In the meantime, your commercial mortgage refinance is now ready to close.  You obtain a letter from the Chapter 11 bankruptcy trustee saying that its okay to pay off the ballooning loan.  The borrower signs your commercial loan documents, the title company blesses the transaction*, and you close.

Two months later the borrower stops paying.  You file foreclosure ... only to get the worst news of your life.  Your mortgage is invalid!  Because the borrower had declared Chapter 11 Bankruptcy (the bankruptcy where the borrower asks for more time to reorganize his finances), title to the subject property was no longer vested in the LLC that used to own the property.  Instead, title is vested in the name of the bankruptcy estate.

Only the bankruptcy court judge can grant permission (in the form of a formal order) to the borrower to sign for a new commercial loan.  While it is the job of the Chapter 11 Trustee to marshal the assets of the bankruptcy estate, the Trustee himself cannot grant your borrower authority to sign for a new loan.

So where does that leave you?  Totally screwed.  You have an unenforceable promissory note (but no mortgage) against a borrower in bankruptcy.  As the old joke goes, "The doctor says you're gonna die."

* What about the title company?  Can you make a claim on the title insurance?  No!  Title insurance does not protect you against fraud or the execution of the loan documents by the wrong party.  That's YOUR job as the lender to make sure the right party is signing on behalf of the property owner.  The title company will usually make a good faith effort to help you verify that, but their title insurance policy specifically precludes coverage in the event that the wrong party signs on behalf of the property owner.