Commercial Loans and Fun Blog

In late May of 1897, the English correspondent for the New York Journal, Frank Marshall White, contacted Mark Twain in London to inquire about his health.  The editors of the newspaper had sent a cable White on May 28, asking him to get Twain’s response to reports that he was on his deathbed in England.

White relayed this request to Twain.  On May 31, 1897, Twain wrote down his response and sent it to White.  The next day, White wrote an article that quoted from Twain’s letter.  On June 2, 1897, the article was published in the New York Journal.  It said, in part:

Uh, where's the Moskva?  Haha!

"Mark Twain was undecided whether to be more amused or annoyed when a Journal representative informed him today of the report in New York that he was dying in poverty in London... The great humorist, while not perhaps very robust, is in the best of health.  He said:

"I can understand perfectly how the report of my illness got about.  I have even heard on good authority that I was dead.  (Haha!  Humorist indeed.)  James Ross Clemens, a cousin of mine, was seriously ill two or three weeks ago in London, but is well now. The report of my illness grew out of his illness.  The report of my death was an exaggeration.”  Source: This Day in Quotes.)

The Coming War With China:

For weeks I was joyous.  Russia was struggling so badly against Ukraine that it occurred to me that China might become less aggressive.  The economic sanctions against Russia have been brutal, and Russia's massive army is bogged down in a slugging match.

Both Russia and the West are finding that their "vast stores" of artillery shells, rockets, missiles, anti-tank missiles, and anti-aircraft missiles are quickly becoming depleted.  And the war has only been going on for two months!  At this rate, the two sides will soon be reduced to throwing rocks at each other.

But My Hopes Were Dashed With the Sinking of the Moskva:

We all chuckled when Russia's flagship in the Black Sea, the huge missile cruiser Moskva, was hit by two Ukrainian Neptune surface-to-sea missiles.  Yay!  Apparently both missiles struck the Moskva, while it was steaming across the Black Sea at night, more than 50 nautical miles from the coast.

This was good news, right?  Both missiles hit a moving ship many miles away at night.  Hellooo?  Surface-to-sea missiles apparently work very, very well.  At any given time, the U.S. Navy operates two to three aircraft carriers within range of China's DF-26 carrier killer missiles.

You desperately WANT servicing!!!

The typical carrier has a crew of 5,000 to 5,2000 sailors, including more than a few women, and carries 24 F-35B's fighter / bombers.  These are the special versions of F-35's that can take off and land vertically.  Each of these F-35's cost around $115 million, and we only have about 700 of them.

Within range?  Holy crap.  China's DF-26 missiles have an effective range... are you ready for this... of 2,000 nautical miles.  Our F-35's can only fly around 1,300 miles round trip.  In other words, we can only attack targets 600 miles away.  It's hard not to be scared.

Economic Sanctions Would Devastate China, Right?:

Yes, they would.  If rational men were making the decision to invade Taiwan, we would be safe.

But here's the deal.  President Xi of China was supposed to resign at the end of his second five-year term.  His predecessor, Hu Jintao, stepped down exactly on the last day of his second term, and he was widely praised for the smooth transition.

President Xi, however, doesn't want to give up power.  Two years ago, Xi manipulated the Communist Party rules to rescind the prohibition against more than two five-year terms.  Uh-oh.  Can you say Dictator-For-Life over 1.4 billion people?

The Presidents of China are elected by the National People's Congress (NPC), and Xi has spent the last three years putting his supporters into place in the National People's Congress.  Anyone who complains is arrested, and they are either shot or imprisoned.

I asked my buddy if he thought Xi would be reelected.  He laughed and suggested that Xi knows how to count.  Xi has made sure that he has enough votes, so when the NPC meets on October 13th to elect its president for the next five years, the issue is fait accompli, which is Latin for "the thing is already done."  

Why You Need to Care About Xi's Refusal to Step Down:

Not every leader in China can be thrilled with the country's new Dictator-For-Life.  Xi has made a ton of boneheaded decisions in the past two years.  For example, Xi picked a border fight with India over some mountaintops that are so high that soldiers on both sides get altitude sickness.  There is nothing of value in those stupid mountains!  He also drove the Philippines back into the arms of the U.S. by trying to seize the Spratly Islands.  

China's domestically-produced COVID vaccines no longer work.  Instead of asking the U.S. to buy Moderna's or Pfizer's vaccines, Xi has locked tens of millions of people in their apartments in Shanghai and other huge cities, while trying to maintain this crazy zero-COVID policy.

Because the Chinese people never got salted with the COVID virus, and because Sinovac and the other Chinese COVID vaccines have fallen to less than 20% effectiveness (due to the Omnicron variants), there is no way out for China.  Millions of people are going to die in China, while the U.S., Europe, and the rest of the world are past the pandemic.  

Someone posted a video on Reddit.com this week of Shanghai's residential apartment towers at night.  Tens of thousands of people were screaming at the top of their lungs to be let out. They were pounding on pots and pans.  It was deafening.  This is going on right now every night in China.  These people have got to be pissed.

Xi has scared so many business owners worldwide with his militarism that company owners are shipping their manufacturing orders to other countries.  Did you know, according to the big investment bank, Piper Jeffries, that China's GDP went negative this quarter?

This is the BEST course I have ever taught.

Do you remember the deal between the Chinese people and the Chinese Communist Party ("CCP")?  The Chinese people will put up with totalitarianism, as long as the CCP continues to grow the country and improve their lives.  Uh, oh.

Soon the Riots May Start:

If Xi falls from power, he will not be allowed to just retire to the country.  His power grab has freaked out so many of China's leaders that he will be taken on a long drive and then shot in a ditch.

If the people in China start to riot - imagine the people of Shanghai breaking out of their apartments like screaming, hungry zombies - Xi will have no choice but to distract his people by invading Taiwan.

China may try to sink an American carrier or two (or three) in the opening minutes of the war, and the sinking of the Moskva suggests that China will be successful.

The sinking of the Moskva suggests that the
Chinese will successfully sink our carriers.

When 5,000+ of our young men and women are being torn apart by sharks, you gotta believe that World War III will be "on."  

Dang.  The rumors that World War III had been called off were greatly exaggerated.

All humor aside, this country desperately needs workers.
Who will assemble our missiles?

Joke Du Jour:

Seeing a homeless guy begging on the street, a woman took pity on him and gave him a handful of change.  “Thank you,” said the homeless man.  “Your generosity is much appreciated.  You know my life used to be great, but just look at the state of me now.”  “How do you mean?” asked the woman.  “Well,” he explained. “I once was a multi-millionaire.  I had bank accounts all over the world, with hundreds of thousands of dollars deposited in each.”  “So where did it all go wrong?” she asked.  The homeless man sighed, “I forgot my mother’s maiden name.”

Quick Review of the Debt Service Coverage Ratio:

Once we get past a quick review of the basics, we will get into today's lesson.  You will recall that commercial real estate lenders usually want the property's net operating income ("NOI") to be higher than the projected loan payments (the "Debt Service").  This extra income provides the lender with a a cushion against vacancies and recessions.

How much higher does the NOI have to be than the projected Debt Service (loan payments)?  This is determined by the Debt Service Coverage Ratio ("DSCR").  

You should be able to say this ratio's name three times in a row very quickly.  Years ago, when I was healthy enough to give nine-hour classes, I would single out a student in the audience and ask,  "What is the name of this ratio again?"  The jumbled answers I would get would soon have the other students in stitches.  "Uh... debt cover ratio?"  "Service debt ratio?"  Hahahaha!

Okay, so what is the Debt Service Coverage Ratio?

DSCR = NOI / Debt Service

The result is usually expressed as something like 1.31 or 1.02.

Conventions When Discussing the DSCR:

The Debt Service Coverage Ratio is alway expressed to two digits to the right of the decimal point; e.g., 1.41, 1.25, or 1.00.  If you express the DSCR with one-digit; e.g., 1.2, or with three-digits; e.g., 1.117, your commercial lender will know that you are a rookie.  In his mind, you're an idiot.  Sorry.  The world is a tough place.

The money in the mortgage business is in loan servicing fees!

A debt service coverage ratio, without a loan constant, is almost meaningless.  You can't just say that the debt service coverage ratio is 1.25.  What interest rate did you use?  What amortization?  A deal may have a 1.25 DSCR at a 3.5%, 30-year constant or a very unsatisfactory 0.92 DSCR at a 6%, 20-year constant.

Most commercial loans, especially those from banks, will be amortized over 25-years.  Therefore, you will usually use a 25-year loan constant.  If a commercial property is older than 40 years, your bank may require a 20-year amortization because the property will not stand forever.  In that case, the commercial loan officer at the bank will use a 20-year constant.  

You, of course, will never submit a commercial loan to a bank asking for a 20-year amortization.  Hellooo?   Your job is to get the borrower the most possible cash.  Your bank commercial loan officer may just automatically use the customary 25-year amortization for commercial loans.

When computing the debt service coverage ratio, you must use annual numbers.  You must use the annual debt service, rather than converting the annual income to a monthly income and then using monthly payments.

Unfortunately for borrowers and brokers, if you compute the debt service coverage ratio using monthly payments, you actually gets you a higher DSCR.  In other words, you might have a deal where the DSCR is 1.23 when computed using the annual debt service and a 1.25 DSCR when computing the ratio using the monthly payments.  That 1.25 DSCR number is sooo important because it is often the minimum DSCR for banks.  

I suppose in this borderline case that you could submit the deal at 1.25 and see what happens.  If you are challenged by the commercial loan officer at the bank, you could always play dumb and show him your monthly calculations.  Worth a try.

Sometimes commercial buildings are so prime that they sell at insanely low cap rates.  When this happens, even commercial loans of just 50% LTV don't cash flow.  But if your borrower is putting down 45% of the purchase price on a super-primo building in a filthy rich area, you should find the closest bank and submit the deal as follows:

Debt Service Coverage Ratio - 0.89% based on a 5.75%, 25-year constant ($237 per month negative)

Even though the DSCR is far less than the usual minimum of 1.25, by showing that the actual amount of the negative cash flow is quite affordable, most banks will approve the loan for your physician borrower (or other high-income borrower).

I went onto Google this afternoon and asked, "Has there ever been a soft landing?"  The answer was interesting.

But before we get into unicorns (the horses with a big wart on their foreheads), soft landings, and other fantasies, let's first define a soft landing.  Adam Hayes, in a superb article for Investopedia, defined a soft landing as follows:

"A soft landing, in economics, is a cyclical downturn that avoids recession.  It typically describes attempts by central banks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a significant increase in unemployment, or a hard landing.  It may also refer to a sector of the economy that is expected to slow down without crashing."

Alan Greenspan, former chair of the Federal Reserve, engineered the only true soft landing in U.S. history from 1994 to 1995, when the Fed raised interest rates enough to slow the economy, but not enough to cause an economic contraction.

With inflation raging at almost 8% annually, and with the construction cost of new homes soaring by 17%, the Fed is receiving heavy criticism for allowing inflation to imbed itself into the economy.  It may take us a decade to unwind this inflationary bonfire.  Wage-push inflation, once ignited, is hard to contain.

Wage-push inflation is an overall rise in the cost of goods and services that results from a rise in wages.  Workers at an Amazon plant this month successfully formed a union, the first for an Amazon plant.  According to Amazon Union's President, workers at another 100 facilities want to unionize.

Inflation is just transitory?  Someone has been smoking dope... not that there is anything wrong with that.  Haha!

The Fed recently announced that will soon start selling off the bonds it holds in its portfolio.  And it has trillions and trillions of dollars worth of bonds.  When the Fed sells off bonds, investors take money out of their bank account and securities accounts to buy them.  This takes money out of the economy.

Think of a slice of bread sopping up some delicious gravy.  Yummy.  In our metaphor, that gravy is the money supply of the country, and a lot of it is suddenly about to get soaked up.

Unfortunately, too much of it.  Far too much.  As a result, the coming stock market and real estate crash is almost certainly going to brutal - at least as bad as the Great Recession.  We are talking about an imminent decline in real estate of at least 45%.  How imminent?  Certainly within the next 18 months and possibly even sooner.

Why is a horrible economic slump so certain?  Answer:  The Fed is about to reduce the money supply at the absolutely worst time.  It's going to be a disaster.

A bad recession is already guaranteed by
the crash in China and the Ukrainian War.

China's once roaring economy has hit a brick wall, and to make matters worse, Covid-19 is raging in Shanghai.  The Chinese people never really got seeded, and their vaccines were not the best.  On top of China's crash is the fact that Ukrainian War has prevented the planting of half of Ukraine's vast wheat fields.  Ukraine is called the bread basket of the world.  Food prices are already rising sharply, and we haven't seen anything yet.  And, of course, oil prices are through the roof.

Therefore the Fed doesn't have to do anything to slow the U.S. economy and to cool inflation.  A major economic slowdown is already baked in, but the Fed won't have the courage to just say so.

Americans are furious with the Fed over inflation.  This is not a good year to be a Democratic Senator or Congressman running for reelection.  Blame will be spread.  Political blood will flow.

Therefore, the Fed is about to make the worst mistake since the Great Depression in 1929.

The Fed is about to greatly reduce the money supply,
just as the U.S. economy enters a bad recession.

It will be like dousing a raging fire with gasoline.  Someone needs to tell Fed Chairman Powell not to start reducing the Fed's portfolio of bonds.  He needs to get up and simply say, "We blew it.  We missed the build-up of inflation.  This was OUR fault; but if we raise rates now, we will crush the U.S. economy."

But I suspect that Fed Chairman Powell lacks the courage to admit his mistake and to resist the pressure to raise rates.  We're toast.

Cute story:  Ted Turner used to own the Turner Broadcasting Company, and his two sons were both highly-paid executives.  He secretly sold out to Time-Warner for $7.5 billion.  If the story is true, he announced the sale for the first time to his sons at a family dinner.  "What about us?" asked one of his sons.  "You're toast," he dryly replied.  Ouch.

So when Fed Chairman Powell fearfully starts selling off bonds, you and I?  We're toast.

My Advice to Mortgage Brokers:

1. Downsize your office immediately.  Negotiate for far less space and MUCH lower rent.
   
   
2. Kick yourself in the butt for not acquiring loan servicing rights.  I have been telling you for years that the real money in the mortgage business is in loan servicing fees.  Mortgage bankers are the guys who service their own loans.  Mortgage bankers survive real estate crashes because they have a steady cash flow.  Mortgage brokers simply get crushed.
   
   
3. Consider getting into the property management business.  Your property management fees may be your only income when real estate falls by 45%.
   
   
4. You love your employees, but if you have more than a dozen, you won't be able to keep them anyway.  Why wait for an economic miracle that is never going to happen?  Why waste the very last of your savings, when you are only going to have to lay them off anyway?  You could use the last dregs of your savings to do some fix-and-flips during the crash.
   
   
5. Don't be too proud to retreat to your house.  Thousands of mortgage brokers work from their homes.  Don't apologize.  Most borrowers will salute your wisdom and envy your commute.  Over the past 42 years, I have been forced to retreat to my house at least four times.  Fortunately, since I began servicing hard money loans, it has not been necessary.  Hint-hint.  "It's the loan servicing income, Stupid!" (President Clinton had a yellow Post-It note on his wall for years.  "It's the economy, Stupid!"  Haha!)
   
   

Joke Du Jour:

Wandering inside a pet store, I stopped in front of a birdcage to admire a parakeet.  We watched each other for a few minutes before it asked, “Can’t you talk?”

Ukraine is Losing the War

We have all relished reading the frequent articles about how the brave Ukrainians, using just anti-tank and anti-aircraft missiles, are devastating the once mighty Russian Army.  Certainly the Ukrainian propaganda industry is waging a brave struggle to maintain the morale of its people.

In truth, however, is that whole Ukrainian towns and cities have been reduced to smoking ruins.  You could be the bravest soldier in the whole wold, but there is no defense to an artillery barrage.  Those inexpensive howitzer shells are heartless, and they tear bodies from limb to limb.  If you go underground, the Russians collapse buildings on top of you.

The U.S., when it invades, first sends in their stealth fighters to destroy the enemy's air defense batteries.  After they are knocked out, the aerial attacks begin, taking out bridges, ammo dumps, military bases, and command and control centers.  American missiles are very accurate, but they are also very expensive.  Finally, the U.S. sends in our infantry, our tanks, and our artillery.

Russia wages war in a far cheaper manner.  They use their tanks to take territory, and then the Russians advance their artillery pieces, hundreds of them, to pound the enemy cities to rubble.  At the end of World War II, when Russia invaded Germany and attacked Berlin, the Russians were said to have had tens of thousands of howitzers, aligned wheel-to-wheel, stretching for miles.  For miles!

Russia has not been using its best tanks either.  Most modern tanks have reactive armor, which fires off an explosive charge, the moment before impact, to destroy incoming missiles.  The tanks the Russians have been using are their old, obsolete tanks, which have no reactive armor.  In the meantime, the Ukrainian are burning through thousands of expensive anti-tank missiles.  The West does not have an unlimited supply of these advanced anti-tank missiles, and NATO stockpiles are dwindling.

Like the rebel cities in Syria, the cities of Ukraine are doomed because the Ukrainians lack the means to reach those Russian howitzers - which fire relentless salvos of cheap, high-explosive rounds - from ten to twenty miles behind the lines.  It sucks.  Perhaps the Russians are not completely inept.  

How Putin's Botched Invasion May Prevent World War III

If 4,000 Russian nuclear missiles are currently headed towards the United States, kindly disregard this article. I was an idiot.  Haha!  Otherwise, one could make a good argument that Putin’s botched invasion of Ukraine may have just prevented World War III.

The hold of the Chinese Communist Party (“CCP”) over 1.4 billion Chinese citizens has been based for decades on an implied contract.  The Chinese people will put up with their totalitarian government, as long as the CCP materially improved the lives of the Chinese people every year.  To their credit, the CCP has delivered for decades.

But right now, China has more economic problems than Carters has pills. Their real estate and construction industry, which used to contribute 29% of their total GDP, has hit a brick wall, due to over-building. 

China has made so many military threats against its neighbors that war with the West began to look almost inevitable.  Who wants to rely on parts and products from a country that might soon be subject to a blockade? 

The real money in this business is in servicing fees.

As a result, companies worldwide have started to move their parts manufacturing facilities to other countries, like Vietnam, Bangladesh, and Thailand. Opening a manufacturing plant in China is now almost viewed as unpatriotic.

China has driven into retirement twenty of their largest entrepreneurs - their great capitalists, like Elon Musk - all for the sin of becoming too rich.  By becoming Soup Nazi’s about COVID, they have shut down huge manufacturing centers, forcing even more worldwide companies to find alternative suppliers.

China has also destroyed its own own access to the international investment banking community.  "China is uninvestible, in my opinion, at this point," the bond king, Jeffrey Gundlach, recently told Yahoo Finance.  Hong Kong and U.S.-listed Chinese stocks witnessed their worst selloffs since the Great Financial Crisis.

Economically, China is screwed.  Personally I think we have already witnessed Peak China.  So what will President Xi of China do when his people start protesting their declining economic prosperity?  His plan used to be that he would rally his people to attack Taiwan. There’s nothing like a good war to defuse civil unrest and to get citizens to rally around the flag.

The U.S. would likely defend Taiwan, especially if China sank some of our carriers in the opening minutes of the war.  That war might have lasted for decades, and there is no guarantee that the U.S. would have won.

Finally we get to my point.  As horrible as Putin’s invasion of Ukraine has been, the invasion has opened the eyes of China’s leadership. (1) Complete economic sanctions can devastate your economy.  (2)  Your precious trillion-dollar foreign reserves can be seized in an instant.  (3)  That huge hoard of gold you keep with the New York Fed?  It’s not there.  It was sold off or loaned out decades ago.  (4) Lastly, inexperienced troops perform very poorly in combat.

One reason why so many Russian generals are getting killed is because they have to get right up there at the front, showing the troops how to perform the most mundane of attacks.  (We have also been hacking their unencrypted cell phone calls.)

Two-thousand years ago, the battle-tested Roman Legions were usually outnumbered at least three-to-one when they fought barbarians, but their superior training, tactics, and experience would usually produce wildly one-sided body counts.

The Chinese Army is far less effective than the Roman Legions.  When China invaded Vietnam in 1979, China’s Army performed so poorly as to be embarrassing.  To this day, China’s military leadership is also keenly aware of the fact that the Chinese Army has very few experienced NCO's and veterans.  The poor performance of the Russian Army has to remind them of China’s own military weaknesses.

So will China still invade Taiwan in the Spring of 2023?  I used to think that the invasion was inevitable.  Now… maybe not.  But to those of you who think that a conventional World War is out of the question, I say to you, “History does not always happen to the other guy."

If you are listening to and reading the news, and you are alert to this issue about the breakdown in world trade, you too will see the signs everywhere.

There was a time when you could walk into a Wal-Mart store and be stunned at the low prices.  Bicycles that retailed for $275 ten years earlier could be purchased for just $79.  

The reason why was because the world was (relatively) at peace, and free trade was at its apex.  While that bicycle may have have been assembled in China, the tires might have come from Indonesia.  The seat covers may have come from Bangladesh, and the sprockets may have come from South Korea.  World trade was humming.

In the early 19th Century (1800's), the famous economist, David Ricardo, advocated for world trade, and he coined the expression, comparative advantage.

Comparative advantage is working at what you do best, while also giving up the least.  For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing.  This is because you’ll make far more money as a plumber.

The opportunity cost of babysitting, on the other hand, is high.  Every hour you spend babysitting is an hour’s worth of lost revenue you could have earned from a plumbing job.  

If you are better than everyone else in the neighborhood at both plumbing and babysitting, you have absolute advantage in both fields; but plumbing is still your comparative advantage.

David Ricardo is also credited with being the first economist to systematically consider how two economies can benefit if they choose to trade.  He suggested that if one country could produce an item at lower opportunity cost than another country, and the other country could produce a different item at a lower opportunity cost, both countries could benefit by trading some of the goods that they were better at producing for some of the goods the other country was better at producing.

The whole world benefits when countries
specialize in what they do best.

This is what is breaking down across the world.

Russia and the Ukraine are the breadbasket of the world.  Collectively they produce 30% of the world's wheat.  Right now Ukrainian farmers should be fertilizing their winter wheat, but they have no diesel fuel with which to run their farm equipment.  One desperate farmer even resorted to siphoning diesel from a gully next to a destroyed Russian tanker truck.

Ukrainian wheat farmers also desperately need more fertilizer.  Ammonium nitrate, urea, and potash are all key ingredients in the production of fertilizer.  Russia accounts for 23% of ammonia production globally, as well as 14% of urea and 21% of potash production.  In response to Western economic sanctions, Russia just banned the export of ammonia, urea, and potash.

Expecting far lower yields, yesterday Ukraine banned the export of wheat.  Countries in the Levant - the countries along the Eastern coast of the Mediterranean Sea - used to get almost half of their wheat from Ukraine.  From where will it now come?  At a minimum, the price of wheat worldwide will be painfully high.  For third world countries, the poor may simply be unable to afford it.  Will there be bloody riots in Egypt?

Will farmers in the Ukraine even be allowed to plant?  Will Russia be allowed to sell its wheat?  Farm land prices here in the U.S. are skyrocketing.  We can grow more wheat here in the U.S., but that takes away land from corn and soybean production (feed for livestock).  Meat prices will surely be increasing.

Then there is China.  The cold war between China and the rest of the world is causing many international companies to seek alternative locations for their parts plants.   China is no longer a reliable parts supplier because it may soon invade Taiwan.  Crushing sanctions would surely follow, and trade with China would come to a screeching halt.  How are you going to get widget parts for your huge doohickey plant in France or the United States when China is blockaded?

It's going to take some time before Vietnam, Bangladesh, and India can pick up the parts manufacturing slack.  At a minimum, costs will be higher.

And that assumes that enough container ships survive a shooting war with China.  If American aircraft carriers are sinking, you can bet that it will be open season on container ships and oil tankers going into and out of China.

Then there is nickel.  Every electric vehicle ("EV") battery requires a a heavy chunk of nickel.  The latest and greatest EV batteries, the ones that get the super-extended mileage, use significantly more nickel than the first generation EV batteries.  

And guess which country produces the most nickel?  You got it.  Russia.  Three days ago, Russia banned the export of nickel.  Yes, there are alternative sources of nickel, but they are much more expensive, and it will take some time for these mines to ramp up.  If you owned a nickel mine, would you invest millions to increase production, when Putin could be assassinated by his own generals at any time?  Just sayin'.

Where will this all end?  Will the standard of living of almost everyone on Earth fall by 40%?  More?  I dunno.  Things could get ugly.

Why do you care?  You may deeply and intimately care when the U.S. stock market finally wakes up to the threat that world trade is breaking down.

Mini-Lesson #1:

Banks and credit unions make 90% of all commercial real estate loans.  If you need a commercial loan, your first thought should be of a bank.  From now on, whenever I say, "bank", please think of either a bank or a credit union.

Mini-Lesson #2:

Banks greatly prefer to make commercial real estate loans located close to one of their branches.  Forget about some New York bank coming in with much lower rates.  The commercial lender with the lowest rate will almost always be the bank located right next door to the property.  If an Iowa deal falls in your lap, you can instantly and easily search either C-Loans.com or CommercialMortgage.com for a half-dozen nearby banks in Iowa.

Mini-Lesson #3:

Banks largely charge the same rates and terms.  The idea of shopping banks for a lower rate is usually an exercise in futility.  Well, that's not complete true.  Banks price their commercial real estate loans at between 275 to 350 basis points over five-year Treasuries, so there is a tiny bit of play there.  The loan will have a term of ten years.  It will have a fixed rate.  There will be one rate readjustment after five years, according to any changes in five-year Treasuries. 

Mini-Lesson #4:

If you have a near-bankable deal, but the borrower's credit has some blemishes, take the deal to a credit union, rather than to a bank.  Credit unions are a little more forgiving about credit, perhaps because they are non-profit organizations.  In addition, credit unions are often desperate for loans.  People just don't think about credit unions when they need a commercial loan.  The reason why is because until twelve years ago, credit unions weren't even allowed to make commercial real estate loans.

Mini-Lesson #5:

Match the size of your commercial loan to the size of the bank.  Take small loans (less than $2 million) to small banks and credit unions.  Take medium-sized commercial loans ($2 million to $8 million) to mid-sized banks, which are often known as regional banks (lending in three or more different states).  Take large loans (over $8 million) to one of the top fifty banks by asset size, which have asset sizes larger than $50 billion.  You'll immediately recognize the names of most of these big banks.

Mini-Lesson #6:

Ideally your borrower will have plenty of liquidity at the time he applies for any bank loan.  Remember, banks only like to make loans to borrowers who don't need the money.  You might even have to refinance the borrower's home and put the proceeds in a bank account, just to show your commercial lender that your borrower has plenty of liquidity.

Mini-Lesson #7:

One of the best ways to get a bank to do a deal is to tell the bank that your borrower will move his company's business accounts to the bank if they will make the loan.  This technique isn't as important as in years past because most banks have more deposits right now than they can possibly use.

Mini-Lesson #8:

Construction loans are made by banks and credit unions.  Banks love-love-love to make construction loans because they are short term deals.  Another reason why banks love to make construction loans is because the bank earns its loan fee on the entire amount of the loan, even though for most of the term of the loan, the bank has only released a few pennies.  The effect on the bank's yield is delicious.

Mini-Lesson #9:

Construction loans are almost always made by local lenders.  The reason why is because the bank's loan officer has to run out to the property regularly to verify that construction is proceeding according to the plans and specifications and to verify that construction is on schedule.  These short site visits are called progress inspections.  Because of the need to conduct six to eight progress inspections on every project, banks only make construction loans close to their office.  

Mini-Lesson #10:

The single most important thing I ever learned about commercial real estate finance ("CREF") is that banks makes commercial loans for their friends.  The smart commercial mortgage banker therefore becomes buddies with his bank loan officer.  I once knew of a very successful commercial mortgage banker who brought cocaine and hookers with him whenever he brought a new commercial loan application to his bank loan officer.  He made the equivalent today of over a $1 million per year in fees, but the drugs eventually caught up with him.  He ended up living in a homeless shelter on Skid Row in San Francisco.  Many of his questionable commercial loans ended up going bad, and the S&L went bankrupt.  Maybe the lesson to be learned is to bring cocaine and hookers when you bring your commercial loans to the bank.  Haha!

Just kidding!

Super Bowl Joke:

My cousin just texted me.  "I know it’s late notice, but a friend of mine has two tickets for the Super Bowl this Sunday, February 13th.  They are box seats, and he paid $3,500 per ticket, which includes the ride to and from his house, lunch, dinner, a $400 bar tab, and a pass to the winner’s locker room after the game.  What he didn’t realize when he bought them last year was that it’s on the same day as his wedding.
 
If you are interested, he is looking for someone to take his place.   It’s at St. Paul’s Church at 3:00 p.m.  Her name is Ashley.   She’s 5’4,” about 100 pounds, a good cook, loves to fish and hunt, and will clean your truck.  She’ll be the one in the white dress.
 
Please let me know if you (or someone you know) is interested."

A Different Commercial Mortgage Portal:

I have spent countless hours over the past two months adding hundreds of new banks to CommercialMortgage.com ("CMDC").  Geez, guys, I have added a TON of them.  We must have close to 3,000 banks and other commercial real estate lenders now on CMDC, far more than on C-Loans.com.

You can look up hungry commercial lenders on CMDC in a tenth the time it takes to prepare a loan application on C-Loans.com, but you can NOT submit a deal using CMDC.  All you can do is look up some names, phone numbers, and email addresses on suitable commercial lenders.  

You have to actually reach out to these lenders from CommercialMortgage.com.  In contrast, when you use C-Loans.com, the lenders pursue you.  I think its worth it to spend a little more time to create an application on C-Loans because you can submit your deals to dozens and dozens of different commercial lenders in minutes.

During the Great Recession, most commercial mortgage brokers were driven out of the business.  Those few old veterans who somehow managed to survive did so by submitting their deals to two-hundred to three-hundred different lenders before finding a lender brave enough to fund a commercial loan.  C-Loans.com is good for work like this.

Today's Commercial Loan Tip:

When you submit a commercial loan to a salaried banker, he is not even going to open it until you follow up that submission with a phone call.  He won't even open your email or package.

You have to call him and bug him, without appearing to bug him.  Here's the best way to do it:  "Hey, Steve, I realize that you have not had time to open my package yet.  I'm just calling today to confirm receipt of the package."

This phone call tells him two important things.  (1) The deal is still alive; and (2) You have not shotgunned the deal to twenty lenders.

Those are the magic words.  Remember them.  Use them.  Unless you call and gently bug him, your commercial lender is not even going to open your package.  Remember, bankers work on salaries.  Enough said.

Where We Get These 3,000+ Banks:

We here at C-Loans.com have some awesome commercial real estate finance training courses.   Not every starving mortgage broker can afford to buy the training, so we we will trade free access to one training course for each commercial real estate loan officer working for a bank or credit union that they introduce to us.  

These commercial loan officers must work for a FDIC-insured bank or NCUIF-insured credit union.  Their branch must have a big 'ole vault.  Lots of bullpoopers call themselves bankers.  Does he have a million-ton vault in his office?  If not, he's not a banker.

For example, let's suppose you'd like to learn how to market for commercial loans.  You can trade one of these special bankers for a copy of the course.

Or perhaps you would like to learn the terminology and the ratios of commercial real estate finance.  You can trade me a special banker for a copy of my Income Property Underwriting Manual.

Need a fee agreement for commercial mortgage brokerage?

How about a regional copy of The Blackburne List, which contains 750 commercial real estate lenders near you.

Final Funny:

At work, I've got the ear of my boss... I'm still not convinced we should pay the ransom.

Joke Du Jour:

Brad lives in California.  He was sick of the world, Covid-19, Trump, Russian belligerence, China, global warming, racial tensions, and the rest of the disturbing stories that occupy media headlines.

Brad drove his car into his garage and then sealed every doorway and window as best he could.  He got back into his car and wound down all the windows, selected his favorite radio station and started the car.  Two days later, a worried neighbor peered through his garage window and saw him in the car.  She notified the emergency services, and they broke in, pulling Brad from the car.  A little sip of water and, surprisingly, he was in perfect condition; but his Tesla had a dead battery.

Banks Are About To Get Fickle:

The first thing you need to understand is that 95% of all commercial real estate loans are portfolio loans.  A portfolio loan is one where the lender does NOT intend to sell the loan off in the secondary market.  It intends to keep the loan on its books for the entire term.  

And your bank may simply not feel like making any commercial loans today.  "Not tonight, honey."  Story of my life.  Haha!

Will China's real estate bust spread to the U.S.?  Will China's slowdown cause a bad recession here in the U.S.?  The Fed is raising interest rates, and soft landings are like unicorns; i.e., few have ever seen one.  The price of Bitcoin is down sharply.  Will Bitcoin be the malinvestment - a boneheaded investment like see-through office buildings, dot-com stocks, and subprime mortgages - of the next major economic downturn?

And then there is Russia.  What the heck is Putin playing at?  Russia's puny economy can't support an army in the field in the Ukraine.  Russia's GDP is no larger that that of the State of New York; but a war in the Ukraine is bound to make American bankers nervous.   

My point is that there are lots of reasons for banks to get squirrelly right now; so you should simply plan on it.  It you submit an absolutely perfect commercial loan to three different banks these days, you can expect at least two of them to flake out on you.

Submission Tip:

In my career I have submitted the same commercial loan to two different loan officers at the same bank, maybe a week apart, only to have one of them close it.

You can always tell when you get a sleepy or indifferent loan officer.  Don't ignore your instincts.  Pull the deal, wait a few days, and then submit it to a different loan officer at the same bank.

Geez, guys, hard money loan servicing is not that hard!
The real money is in loan servicing fees.

Use C-Loans.com

This is going to sound like a sales pitch, but when you use C-Loans.com, you can submit the same deal to six different banks at a time.  Then, the moment just one of those six banks sounds squirrelly, immediately go back into C-Loans.com and submit your deal to six more banks.

Words of Death:

"Gee, George, I've looked at your commercial deal, and I'm not sure..."  Translation:  Your deal has a stake through the heart, it has a bullet in the brain, and it has Ebola.

Immediately go back into C-Loans.com and re-submit your commercial loan to six more lenders.  Just one bank gets flakey, and you re-submit to SIX MORE banks - six to one.

When interest rates are rising, and when banks fear the next recession, banks can become extremely unreliable.  Expect a lot of turndowns in the coming years, the ugly end of the real estate cycle.  

If you have a balloon payment coming due in the few years, you really need to get off the couch and start working on the refinance of your commercial loan.

My Paranoia Over China:

I greatly fear that the Chinese economy will crumble and that President Xi, in order to distract his people from his boneheaded economic decisions*, will invade Taiwan and start World War III.  We could easily lose that war, as the Chinese Communist Party pressed its 1.4 billion people to build tens of thousands of long-range and highly-accurate missiles.

Some recent fuel for my nightmare:

1. We have all heard of Evergrande's $300 billion debt problems, but the next shoe to drop may be China's high-speed railway corporation, which has US$850 billion+ in debt and which is bleeding money in buckets.  Remember, folks, we do not want China's economy to collapse.  We do not want President Xi to be desperate.  He could start World War III.
   
   
2. Contrary to what I wrote last week, our new mid-air refueling drones are apparently suffering from some serious design problems.  The refueling arms don't work.  Yikes.  Remember, right now, the Chinese can hit us with their long-range missiles with near-impunity.  Our wildly expensive F35 fighter-bombers lack the range to strike back.  We desperately needed those refueling drones, but it looks like they will not be ready by T-Day, the early weeks of March 2023, when the Chinese are most likely to invade Taiwan.
   
   
3. The Chinese this week tested a satellite with arms, which grabbed one of their own failed satellites and placed it in a graveyard orbit, where it won't collide with anyone else's satellites.  I see no potential offensive military use of this new satellite with arms.  Do you?  Without our satellites, the U.S. is blind.  If I was a Chinese admiral, and war between the U.S. and China was about to break out, I would surface a submarine in the Gulf of Mexico and fire enough conventional missiles to destroy all four of Space X's missile manufacturing and launching complexes.  America would soon be blind.

*Xi's Most Recent Boneheaded Economic Mistakes:

China generated great wealth by becoming the manufacturing hub of the entire world; but with his continuing threats against Taiwan, the U.S., India, Australia, the Philippines, and Japan, President Xi has alerted the world that these manufacturing plants may soon be cut off during a war.  Who wants their business to rely solely on parts from a totalitarian country that is threatening war?

To make matters worse, China's zero-COVID policy is locking down tens of millions of workers, who used to make parts for the world's companies.  These companies are now rapidly looking for alternative manufacturing sites in places like Vietnam, Thailand, and Bangladesh.

So real estate in China, which used to account for 29% of their GDP, is contracting.  President Xi has scared the heck out foreign investors, with crackdowns on large public companies, like Alibaba, Tencent, and DiDi (their version of Uber).  He has also driven China's top twenty billionaire Elon Musk's into virtual hiding.  

And you don't believe we're on the Eve of Destruction?  People told me I was absolutely nuts when I predicted a crash and outright deflation in 2007.  I even wrote a book.  

This isn't an ego thing.  I definitely want to be wrong, folks!  Let's all have a beer and laugh like hell at me in late 2023, when the Chinese decide not to invade.  Haha!

Learn an Entire Profession For Free:

My $549 nine-hour training course, How to Broker Commercial Loans, teaches you an entire profession, including marketing, underwriting, packaging, placement, and fee collection.  You can obtain a free copy of this popular training course by finding me twenty bankers who make commercial real estate loans.  Here is how you can quickly build a list of bankers and later use it to solicit hem for referrals.

Final Funny:

Seeing a homeless guy begging on the street, a woman took pity on him and gave him a handful of change.  “Thank you,” said the homeless man. “Your generosity is much appreciated.  You know my life used to be great, but just look at the state of me now.”

“How do you mean?” asked the woman.  “Well,” he explained. “I was a multi-millionaire.  I had bank accounts all over the world with hundreds of thousands of dollars deposited in each.”  “So where did it all go wrong?” she asked.  The homeless man sighed, “I forgot my mother’s maiden name.”

Every day you meet good potential business contacts.  Maybe you're a plastic surgeon, with your own private practice.  You meet a beautician at Supercuts, while getting your own ears lowered.  Could she refer you a new patient in need of some rhinoplasty?  You betcha.

You play golf with a new physician buddy, who is a general practitioner.  New contact for your email list?  Absolutely. 

I have personally added six to eight new contacts - people whom I have met in the legitimate course of business - to my mailing list (email list modernly) every single day for 44 years.  Every day.  I hope you'll agree that we've had some fun together.

Okay, so what do you send them?  Well, how about the best jokes and memes that your own buddies send you?  Need more?  There are tons of sites on the internet with jokes and funny memes, like dailyhaha.com. I enjoy a free subscription to six different daily joke email newsletters.  Part of my job is to sit around and read jokes.  Haha!  

Maybe you might show your contacts some of the wonderful plastic surgery work being done by Doctors Without Borders, correcting, say, some unfortunate third world children born with a cleft palate.  Maybe there is a new surgical procedure to tighten up excess skin.  If you look, you'll find something interesting to share every couple of weeks.

Okay, but where do you maintain this email list.  We here at Blackburne and Sons have worked well with iContact.com.  They not only provide the software to maintain your email list, but they will also provide email templates and blast out your newsletters for you.   They do all of this for you for just a few hundred dollars per month.

Templates, huh?  You have to be professional, right?  No-no-no!

Oh, my goodness.  Have you ever read a "professional" newsletter from a CPA?  I am asleep in ten seconds.  ZZZ.  Never-ever-ever try to be professional.  Professional is boring.  No one reads boring stuff.

Want to be rich?  Then write to your contacts as if they were your friends and sitting next to you in a bar.  Violate every rule your English teacher ever taught you.  Use contractions.  Use incomplete sentences.  Use lots of slang.  Start sentences with the word, "and" or "but."  Write the way people speak in real life.

True Story:

I am sitting in a bar watching an Indianapolis Colts game.  A forty-year-old man sits down next to me, along with this lovely 32-year-old wife.  Somehow we get on the subject of children.  (I am constantly boasting about mine.)  He announces that he and his wife do not intend to have children.  Too many problems in the world.  Yada-yada.  

I look over at his beautiful wife, and I see the pain in her eyes.  Then I tell this guy that he is missing out on the greatest joy on earth, like the time that my wonderful first-born son came from behind 14-0 at the Junior National Fencing Championship... and won 15-14.   Or the time when my second son, a natural athlete, hit four straight three-pointers in the fourth quarter of his basketball game.  Or the time when my miracle daughter (eleven in vitro fertilization attempt$$$) smashed the winning goal in the Sectional Soccer Championship against her arch-rivals.

"You are missing out, sir, on the greatest joy on Earth."  We exchanged phone numbers.  Twelve months later, I got a text, "Well, George, we listened.  We went right home and created our beautiful baby boy.  Thank you!"  And he was indeed a beautiful little boy.  [Proud grin]

So back to today's marketing tip:  I urge you to be conspicuously unprofessional and to write to you contacts like they were your buddies  And don't worry about having the most professional-looking newsletter.  You don't want to be professional.  You want to be fun!  People read fun newsletters.

Okay, let's start small.  Find a shoe box.  Every time you meet a new contact - maybe a CPA or a real estate broker - scribble his contact information on a pink message slip and throw it in the shoebox.  

Smart Tip:

Also write down the date and how you met him.  "Met Steve at the National Realtor's Convention in May of 2022."

When you get 200 contacts in your shoebox, ask your ten-year-old kid to set you up on iContact.  After that, add all your new contacts directly into iContact.  Every day.  I am semi-retired, but I still add six to eight new contacts every single day.

Don't worry if your newsletter is butt-ugly.  I want it to be butt-ugly.  For twenty-five years, I just typed my company address at the top of a piece of copy machine paper and started adding my corny jokes and interesting stories.  

Someday I'll tell you about The Hot Zone and my newsletter about it.  Ebola became airborne and almost killed us all.  My best newsletter ever - just typed on copy machine paper.

My buddy, Tom Harrier of Integrity Commercial Loans, just wrote me, "Soranus was a Greek physician.  I wonder if he was a proctologist?"  Hahahaha!

Okay, so you guys know that I live in Indianapolis, Indiana, even though my company remains in California.  Grandchildren.  Indianapolis is a lovely, lush, green city, with oodles of water.  It gets only the occasional dusting of snow.  The state has a balanced budget, a surplus actually.  The city is a wonderful place for my son, Tom, to raise our grandchildren.

Anyway, somebody sent me a cute Indiana joke:  Hey, have you heard about the latest anonymous sperm bank being established by the State of Indiana?  It will be called "Hoosier Daddy!"  Hahahaha.

Different Subject - Investments:  Investors may want to think twice about putting their money to work in China, contends DoubleLine founder Jeffrey Gundlach.

"China is uninvestible, in my opinion, at this point," the bond king told Yahoo Finance in an interview at his California estate. "I've never invested in China long or short.  Why is that?  I don't trust the data (George:  He means their hogwash GDP numbers).  I don't trust the relationship between the United States and China anymore.  I think that investments in China could be confiscated.  I think there's a risk of that."

Joke:  A fellow came into a bar and ordered a martini.  Before drinking it, he removed the olive and carefully put it into a glass jar.  Then he ordered another martini and did the same thing.  After an hour, when he was full of martinis and the jar was full of olives, he staggered out.  "Well," said a customer, "I never saw anything as peculiar as that!"  "What's so peculiar about it?" the bartender said. "His wife sent him out for a jar of olives."

A Little More About China:  With his military aggression and his threats to invade Taiwan, President Xi has encouraged India (no technological slouches themselves) and Japan to rapidly re-arm.  

Here's something that is kind of funny.  Under their Constitution, Japan's Self Defense Force was not allowed to have aircraft carriers; but they were allowed to have "helicopter carriers."  With the risk of war increasing, these helicopter carriers are now all carrying American-made F-35B fighter jets.  F-35B fighter jets take off vertically, just like a helicopter.  Haha!

Dad Joke:  "Whenever the cashier at the grocery store asks my dad if he would like the milk in a bag he replies, ‘No, just leave it in the carton!’"

Final Thoughts on China:  The Chinese Communist Party meets in the Fall of 2022 to choose its next leader.  President Xi has stacked the deck with his cronies to give himself an unprecedented and previously illegal third term.

Six months ago, President Xi was a shoo-in.  Today, it is clear that he lacks unanimous support.  His expensive $1.5 trillion Belt and Road Initiative is clearly out of favor with both his party and the world.  Countries are defaulting on these huge Chinese loans, and China has foreclosed on the national assets of several tiny countries.  Four Chinese factories were burned in Miramar (Burma) this month.  It's kind of nice not to be Evil Empire in the eyes of the world.

Joke:  When I look at chocolate, I hear two voices in my head. The first one says, "You need to eat the chocolate.”  The second one says, "You heard.  Eat the chocolate."

With the Evergrande Crisis revealing to the world that much of China's massive GDP has been in the construction of vacant apartments and vacant cities in Bum Flowers, Egypt (okay, China, haha) -

there is a growing view that China's GDP
will never catch that of the United States.

Final Funny:

Little Johnny:  “Having a farm is really hard work.”
Billy:  “It’s an ant farm Johnny, all you have to do is supervise.”