Commercial Loans and Fun Blog

Right behind my right ear is this goiter that swells up, pulsates, and glows a florescent internet green whenever I run across a commercial loan that smells like a big commission.  I call that goiter my "greed gland", and boy does that sucker pulsate (thump-thump, thump-thump) whenever I stumble across a hot commercial mortgage lead.

It's sort of like that old joke, "What do a hurricane, a tornado, and a redneck divorce all have in common? Someone's fixin to lose a house trailer."  Well, when certain stars align, some lucky commercial mortgage broker is fixin' to earn a big commission.  But here's the $20,000 question, "What do the stars look like when a commercial loan is almost certain to close?"

It's easy to spot the hopeless deals:

1. Commercial construction loans
2. International commercial loans
3. Letter of credit commercial loans
4. Most large commercial loans
5. Loans on casinos and mines
6. Land loans

Here are some of the deals that make my greed gland glow:

1. Loans with balloon payments.
2. Deals where the bank has offered a discounted pay-off.
3. Since the start of the Great Recession, low-LTV commercial mortgage loans to business owners to help cover their losses.
4. When an heir inherits a free-and-clear commercial property, he usually has it mortgaged to the hilt within five nano-seconds.

I used to teach my students that, "Commercial property owners who pay off their mortgages almost never mortgage their commercial properties again.  Corrolary:  When an heir inherits a free-and-clear commercial property, he usually mortgages it to the hilt within five nano-seconds."  Yeah-yeah, I said the same thing in the list above, but this is so important that it was worth mentioning again.

Since the Great Recession, we have refinanced a number the commercial properties where the business owners had previously paid off their mortgages.  Clearly the rule is not perfect.  The Great Recession was just so bad that they just plain needed the money.

The wise commercial mortgage broker will therefore not waste his time working leads from the first list, but rather he will relentlessly pursue the leads from the second list.  And if he has worked all of the hot leads, he will devote his time to marketing for more referral sources.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

On December 21, 2024, old man Blackburne was fatally struck by a car while crossing the street with his beloved family.  Fortunately, only the old man was hit.  George didn’t die instantly.  He died of internal bleeding about four minutes after the collision.

Arguably it was a blessing.  As his wife of 42 years held his hand, he had time to remind her of his undying love.  To his three children, he told them each that they had made him very proud.  And as the light started to dim in his eyes, he passed on one final lesson to his sons:

“And please always remember, sons, the most important lesson in all of commercial mortgage finance.  It’s a critical lesson that I wish I had understood much earlier in my career.  Commercial lenders close loans for their friends.”

That’s it?  Those were George’s final words?  What could possibly be so important about those simple seven words?

By the way, its just 2012 right now, so I still have another twelve years before I get hit by that car.  I just needed a way to dramatize this lesson so that you would remember it.

We start from the basic proposition that every commercial real estate loan ever made had at least a few black hairs.  Maybe the property had some vacancies.  Maybe the borrower’s net worth was not larger than the loan amount.  Maybe the property was a little older.  There are a thousand potential flaws to a commercial real estate loan, and every deal has at least a few of them.

Will the commercial lender fixate on the one or two negatives on your deal or will he recognize the two-dozen other pluses?  The answer lies with your loan officer and with Loan Committee.  Do they like you?  If so, your deal has a chance.

Commercial lending is also an advocacy process.  Loan Committee’s job is to say, “No” to every deal.  Their job is to point out the flaws in your commercial loan package.  Your loan officer is like the public defender in a criminal trial.  His job is to convince Loan Committee that your commercial loan request should be approved.  It’s his job to point out all of the strengths on the deal and to refuse to take “No” as an answer.

So will your loan officer fight hard for you in Loan Committee?  Well… does he like you?

But how do you make the loan officer at the bank like you?

1. If you are personable and the lender is local, try to deliver your commercial loan package in person.  Sit down and get to know your commercial loan officer.  Chat him up.  Schmooze him.
   
   
2. Make a big fuss over the receptionist or the commercial loan department secretary.   Bring her flowers or candy.  Joke or flirt with her over the phone.  Compliment her in an interesting way.  “Hey Julie, I really like your new necklace.”   You want her saying, “Mr. Wilson, that nice Mr. Blackburne is on the phone,” rather than, “Hey, boss, that jerk Blackburne is holding for you.”  (I was soooo arrogant in my early years as a commercial mortgage broker, and I was often rude to the receptionist.  Dumb-dumb-dumb.)
   
   
3. Make sure your commercial loan package is nicely organized and understandable before you submit it.  Lenders appreciate a well-organized package.
   
   
4. Take your loan officer out to lunch.  Everybody loves a free lunch.
   
   
5. Take your loan officer out for drinks after work.
   
   
6. Play golf with your loan officer.  Golf is a great way to develop a relationship with a lender.  (BTW, it is now October of 2016, and I am updating this article.  I just came back from the 2016 Western States CREF Conference, where I arrived a day early to play in the golf tournament.  I made two wonderful contacts at the golf outing, both of whom only make the HUGE loans.)
   
   
7. If your loan officer is local, invite him to a ball game or a barbeque at your house.  Even if he has to decline, he will appreciate the invitation.
   
   
8. If your loan officer is located far away, arrange in advance to meet him at a commercial real estate finance trade show.  Meet for drinks or golf there.  (The Big Boys - the really big lenders like Key Bank or Holiday Fenoglio and Fowler - rent small meeting rooms or cabanas around the pool at big conferences to hold private meetings all day long with their best brokers.)
   
   
9. The great Dale Carnegie, author of Making Friends and Influencing People, tells the story about how he learned that the 12-year-old son of an important sales prospect collected foreign stamps.  When Dale Carnegie received an envelope from Africa with an unusual stamp a few weeks later, he rushed it over to his sales prospect.  The man was immensely grateful, and Mr. Carnegie eventually made that sale.  My point here is to look for ways to show kindness and thoughtfulness to your bank loan officers.  If you want to have friends, be a friend.
   
   
10. Invest a little money in your schmoozing of bankers.  Commercial real estate loan officers may move from Bank of America to Wells Fargo Bank, but they seldom leave commercial real estate lending completely.  Your investment in most cases will pay off handsomely.

As a mortgage broker, a good argument can be made that the most significant contribution that you add to a deal is your relationship with your best lenders.

If you learn nothing else from this course, at least tattoo the following words to your forehead:  Commercial lenders close loans for their friends.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

My sons were reading a newsletter issued by a commercial mortgage banking firm that is a correspondent for a number of life companies.  Confused, they asked me what the following sentence meant:

"Although non-recourse options are more the exception than the rule, they are quoting low LIBOR +250 terms on an interest only basis down to a break-even going-in coverage."

Back in the old days (the 1970's and earlier) it took a computer the size of a small bedroom about 7 minutes to figure out the monthly payments on a fully-amortized loan.  Obviously loan officers could not carry around a 2-ton computer.  They therefore used "loan constants".

You will recall that a "loan constant" is the monthly payment on an imaginary loan of $1,000 at a particular interest rate and amortization.  For example, the monthly payment on a loan of $1,000 at 4.5% interest and fully-amortized over 25 years is $5.56/month.  In other words, if you borrow $1,000 at 4.5% interest and pay back $5.56 every month for 25 years the loan will be paid in full.

The office manager at the mortgage company would announce to all of its loan officers that Freddie Mac had just raised its interest rate from 4.375% to 4.5%.  The new loan constant was therefore $5.56.  If a borrower was borrowing $200,000 rather than just $1,000; the loan officer would simply multiply $5.56 (the monthly payment on a $1,000 loan) by 200 to get the monthly payment on a $200,000 loan at 4.5% interest and fully-amortized over 25 years.

Modernly, when commercial loan officers talk about "loan constants", they are doing so to tell the reader what interest rate and amortization they used when they computed their debt service coverage ratio.  For example, a loan officer might say, "The debt service coverage ratio is 1.42 based on a 4.5%, 25-year constant."  The constant matters a lot.  That same property might only have a 1.02 debt service coverage ratio using a 6.75%, 20-year constant.  A debt service coverage ratio of just 1.02 is not good enough for most commercial lenders.

What if the proposed commercial loan is an interest-only loan?  The monthly interest-only payment on a loan of $1,000 at 4.5% is $3.75 per month.  So if a loan officer is talking with his boss about an interest-only bridge loan, he might say, "Boss, the debt service coverage ratio on this deal is 1.57 based on a 4.5% interest-only constant."  

So the sentence, "Although non-recourse options are more the exception than the rule, they are quoting low LIBOR +250 terms on an interest only basis down to a break-even going-in coverage," means in English that this commercial lender is making commercial loans at one-month LIBOR (just 0.25% today) plus 2.50%, which works out to a 2.75% interest rate, with the rate being readjusted monthly.  The loan has interest-only payments, and the lender is only requiring a 1.0 debt service coverage ratio (break-even cash flow) based on a 2.75% interest-only constant.  The borrower would also probably have to personally guarantee the loan.

Phew!  There were a lot of moving parts in that one little sentence.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

Many times in my career I have a closed a commercial real estate loan with the very same bank that had previously turned it down.  In fact, this happens all of the time.

We start from the basic reality that all commercial real estate loans have at least one black hair.   There is no such thing as a perfect commercial real estate loan.

Now whenever you call a banker, you’re supposed to ask him the following key question first:  “Bob, I have a commercial loan I’d like to run by you.  Did I catch you at a good time?  If not, I can easily call you back later.”

Let’s suppose you’re a dummy and you failed to ask Bob of ABC Bank that crucial question.  The banker was in fact extremely busy.  He was in no mood to listen to your description of a new commercial loan.  Irritated, he listened very impatiently until he heard about the very first black hair on your deal (remember, all commercial real estate loans have black hairs).  Then he immediately turned your commercial loan down.

Okay, now what?  Do you give up on ABC Bank?  Absolutely not!  Simply call a different commercial loan officer at ABC Bank, ideally one in a different branch.  And this time, don’t be a dummy.  Ask him first if this is a good time to discuss a commercial loan.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

In our last lesson I wrote that much of your success as a commercial loan broker depends on you hooking up with the right loan officers at the right banks.  But who are the right loan officers?  Who are the loan officers who are closing most of the commercial loans for the bank?

Below are some techniques and clues that might help you spot a “hot loan officer”.   I’m not talking about looks here, but rather who has the highest closing ratio.

1. Ask the bank’s receptionist or the commercial loan department's secretary.  “Ma’am, I’m just a starving mortgage broker here on straight commission.  Would you please-please tell me who closes the most commercial real estate loans for your bank?”  It’s been my experience that if you are really good at sounding pathetic, the clerk will direct you to the right loan officer.  “They’re all good,” she’s likely to say, “But you probably want to work with Bill Bradley.  Do you want me to transfer you?”
   
   
2. Pay attention to tombstones.  Tombstones are announcements about commercial loan closings.  In the old days tombstones were little display advertisements placed in financial newspapers; but modernly most tombstones go out by email.  Which loan officer for the bank closed that deal?
   
   
3. Stay close to the speakers at commercial real estate finance conventions.  These guys and ladies are usually the “big guns” at their banks or lending firms, and they have lots of buddies at other firms who are also big guns.
   
   
4. Look for the younger male loan officers who are, at least partially, on commission.  The ideal loan officer will be a man in his late 30’s who is either on commission or a salary-plus-bonus compensation system.
   
   
5. Avoid the sleepy old men.  It’s been my experience that most of the old men working as commercial loan officers for banks are on straight salary.  Too often these sleepy old guys couldn’t give a flip if they ever make another commercial real estate loan.  Often these older guys are just counting the days until retirement.  They certainly aren’t going to risk their retirements by fighting hard for you in Loan Committee.
   
   
6. As a general rule, I am also not crazy about submitting my commercial deals to women bankers who are on straight salary.  If you find yourself a little outraged by the above comment, please keep in mind that if she would get my deals closed, I would be happy to do business with a green-haired lesbian from Lapland.  What do I care?  I am just reporting my very painful observation that my closing rate with salaried female loan officers is about 1/10^th my closing ratio with salaried male loan officers.  (Please read that last sentence again.  This closing rate differential is too important to ignore simply because the subject is politically sensitive.)  Too often, it seems, these women loan officers are just out to prove that they are strong enough to say no.  Since every commercial loan has at least a few black hairs on it, these women bankers merely glance at the package until they find a black hair.  Then they kill the deal.  I have tried to figure out why the closing rate of women bankers is so pitifully low.  Perhaps it is because these ladies are often the sole breadwinners for their families, so they dare not risk their jobs by arguing too passionately for my deals in Loan Committee.  Women loan officers also seldom go out to nudie bars with the “good ‘ole boys” on Loan Committee, so women in banking really are the subject of a little discrimination.  Hey, I’m not sayin'...  I’m just sayin’...  All that being said, I have to confess that my very last deal was closed for me by … a salaried, divorced, female banker with children.  She was excellent.  LOL.  Still want to scratch my eyes out?  I'm really not prejudiced against women.  The top three executives at Blackburne & Sons are all ladies, and their abilities are miles above our men.  All I'm saying here is that I have had a miserable record of geting salaried women bankers to close my deals.  After 33 years, its hard to ignore the reality of the statistics.
   
   
7. But if a woman banker is on straight COMMISSION, she may be my first choice, especially if she is attractive.  It’s been my personal observation that women on straight commission can be very powerful business animals, like a mama bear protecting her cubs.  Don’t get in this woman’s way.  She’s on a mission to get deals closed.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

This may shock you, but most commercial loan officers will NOT read the commercial loan packages that you send to them.  This is especially true for bankers working on salary.

Your commercial loan package will sit on their desks (or will rot in their email boxes) for weeks – until you call to “confirm receipt of the package.”

Why?  Most commercial loan officers will assume that you, the commercial mortgage broker, have shot-gunned the package out to dozens and dozens of different banks.  They are not going to waste their time slogging through some great, big, thick commercial loan package until you signal that you really want to hear from them.

Question:  So how do you send “the signal” to the loan officer that you actually need him to read the package?  Answer:  By calling to “confirm receipt of the package.”

The call should go as follows:

“Hey Jim, this is George Blackburne from C-Loans.  I realize that you could not possibly have reviewed the package by now, but I sent you an email a few hours ago containing a very short PDF of a commercial loan package.  I think it’s a great one!  All I’m doing right now is calling to confirm that you received my package.”

“You don’t remember receiving it?  Your email address is james.t.kirk@mybank.com, right?  The subject line reads, “Jim, Here’s a Sweet Commercial Deal in Your Backyard”  You still don’t see it?  Huh.  Would you mind checking your junk mail filter?  Sure, I’ll be happy to hold.  You found it?  Hallelujah, Jim!  Okay, I’ll leave you to do your thing.  I think you’ll love this deal.”

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

The reason why you want to inspect the commercial properties that you are trying to finance is because you don’t want to waste a lot of time trying to finance a commercial property in a low-income, high-crime-rate, high-drug-use area.

But some commercial properties are located just too far away to personally inspect.  If your commercial deal is simply too far away to personally inspect, you can do a pretty decent job of pre-screening it by using a few of the wonderful tools on the internet.

My personal favorite site for demographic information is City-Data.com.  (Don’t forget the dash between City and Data!)  City-Data will give you a FREE demographics report containing the income level of the nearby residents, their educational level, the crime rate statistics, and the racial make-up of the neighborhood.  

After studying this free demographics report, you should be able to get a feel for whether or not this is an area that you would allow your mother to walk around in at night.  City-Data.com works great for small-to-medium-sized towns

Suppose, however, you’re trying to finance a commercial property in Chicago, llinois.  Chicago has some very nice neighborhoods … and some very dangerous ones.  How do you know whether your particular neighborhood is a safe and affluent one if you are located in Boston and cannot personally inspect the site?

The best site for this is NeighborhoodScout.com.  This is not a free site; but we have figured out how to use it for free.

Start by going to NeighborhoodScout.com.  Click on the state in question; in this case, Illinois.  Next click on the gold Crime Rate tab.  In the upper-right-hand corner of the map of Illinois, you’ll see two white buttons that allow you to choose between a Satellite view or a Map view.  Choose the Map View.

Then locate the neighborhood in question on the map by either zooming in and out or dragging the map to the left or right.   Once you’ve centered the neighborhood in question, you’ll be able to tell by the shade of blue that the neighborhood is colored whether this area is a good one or not.

Lastly, it’s always a good idea to use Google Maps (http://maps.google.com) to look at your property from a satellite.  Start by typing in the property address and then hitting the “Search” button.  By placing your cursor over the Map button, another button will pop out that says, “Satellite”.  Check on the Satellite button.  Then move the slider on the left to zoom in on your property.

There is also a chain link button that allows you to create a hyperlink to your satellite view that you can place right into your loan package.  Lenders will appreciate this extra touch.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

The USDA Business and Industry Loan Program is very similar to the SBA 7a Loan Program.  What's the difference?  When should you go with a USDA B&I loan, rather than an SBA 7a loan?

You will recall that the USDA Business and Industry Loan program was developed to help foster employment in rural areas, defined as communities of less than 50,000 people.  Some of the lowest wage rates and the highest unemployment rates in America can be found in rural areas.  The Federal government is therefore trying to encourage companies to build factories in these underdeveloped areas.

Therefore it should not surprise you a company does NOT have to be a small business in order to qualify for a USDA B&I loan. The company could have 10,000 employees and still qualify.

Secondly, the property does not have to 51% owner-occupied in order to to qualify for a USDA loan.  Suppose a company wanted to move into a large, vacant industrial building; but they only intended to occupy 25% of the space.  They would still qualify.

In fact, investors can even qualify for a USDA B&I loan, even if they intend to lease out 100% of the space to others!

Non-profit organizations do not qualify for an SBA loan.  In contrast, the USDA will gurantee commercial loans to non-profit organizations.

While an SBA 7a commercial loan can be used to refinance existing debt, there must be a 20% reduction in the debt service.  In contrast, USDA Business and Industry Loans can also be used to refinance existing debt, but there is no requirement of a 20% reduction in debt service.

Lastly, the USDA will regularly guarantee commercial loans up to $10 million, as opposed to just $5 million for the SBA 7a loan program.  On a case-by-case basis, the USDA will guarantee commercial loans as large as $25 million.

You can submit your USDA Business and Industry loans requests, as well as your SBA commercial loan requests, to scores of hungry lenders in just four minutes using C-Loans.com   And C-Loans is free!  Just please be sure to check the box that says, "I need an SBA loan" or "I need a USDA Business and Industry loan."

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

If you need a commercial real estate loan, to whom should you submit your deal?  What kinds of lenders are making commercial loans today? 

There is a pecking order in the commercial financing industry.  The lenders with the very best commercial mortgage rates cream the market.  If a commercial loan won't qualify with the very cheapest commercial lender, the commercial mortgage deal then goes to the commercial lender with the next best commercial mortgage rates - and so on.  The pecking order is as follows:  life insurance companies, conduits (CMBS lenders), banks, savings banks and S&L's (known as thrifts), credit unions, mortgage REIT's, and finally hard money lenders.

Most mortals will never qualify for a commercial loan from a life insurance company.  Life companies, as they are called in the language of commercial mortgage finance, will seldom make commercial mortgage loans of less than $5 million.  The property either has to be almost brand new or located in a fllthy-rich commercial area, like in the financial district of Downtown San Francisco.  Life companies usually limit their commercial loans to just 50% to 55% loan-to-value, and they will not allow second mortgages behind their loans.  This means that a commercial property buyer would have to put down a minimum of 45% of the purchase price.  Yikes.  Like I said, few mortals will ever qualify for a commercial loan from a life company.

Assuming you're a mortal like me, let's move on to the class of commercial lenders with the next best commercial mortgage rates - the conduits.  Conduits, also known as CMBS lenders, make large commercial first mortgages exclusively on very standard commercial properties - multifamily, office, retail, and industrial.  Conduits will also occasionally make loans on hospitality properties (hotels).  Like life companies, conduits prefer loans of larger than $5 million, although they will occasionally finance deals as small as $3 million.  Unlike the life companies, the commercial property does not have to be gorgeous or almost brand new.  Bread-and-butter commercial buildings will often qualify.  The typical conduit loan will have a terrific interest rate, just 30 to 50 basis points higher than that of a life company.  Loan-to-value ratios as high as 65% LTV are possible, and conduits will allow mezzanine financing behind their loans, as long as the "mezz piece" is arranged at the same time the permanent loan is arranged.

Commercial banks have the third-best commercial mortgage rates, and banks are making, by far, the largest number of new commercial real estate loans.  In fact, at least 75 out of every 100 new commercial loans originated in the last year were originated by a commercial bank.  Commercial banks will make commercial real estate loans as small as $150,000 to as large as $50 million or more.  The property needs to be functional and leased, but it does NOT have to be beautiful.  The borrower must be clean and strong, and it helps a lot if he has lots of cash in the bank.  Banks will even finance business properties, like motels, restaurants, and bowling alleys, as long as they are successful.

Savings banks and savings and loan associations (thrifts) are making very few commercial real estate loans today - so few that they are not even worth discussing.

I lied to you earlier.  I told you that commercial banks have the third-best commercial mortgage rates.  There is actually a class of commercial real estate lenders that has even better commercial mortgage rates than banks - credit unions.  Credit unions are brand new to the commercial real estate financing arena, and they have rates that are 30 to 40 basis points cheaper than commercial banks.  They will finance business properties, like self storage facilities and motels.  Credit unions have two important limitations - the property must be located close to the credit union and the maximum loan that you're likely to get from a credit union is around $1 million.  Credit unions only do small deals.

There are only two commercial mortgage REIT's actively making commercial real estate loans today, and their rates are no better than those of any other hard money lender.

Hard money lenders are making lots of commercial loans today.  Hard money lenders make one-to-three year bridge loans at high rates and high points.  Sometimes a borrower simply needs the money, perhaps to inject into his struggling company.  In such a case, hard money lenders, like Blackburne & Sons (my own company), can be very helpful.  Hard money commercial lenders will often make loans to borrowers with poor credit and/or struggling businesses, up to around 65% loan-to-value.

Bottom line:  Most commercial loans today are being written by either commercial banks or hard money lenders.  You can submit your commercial loan to 750 different commercial lenders in just four minutes using C-Loans.com   And C-Loans is free!

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

Before condominiums became popular, co-ops were often used to buy real estate collectively, especially in New York City and Florida.  A co-op is a corporation that owns a piece of real estate, usually an apartment building or a mobile home park.

The individual owner would not own the airspace (for apartments) or the land (under his mobile home) encompassing his residential unit.  Instead, the individual owner would own a share, or several shares, in the corporation that owns the apartment tower or the mobile home park.  Along with the share(s) comes the exclusive right to lease a particular apartment or mobile home park pad.

Each month the individual owner is responsible for paying his lease payment and his own mortgage payment, if the individual owner used bank financing to buy his shares in the co-op.  In addition, the individual owner must pay his pro rata share of the common operating expenses, such as the doorman, common area utlities, common area repairs, real estate taxes on the entire property, and insurance on the entire building.

There are special issues associated with financing a co-op.  One issue is that many co-op's still own a number of unsold shares (units), which are commonly rented out.  If the co-op still owns too many unsold units or has "foreclosed" on too many shares (units), such properties are difficult to finance.  As a general rule, if the co-op still owns more than 30% of the shares, few banks will finance the project.

So what happens if a balloon payment comes due at a time when the co-op has foreclosed on too many shares (units)?  It's fair to say that there is "big trouble in River City".

There are other issues associated with owning and financing co-ops.  One issue is that the Board of Directions of the corporation has the right to veto an owner's sale of his share (unit).  Madonna once tried to buy a co-op in New York City, but the Board of Directors rejected her application!  The Board of Directors can also forbid or limit a shareholder's ability to rent his unit out.

Another issue with co-ops is that if a number of shareholders are not paying their lease payments and assessments, the remaining shareholders have to come up with the extra money every month to cover the shortfall.  Remember, the corporation owns the building, not the individual occupants.  The mortgage is often huge, and the mortgage loan is in the name of the corporation.  If the bank financing the entire building forecloses, every shareholder is wiped out.  Yikes!

As a result, condominiums have become the preferred method of collective ownership of commercial real estate.  Nevertheless, tens of thousands of apartment buildings and mobile home parks are still owned by co-ops.

Does your co-op need a commercial loan?  if so, please write to me, George Blackburne, at george@blackburne.com.  In the subject line, please write the words, "Co-Op Loan".  Thanks!

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)