Commercial Loans and Fun Blog

I have been blogging recently about how credit unions are emerging as an excellent source for commercial loans. However, not every borrower is eligible for a loan from a credit union.

In the past, you had to work for a company (for example: Lockheed) that had a credit union.  Then the laws changed to allow a lot more people to join credit unions.  Nowadays, if you live in the same community as a community credit union, you can join the credit union and hence be a borrower.

Today we made a fascinating discovery.  We were working on a commercial loan for a dentist who owned a commercial building in Florida that was leased out.  But the dentist lived in California.

We submitted the deal to a Florida credit union located close to the property.  When we asked if this California resident could join and borrow from a Florida credit union, the loan officer replied, "Yes!"  Apparently just owning a commercial property in close proximity to a community credit union gives the borrower enough ties with the community to join the credit union, even if the borrower lives 2,000 miles away!  I was floored by this news.

Earlier in this article I wrote that "not everyone is eligble to borrow from a credit union."  That may not be true! 

So where can you find credit unions hungry for small commercial real estate loans.  C-Loans.com is an excellent place to start.  Dozens of credit unions have recently joined C-Loans in search of good small business loans.  You can submit your commercial loan to 750 different banks, credit unions, conduits, life companies and private commercial lenders in just four minutes using the C-Loans Commercial Mortgage Portal.  And C-Loans is free!

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.  :-)

Credit unions are emerging as a very good source for small commercial loans.  As short as seven years ago, credit unions made less than 1% of all new commercial real estate loans in the country. 

The Credit Union National Association now estimates that its member institutions hold almost 6 percent of small business loans in the U.S., totaling $40 billion.  That is an enormous increase in such a short period of time.   Credit unions are actively filling the void left when commercial banks across the country sharply cut back their volume of new commercial real estate loans.

Credit unions are planning an even larger foray into small business lending.  Lending by credit unions to businesses is currently limited by law to 12.5 percent of total assets, a substantially more restrictive limit than that imposed upon commercial banks.  Legislation is pending in Congress to expand the limit to 27.5 percent of assets.

Credit unions offer lower rates for small commercial real estate loans than commercial banks.  The reason why is because credit unions are exempt from Federal taxation.

Credit unions will also lend more dollars.  We got a quote from a credit union today of 80% loan-to-value.  Eighty percent!!

So where can you find credit unions hungry for small commercial real estate loans.  C-Loans.com is an excellent place to start.  Dozens of credit unions have recently joined C-Loans in search of good small business loans.  You can submit your commercial loan to 750 different banks, credit unions, conduits, life companies and private commercial lenders in just four minutes using the C-Loans Commercial Mortgage Portal.  And C-Loans is free!

Another way to find hungry credit unions is to identify all of the credit unions located within a 30 mile radius of the subject property.  Credit unions are strictly local lenders, so you need to find nearby credit unions for your deal.

So how do you actually find these credit unions?  Simply go to maps.yahoo.com and type in the address of the subject property.  Then, in the "Find a Business" field, type in "banks".  All of the local banks and credit unions will appear plotted on the map.

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The reason why residential real estate brokers are a great source for commercial loans is because they are NOT experts at commercial real estate finance.  They often need the help of a commercial mortgage broker to find a lender for their buyers.

In contrast, commercial real estate brokers ("commercial brokers") are often near-experts at commercial mortgage finance.  Because all of the properties they sell are commercial in nature, they have their own personal stables of bankers and other direct commercial lenders that they use to finance their commercial property sales.

In addition, since they often sit in the same office together, its easy for them to just turn around and ask, "Hey, Steve, what bank do we know that is financing hotels today?"  Therefore these guys often don't need the help of a commercial mortgage broker.  They know this stuff as well as you and me.

There is another reason why I absolutely love residential real estate brokers as a source of commercial loans.  Residential real estate brokers are the guys who list the small commercial properties, like houses converted into small office buildings, small motels, and bread-and-butter mixed use properties, like a small retail shop on a busy strip with a triplex in the back.

And the thing about small commercial loans is that they close!  If your current pipeline is full $5 million and $10 million loans, especially if they are construction loans or international loans, there is a very good chance that every one of your deals will fall out.  Remember, it is the small commercial loans that actually close.

So why won't the big commercial brokers - companies like CB Richard Ellis, Cushman Wakefield, and Marcus & Millichap - list small commercial properties for sale?  They usually don't want to be bothered with properties valued at less than $2 million. 

This means that the owners of small commercial properties are often forced to list their properties for sale will small, mom-and-pop, residential brokerages.  That's wonderful news for us commercial mortgage brokers because the agents in these mom-and-pop shops actually need us. 

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In our first lesson on the Operating Expense Ratio, we said that borrowers and brokers had an incentive to understate their commercial property's operating expenses.  The lower the operating expenses, the larger the commercial loan for which the borrower can qualify.

Commercial lenders therefore use the Operating Expense Ratio to see how much the borrower or broker is fudging his operating expenses.  Below are some reasonable operating expense ratios that commercial real estate lenders will believe:

1. Multifamily:  35% to 45%
2. Triple-Net Leased Buildings:  7% (Management and Replacement Reserves)
3. Self Storage:  25%
4. Mobile Home Parks:  25% to 40%  (Pool?  Clubhouse?  Closer to 40%)
5. Hospitality (Hotels/Motels):  50% to 65%
6. Assisted Living:  85% (That's NOT a typo.)

The owner or broker would be foolish to try to get away with operating expenses that are too much lower than those shown above; otherwise, your commercial lender may apply some punitive assumption (say, a 45% operating expense ratio on a multifamily deal) that will just kill your deal.

Remember, pigs get pleasantly plump.  Hogs get slaughtered.

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Imagine having a list of 2,000 commercial lenders organized by state.  I will trade you a free copy of The Blackburne List for the contact information of just one banker who makes commercial real estate loans.  We solicit these bankers to refer their turndowns to C-Loans.

Got a commercial loan that will qualify at some bank, but you just haven't found the right bank?  Remember, C-Loans.com is free!

Do you need commercial leads?  We sell our commercial leads for just a token fee upfront (1 to $9 each), plus 37.5 bps. when the deal closes.

The Operating Expense Ratio is used by commercial mortgage underwriters to catch commercial borrowers who are trying to cheat.  The Operating Expense Ratio is defined as the Projected Operating Expenses divided by the Effective Gross Income (the Gross Income minus a 5% Reserve for Vacancy & Collection Loss), the result multiplied by 100%.

Operating Expense Ratio = (Projected Operating Expenses / Effective Gross Income) x 100%

Example:  Suppose an apartment building owner is trying to refinance his 64-unit project.  His Projected Operating Expenses for next year, including a 6% off-site property management factor*, is $248,064 per year.  His Projected Gross Income is $1,000 per unit per month, or $64,000 per month.  Assuming a 5% Reserve for Vacancy and Collection Loss, his Effective Gross Income per month is $60,800 (95% of $64,000).  If we anualize that number, we get $729,600.  Therefore:

Operating Expense Ratio = (Operating Expenses / Effective Gross Income) x 100%

Operating Expense Ratio = ($248,064 / $729,600) x 100%

Operating Expense Ratio = 34.0%

*  Even if he manages the property himself, the owner has to figure in the cost of an outside management comapany because if the bank forecloses, the bank certainly isn't going to manage the property itself.

If this ratio is too low, according to industry standards, the commercial lender will simply disregard the projected operating expenses provided by the borrower or broker and use an assumption instead.  This assumption is usually punitive and often kills the deal.

When most commercial mortgage borrowers apply for a new commercial loan, the single most important term in their minds is the loan amount.  Most commercial mortgage borrowers want the largest commercial loan possible.  If a commercial mortgage borrower is buying a property for, say, $1,000,000; he'll usually want to be able to borrow at least $750,000.  This way he only has to put down $250,000 (25% of the $1MM purchase price).

In real life, most commercial mortgage borrowers will choose a $750,000 loan at 5.75% over a $690,000 loan at just 5.0%.  It's the loan size, not the interest rate, that is usually the most important commercial loan term.

The problem, however, is that the commercial loan size is limited by the debt service coverage ratio.  You'll recall that the debt service coverage ratio is defined as the net operating income (NOI) divided by the debt service (annual principal and interest payments on the proposed loan).     Most commercial lenders today require a debt service coverage ratio of at least 1.25.

The higher the NOI, the larger the commercial loan for which the borrower can qualify, given a particular debt service coverage ratio.

Borrowers and brokers therefore have a large incentive to make the projected expenses on their operating statements look as low as possible.  After all, the lower the projected expenses, the higher the NOI appears.  The higher the NOI appears, the larger the commercial loan for which the borrower can qualify.

Commercial lenders therefore must be very suspicious of the projected operating expenses provided by either the borrower or mortgage broker.  The projected operating expenses are often understated or fudged.

So how can a commercial lender check to see if the projected operating expenses are reasonable or understated?  Commercial lenders use the Operating Expense Ratio to check to see if the projected operating expenses are reasonable.

So what are these industry standards for the Operating Expense Ratio?  We will cover them in our next blog article, Operating Expense Ratio II - What Ratios Will Commercial Lenders Believe.

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More commercial real estate loans are ballooning in 2016 than in any year in history.  For well-trained commercial mortgage brokers, it will be like a turkey shoot.

Got a bankable commercial loan?  Find scores of banks hungry to make commercial loans.  And C-Loans is free to borrowers and commercial mortgage brokers.

Imagine coming in to work at your commercial mortgage brokerage practice and finding four or five new commercial loan applications in your email box.  Imagine getting another dozen commercial loan leads calls over the course of the day.  Imagine having a magic button that you can push whenever your volume of commercial loan lead calls starts to fall off.  All of this is possible... if you know how to properly market for commercial real estate loans.

But marketing for commercial real estate loans can be very unrewarding, unless you know precisely what to do.  If you need commercial loan leads, you can easily waste tens of thousands of dollars and years out of your life on commercial loan marketing schemes that are a complete bust.  Imagine spending $10,000 on a large snail-mail campaign to commercial property owners and then not closing a single commercial loan.  Imagine paying $5,000 for a large magazine ad and then not getting a single commercial loan lead.

This is why I have just finished a wonderful new training course for commercial mortgage brokers, SBA lenders, and bank loan officers enitled, Marketing for Commercial Real Estate Loans.  This $199 training course was written in 2012, and it contains all of my latest high-tech techniques for generating commercial loan applications as easily as turning on a spigot.

First of all I will share with you all of the marketing schemes for generating commercial loans that do not work.  Over the past 31 years I wasted over $1 million dollars on marketing schemes that were a complete bust.  I soooo wish I could have taken a course in commercial mortgage marketing instead of wasting that $1 million.  If I had only bought farmland with that $1 million that I had wasted on unsuccessful marketing schemes...

Then I will teach you a number of simple and proven methods for marketing for commercial real estate loans that work as reliably as turning on a water spigot.  This course is written in the form of 52 separate lessons on commercial mortgage marketing.  To see a sample lesson (five slides), please click on the link below:

Please remember to return to this blog article when this mini-course is done.

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This lesson is probably the third most important lesson I will ever teach you.

You should focus-focus-focus your commercial mortgage brokerage practice on your local commercial real estate market. 

Why?  There are several reasons:

1. Commercial mortgage brokerage is all about relationships.  Commercial lenders close deals for their friends (best brokers).  Every commercial mortgage loan ever written had a few black hairs.  Whether a loan officer chooses to fight with Loan Committee in order to push through your deal depends to a very great extend on whether he likes you.
   
   
2. It is much easier to develop a relationship with a lender if you can bring him your packages in person.  You can take the guy to lunch.  You can bring his female assistant flowers and candy (very clever trick once taught to me by the richest commercial mortgage broker in history).  You can play golf with your lender.  You can invite him to your home for dinner or to watch the Super Bowl.  Never forget that commercial lenders close loans for their friends.
   
   
3. You should personally inspect every property that you try to finance.  If you do, you can tell him stuff like, “Bob, I too thought this property was in a tough part of town, but when I drove out there with my wife the other day, I was really impressed by all of the renovation and gentrification going on in the area.”  It’s economically infeasible to inspect commercial properties located more than two hours from your office, so why not focus your marketing on local referral sources (bankers, commercial realtors, etc.) so that the deals they will refer to you will also be local?
   
   
4. The single best way to receive commercial mortgage referrals is to personally call on bankers.  Therefore you should be regularly calling on bankers located closed to your office so that they can refer you local deals.
   
   
5. Commercial real estate brokers are also great referral sources, and it is easy to meet them because their “For Lease” and “For Sale” signs are posted on local commercial buildings all over town.   Since they are local, their listings will also usually be local.  So stay local!
   
   
6. Now if you get a good commercial lead on a property outside of your immediate area, then, by all means, work it.  If you meet a good potential referral source – say, a banker from another state at some lending conference – then, by all means, add him to your email list and mailing list.   I’m just saying that you want the great majority of the potential referral sources on your email list and your snail mail list to be local. 

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.  :-)

When I was around twelve years old, my parents took me to a theater to see an action movie about the ancient Mayans.   I have never forgotten the terrifying scene where the priests dragged a lovely, young Indian maiden up the 200 steps of the their stone pyramid and held her down over a stone altar.  Then an ugly old priest looked up at the Sun God, chanted some nonsense, and drove his knife into the terrified maiden’s chest.  He carved for a minute or two, and then he held up her still-beating heart for all of the people to see.  Yikes!  I was much too young to see such real-life violence.

While that movie scene traumatized me for life, it also helped me to later develop an important theory about commercial real estate finance.

Sacrificial Virgins Theory:  In commercial real estate finance, sometimes a new commercial mortgage broker has to sacrifice five lovely packages on the altar of a new lender before the lender will finally start to seriously look at the broker’s deals.

The commercial real estate loan officers who handle the really large loans for banks and life companies are often swamped with calls.  To handle the volume, they usually turn down almost everything brought to them by newbie mortgage brokers.

When they actually want to close a deal, they work with one of their best brokers, who have been carefully trained to screen out all of the weak deals.  Therefore, when one of these best brokers (aka: Big Boys) calls the lender, the lender knows that his best broker probably has a very good deal in hand.

When a normal mortgage broker calls the bank or life company, the loan officer will listen politely, until he discovers the first black hair on the deal.  Then he will turn down your deal.  Since every commercial loan ever made has a black hair, this means you will always be turned down.  It doesn’t matter how good your deal is.  The loan officer just wants you to go away.

So how do you become a best broker?  You must first sacrifice five packages to this loan officer.  Suppose you have a $5 million office building refinance on your desk.  You can either take the loan to Bank A, a lender with whom you have a relationship, or to Life Company B, a new lender with great rates whom you would like to develop into a regular lender.  To whom should you take your package?

You should take the package to both lenders! 

“But, George, what if they both lenders issue a proposal?”

It won’t happen.  Why?  Because Life Company B is going to turn down your first five deals anyway.  You can therefore use your current package as a sacrificial virgin.

After you have sacrificed five lovely packages on the altar of this lender, he will start to realize that you are a survivor and a producer.  He will then start to train you to become one of his best brokers.

The ultimate irony is that you may someday drag in to this lender a rump-ugly carcass of a deal – a deal that could not hold a candle to the five lovely virgins you sacrificed earlier - and the lender will approve your deal!

Welcome to commercial real estate finance.

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, without having to remember to come back, please fill in your email address in the space provided on the right.

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In addition, most of the large commercial loans we see as mortgage brokers have already been turned down by several banks.  The loan may have been turned down because borrower’s credit was flawed, the borrower lacked enough equity in the property or a large enough cash down payment, the developer was not contributing enough equity into the construction deal, or the borrower’s net worth was too small when compared to the loan amount.  Remember, if a commercial real estate investor is really clean and really strong, he usually has a half-dozen different bankers in his back pocket.

Lastly, even if a mortgage broker is lucky enough to have a perfect large commercial loan in hand, he will often still fail to place the loan because he is not in the Big Boy clique.  Remember, the bank loan officers who close the really large commercial loans are very choosy about the brokers with whom they will work.  They’ll politely take your call, but the moment they discover a black hair – and every deal has a black hair – they will often just shoot you out of the water.

All these things being said, however, a few large commercial loans do sometimes close.  What allows these large loans to close?  Here’s my observation:

Large commercial loans only close when the
mortgage broker doesn’t need the commission.

If the mortgage broker has plenty of dough in the bank, and if he has a huge pipeline of small and/or high-probability commercial loans in processing, the mortgage broker will sound cool, relaxed, funny, and knowledgeable when he presents his large loan to his lender.

But if the mortgage broker needs the large loan to close, the battle is already lost.  The mortgage broker will sound nervous and needy on the phone, so the bank loan officer will already be assuming his “No!” position.

The wise mortgage broker will therefore focus his time on building a huge pipeline of smaller and/or high-probability commercial loans before spending a lot of time trying to close a single large loan.  I’m not saying that you shouldn’t work on a large commercial loan if it falls in your lap.  I’m just saying that you shouldn’t neglect the smaller commercial deals in your pipeline because they are probably the only deals that will close.

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, 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.  :-)

There are a lot of different ways to structure a commercial loan in order to close a tougher deal. Here are just a few:

1. Carrying Back a Second Mortgage on a Different Property. Suppose a seller is motivated to sell his property, and your buyer lacks the full 35% cash down payment often required by banks nowadays. The typical bank will also prohibit junior financing. Here's a trick: Get the seller to carry back his second mortgage on a different property owned by the buyer, say, a rental home or his vacation home.
   
   
2. Subordination for a Partial Paydown.  At Blackburne & Sons, we use this trick all of the time.  Suppose a former seller has a $1 million ballooning note.  Because commercial real estate has fallen about 45% since the start of the Great Recession, perhaps the largest prudent new commercial loan that can be made is just $600,000. Many times the former seller will take just $600,000 now and will subordinate his remaining $400,000 as a second mortgage.  Most banks today will not allow junior financing, but Blackburne & Sons will!
   
   
3. Blanket Other Collateral.  If the deal is close, frequently a commercial lender can be convinced to do the deal if he can also have a second mortgage on the borrower's personal residence and/or another property.
   
   
4. Bring In an Outside Personal Guarantor.  If the borrower's credit is flawed or his net worth is small compared to the loan request, you can often help a commercial lender to get comfortable by bringing in the borrower's father, brother, or friend to personally guarantee the loan.
   
   
5. Have the Borrower Bring Cash to the Closing Table.  Let's suppose the borrower has a $720,000 ballooning loan, but he can only qualify for a $600,000 refinance.  The borrower may be able to raise the remaining $120,000 by selling some stocks, liquidating his IRA, or refinancing his house.
   
   
6. Convince the Bank to Take a Discounted Pay Off (DPO).  Banks have never been more willing to accept 65 cents on the dollar in order to get a commercial loan off the books.  Most banks are under heavy pressure from their regulators to clear their troubled commercial loans off the books.  At Blackburne & Sons, we have seen a great many banks accept DPO's recently.  We love to help borrowers pay off banks at a discount.
   
   
7. Sometimes the Borrower Just Has to Accept a Smaller Loan.  Every borrower wants max cash, but sometimes he just needs to be convinced that you are getting him the most cash that is possible.

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, without having to remember to come back, please fill in your email address in the spcae 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.  :-)