Commercial Loans and Fun Blog

Let me set the stage here.  You’re a commercial mortgage broker.  A potential borrower calls his own bank asking for a commercial real estate loan, but the bank is forced to turn him down.  Fortunately, the kindly banker recommends your commercial mortgage company and suggests to the borrower that he call you.

So your phone rings, and the borrower tells you that he needs a commercial real estate loan.  You ask for the details, and he share them with you.  He says, “I need a $700,000 refinance of my industrial building in Chicago, Illinois.”

Now your commercial loan office (if you are smart, a bedroom in your home) is located 200 miles away in Minneapolis, Minnesota; however, you are confident that you can find a lender to make his loan.

Question:  How do you quote the loan?

Now you have several commercial banks that have closed commercial real estate loans for you in Minnesota, and they usually quote you between 4.5% to 4.75%, 1 point, 25 years amortized, 10 years due, with one rate readjustment (based on a spread over Treasuries) after five years, and a prepayment penalty of 3% in year one, 2% in year two, and 1% thereafter.

George’s Answer:

As a commercial mortgage broker, you should quote your borrower a very specific rate and term, even though you might not yet have a specific lender picked out for the deal.

Now I do not want you to lie and issue some lowball quote for a loan that you suspect would be impossible to deliver.  No-no-no!

I just want you to make a detailed, specific quote based on the knowledge that most banks throughout the country offer commercial real estate loans at roughly the same rates and terms.  Therefore, if your local banks in Minnesota are quoting 4.5% to 4.75% for a loan that is amortized over 25 years and due in 10 years, you can be reasonably sure that the banks in Chicago will be quoting pretty much the same terms.

So you might quote the borrower:  4.625%, 2 points (one of those two points is your fee), 25 years amortized, 10 years due, with a rate readjustment after five years, and a prepayment penalty of 3% in year one, 2% in year two, and 1% thereafter.

“Why is it so important that my commercial loan quote be so precise and exact?  Why can’t I just give a range?”

When an experienced commercial property investor calls his bank, the bank loan officer doesn’t generally give him a loan quote with a very wide variance.   The banker doesn’t quote him, “You rate will be between 4.5% and 12%.”  No, the banker is usually far more precise.  He might say that your rate will be between 4.5% and 4.75%, but that’s about as much variance as he typically puts in the quote.

If you give your borrower a quote of between 4.5% and 12%, the borrower will know that you are just a broker.  You don’t want to come across as “just a broker”.  I don’t want you to lie, and if the borrower asks you directly if you are just a broker, you tell him the truth.

Nevertheless, the wise commercial loan salesman will come across confidently and specifically, as if he has been representing that bank in Chicago for a decade.  (Remember, at this point we don’t know what bank in Chicago might make this loan; but we do know that most banks across the country quote their commercial real estate loans at roughly the same rates and terms.)

“But George, what if I am wrong?  What if I can’t deliver that exact quote?”

Don’t worry about it.  All you can do is quote the most likely rate and terms for which the borrower is likely to qualify.  You are not issuing a low-ball quote.  You are issuing a reasonable, market rate quote.

However, good ethics require that you notify the borrower the moment you learn that you will not be able to deliver the quoted rate.

“Bob, I’m just calling today to let you know that the rate is more likely going to be 5.25% than 4.675%.  The reason why is that this area of Chicago isn’t the greatest.  Do you still want to continue?” 

By this time your borrower will have spent too many hours with you providing documents to start all over.  You will rarely lose him

Now I want to be crystal clear that you must not engage in bait-and-switching.  No-no-no!  If banks in Minnesota are quoting you 5.5% for commercial real estate loans, you must not quote your borrower a 4.625% rate for his Chicago deal.  That would be immoral and illegal.

I’m just saying that commercial banks across the country quote very similar programs on commercial real estate loans, so its reasonable – and a good sales practice – to issue very specific commercial loan quotes, even if you do not have a specific bank in mind when you make the quote.

Commercial loan brokers should never talk about T and A because the use of these words will almost always open up a can of worms that will kill your deal.

Now I am not talking about ta-ta’s and booty.  The t-word I am talking about here is toxic report.  The a-word is appraisal.  The wise commercial mortgage broker avoids the t-word and the a-word like the plague.

Why?  If you’re the first commercial loan broker who has to tell the borrower that he will eventually have to pay $2,500 (to $3,500) for a toxic report and $3,000 (to $5,000) for an appraisal, I guarantee that you will lose the deal.

The borrower is going to be horrified.  Oh my goodness!  He won’t believe you when you tell him that such third party report fees are quite normal in commercial mortgage finance.  He will feel compelled to shop to other lenders in hopes of finding a bank that will do such reports in-house.  (Good luck with that!)

After three or four other banks and commercial mortgage brokers tell him the same thing, he will finally accept the fact that he is going to have to shell out big bucks up-front for the third party reports.  But that won’t help you a bit.  You will have already lost the deal.

Therefore, be smart.  Never talk about T and A.  Don’t even use the words.  If they slip out of your mouth, know that you have just killed your own deal.  Go wash your mouth out with soap.

A commercial mortgage broker is a salesperson, and convincing the borrower to send in his initial commercial loan package is arguably the single most important sales step in the commercial loan business.

In prior lessons on how to rope in a commercial loan package, I laid out for you certain rules:

1. Make sure that your initial list of requested commercial loan documents is short and very easy to gather.  Right now you’re fighting inertia.  The borrower is at rest, and a body at rest tends to stay at rest.
   
   
2. Typically the first set of documents will be the income and expenses on the property, plus some color pictures.
   
   
3. Be careful when asking for color pictures.  If the commercial property owner is older, he may not know how to send pictures by email.  If he doesn’t, and if he doesn’t have a property manager or a child who can send in the pictures for him, you should quickly back off from asking for any pictures.
   
   
4. You should collect your commercial loan documents in a series of small batches, making sure that each step is relatively easy.  Once the borrower has sent in his initial package, inertia is now on your side.  A body in motion tends to stay in motion.
   
   
5. Never ask for a complete package!  Remember, out of the 1,000+ times I have asked for a complete commercial loan package, I have received exactly zero packages.
   
   
6. Never send a commercial mortgage borrower a list of all of the loan documents that you will eventually need for your package.  The list is far too long and intimidating.  Your borrower will head for the hills.
   
   
7. Never orally give your borrower a list of all of the loan documents that you will eventually need.  You’ll scare him away 100% of the time.
   
   
8. Don’t combine any document-gathering steps in order to “save time.”  All you will end up doing is saving yourself the time and trouble of depositing a commission check.  Instead, make sure that each step is easy and short.

Now let’s talk about Pooh-Pooh Soup.  My lovely wife, Cisca, and I occasionally go out to French restaurants.  French restaurants are expensive, the waiters are often rude, and the portions are tiny; but the food is usually excellent. 

There is common characteristic of most French restaurants that invariably sets Cisca and me to giggling.  No matter what you order, the waiter always tells you that you have made a great choice and that the food is going to be excellent.

For example, if you order the duck a la orange, the waiter will almost always say something like , “Ah, good choice!  The duck a la orange is magnifique.”  If you order the Crepes Suzette, the waiter will say something like, “Good choice!  The Crepes Suzette are delicious!”

Therefore I have often wondered what would happen if I ordered the pooh-pooh soup?  And yes, folks, the pooh-pooh soup is exactly what you feared – a couple of short brown logs in a delicate broth.   Eeuuuu, yuck!  Would the French waiter say something like, “Ah, the pooh-pooh soup is delicious!”

But as commercial mortgage brokers, we can all learn an important lesson from that French waiter.  When he is telling us that the pooh-pooh soup is delicious, that French waiter is giving us positive feedback.

Commercial mortgage borrowers need a lot of positive feedback as they slave away over a copy machine making copies of their voluminous tax returns and thick leases.  They constantly need to be reassured that they are not wasting their time.

The whole point of the Pooh-Pooh Soup Story is this:

In order to eventually compile a 200+ page commercial loan package, you need to gather the documents just a few pages at a time and then give the borrower lots of reassurance each time that his loan still looks good.

For example, after you receive the income and expenses on the property and the color pictures, you should call the borrower and say:  “Dr. Smith, I analyzed the cash flow of your property, and the numbers look very good.”  (The pooh-pooh soup is delicious!)  Now all I need is an old personal financial statement and two years’ personal tax returns.”

“Dr. Smith, I looked at your personal financial statement and your tax returns, and the numbers looked quite good.  (The pooh-pooh soup is delicious!)  Now all I need is copies of the leases.”

And so on.  Remember, make each set of documents just a short list.  Never combine steps “to save time”.  And be sure to give your commercial mortgage borrower lots of positive reinforcement.  The pooh-pooh soup is dee-licious!

In my last lesson I pointed out that a commercial loan broker has to be very, very careful when he requests the documents that will go into his loan package.  If he asks for too many documents, the borrower will want to shop around.

If he asks for the wrong documents, like an updated financial statement, the commercial loan broker will probably lose the deal to a competitor who will pop up during six long weeks it takes for the borrower’s accountant to prepare the updated financial statement.

And if the commercial mortgage broker makes the horrible mistake of describing all of the documents that will eventually go into the commercial loan package, the deal is most sincerely dead.  Remember, never-ever send or verbally give to your commercial mortgage borrower a list of all of the documents that eventually will go into a complete commercial loan package.  This list is so huge and so scary that your borrower will run for the hills.

Instead, you should just ask for a few loan documents initially.  You will collect the rest of the documents slowly over time, as the borrower slowly becomes wedded to the idea that you are the broker that he has chosen to fund his deal.  (If you and I were chatting over a beer, I would put this differently.  You will wait to collect the bulk of your loan documents until the hook is firmly set in your borrower’s mouth.  Don’t jerk the hook out of his mouth by asking for too many documents too soon.  You’ll just scare the fish away.)

So what documents should you gather first and when should you ask for them?  Here are some general rules:

1. You should collect your commercial loan documents in a series of small batches.  Make each step easy!
   
   
2. After receiving and reviewing each batch of loan documents, call your borrower and tell him that his commercial loan application looks good.  In other words, give him some positive feedback, so he knows that he is not wasting his time.  I’ll cover this important step in another lesson called the Pooh-Pooh Soup Story.
   
   
3. Ask for initially just the income and expenses on the property and some color pictures.  I’ll cover this important first step in far more detail below.
   
   
4. Be very careful when ask for color pictures of the property.  We want the first step to be very easy in order to get inertia on our side.  (Inertia:  A body at rest tends to stay at rest.  A body in motion tends to stay in motion).  For most middle-aged folks, it’s pretty easy for them to snap some pictures using a smart phone and to email them to you.  Many commercial properties, however, are owned by elderly investors who don’t know how to use email to forward pictures.  You might ask your borrower if he knows how to take pictures and to send them by email.  If he doesn’t, you might ask him if he has a property manager or a younger relative who could do this for him.
   
   
5. The second batch of documents you will request is an old (!!) financial statement or an old (!!) loan application, plus his last two years’ personal tax returns.  If you ask for an updated loan application or an updated financial statement, you will probably lose the deal.
   
   
6. Most borrowers do not own a copier with an auto-feeder, so copying the tax returns is often an agonizingly slow, one-by-one, process.  The borrower will therefore only want to do this once.  This is why I often say, “The first commercial mortgage broker to get the borrower’s tax returns usually wins the deal.”
   
   
7. After receiving these documents, call your borrower and give him some positive feedback.  (The Pooh-Pooh Soup Story.)
   
   
8. Next – but do NOT combine steps – ask for copies of all of the commercial leases.
   
   
9. At a later date you will ask for other documents, including a financial statement on the LLC that owns the property, two years’ tax returns on the LLC, the Statement of Organization on the LLC, and the Operating Agreement on the LLC.  However, I recommend that you do NOT ask for these file-filler documents until your lender has issued a term sheet and the borrower has signed it.

So what documents make up the income and expenses on the property (see step 3 above)?  It depends on the type of property:

Multifamily and self-storage properties:

1. Current rent roll.
   
   
2. Last year’s actual operating expenses.

Office, Retail, and Industrial Properties:

1. Schedule of Leases (one page summary of the tenants, the square footage of each unit, the rents, and lease expiration dates)
   
   
2. Last year’s actual operating expenses.

Hospitality (Hotels and Motels) and Health Care Properties:

1. Last TWO years’ actual Profit & Loss Statement (P&L)
   
   
2. Any year-to-date P&L Statement that is ALREADY available.  If it’s late in the year, perhaps a P&L Statement on the first quarter or on the first two quarters might have already been prepared by the accountant.  Do NOT ask for an updated P&L.  No-no-no!  You’ll lose the deal while you’re waiting for the accountant to prepare it.

“But George, if you bleed the loan documents out of the borrower this slowly, it will take four months to close a commercial loan.”

Yup.  That’s right.  The situation reminds me of that age-old joke about the old bull and the young bull who trot up to the top of a hill and see a whole herd of beautiful, available heifers grazing in the valley below.  The young bull turns to the old bull and says, “Hey pops, let’s run down and kiss one of those cows.”  To which the old bull replies, “Son, let’s walk down and kiss them all.”

Folks, if you try to rush the document collection process, you’ll scare away 49 out of every 50 commercial mortgage borrowers.  Why not reel in the necessary commercial loan documents slowly and close them all?

One of the biggest mistakes commonly made by rookie commercial mortgage brokers is to request far too many loan documents during the first phone call.  Such a mistake is almost guaranteed to kill your commercial loan deal.

These rookie commercial mortgage brokers are no doubt thinking to themselves, “The sooner I gather a complete commercial loan package, the sooner I can submit the deal and get paid.”

The problem with this approach is that most commercial mortgage borrowers are wealthy and busy running their own businesses.  They are not anxious to devote long hours assembling a huge commercial loan package for you when they are not even sure that you will be able to perform.

If you ask for a huge number of loan documents (financial statements, tax returns, leases, LLC operating agreements, etc.), the borrower is likely to think to himself, “Gee, that’s an awful lot of work.  I wonder if someone else out there has an easier process.  I think I’ll make a couple of more calls.”

Therefore it has been my observation that –

The commercial mortgage broker who asks for the least number of loan documents usually gets the deal.

There are other dangers to asking for a complete loan package.  Invariably your commercial loan borrower will not be able to gather every document immediately.  Maybe he’s waiting for a lease extension to be signed.  Maybe he’s waiting for his accountant to complete the latest financial statements on his company.

Since your borrower will not be able to send in a complete loan package, he might not send in anything at all.  He’s thinking to himself, “I’ll just hold off sending in the package until I have everything.”

In the meantime, stuff happens.  A nearby banker might stop by your borrower’s office for his annual business development (schmoozing) session, at which time the banker steals your commercial deal.  Alternatively, your commercial mortgage borrower might mention to his real estate broker-buddy that he’s looking for a commercial loan.  Soon the lead will be rushed to a competing commercial mortgage company, and they could steal your deal.  Given time, there is a very high chance (80%+) that you will lose your commercial loan applicant.

The wise commercial mortgage broker will therefore do everything he can to encourage his borrower to send in some sort of initial package right away.   The package does not have to be complete.  It is just critical that you not allow any delay.

And whatever you do, never-ever-EVER send your borrower a complete list of the documentation that he will eventually be asked to provide.  No-no-no!  Such a description of a complete package is so intimidating and discouraging that it is 100% guaranteed to send your borrower running towards the hills.

In fact, in my 33 years in the commercial mortgage business –

I have lost every single commercial loan app where I sent the borrower a list of the items required in a complete package. 

One hundred percent.  A perfect score.  Because I’m stupid, I tried it over 1,000 times.  Out of those 1,000+ times, I received exactly zero loan packages.

Don’t even do it over the phone.  If you find yourself giving your commercial mortgage borrower over the phone a complete list of the documents that you will eventually need, you have just killed your deal.  Bang!  You just shot a bullet into your deal’s head.  You just stuck an ice pick through its eye.  You just dropped a house on your deal.  Your commercial mortgage deal – as the munchkin’s coroner sang in the Wizard of Oz – is really most sincerely dead.

So never-ever send or verbally give your borrower a complete list of the loan documents that you will eventually need.  The list is way too long and scary.

So how do we request loan documents?  We’ll cover that in an upcoming lesson.

Queue the music theme to the James Bond movie series.  The silhouette of James Bond is now walking across the screen.  Folks, I want you to become the new “Doctor No” of commercial real estate finance.  (The original Doctor No was killed off in the second James Bond movie.)  I want you to learn how to say no.

There is a common theme to my commercial mortgage finance training.  As a commercial mortgage broker, you simply must learn to say, “No,” to those goofy commercial loan requests that will waste your time but will never close. 

Rather than taking a one-in-ten-thousand chance on a goofy commercial loan application, you need to preserve every available working minute and devote it to marketing for do-able commercial loans.

The following words drive me absolutely bonkers:  “Well, I didn’t have any other commercial loan packages going, so I thought I might try to place this (goofy) one.”  Arghhh!  No-no-no!

You could have been using that same time to add new referral sources to your mailing list and to your email list.  You could have been calling on bankers.  You could have been making a few calls to your local realty agent buddies.  You could have been writing up your latest fun newsletter.

How many wealthy income property investors did you add to your newsletter list this week?  You didn’t have time?  Hmmmmm.

So let’s practice this today together:

“Hey, George, do you know anyone who would finance a golf course in Mexico?”

Sorry, Steve, but the answer is no.  If an American bank were to make a loan in Mexico, the Mexican government would slap a 30% withholding tax on its interest income.  If the nearby Mexican banks won’t do the deal, it will never get done.

“Hey, George, I have a client who needs a $10 million loan to buy a commercial building.  Do you know someone who could finance this deal?”

What’s his net worth, Bob?  Just $1.2 million, huh?  How much is he putting down?  He’s trying to get away with just 7% down?  I’m sorry, Bob, but the answer is no.  Your buyer isn’t strong enough to qualify for a $10 million loan.  He would need a net worth of pretty close to $10 million to qualify for a $10 million loan.

“Hey, George, do you have any construction lenders who would finance the construction of a new $7 million spec office building?”

Gee, Ralph, very few banks will finance new commercial construction, unless the builder is prepared to cover at least 35% of the total project cost.  Does your builder have at least $2.45 million (35% of a total project cost of $7 million) to contribute to the project?  No?  Then I’m sorry but my answer is no.

“Hey, George, do you know anyone who will finance a gold mine?  Our expert says there is $100 trillion in gold reserves in this mine.”

No.  I have never known anyone to close a mine deal in my 33 years in this business.

“Hey, George, do you know anyone who will make a $4 million acquisition and development loan on a residential subdivision in the Central Valley of California (the worst housing market in the country)?”

If you were asking for San Antonio, Texas; Austin, Texas; or Washington, DC, the answer would have been maybe.  But John, unless you’re talking about the absolute hottest housing markets in the country, no one is making subdivision A&D loans right now.   There are enough finished but unsold residential lots in America to last for another twelve years.

“Hey, George, I know a guy who knows a guy who needs a …”

Sorry, Jack, but the answer is already no.  Daisy chains don’t close.

“Gee, George, what kind of commercial loan are you looking for?”

I’m looking for permanent loans on standing commercial properties only.  A standing commercial property is one that is already built.  These are the only type of commercial real estate loans that are actually closing today.

And the smaller the loan, the greater the chance that the loan will actually close.  I’ll take one loan of $600,000 over ten loans of $6 million any day.  Unlike a lot of newbie commercial mortgage brokers, I actually want to close deals and get fed.

Success in the commercial mortgage brokerage business does not usually happen overnight.  It could be seven to eight months before you finally start to hit your stride.  Here’s why:

1. Commercial banks are the lenders closing most of the new commercial real estate loans today, and the average bank takes four months to close a commercial loan.  Yeah, yeah … the bank loan officer will tell you that the process only takes about 60 days … but he’s flat-out lying to you.  A narrative income-property appraisal alone takes about 60 days, and most commercial lenders don’t even order the appraisal until 30 to 45 days into the process.
   
   
2. Traditional advertising – like direct mail, magazine advertising, radio advertising, and TV advertising – simply does not work in the commercial mortgage business.  You are therefore going to have to build yourself a network of 1,000+ referral sources.  These referral sources won’t start producing a lot of leads for you for at least six weeks, assuming you hit them with a newsletter every ten days for six weeks.  You’ll surely build a relationship with these contacts, but these relationships take a little time.
   
   
3. Therefore, even if you hit the ground running, it’s likely to take at least six weeks plus another four months before the first of your commercial loans start to close.

The wise newbie will therefore keep his day job as he starts to build his mailing list and email list of referral sources.  If you are teaching school or driving a cab, keep at it until your pipeline finally starts to deliver.  If you are currently working as a residential mortgage broker, keep at it!   With interest rates so low, this is a good time to be refinancing homes.

Since it takes so long to close your very first commercial loan, why should you even bother to learn commercial real estate finance?  There is a superb reason, and I want you to read this answer at least three times:

Wealthy investors own the big commercial buildings you see around town, and there is no better way to meet those wealthy investors than to be a commercial mortgage broker.

Please re-read the above paragraph two more times and permanently engrain this concept into your head.

Once you have met and worked hard for a wealthy investor – you don’t even have to close a loan for him – you can make all kinds of money from this relationship.

You can sell this wealthy investor rental homes or commercial REO’s (properties foreclosed upon by a bank).  You can manage a few properties for him.  You can convince him to buy hard money mortgages from you.  You can convince him to invest in a private money mortgage fund that you run.  You can syndicate your wealthy investors to buy huge commercial properties.   You can even partner with these wealthy investors if they have a great idea of their own.

So why do you want to become a commercial mortgage broker?  Answer:  Because there is no easier way to meet wealthy investors than to become a commercial mortgage broker.

In the mortgage business, a wholesaler is lender or broker that accepts deals almost exclusively from mortgage brokers.  In contrast, a retailer is a lender or broker that only accepts loan applications directly from the borrower or real estate agents.

Never try to be a commercial mortgage wholesaler.  It simply doesn’t work.

The concept sounds like it should work.  A mortgage broker becomes an expert at placing commercial mortgage loans.  He sets up a network of 500 residential mortgage brokers to bird-dog for him.  The residential mortgage brokers bring him all of their commercial loans, and then the commercial mortgage expert uses his expertise to place these commercial loans.  The residential mortgage broker adds a point to the deal, and the commercial mortgage expert adds a point for himself. 

This should work, right?  Unfortunately it doesn’t.  But why?

1. Even rookie mortgage brokers quickly learn that daisy chains don’t close.
   
   
2. Therefore your residential bird-dogs will take their easy and do-able commercial loans directly to some bank.
   
   
3. Your residential bird-dogs will only bring you their commercial mortgage deals that have been turned down by every direct commercial lender that they know.  In other words, if you try to work as a commercial mortgage wholesaler, the only commercial loan applications that you’ll ever receive will be the dregs – deals that have already been turned down by a half-dozen commercial lenders.
   
   
4. Worse yet, your residential bird-dogs won’t tell you that the deal has already been turned down by six other lenders.  They won’t tell you that the deal has a toxic contamination problem, a vacancy problem, a structural engineering problem, or a crumby-trashy-druggie neighborhood problem.  They won’t tell you because they’re hoping that your lender won’t find out.  In the process, you’ll spend countless hours working on dozens of commercial loans that never had a chance in Hades of ever closing.
   
   
5. Working as a commercial mortgage wholesaler also guarantees that every deal you work on will have a daisy chain problem – lousy communication, bald-faced lies by the intervening brokers, and excessive loan fees (packing).  Packed deals almost never close.

So be smart.  Never try to work as a commercial mortgage wholesaler.

Now this does NOT mean that you should never work with other mortgage brokers.  Residential mortgage brokers often make great bird-dogs.

However, you must ONLY work with residential mortgage brokers on a name-and-number referral basis.

Their job is to call you up or email you the name and number of a potential commercial mortgage borrower in exchange for a 10% or 20% referral fee.  They must not try to work as your loan agent or as a commercial mortgage broker 

If your residential bird-dog starts trying to play commercial mortgage broker, you have to cut him off.   Really?

Yes!  The reason why is because he will never again bring you an easy, do-able commercial loan again, like the purchase of a small apartment building or the refinance of a ballooning loan on a standing commercial property.  He’s already taken those loans to his own stable of banks.

Instead, your ambitious bird-dog will only bring you the deals that he cannot place himself - like a goofy $15 million land development deal, a loan on a gold mine, or some pipe-dream commercial construction loan to some undercapitalized developer with poor credit.  You have to cut him off.

So don’t forget – never try to be a commercial mortgage wholesaler.  You will waste countess hours pouring over crumby, hard-to-understand loan packages, and you will never close a single loan.

Not long ago one of our loan officers had a little $400,000 apartment loan that was far too clean to go hard money.  It needed to be placed with a bank.  Alert-alert – this is the perfect size and type of commercial deal to actually close and make a commission!

We entered the deal into C-Loans.com, but none of our C-Loans lenders wanted to do the deal.  It was too small and in a rural area.

We next went to Yahoo Maps, plotted the property on a map, and then asked for nearby banks.  Unfortunately none of the local banks wanted to do the deal.

Now what?

You can easily find banks of the perfect size that are located close to the subject property by going to the FDIC’s website.

1. Go to http://www.fdic.gov
   
   
2. In the middle of the FDIC’s home page, left-justified, you will see a blue and gray banner that reads, Quick Search | Top Search | About FDIC.
   
   
3. Click on the middle link, “Top Search”.
   
   
4. Click on the link in the second column, “Bank Find”.
   
   
5. About two-thirds of the way down the page, on the right, click on the button that reads, “More Search Options”.
   
   
6. Fill in the “County” and “State” where the property is located.
   
   
7. At the bottom of the search criteria, click “Find”.
   
   
8. You will find potential banks listed in asset size order, the largest banks being listed first.  Choose a bank of the appropriate size.  Remember, banks are uncomfortable making commercial loans that are more 2.5% of their Total Assets (25% of their legal lending limit).
   
   
9. If you cannot find the perfect bank in that county, expand your search to nearby counties.

This is wonderful tool you can use to find banks willing to fund your commercial loan.

Here is a simple but important rule:  Big banks like to make big commercial loans.  Small banks like to make small commercial loans.  The wise commercial mortgage borrower or broker will therefore match the size of his commercial loan request to the size of the bank to which he submits his loan.

The reason has to do with legal lending limits.  National banks cannot lend more than around 10% of their capital and reserves to a single borrower.  Therefore, if your small, local bank has just $20 million in capital, it cannot lend more than $2 million to a single commercial mortgage borrower.

In real life, banks rarely make commercial loans larger than about 25% of their legal lending limit.  In practice, therefore, this small, local bank will probably seldom make a commercial real estate loan much larger than $500,000 (25% of $2 million).

At the opposite end of the spectrum, Wells Fargo Bank, the fourth largest bank in America, loves to make $20 million commercial loans.  Instead of making 40 commercial loans of $500,000; they only have to make one commercial loan of $20 million.  It’s a lot less work and far more profitable.

So what’s a big bank?  What’s a small bank?  A small bank arguably is any bank with less than $1 billion in assets.

What are a bank’s assets anyway?  Bank assets consist mainly of outstanding loans.  Deposits are liabilities because they eventually have to be given back to the depositors.

A large bank is any bank with more than $20 billion in assets.  There are about 50 banks in America with more than $20 billion in assets.