Commercial Loans and Fun Blog

If you are a commercial mortgage broker and you're struggling, you should probably only work on small commercial loans.  Large commercial loans rarely close these days.  Here's why:

To close a large commercial loan today, you will pretty much have to work with a bank.  There are no large hard money bridge loan funds anymore.  I am talking about subprime (hard money) mortgage funds of $150 million or larger.  They all kaput, wiped out by commercial real estate depression that started in 2007.  (If anyone knows of a large commercial morgtgage fund that is still doing deals, please write to me at george@blackburne.com.)

Now a number of smaller commercial mortgage funds have started up since the real estate depression began, but most of them are still fairly small.  Remember, most funds have operating agreements whereby the sponsor of the fund is not allowed to add any loan to the fund that is larger than 5% of the total fund balance.  This means that if you were trying to place a $15 million bridge loan, you would have to place it with a fund of at least $300 million.  I am not sure there are any surviving mortgage funds that large.

This means that you will have to try to place your $15 million deal with a bank.  Yikes.  Good luck on that.  You could easily shop the deal to 40 banks and not find a single one in the mood to make a $15 million loan today.  And if you can't place your deal with a bank, you're stuck.  You have no reliable hard money lender waiting in the wings.

But if you work on small commercial loans, and 40 banks turn your deal down, you can always take your $750,000 deal to a hard money commercial lender like Blackburne & Sons.  All of your effort trying to place the deal with a bank will not have been in vain.  At least you will still close the deal and get paid.

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The CMBS industry is picking up again.  This is the industry that originates large, fairly standard commercial real estate loans and then securitizes them.

Earlier in the year, when it appeared that we were headed for a double-dip recession, investor appetite declined sharply for commercial mortgage-backed securities.  Investors would only buy these bonds if the rates were much higher.  In the parlance of the industry, the spreads or margins over corresponding Treasuries spiked sharply.

In recent weeks, however, spreads have leveled off, so many CMBS lenders are eager to close new loans in order to meet their year-end loan production targets.  This is a very good time to submit your commercial real estate loan to a CMBS lender.  You can do so by using C-Loans.com.

CMBS lenders are once again making loans on hotels, as long as the loan is larger than $5 million.  In the future it is anticipated that this loan minimum will come down, as CMBS lenders hire more staff.  In the meantime, hotel owners needing loans of less than $5 million should apply for an SBA loan.  You can apply for both CMBS loans and SBA loans using C-Loans.com.

The SBA is now, for the first time, issuing loan guarantees on self-storage projects.  In the past such projects did not qualify because they did not create a lot of jobs.  You can apply to scores of SBA lenders using C-Loans.com.

The SBA has been very disappointed by the volume of new SBA 504 loans originated this year.  Therefore, in order to encourage more lending, they are now allowing the SBA 504 program to be used to refinance maturing loans (this change was made about a year ago) AND if a 504 borrower is refinancing a ballooning loan, he can now pull extra cash out of his owner-used commercial property - up to 90% LTV - to reduce his paybles, to pay salaries, or even to use for operating capital!  You ca apply to scores of hungry SBA lenders by clicking here.

I have been in commercial real estate finance for more than 31 years.  During that time I have never seen an international commercial real estate loan ever close!

Every day I run across developers seeking commercial construction loans in Mexico or Poland or some other far-off locale.  To the best of my knowledge, none of them ever get funded by American lenders.

The problem is one of taxation.  If a Chinese bank based in Hong Kong were to make a big loan here in the states, the US government would levy a foreign lender tax of 30% of it's interest income!   Most countries do the same to foreign banks trying to lend in their own country.  (The way this problem is solved is that the Chinese bank starts a subsidiary bank here in the US and the subsidiary makes loans in the US.)

So if you are seeking a loan in Mexico, go to a Mexican bank.  Go local.  It's generally the right way to go.

But now I have a confession to make.  I actually do know of an international loan that closed.  A hard money lender on C-Loans.com at the time made a $3 million loan on a $20 million free-and-clear golf course and residential subdivision in Mexico.  The loan was guaranteed by three pro atheletes, with a combined net worth in the range of $100 million.  The hard money lender charged 15% and 15 points for an 18 month interest-only loan.  I know the deal closed because C-Loans.com actually got paid on it.

So how did this hard money lender get around the taxation issue?  Shhhh.  They didn't tell anybody they were making the loan.

But as you can see, getting a U.S. lender to make a commercial real estate loan offshore is phenomenally expensive and has about the same chance of closing as the lovely Jackyln Smith (the original Charlie's Angel) has of falling in love with rump-ugly 'ole George Blackburne III.  It ain't likely to happen, folks.

If you need a commercial mortgage loan here in the United States, you can find 750 different and hungry commercial mortgage lenders on C-Loans.com.

Suppose your client is trying to buy a commercial property with a down payment of just 10%.  His plan is to have the seller carry back a second mortgage on the commercial property equal to 15% of the purchase price.  He will then try to get a loan from a commercial bank for 75% of the purchase price.

Unfortunately the plan will not work.  Most banks and all CMBS lenders forbid second mortgages on the property at the time of the purchase.  (Many CMBS lenders WILL allow a mezzanine loan, however.)

So why are second mortgages forbidden on the sale of commercial properties.  The reason is because commercial lenders fear that the property owner, if cash gets tight, will use the repair money to make the payments on the second mortgage rather than to maintain the property.

A good solution is to have the seller carry back the second mortgage on another property owned by the buyer, say a rental duplex or a different office building.

When you apply for a commercial mortgage loan using C-Loans, we have a special section called "Special Issues" where you can describe the junior financing that you hope the bank will alllow the seller to carry.  C-Loans is a great way to quickly present your deal to 30 lenders to find the one lender aggressive enough to help your client.

My own private money commercial mortgage company, Blackburne & Sons, will, in many cases allow, the seller to carry back a second mortgage.

Here's a common situation.  An investor buys a commercial building for $1 million in 2005, before the Great Recession.  He puts 40% down, and a bank makes him a $600,000 new first mortgage.  The Great Recession hits.  The property falls to just $600,000 in value.  Now the property is 100% financed. 

Then, to add insult to injury, the bank's 5-year loan balloons.  The borrower applies all over town for a new first mortgage, but no one will make a loan larger than $375,000.  Everyone is demanding that the borrower bring $225,000 in cash to the closing table to pay off the ballooning loan.  He doesn't have it.

Therefore the borrower goes to he first mortgage holder, the bank, and begs them to take a $225,000 discount.  They refuse, BUT they save they would take $375,000 now and would subordinate their remaining $225,000 balance to a new first mortgage.  Hooray.

But when the borrower goes back and tells the new potential first mortgage lenders about his new plan, they all say, "Sorry, but we do not allow secondary financing."  Every banks says the same thing.

Blackburne & Sons would make that deal.  Blackburne & Sons allows secondary financing!

The concept of equity is far more complicated than you probably think; but if you want to play in the big leagues of commercial mortgage finance and structured finance, you need to be able to understand the dozen or so different meanings of the word, equity.

Let's take an easy example first - the equity in your home.   Your house is worth $400,000.  You have a $250,000 mortgage against it.  The difference between the value of your house and what you owe against it is your equity - or $150,000 in this case.

Can a business have equity?  Let's say your mortgage business is worth $2 million because you have a huge book of repeat clients.  The company owes $30,000 on a car loan, $75,000 on your furniture loan, and another $95,000 to the bank on its line of credit.   The difference between the value of company ($2 million) and the debt against the company ($200,000) is the owner's equity in the company ($1,800,000).  So you can have equity in a company, just as you can have equity in real estate.

In fact, investment bankers (think: stockbrokers) are in business of raising both debt (think: loans) and equity (think:  investments by outsiders) for corporations.  In order to raise equity dollars for a corporation, an investment banker will find buyers for the corporation's stock.  The difference between the assets of a corporation and its liabilities is called the stockholder's equity.

Now the wonderful thing about equity is that equity has no required payments.  If you borrow from the bank to grow your company, you might have to make payments of, say, $9,000 per month.  If the economy goes into a severe recession, you may not be able to make your $9,000 monthly payments.  The bank might foreclose and wipe you out.  You could lose your company.

But if you were able to raise the money to expand your business or to renovate your apartment building by selling equity, you would be far better off in a recession.  There are no required payments on equity investments.  You do not have to declare a dividend to the stockholders if the company is struggling.  The investors in common stock cannot foreclose on your company if you cannot afford to pay them a dividend.  They just have to wait until better times to get a return on their investments.

Equity investments are risky because the equity investors are the last to be paid if the company or project fails and the assets are sold off to pay the creditors.

Suppose you cannot afford to make the monthly payments on your house.  You can't even afford repairs.  The house deteriorates, so it is now only worth $360,000.  The mortgage has been unpaid for months, and with interest and penalties, the balance grows to $290,000.  The house sells at the foreclosure sale for only $300,000 because hardly anyone ever bids at foreclosure sales in real life.  Guess what?  The bank gets their entire $290,000 and the owner - the equity investor - only gets $10,000.

The equity investors are the last to be paid when a business or a piece of real estate is sold off to pay the debt.  The equity investors take the biggest risk.

Equity also is an important concept in construction financing.  Suppose a project will cost $10 million to build.  The bank will usually insist that the owner of the project (the developer) must put up 20% of the total cost of the project, or $2 million in this case.  This $2 million is the developer's equity contribution and can consist of his equity in the land, any costs he has pre-paid (architectural fees, engineering fees, etc.), and the cash he can bring to the loan closing.

What if the developer doesn't have enough equity dollars in the project?  The developer can sell part-ownership of the project to some rich doctors that he knows in order to raise more equity.

Another alternative would be to get a mezzanine loan (sort of like a second mortgage) behind the construction loan.

Finally, the developer can go to a company that specializes in raising equity dollars for real estate projects.  You can think of real estate equity investors as venture capitalists who help provide the equity required by construction lenders.  In return for their equity investments, these investors typically require a preferred return (they get paid before the developer gets paid anything), as well as a large share of the ownership of the project.

As you can see, equity means a lot of different things, depending on the context.  But the important concept to understand is that equity provides a protective buffer for the  lender, and from the lender's point of view, the more equity, the better.

It is possible to finance a commercial property in Chapter 11 bankruptcy, but only with the court's permission.

Suppose the Jones family is in the business of manufacturing widgets.  The Jones family owns the industrial building occupied by Jones Widgets, Inc.   The property is worth $1 million.

Suppose further that Hometown Bank has an existing $400,000 first mortgage on this industrial building, and the loan has matured.  The Jones family therefore has to obtain a new first mortgage to pay off the $400,000 balloon payment.

Peter Jones therefore applies to First National Bank of Hometown for a new loan to pay off the balloon. Several months go by, and the maturity date comes and goes; but Mr. Jones assures Hometown Bank that  his refinance is almost completed.

Suddenly, for no justifiable reason, First National Bank of Hometown decides not to make the loan.  Now Peter Jones is in trouble.  Hometown Bank has filed for foreclose, the foreclosure sale is in one week, and he is in danger of losing a $1 million property for a lousy $400,000 loan!

Fortunately the government has a procedure where creditors (lenders) can be held at bay while a solvent family or business rearranges its finances.  This procedure is called a Chapter 11 Reorganization Bankruptcy.  While filing bankruptcy will smear the credit and good name of the Jones family, it sure beats losing $600,000 in equity.

Now the $24,000 question.  Can the Jones family get a loan to pay off Hometown Bank while they are in a Chapter 11 Bankruptcy?  The answer is yes, as long as they get the court's permission.  Be careful here.  It is not the bankruptcy trustee's permission that you need.  It is the court's permission!  A letter from the bankruptcy trustee will NOT suffice.

While a debtor, here the Jones family, is in a Chapter 11 Bankruptcy, they are no longer the legal owners of their assets.  Those assets are owned by the bankruptcy court trustee in trust for the unpaid creditors.  Fortunately the Jones family gets to keep living in their home, driving their cars, and Jones Widgets, Inc. gets to stay in the industrial building while the Jones family is in Chapter 11 Bankruptcy.  This is because there is a presumption that the Jones family will be able to sell off some of their assets and pay all of their creditors.  Therefore they get to keep their stuff ... at least for awhile.  They are called debtors-in-possssion (of the assets).

While a hard money commercial mortgage lender (like Blackburne & Sons) would be happy to make a $400,000 loan on a $1 million building to pay off Hometown Bank, Peter Jones no longer has title to the industrial building in order to give the lender first mortgage title.

But all is not lost.  The hard money lender merely issues a commitment letter that the Jones attorney will take to the bankruptcy court.  The court will smell the deal, make sure that there is enough money to pay everyone, and then give it's legal blessing (in the form of an order).  The Jones attorney will give a copy of the order to the hard money lender and the title insurance company, and the hard money mortgage company will make the loan.

If you own a commercial property, and you are in bankruptcy, you can apply directly to Blackburne & Sons by clicking on this easy mini-app.

If you are a commercial mortgage broker or a commercial lender, you can supercharge your volume of new commercial loans by using marketing leverage.

Just imagine that you had a magic machine that multiplied every one of your marketing dollars by 400.  For example, if you had just $100 to spend on marketing for commercial loans, this magic machine would suddenly turn that $100 marketing budget into a $4,000 marketing budget.  Wouldn’t that be wonderful?

Such a magic machine actually exists.  It’s not really a machine but rather a technique to take advantage of marketing leverage.

Here is that magical technique:

Advertise to the companies that are currently advertising.

Here’s how it works.  The typical residential mortgage broker spends around $400 per month on marketing for mortgages.   If you can reach this residential mortgage broker every three weeks with a $1 mail piece, and if he refers you every commercial loan request generated by his $400 marketing budget, then you have just achieved a 400:1 marketing leverage.

You can also achieve marketing leverage by mailing to banks and other commercial lenders.  The typical commercial lender spends far more than $400 per month advertising for loans. 

In theory, you could achieve similar marketing leverage working with a commercial real estate brokerage company sending newsletters or email newsletters to commercial property owners.  If you could somehow hitch a ride in their newsletters, in return for a promise to pay them referral fees, you will have achieved substantial marketing leverage.

So look for mortgage companies and mortgage lenders that are advertising heavily for mortgage loans.  These will be the guys with the most commercial leads to refer your way.

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Over the past 31 years I have invested at least $250,000 in advertising directly to the public for the commercial real estate loans. I have tried postcards, newspaper display ads, classified ads, magazine ads, bulk mail, and individually word-processed letters.

Every such marketing campaign directed at the public for commercial loans was a complete and utter failure.

There are two reasons why.

1. There are home loan lenders who will refinance your home with no points and no closing costs.  In stark contrast, commercial mortgages commonly require $3,000 to $4,000 appraisals and $2,000 to $3,000 toxic reports, in addition to points, closing costs, and legal fees.  The transaction costs are therefore very high.  As a result, few commercial real estate investors refinance their properties more often than once every five to ten years.  If you try to advertise directly to the public for commercial real estate loans, the chances that your mailer or advertisement will reach a commercial property owner at the exact moment he is in the mood to borrow, in real life, is very slim. 
   
   
2. Commercial property owners almost always call their own bank first before looking elsewhere for a commercial real estate loan.  Rather than respond to your ad in some magazine or newspaper, they will call their buddy at the bank first.

It really doesn't matter why advertising directly to the public for commercial real estate loans doesn't work, as long as you don't waste your precious marketing dollars trying.  Been there.  Done that.  My T-shirt says, "Wasted a Quarter Million Dollars."

So what does work?  Order our 90-minute video training course, "How to Market for Commercial Real Estate Loans."

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Commercial real estate brokers are a great source of leads for commercial loans. They call themselves "commercial brokers", even though a particular commercial broker may only have a real estate salesman's license, as opposed to an actual broker's license.

The typical commercial broker will have a dozen or so core clients.  These are wealthy real estate investors who each might own three to six commercial properties.  Since most commercial real estate loans have a balloon payment every five to ten years, these 12 core real estate investors will have balloon payments coming due on a regular basis.

The typical commercial broker handles many duties for his core clients, often including helping them refinance their ballooning commercial loans.  Since he seldom earns a fee for helping his clients place their commercial loans, the typical commercial broker is very receptive to solicitations from commercial mortgage brokers.  He views a commercial mortgage broker as someone who is going to reduce his work load.

While many residential brokers treat mortgage brokers like dog poop, commercial brokers treat mortgage brokers like dear friends.  This courtesy extends all the way to the receptionist.  If you call the receptionist of a commercial brokerage company, she will often and cheerfully provide you with a list of all of the brokers in the office and their email addresses!

It's therefore easy to build as huge email list of commercial brokers in your city.  Simply look for realty signs on commercial buildings that read, "For Lease" or "For Sale".  Dictate the phone number of these commercial realty offices into the tape recorder application on your smart phone.  Then, when you get back to the office, simply call the receptionist and ask her to please email you a list of the brokers in the office.

If you need a commercial real estate loan, and the deal is slightly flawed, you should take it to a bank located close to the property.  Most commercial real estate lenders greatly prefer to lend close to one of their offices.

Let's suppose that the commercial property that you are trying to finance is a very successful restaurant in the very best location in town.  Now banks normally do not like to make loans on restaurants because of the high failure rate.  If a local banker, however, dines regularly at the restaurant and appreciates the fact that this particular restaurant business is thriving, there is an excellent chance that he'll still make this commercial real estate loan.

Here's another example.  Suppose your borrower has credit that is slightly dinged, and most of the big banks have already turned down his commercial real estate loan request.  This is another example of where you should take his commercial real estate loan to the small bank located just down the street.

This small, local bank will probably demand a higher interest rate than Wells Fargo Bank or PNC Bank, but their rate will, almost certainly, be a whole lot better than even the cheapest commercial hard money lender, like Blackburne & Sons.

Banks will ocassionally make a near-hard-money quality commercial real estate loan simply because the commercial property is located close to their bank, and they are very comfortable with its value.

Using maps.yahoo.com you can easily pinpoint nearby banks to any property in America.  Simply type in the address of the commercial property that you are trying to finance, and then ask the software to plot all of the nearby banks.  (Use the "Find a Business" field and type in "bank".)  Or you can simply go to C-Loans.com and choose six banks located close to the property.