Commercial Loans and Fun Blog

My son, Tommy, sent me an email this week, "Hey, Dad, what in the heck is an end loan?"  Commercial mortgage-ese is the language of commercial real estate finance, and today's quick review will help us all to stay fluent.

A permanent loan is a first mortgage loan on a commercial property, with a term of at least five years and which has at least some amortization.

By "some amortization" I mean that the loan has a 25-year or 20-year amortization, as opposed to just interest-only.  A 25-year amortization is the standard amortization schedule for most commercial mortgage lenders, although if your property is older than 35-years-old, many commercial lenders will insist on a 20-year amortization.  After all, the property is not going to stand forever.

If the commercial first mortgage loan had a term of less than 5 years, it would be considered either a bridge loan or a mini-perm.  See below for more details.

Permanent loans on commercial real estate are made by banks, credit union, and life insurance companies (life companies).

Takeout Loan or End Loan

A takeout loan is merely a permanent loan that is used specifically to pay off a construction loan.  Takeout loans are also sometimes called end loans.

All takeout loans are permanent loans, but not all permanent loans are takeout loans.  For example, a refinance used to pull equity out of a property would be a permanent loan but not a takeout loan.

Takeout loans are are made by banks, credit unions, and life companies.

Forward Takeout Commitment

A forward takeout commitment is merely a letter promising to pay off a construction loan at some specific time in the future, as long as certain conditions are met; i.e., the building is built according to plans and specifications, the certificate of occupancy has been issued, the property has achieved the agreed occupancy rate (typically 90% to 95%), and the effective rents meet or exceed the pro forma rents.

The lender issuing the forward takeout commitment will typically charge between one point  and two points just for the letter.  The takeout lender will also typically change another point or two upon funding.

Forward takeout commitments are rare modernly because few lenders want to commit to an interest rate in the future.  If a life insurance company were to issue a forward takeout commitment for 4%, and interest rates were to spike up to 7%, you can bet that the developer who paid the commitment fee would "put" the commitment to the life company.

Since forward takeout commitment lenders are loathe modernly to commit to a fixed interest rate, many forward takeout commitments are written so that the interest rate floats until the loan funds.  Since the takeout lender is going to require at least a 1.25 debt service coverage ratio, and since the annual payments vary according to the interest rate, it becomes impossible to pin down the future loan amount!

Therefore most construction loans today are written as opened-ended or uncovered.  This means that there is no forward takeout commitment in place.

Bridge Loan

A bridge loan is a short-term loan on commercial real estate that is used to solve some temporary problem.  For example, suppose a speculator is buying a half-empty strip center.  The speculator cannot just go to his bank for a new permanent loan to buy the center because the property is not generating enough net operating income to service the debt (make the loan payments).

Most bridge loans have a one-year to two-year term.  Often the lender will grant the borrower a six-month to one-year extension upon the payment, at the time of exercise of the extension, of a one-point or two-point extension fee.

Most bridge loans are made by mortgage funds, which specialize in short term commercial real estate loans.  The rate is normally 3% to 8% higher than the rate on permanent loans, and the loan fee to the bridge lender is typically around 3 points.  It's an expensive loan, but bridge lenders are usually pretty fast.

Mini-Perms

Mini-perms are short term commercial first mortgages, typically made by commercial banks at interest rates that are much lower than those offered by bridge lenders.  Most mini-perms are written at a flaoting rate, typically at 1.5% to 2% over prime.

Mini-perms typically have a term of two years or three years.  Occassionally a mini-perm will have a term as long as five years.  Many times mini-perms are written as interest-only loans.

Mini-perms are most often created as part of a construction loan request.  Rather than demanding that the developer find a forward takeout commitment (very difficult!), a commercial bank might offer its own forward takeout commitment in the form of a mini-perm.  The advantage to the bank is that the bank gets to charge an extra one-point for the forward takeout commitment.  In real life, the developer will seldom exercise his commitment for the mini-perm because the mini-perm has a floating rate.  Yuck!  Once a commercial property is completed and leased, its easy to find attractive, fixed rate financing.

Commercial Bank

The word "commercial" is just a fancy word for "business".  A bank that makes loans to businesses - secured by accounts receivable, inventory, equipment, commercial real estate, and/or even just the good name of the business - is considered a commercial bank.

Bottom line:  Just about every bank that you know is commercial bank.

A commercial bank is different than an investment bank.  An investment bank is just a fancy name for stock broker.  An investment bank takes companies public (issues Initial Public Offerings) and maintains a market in the shares of the company.

My own hard money commercial mortgage company, Blackburne & Sons, recently made a very interesting commercial loan.  We made one blanket private money loan against eleven rental houses in a small town in Ohio.  When we put the loan out for sale to our private investors, the loan sold out in less than one hour.  Our investors just scarffed it up.  Yum!

Blackburne & Sons intends to make more such loans - blanket loans against a portfolios of free-and-clear rental houses.  In fact, we made a blanket loan offer this week on 23 rental houses in Indianapolis.

Sooner of later these investors / speculators are going to want to start selling off these houses.  How do you sell off a single house when that house is subject to one blanket mortgage covering 22 other houses?  The answer is a partial release clause.

A partial release clause is an addendum to a note and mortgage that says that the lender will release one of the parcels upon a paydown on the mortgage of a certain dollar amount.  Here is an example of a partial release clause that we included in our recent offer on the 23 homes:

"PARTIAL RELEASE:  Finished lots (or individual homes) can be sold off and released individually upon the payment of a Partial Release Fee equal to a 1.5 percent of the amount prepaid and a pay-down of the principal equal to the higher of 87% of the sales price or 125% of the loan value assigned to each lot, home, unit, or parcel."

So how much does the borrower have to pay down his loan to have a property or unit a released?  The lender will assign a loan value to each property, home, or unit.  For example:

Unit A .... $42,000
Unit B .... $26,000
Unit C .... $84,000

Now let's suppose the owner finds a buyer for Unit A willing to pay $63,000.  The lender has assigned a loan value to that particular house (Unit A) of $42,000.  If the lender has a 125% partial release provision, this means that to release this particular house the borrower must pay down the blanket loan by 125% of $42,000 or $52,500.

Different lenders will have different partial release formulas.  For example, one lender might only have a 115% partial release requirement.  This means that to sell off the first house (Unit A), the owner would only have to pay down the blanket loan by 115% of $42,000 or $48,300.

Why do commercial lenders even require a partial release formula?  Why not just prorate the loan among the various units and just release each unit for a paydown equal to the loan value assigned to that unit; e.g. release Unit A for a $42,000 paydown?

The answer is that the appraiser assigning a loan value to each unit might be wrong with his estimates.  Maybe Units A, B, and C are great units, but the rest of the units are perceived as stinky by the marketplace.  Maybe Units D and E lack a view of the ocean, and Units F and G overlook a landfill (a garbage dump).

Without a conservative partial release formula, Units A, B, and C might sell for $200,000 each and would be quickly released.  This might leave the lender with a $200,000 remaining loan balance blanketing four units that collectively are worth only $140,000.  Yikes!

A conservative partial release formula allows the lender to effectively "make a profit" each time a unit is sold.  Each time a unit is sold the blanket loan is paid down disproportionately, leaving the lender even more secure than he was before.  This prevents the lender from being stuck with a lot of lemons.

If you need a commercial loan right now from a flexible commercial lender - a lender who will not simply rely on the debt service coverage ratio - please click here:

Most commercial real estate lenders insist that a commercial property's net operating income be at least 125% of the proposed annual loan payment (debt service).  More precisely, traditional commercial lenders often insist on a debt service coverage ratio of at least 1.25.

Ocassionally the subject property is so desirable that it sells at a ridiculously low cap rate.  A cap rate is the return on your money that you would enjoy if you purchased the property for all cash.

For example, let's suppose you bought an average office building for $1 million, and the office produced an $80,000 per year net operating income.  Eighty thousand dollars (your annual return) divided by $1 million (your investment in the property) equals 0.08.  Mulitplied by 100% give you 8%, which would be the return on your investment ... also known as your cap rate.

Okay, but have you ever priced decent apartment buildings in Chinatown in San Francisco?  So many thrifty Chinese savers would love to own one of these apartment buildings that they bid the sales price up into the stratosphere.  An apartment building generating $80,000 in net operating income in Chinatown might sell for $2,667,000.  Let's compute the cap rate.  Eighty thousand dollars divided by $2.667 million, times 100%, produces a cap rate of just 3%.

Now we are finally getting to the point of today's lesson.  If a traditional commercial lender is going to insist on a debt service coverage ratio of 1.25, this wonderful apartment building in Chinatown might only qualify for a new first mortgage of 46% loan-to-value!  This means the buyer would have to put down 54% of the purchase price.  Who has that kind of money?

If only a lender would be willing to consider income outside of the subject property.  After all, the buyer is a very successful plastic surgeon.  He makes $750,000 per year.  He can easily afford the negative cash flow on a $1.8 million new loan.

When a commercial real estate lender will consider the outside income of the borrower, it is often said that this lender will consider global income.  Here we are proposing that the plastic surgeon put down $867,000 or 32.5% of the purchase price.  At only 67.5% loan-to-value ratio on a very desirable property, the commercial lender is still very well-secured.

So how do you find commercial lenders willing to consider global income?  Certainly hard money lenders - like Blackburne & Sons - will consider global income.

Small commercial banks located close to the subject property (near Chinatown, in our example) will also often consider global income.

I learned something interesting about commercial real estate finance this week.  To understand this important lesson, I need to first provide you with a little background and context.

Most (from the) ground-up commercial construction loans are made by commercial banks.  The reason why is because commercial construction loans require progress inspections and the payment of subcontractors using some sort of voucher system as construction progresses.

After a subcontractor completes some construction work, he typically submits a payment request, known as a voucher.  The developer and/or the general contractor signs off on the voucher, and then the voucher is submitted to the construction lender for payment.  When the construction lender is a local bank, its fairly easy for the loan officer working for the bank to quickly drop by the property to verify that some work was actually done.

So when you think of a construction lender, think of a commercial bank located close to the property being built.  Okay, but what happens if almost every commercial bank in the country is too scared to lend?  Hmmm.  Now it gets a little tougher to build anything.

There is a class of commercial real estate lender that we'll call a mortgage fund.  Some of these mortgage funds are huge, while others are tiny.  You could have a $500 million mortgage fund or just a $2 million mortgage fund.  Obviously the big funds make the big loans, and the small funds make the small loans.

But these mortgage funds of varying size have a number of characteristics in common.  First of all, mortgage funds charge an interest rate that is typically 3% to 8% higher than the bank.  Secondly, mortgage funds like to make short-term bridge loans (1 to 3 years).

Lastly, mortgage funds (bridge lenders) seldom make construction loans.  The reason why is because most mortgage funds are single-office, national lenders.  Therefore, mortgage funds are seldom located close to the property being built.  Most also lack experience in making construction loans, and they are just not set up to administer construction loans.

Okay, so you can imagine my surprise this week when I read in a national commercial real estate magazine about a big mortgage fund that had just funded a $35 million construction loan on a huge, new residential condo project. 

This bridge lender was able to make this new construction loan because it blanketed two other standing commercial properties.  The mortgage fund blanketed a large shopping center and a large office tower owned by the same builder.

So how can you finance new commercial construction in a market where every commercial bank is afraid of its shadow?  The answer is to blanket other property!

New commercial mortgage brokers often ask me, "George, what loan brokerage commission should I charge my commercial mortgage borrowers?"

It's not fair for a commercial mortgage borrower or some court to say, "A reasonable fee is a commission equal to roughly $150 to $200 per hour times the number of working hours that the commercial loan is likely to take to close."  The reason why is because the closing rate for commercial real estate loans is far less than one in five.  For newer commercial loan brokers, the closing rate could be less than one in twenty.

A commercial mortgage broker has to make enough dough of the ocassional deal that closes to make up for the dozens of deals that don't close.   There is no law that says a real estate broker selling commercial property has to charge a 6% commission.  The reality is that every realty brokerage firm that tries to charge less than 6% goes out of business.

Commercial borrowers might argue, "The typical fee charged by commercial mortgage brokers is one point."  My response to that argument is this, "The typical commercial mortgage brokerage company fails within three years."  If there are 50 commercial mortgage brokerage companies on my mailing list in year one, by year three that list is usually down to just ten to twelve surviving brokers."

Nevertheless, here is my opinion of the market:

Loans under $500,000:  Bankable deals - 1 to 2 points, depending on the loan size.  Subprime deals - 2 to 3 points.

Loans from $501,000 to $1 million:  Bankable deals - 1 to 1.5 points, depending on the loan size.  Subprime deals - 2 points.

Loans from $1 million to $4.99 million:  Bankable deals - 1 point.  Subprime deals - 1 to 2 points.

Loans over $5 million:  Bankable deals - 0.50 to 1 point.  Subprime deals:  1 point

Construction loans are very difficult to close because 99% of developers who seek out a commercial mortgage broker for a construction loan do not have enough equity in the deal.  At a minimum, a broker should charge one extra point on construction loans.

Tombstone?  What on earth is a tombstone, and what does a tombstone have to do with commercial real estate finance?

First you'll need a little background.  Investment bankers - companies like Goldman Sachs and Merrill Lynch - are not allowed by the SEC to publicly advertise many of their investment offerings.  For example, let's suppose that Merrill Lynch is selling commercial mortgage-backed securities.  Merrill Lynch is not allowed to take out a big ad in the Wall Street Journal and say, "Hey, everybody, come and invest in our latest commercial mortgage-backed securities offering.  These CMBS bonds are paying 4%, and they are very, very safe."

On the other hand, Merrill Lynch is allowed to boast about the successful placement (sale) of an investment offering. The investment banking company might boast in a huge advertisement in the Wall Street Journal something along the lines of, "Merrill Lynch is pleased to announce that it has successfully closed the sale of $1 billion worth of commercial mortgage-backed securities priced to yield 4.0%"

"Gee, George, such a big advertisement in the Wall Street Journal might cost $65,000.  That's an awful lot of money to pay just to publicly pat yourself on the back.  Why would they waste the money?"

Answer:  When investors see an advertisement like that, they think to themselves, "Gee, I wish I had invested in that deal.  I never even got to see it.  I'd better call Merrill Lynch and get on their distribution list so that I hear about the next offering."  Merrill Lynch then fields a bunch of incoming calls from hungry investors and lines them up to invest in their next offering.

When you see these ads in the Wall Street Journal, they are typically rectangular in shape, placed vertically of the page.  They look like tombstones, so hence the name.

Just like investment bankers, commercial mortgage lenders also like to boast of deals that they have recently closed.  In the old days, commercial lenders placed similar tombstones in financial newspapers and real estate magazines.  Modernly, most commercial lenders use email to publish a tombstone announcing their latest commercial loan closing.  In stark contrast to the $65,000 tombstone in the Wall Street Journal, email is almost free.

Now we come to the point of today's commercial mortgage finance training lesson.  Blackburne & Sons has recently enjoyed tremendous success using tombstones to market its commercial hard money lending programs.  Tombstones are proving to be even more successful than our entertaining and educational newsletters.  We now try to alternate between a tombstone and a newsletter every ten days.  Here is an example of one of our recent tombstones.

You don't have to be a commercial lender to publish an email tombstone to all of your clients.  If your little commercial mortgage company closes a nice commercial loan, I strongly urge you to send out an email tombstone to all of your contacts.  They seem to work better than any other form of commercial mortgage marketing that we have ever used.

This year I finished a brand new training course for commercial loan officers and commercial mortgage brokers entitled, Marketing for Commercial Real Estate Loans.   Rather than sell this course on DVD's, we cooperated with Netbility.com, an online education firm, and created a course that can be viewed by our students online.  The new course came out marvelously.

Marketing for commercial real estate loans is tricky, and it is not intuitively obvious.  For example, advertising directly to real estate investors (the actual commercial mortgage borrowers) does not work at all.  It doesn't matter whether you use Yellow Page ads, Google ads, direct mail (snail mail), postcards, or email.  Advertising directly to potential commercial mortgage borrowers is an easy way to waste tens of thousands of dollars.

So what does work?  This is what we will teach you in the course.

Students often have questions about the course, and those questions are fielded by Mick Carlson, the General Manager of C-Loans.com.  I had Mick take the course this week so he would better understand what the course entailed.  His unsolicited response and enthusiam is what prompted me to write this blog article about our new commercial mortgage marketing course.  Please read what he wrote to me this week unsolicited about the course.

"Today I was less swamped with C-Loans tasks and incoming calls/e-mails, so I decided to take full advantage of this and complete the new C-Loans marketing course.  Bravo, George!  ...  Although I've personally heard you preach most of these points multiple times in the past, this course is great.  I'm really glad I watched it..."

Here's what great about the commercial mortgage marketing techniques that I teach:  You get the leads when you need them.  Commercial borrowers often seem to all apply at the same time, like a school of fish swimming under a fisherman's boat.

The problem this creates is that there will be times when a commercial mortgage broker or a commercial lender will be very slow.  Our commercial loan marketing techniques allow you to press a button and almost immediately begin to receive deals.  No longer will you be a slave to the fickleness of commercial loan demand.  When you are slow, you will no longer have to just sit there and twiddle your thumbs.  When you're slow, you press a button and - presto, chango - you're busy with incoming commercial loan lead calls.

What is a commercial mortgage company?  It's basically a desk, a phone, a computer, the relationship with some commercial lenders, and most importantly, the incoming commercial loan lead flow. 

Our commercial mortgage marketing techniques allow you to turn that desk and phone into a practice - just like the practice of an attorney, a tax preparer, or a CPA.  It's all about customers reliably and steadily coming in the door.  Since advertising directly to commercial mortgage borrowers does not work at all - not even a tiny bit - you need to learn how to very cheaply make your phone ring off the hook with incoming commercial loan leads.  And if you receive eight to ten commercial loan leads every day, you will truly own a practice, something that is tangible and valuable.

The course contains more than fifty different marketing lessons, and it is one of my finest works.  If nothing else, for just $199 you'll save yourself from wasting over $50,000 over a 25 year career on marketing techniques that have absolutely no chance of succeeding.  Guys, I have been marketing for commercial real estate loans for 33 years.  I know what works, not because I'm brilliant, but rather because I have painfully and fruitlessly banged my head against so many walls that I finally figured out how to get through the maze.

If you follow my proven techniques, you will be able to turn on your commercial loan deal flow like turning on a spigot.  That's how I can live in the cornfields of Indiana, enjoying the good life of playing some golf and seeing every one of my children's ball games or fencing tournaments.  I'm a rainmaker.  When the Sacramento office needs deals, they call me and and say, "Make it rain, boss."  I do my little magic, turn the spigot, and soon our phones are ringing off the hook.

For a lousy $199 I can teach you to be a rainmaker.  The commercial mortgage business is actually pretty easy, as long as you know what works.  And remember what my General Manager wrote to me unsolicited last week, "Bravo, George ... this course is great."  (His enthusiam is why I decided to blog on the subject today.)  Please click the green button below if you are interested.

Our private money commercial mortgage company lost a $975,000 commercial loan this week to a credit union, of all lenders!  This crazy credit union wrote a 5% loan with no appraisal and no toxic report.  That's insane!

Every decade or so a new class of commercial lender enters the market and starts making goofy commercial loans.  Most recently it was the conduits who were making 82% loan-to-value commercial loans, with a two-year interest-only period before the loan started to amortize, all based on projected rents.  Absolute lunacy!  Not surprisingly, almost 9% of all conduit commercial loans are now in default.

Before the conduits, the S&L's were making huge commercial construction loans on new office buildings with no pre-leasing.  Not surprisingly, the country ended up with a lot of empty, "see-through" office towers.  The country also got to bail out the whole S&L industry.

Before that, it was a small group of industrial loan companies acting like crazy people.  Back in the 1980's, the State of California allowed the formation of a new class of tiny bank-like entities called thrift and loan associations.  (Be careful here not to confuse a thrift and loan association with a  "thrift", which is a slang term for a savings and loan association.)

This was back in the days before Reg Q was replealed.  Regulation Q limited the interest rate that banks and S&L's could pay on federally-insured deposits.  For example, the Fed might say that the highest rate on deposits that a bank could pay was 4.0%.  Savings and loan associations could pay 0.25% higher on deposits, but those deposits were tied up in a CD.  Therefore, Home Savings, for example, could pay 4.25%.

Thrift and loan associations were only licensed to accept deposits in California, but they could (eventually) make commercial loans nationwide.  Since their deposits were only insured by a state fund, rather than the FDIC, they offered even higher rates of interest on deposits, say 6% in a 4% CD market.

For 15 to 20 years, all was good.  These thrift and loan associations wrote fairly conservative loans, and they paid their depositors the promised 6% interest rate.  But then a few of the owners started to get greedy.  They started to make poor-quality commercial loans at outrageous interest rates.  I am talking about commercial real estate loans that would terrify even an experienced, commercial hard money broker.  In some cases, the APR's charged by these thrift and loan associations exceeded 24%!

Not surprisingly, the loans went bad.  Several of the thrift and loans became insolvent.  Their losses soon used up the entire state deposit insurance fund, so a run on the solvent, well-run thrift and loan associations began.  The governor declared a thrift and loan holiday.  The weak thrift and loans were dissolved, while several of the well-run thrift and loans were allowed to change their charters to become "Federal Savings Banks".  The new charter allowed them to obtain FDIC insurance, and a few of these these well-run thrift and loans actually survived.

Now we get to the point of today's blog article.  Every decade a new class of stupid commercial lender enters the marketplace.  This decade the new idiot on the block is the credit union.  These new guys don't know what they are doing - like making a $975,000 commercial loan with no appraisal and no toxic report.  Mark my words, within seven or eight years the credit union industry will take immense losses in commercial real estate lending.

But if you are a borrower or a commercial mortgage broker, do you really care?  Maybe not.  If these guys are idiot enough to make such high-risk commercial loans, why not bring them some loans?

So where can you find some credit unions making commercial loans?  C-Loans.com has a number of participating credit unions.  And let me make one final point.  It's actually smart of the credit union industry to start making commercial real estate loans.  The banks are leaving too many good deals on the table.  But hey, at least get an appraisal and toxic report.  Geesch!

The year 2012 was supposed to have been a total diaster for commercial real estate loans.  Almost $151 billion worth of multifamily and commercial real estate loans were scheduled to mature during 2012, just five years after the insane underwriting year of 2007.

During the heady and insane underwriting months of 2007, some conduits and money center banks were making five-year commercial loans of up to 75% to 80% loan-to-value ... based on projected rents!  A number of these commercial loans were given a one year or two year interest-only period, before the loan started to amortize.  A few crazy conduits even wrote deals up to 82% loan-to-value, and I know that a handful of conduit commercial loans were written up to 82% LTV, with an interest-only period of two-years, all based on projected rents!  Its no wonder that many experts expected a shipwreck in 2012, when these five-year, conduit-style commercial loans matured.

But a funny thing happened in 2012.  Commercial real estate loan (CMBS) delinquencies actually declined from a high of around 9% at the beginning of the year to just 8.7% in the fourth quarter of 2012.  Every quarter of 2012 the delinquency rate declined.  It's no wonder that confidence has returned to the commercial real estate mortgage bond market.

So what happened?  New commercial real estate construction during the Great Recession came to a complete halt.  With no new buildings coming on line, there was less competion for tenants.  The commercial properties securing most conduit loans were also larger, better-located, better-managed, and more desirable than the typical small commercial property.  Occupancy rates for conduit-quality commercial properties held up surprisingly well. 

As Treasury bond yields plummeted, real estate investors became desperate for yield.  Cap rates compressed, and many commercial properties, those that were well-leased, actually saw some appreciation.  Finally, property owners were forced to become more efficient.  Costs declined and net operating incomes actually improved.

In the end, most commercial real estate owners were able to either refinance their ballooning loans in 2012 or sell them for more than what they owed on the property.

How does the future look for commercial real estate loans?  It looks excellent.  Almost $151 billion in commercial real estate loans matured in 2012.  According to the Mortgage Bankers Association, less than $120 billion in commercial real estate loans are scheduled to mature in 2013.  Even fewer commercial loans will mature in 2014.  The years 2015, 2016, and 2017 will be a bit more challenging, as the ten-year loans written in 2005, 2006, and 2007 finally mature.  With no new commercial construction going on, however, the challenge should be quite manageable.

Bottom line:  The crisis in commercial real estate financing is arguably over.  There will probably be no new flood of commercial real estate foreclosures.

There are two kinds of commercial mortgage-backed bonds. The most popular kind is a standard conduit deal, known as a commercial mortgage-backed security ("CMBS"). A typical CMBS deal is a $6 million first mortgage on an attractive office building that is only 63% LTV in some primary market, like Washington, D.C. or New York City. Please click here if you need a CMBS loan.

A less-well-known kind of commercial mortgage-backed bond is an Asset-Backed Security (ABS) that happens to be backed by subprime commercial mortgages. You can think of these subprime commercial mortgages as less-than-perfect or hard money quality deals.

Each subprime commercial mortgage in the typical Asset-Backed Security portfolio has some sort of black hair.  Maybe the lease is short term.  Maybe the property has some vacancies.  Maybe the LTV is higher than the 63% that most CMBS lenders will allow.  Maybe the borrower has less-than-perfect credit.  There will always be some black hair.

Now main characteristic about an ABS offering is that the lender will accept several different types of loans into the portfolio - typically scratch-and-dent residential loans, subprime commercial loans, car loans, and credit card loans.  The theory behind an ABS offering is that the end bond investors enjoy more diversification.  Not all of their investment is backed by car loans or commercial real estate loans.  Maybe commercial real estate is depressed but car loans are paying like a slot machine.

Another important characteristic about ABS bonds is that they typically offer 2% to 2.5% higher yields than CMBS bonds. You find a number of subprime commercial lenders here.

Here's the point of this article:  Yield-starved bond investors absolutely love bonds backed by commercial mortgages right now - even ABS bonds. This is very, very bullish for the future of commercial real estate lending ... and ultimately commercial real estate values.