Commercial Loans and Fun Blog

There is a big difference between an application fee and a deposit for third party reports.

Application fees are greatly abused by con men to steal millions of dollars from unsuspecting commercial loan borrowers every year.  If you are reading this article because some so-called "commercial lender" is demanding some huge application fee, trust your instincts.  You are probably being conned.

The way the con works is that some company with a fancy sounding name offers you a very generous amount of money at an interest rate that sounds irresistible - say, 80% loan-to-value at 3% fixed for fifteen years.

To get the loan, all you have to do is to give the "commercial lender" an application fee of $20,000.  Once the "commercial lender" has your money, he disappears and ghosts you.  

Here is a longer article I have written on the subject of advance fee fraud (application fee fraud) that should be very helpful for you.

But... life is complicated.  Legitimate commercial lenders, like banks, hard money commercial lenders, and Blackburne & Sons, my own hard money shop, still have to order third party reports in order to make commercial real estate loans.

The borrower doesn't want to pay for third party reports unless his loan is already approved, but the commercial lender can't approve the commercial loan request until it reviews the third party reports.  It's almost a Catch-22.  The way this Catch-22 is solved is through the issuance of term sheets.

What is a Term Sheet?

If your borrower receives a term sheet, it generally means that his loan is going to be approved, assuming the property appraises for enough money and the toxic report comes back clear.

Term sheets are sometimes also called conditional commitment letters, proposal letters, or good faith letters.

Okay, so the commercial loan marketplace is flooded with advance fee scammers.  At the same time, legitimate commercial lenders still need to collect $3,000 to $4,500 for third party reports.

How to Spot Advance Fee Scammers:

So how does a layman tell a legitimate commercial lender from an advance fee scammer?  Here are some clues:

Banks and credit unions are clearly legitimate commercial lenders; but be careful of any "commercial lender" masquerading as a bank.  It is illegal for a non-bank to use the words, "bank," "banc," or "bankers" its name.  For example, the names Northwestern Bankers or Wilmington Banc Mortgage are illegal if these "commercial lenders" are not actual FDIC-insured banks.

The following will sound obvious, but you will be surprised at how many commercial borrowers, desperate for a loan, will ignore it:  In order to be a legitimate commercial lender, you have to have money to lend.  

Banks and credit unions get their dough from depositors.  Life companies get their lending dough from insurance premiums.  Hard money lenders have funds, or they syndicate groups of private investors.

But where on earth does Northwestern Bankers get its dough to lend?  The con man better have a pretty good story.

Take a look at the so-called "commercial lender's" website.  Commercial loans are usually large loans, so the website should be very, very extensive.  

Here's a quick tell.  If the website lacks a physical street address, the "commercial lender" is a con man.  These con men don't want angry victims showing up in their office.

Here is another great tell:  When you call the lender, does a real-life person answer the phone?  Or do you have to leave a phone number and wait for a call back?  Remember, con men need to screen every call to avoid getting a tongue-lashing from furious past victims.

Legitimate commercial lenders are never-ever-ever international lenders.  That great offer from a Swiss life insurance company?  Uh-huh.  It's a con.  There are huge tax penalties levied on foreign lenders trying to lend in the U.S.  We don't want Germany's largest bank undercutting JP Morgan Chase, so we tax them into oblivion.

Lastly, be very wary of commercial loan offers that are almost too good to be true.  They are cons.  The difference between the cheapest commercial lender in the country and the second cheapest is a mere 1/8th of one percent.

If all of the banks in town are offering 5.5% and some other "commercial lender" is offering 3.5%, what on earth is going on?  To get all of the business, a hungry bank merely has to lower its rate to 5.25%.  Why go all the way to 3.5%?  It makes no sense from a capitalistic point of view.  It's a con.

One lender offers you 80% LTV at 3.5% fixed for 30 years.  A strange, unknown hard money lender offers you 55% LTV at 14% for two years.  Which one is the con man?  I hope by now you will immediately say the first offer.

I tend to trust very expensive, very conservative, very short term offers.

But be very careful of the lightning fast loan commitment at outrageous rates based on 50% of "quick sale value."  What the heck is quick sale value?  There is no enforceable definition in the law.  

The lender will charge you a $200,000 commitment fee for a $10 million commercial loan, as long as the loan does not exceed 50% of quick sale value.  

When the appraiser goes out, he values your $20 million resort at just $7 million on a quick sale basis.  The lender then offers to fund a $3.5 million loan, when you owe $7 million.  When you decline it, the lender keeps your $200,000 deposit and blames you for over-valuing your property.

I am shocked - shocked I tell you - that there are con men in this business.

Please follow my logic.

The Chinese people distrust banks for historical reasons.  They therefore keep much of their savings in real estate.  Usually they buy apartments (think of condo's) that neither they, nor any renters, will ever occupy - at least not for a decade or two.

These apartments are often unfinished.  They have rough electrical and rough plumbing, but these apartments often don't even have interior walls, finished electrical, finished plumbing, or floor coverings.

Surprisingly, there are no real estate taxes in China, so the cost of ownership is low, other than the mortgage.  Paying down on the mortgage, like the funding of an IRA, is how the Chinese people save.  Most of the savings of the Chinese middle class is in the form of these extra 50 million to 65 million vacant apartments.

New homes sales by Evergrande, China's second largest home builder, have fallen by a stunning 97%.  Sales of homes by other home builders have plummeted as well.  Who wants to buy a home today when the price will be significantly lower in two months... and perhaps 30% lower a year from now?

Since the Chinese keep their savings in these apartments, and since sales of apartments are plummeting, a great many of the Chinese middle class suddenly lack access to their emergency savings.   With no apartment buyers, they can't get at their dough.

Suppose you're a middle-class Chinese worker.  Do you feel comfortable enough, with your savings tied up for the next four years, to buy a new car this year?  Or do you muddle through with your old one?  

Or suppose you owned a small manufacturing company in China.  You build little parts that go into some other parts that eventually go into machines assembled by large companies.  Would you right now (1) open a second assembly line to expand your business; or (2) get more conservative with your spending until you have rebuilt your emergency savings in the form of cash?

Now imagine similar decisions being made all throughout China.  China's middle class consumers - who number more than the entire US population - must be cutting back significantly on their consumption.

And remember, the Evergrande default is only three weeks old.

If China goes into a great recession (can there be any doubt?) - like we did in 1986, 2000, and 2008 - will this financial contagion remain in the peeing section of the Chinese swimming pool?

What Keeps Me Up At Night:

Living through a world war is not always the fate of some other guy.  Did you know that World War I was once called, The War to End All Wars?  As Dr. Phil might have asked, "How did that work out for you?"

President XI this week will re-write the election laws that will help him cement his position as Dictator-For-Life of China at a big party meeting in the Fall of 2022.  Now I have to believe that there are some people in China, including many quiet ones in the Chinese Communist Party, who are very upset by this.  If President Xi is ever deposed, I doubt his enemies will allow him to quietly retire to a house in the country.  I'm thinking he would be taken on a long car ride, and he would never be seen again.

Absolute power corrupts absolutely.  There is significant evidence that President Xi is taking the Chinese economy in the wrong direction.  For example, he is waging a secret police war on the very billionaires who created the so-called "Chinese Economic Miracle."  As a result, many of these billionaires have retired in the past nine months.  Imagine the loss to the American economy if Elon Musk retired.  Xi has forced at least 20 of these super-capitalists to retire.

Okay, so suppose a garden-variety real estate bust drives China into a garden-variety great recession.  I say "garden-variety" because we have had three such crashes in my lifetime - the S&L Crisis, the Dot-Com Meltdown, and Great Recession.  We'll probably have another one when China's crash reaches us.

What should China do?  Chinese regulators should let their most reckless banks fail and bail out the rest, making sure that the economy still has plenty of credit to recover.

China should also just let real estate crash, until prices reach "rock bottom."  Japan failed to allow their real estate market to bottom out in 1989, and their economy suffered for two Lost Decades.  Real estate is NOT going to zero.  It will likely crash by 45%, just like ours did in 1986, 2000, and 2008.  China needs to let over-leveraged investors go bust, to teach the market a lesson.  Prudence.  Thrift.

This tendency to make the same boneheaded economic mistakes every ten to fourteen years is not a capitalist thing.  It's not a communist thing.  President Xi and the CCP arguably did nothing wrong.

Jesus' first miracle was to change water into wine, remember?

This boom-bust cycle is just a strong tendency of human beings to forget thrift (the admirable trait of saving), to borrow too much money, and to speculate.  This strong tendency reminds me of that scene with the moth, attracted by the porch light, in the kid's cartoon movie, It's a Bugs Life.  "No, Harry, don't look at the light!"  "I can't help it.  It's so beautiful."  Zap.

But China won't let the crash just play out.  The Chinese Communist Party ("CCP") is afraid of its own people.  (These are not my words.)  The deal between the Chinese people and the CCP is that the people will endure the CCP's repression in exchange for the CCP improving their lives by 6% to 8% every year.

But clearly that "economic miracle" cannot continue straight up.  Just like a forest needs forest fires to clear out the undergrowth, so too does an economy need busts to clear out the old, weak companies.  The old, weak companies need to fail, so their workers and machines can be picked up by younger, more vibrant companies.  The famous economist,  Joseph Schumpeter in 1942 called this process, creative destruction.  It is also sometimes referred to as Schumpeter's Gale (a gale of destruction).

But it won't happen in China.  The Communists will paper over the crash.  For example, the Chinese government has essentially assumed the debts of Evergrande. It is the Chinese government that is really making the interest payments to Evergrande's bond holders.  The CCP will try to contain this garden-variety great recession through money printing, the bailing out of failing businesses, propaganda, and sleight of hand.

But just as Miami may someday be unable to contain rising seawater, so too the communists may be unable to contain the dramatic slowing of their economy.  They can't prop up every company.

My fear is that when the Chinese people realize that the quality of their lives is going backwards, they will begin to protest.  To stop the protests and riots, Xi will move to unite the people against a common enemy - the United States.  He will order the invasion of Taiwan and start the next world war.   Starting a war to unite the people is an old trick, but it works.

Okay, what should you do?  I was about to say watch the price of gold and use it as a signal as to when to get out of stocks.  Then I looked up the price of gold.  Gold is up to over $1,860 per ounce.  Maybe gold's recent move is just in response to inflation. Maybe that's it.  By the way, when markets crash, everything goes up for sale at fire sale prices, including gold.  But maybe the smart money is starting to hedge.

My view that war is almost inevitable and fairly imminent is still the minority view, but if you listen to the admirals and generals on the news these days, it's a view that is gathering support.  For example, China is practicing missile fire at mock-ups of US carriers and warships in the desert this week.  A new congressional study was just released that concluded that China has the military capability to win right now.  I humbly predict that China will invade Taiwan in March of 2023, after Xi is confirmed as President For Life in the Fall of 2022 and when the tides in the South China Sea will permit an invasion.

But no matter what, China's economy is slowing dramatically.  This can't be good for the world's economy and your stock portfolio.

Commercial real estate appraisals can be quite extensive, as thick as thirty to fifty pages. The appraiser needs to determine, for example, if each lease provided to the appraiser reflects the current market rent of the property or whether the rental amount is out-of-date, meaning it is too high or too low.  The lease might even be fraudulent.  This can often only be determined by checking the rents of a number of similar properties nearby. 

Did the borrower provide the appraiser with his actual operating expenses or did he fraudulently slip in some understated expense numbers, in order to make his net operating income look higher?

The appraiser also has to carefully analyze the cost of the commercial building's construction, to help determine the fair market value of the building and to determine if the rental rate is reasonable.

Image if a developer could build an office building for just $1 million and lease it out for $1 million per year.  Clearly something is wrong; otherwise, why aren't capitalistic developers rushing to build competing office buildings?  That lease for $1 million per year smells awfully fishy.    

Whether the borrower pays $2,000 to $2,500 for a commercial appraisal or $4,000 to $4,500 for the appraisal depends on the qualifications of the appraiser.

It is the commercial lender who determines the minimum qualifications of the appraiser.  If the loan amount is small, a bank may only require a General Certified Appraiser.  If the loan amount is large, or if the property type is unusual (think movie complex), the bank will likely require a MAI appraiser.

Uh, 68?

A General Certified Appraiser is one who has been extensively training in the three approaches to value - the Income Approach, the Sales Comparison Approach, and the Cost Approach.  In order to be awarded the General Certified Appraiser designation, the state will usually require a large number of training courses in the valuation of commercial property, will test the candidate extensively, and will require that he or she have a certain level of appraisal experience.

General Certified Appraisers are usually pretty good, and they typically charge between $2,000 to $2,500 for an appraisal of a commercial property valued up to $6 million or so. Small banks and hard money lenders are the commercial lenders who will most often require just a General Certified Appraiser.

Larger banks, when valuing commercial properties worth more than $6 million to $7 million or so, will usually require a MAI Appraisal.

MAI stands for Member, Appraisal Institute, a private, well-respected professional  association.  The Appraisal Institute defines a MAI Appraiser as an appraiser who is  experienced in the valuation and evaluation of commercial, industrial, residential, and other types of properties, and who advise clients on real estate investment decisions.

MAI Appraisers are like the CPA's of the appraisal industry.  They are the top of the food chain.  They are most highly trained and experienced commercial real estate appraisers in the industry.  

MAI Appraisers will typically charge between $4,000 to $10,000 for an appraisal assignment.  For most commercial property owners, borrowing from a bank, the MAI appraisal will cost you between $4,000 and $4,500.

Borrowers, brokers, and mortgage brokers should never order the appraisal themselves.  If they do, the cheapest commercial lenders will NOT be able to use it.  

Do you remember the Savings and Loan Crisis back in 1986, when over 1,000 S&L's went bankrupt?  They lost billions of dollars, in large part due to bad appraisals.  Developers were ordering the appraisals themselves from crooked MAI appraisers.  They would shop an appraisal assignment until a MAI Appraiser promised to bring in the appraisal at the value the developer wanted.  The joke back in those days was that MAI stood for "Made As Instructed."  

The law that eventually cleaned up the appraisal industry was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 - pronounced FIRREA (like diarrhea).  

Geesch, everyone is getting stuck in the stocks.

After the passage of FIRREA, state laws were passed to license and regulate real estate appraiser.  The appraisal industry became far more professional and ethical, and the prestige of the Appraisal Institute itself recovered its lustrous reputation.

But let's get back to the issue that a borrower or a broker must never order the appraisal themselves.  Under FIRREA, it is illegal for an insured bank or savings and loan association to accept and use an appraisal ordered by a borrower or a broker.

It is too late?  Are you stuck with a $2,000 or $4,000 appraisal that no bank will accept?  My own hard money shop, Blackburne & Sons, will often accept commercial real estate appraisals ordered by competing lenders.

Heavens, I miss 'ole Al Bundy.  Katie Sagal got hit by a car and
hospitalized this month while walking across the street.  She's okay.

So you're thinking about buying a commercial property - maybe a small apartment building or an office building.  

As a general rule, commercial real estate lenders are more conservative than conventional home loans lenders.  Conventional home loans lenders will regularly make purchase money first mortgages that are 80% loan-to-value.  You might say that 80% loan-to-value ("LTV") is the standard LTV for home loans, sort of the "default mode" for such loans.

By the way, a conventional home loan is one where the loan is not guaranteed by the government.  Examples of government-guaranteed home loans include FHA loans and VA loans.  When the government is willing to guarantee the lender against loss, obviously the lender will increase its loan-to-value ratio.

Earlier I used the expression, purchase money first mortgage.  A purchase money first mortgage is one where the loan is used to buy the property, as opposed to a refinance, where the loan proceeds might be used to start a business or pay for your kid's college tuition.

The standard or "default mode" for a purchase money first mortgage to buy an apartment building is a loan of 75% loan-to-value.  If you shop dozens of small banks and credit it unions located close to the property that you are buying, it would not be shocking if one of them - because they happened to be flush with cash - would offer to make you an apartment loan of 80% loan-to-value.

Is a triplex an apartment building?  No.  Multifamily properties have five or more rental units.  Loans on duplexes, triplexes, and four-plexes are actually considered home loans.  Why?  Both Fannie Mae and Freddie Mac will buy loans on one-to-four family dwellings.  As a result, home loans of up to 80% LTV are common on four-plexes.

Okay, but what if you want to buy a small strip center or a small multi-tenant office building to provide income for your retirement?  How large of a downpayment will you have to raise?

In most cases, if you want to buy a commercial-investment property, you will probably have to put 30% down.  If the deal is small, and if you shop 30 or more banks and credit unions located close to the subject property, you just might find one willing to allow you to put just 25% down.

What if the seller is willing to carry back a second mortgage on the property?  Can you put down less money?  Unfortunately not.  Prior the the Great Recession, some banks allowed this; but these banks got crushed in the crash.  Bank regulators will no longer allow second mortgages behind bank first mortgages - neither on purchase money deals, nor later, when there is sometimes TONS of equity.  They won't allow it.    The bank will make you you refinance the entire first mortgage to access that equity.

But wait, as they say in the Ronco commercials, there's more.  If you are trying to buy a commercial-investment property, and the seller is willing to carry back a second mortgage for some of the purchase price, you should apply to Blackburne & Sons.  Unlike banks, we will allow such second mortgages.

Okay, but what if you are trying to buy a commercial or industrial property for your company to occupy and use?  By all means, if your downpayment is an issue, you should apply for an SBA or a USDA loan.

You have probably heard about the SBA loan program.  If your business is older than three years, SBA lenders will lend you up to 90% of the purchase price of a building that you intend to use for your business.

What if your business is less than three years old?  The SBA will probably require that you you put 30% down.

Okay, you have heard of the SBA loan program; but what is this USDA loan that I mentioned above.  The US Department of Agriculture, in order to bring jobs to financially depressed rural areas, has developed a program that is very similar to the SBA loan program.  It's called the USDA Business and Industries loan program.

Click here to apply for a USDA Business and Industries loan.  When the system asks for "Loan Type," simply click on USDA B&I Loan.

Please keep in mind that (1) the Chinese economy is already starting to crumble; (2) the collapse will likely resemble the collapse of the Japanese economy in 1989, leading to the Lost Decade in Japan; (3) President Xi and the Chinese Communist Party ("CCP") will almost certainly be blamed; (4) President Xi will be at great risk of losing power and quite possibly being quietly shot in some cell in a remote prison; and finally, in desperation (5) President Xi will distract the Chinese populace from the collapsing economy and will unite them by invading Taiwan.

Students of history and wave theory can spot humans making
the same boneheaded decisions every generation.

The invasion of Taiwan will require the destruction of the U.S. air bases on Guam, and likely also those in Japan.  Otherwise, the U.S. and its allies will enjoy air superiority.  It is interesting to note that the U.S. military required the participation last week of all 3,000 civilians located near its airbases in Japan in an evacuation drill.

Guam is a U.S. territory, and neither Japan nor the United States are likely to tolerate missile attacks on their sovereign territory.  These missile attacks will probably start World War III, a conventional (non-nuclear) war fought with missiles, jets, and warships.  According the last three war games, the United States and its allies will lose this war.  

We just can't reach the bastards with our conventional weapons.  Our jets can't fly far enough to reach their missile launchers, and the range of their best (and most expensive) missiles is more than twice (three times?) as far.  It will be like a bully in the school yard, holding the forehead of the smaller guy, while the little guy swings at the air.

I try to have fun with this blog, but this is serious stuff.

A buddy of mine asked.  "Can't we just nuke the bastards?"  Between our nuclear triad (intercontinental nuclear missiles, our long-range intercontinental bombers, and our 72 nuclear submarines), we have enough firepower to destroy every town larger than 10,000 people in all of China; but as my Hong Kong buddy recently pointed out, "George, you could kill a billion of us, and we would still have more population than you."  Oh.

But we will never use nuclear weapons, just like we will never use our 2,000 canisters of anthrax or our 20,000 poison gas howitzer rounds.  China has boomers (submarines with nuclear missiles) too, and they are building a whole desert full of intercontinental missile silos.  Almost every human in the United States could die.  At least in a Chinese invasion, maybe our younger children might be allowed to survive.

Interesting note:  While China tested a hypersonic missile last week that flew around the world and then attacked a test target (missed it by a number of miles), someone in our Defense Department pointed out that hypersonic missiles are incredibly expensive.  

Perhaps China has some really cool and dangerous missiles, but maybe they can't afford enough of them.  Remember, these are all conventional missiles.  Each missile might take out an aircraft carrier or several city blocks, but it might take a whole lot of expensive missiles to take out all of our shipyards and missile factories.  Hey, hope springs eternal.

We need to finish developing our mid-air refueling drones to accompany our fighter jets on their 1,000+ mile bombing missions.  I read this week that China has the same problem as the U.S. - not enough refueling jets.

It's kind of cool to watch history play out in slow motion right in front of us, but as I have repeatedly told my kids, history does not always happen to the OTHER guy.  Just think, you and your family could make some history books someday.  Let's just hope you are dipping and kissing some beautiful nurse in a ticker tape parade, rather than...

Remember, I will shortly be sharing with you the exact moment that President Xi will launch his attack.  My earlier prediction that the U.S. and  China would go to war within three years may have been too generous.  With the crash of Evergrande, the war is likely to start a year earlier.  Poop!

Every time you hear in the coming weeks about how China's economy is crumbling, keep in mind that this economic crash only accelerates President Xi's plans to invade Taiwan and start World War III.  Absolutely don't be doing your happy dance when you read that their real estate has fallen by 25%!  

Okay, so when will President Xi start his invasion of Taiwan?  Remember, he has to invade in order to distract his people.  

Another interesting note:  In the past year, President Xi has purged over 1,400 security apparatus officers and policemen.  Does that mean he shot them?  I dunno.  Before World War II, Stalin shot 50,000 officers out of an officer corp of 100,000 - so arguably Xi is just a light weight communist dictator.

Xi would not be purging the secret police if he had no opposition.  Remember, he is trying to run for a third term, and not every communist in China can be comfortable with a President who won't step down.  

In prior blog articles, I hypothesized that the Chinese people would rise up in mass protests and riots once the economic meltdown got really bad.  I read some articles this week that suggest that if Xi is overthrown, it will probably happen from within the Chinese Communist Party.  

C'mon, George, you're killing me here.  When will China invade Taiwan?  

There is a five-month window when the the seas between Taiwan and the Chinese mainland are far too choppy for landing craft.  That five-month period starts in October every year and lasts through the end of February.  March is the first month when an invasion is even physically possible.

But before the Red Chinese can hope to invade Taiwan, they first have to soften up the island nation.  They therefore need to start their super-accurate missile bombardment in October of the preceding year.  They need to take out the shore batteries, the air defense missile batteries, the airfields, the fleets of fighter jets, the beach fortifications, etc.  This missile barrage will likely take months, so perhaps the window for March of 2022 is close to closing.

Therefore I hypothesize that the missile war will start in October of 2022 and the actual invasion will begin in March of 2023.  There is always the chance that the timing will work against Xi.  People could start rioting during the no-go months, and by the time the attack window finally opens, Xi will have already been swept from power.  Hope springs eternal.

Our generals have told Congress that, "The invasion will not start until 2025.  That's the soonest time that China will be ready."

Folks, if we make it to 2025, then Xi will have long since been deposed (and probably shot).  Please pray that Xi gets peacefully deposed.  But just remember what I constantly remind my children:

"History doesn't always happen to the other guy."

In the United States, we have the very good habit of not executing our former presidents. If the former president of a country fears that he will be executed when he steps down, it tends to discourage him from stepping down.

A good example is President Duarte of the Philippines.  His police, army, and death squads executed 30,000 drug dealers and drug users during his six years as president.  He must know that there are a lot of angry drug dealers and families of drug users just waiting for him to relinquish power.  It is going to be interesting to see if he declares martial law at the end of his allotted single term.

President Xi faces a similar problem.  He is not supposed to serve much longer, but he has been installing his cronies into positions of power within the Chinese Communist Party ("CCP"), and they have changed the rules to allow him to run again.  He has effectively become Dictator For Life in China.  If he ever gets ousted, his enemies are going to want him dead.  He is too dangerous if he simply retires.

What does this have to do with selling your apartment in China?  President Xi is desperate to prevent a real estate crash in China.  Most Chinese people store 60% to 90% of their wealth in their real estate, as opposed to in the stock market here in the United States.  

If real estate were to crash in China, suddenly the Chinese people would feel much less wealthy.  They would stop buying so much stuff and start saving more.  Imagine if Americans suddenly reduced their spending by 30%.   Pow.  The American economy would hit a brick all.  The sudden slowdown in China could be far worse.

There is an unspoken deal between the Chinese people and the CCP.  As long as the CCP improves their lives by 5% to 8% every year, the Chinese people will tolerate the repression of the communists.  So what happens when the Chinese economy suddenly crashes?  I read somewhere that an incredible percentage of Chinese citizens are homeowners.  If real estate crashes in China, it will be like the stock market crashing here.  People are going to stunned, and spending will tank.

In China, the people may start to protest and riot.  Remember, the Chinese people are sick of the corruption and the restrictions on free speech.  President Xi "is living on a powder keg and giving off sparks."

Xi doesn't want to be dragged from power and shot.  He also probably thinks that he is a great leader and a brilliant military strategist.  He knows a bust is coming, and he has a plan.  As soon as the riots begin, he will invade Taiwan.  This will distract the Chinese people and unite them behind him.   Invading Taiwan could easily start World War III.  According to repeated war games, the U.S. loses.  We do NOT want riots in China.  No, sireee.

As I wrote earlier in the week, the Evergrande default is a dangerous spark.  Everyone in China must now appreciate that apartments there are greatly overbuilt.  The rich folks in China own their own apartments, plus at least one more more.  About 20% of the Chinese people own more than one apartment.  Now if you knew that stocks were over-valued and that a crash was coming, would you sell some of your stock?  You betcha.  Therefore you can bet that at least some folks in China are right now trying to sell their extra apartments.

I read this week that the CCP is starting to erect obstacles to selling apartments.  One technique is to refuse to transfer title.  

Part of me is hoping that the strategy works; otherwise, with buyers reluctant to invest in a declining asset, the sellers will start a bidding war to the bottom.  "I'll sell for a 5% discount."  "I'll sell for a 10% discount!"  "20%."  "30%!"  Real estate crashes in the U.S. tend to always be 45%, so can you imagine the effect on the Chinese economy if their consumers suddenly feel 45% less wealthy?

We do NOT want the Cheese economy to crash!

Think back to the beginning of the pandemic.  We were all absolute idiots to think that we could contain the pandemic to China.  It was like believing that you could have a non-peeing section in a public swimming pool.

Ah, Wendy Peffercorn...  Later got married to Squints and had NINE children.  Haha!  If you have never seen The Sandlot, it is a must-see classic, like The Princess Bride or Willow.

The economic forces lined up against President Xi of China are immense.  Most recently, the huge Evergrande default exposed the fact that China has 50 million to 65 million unsold apartments (condo's).  A huge percentage of China's GDP - called by many an "economic miracle" - has been in the construction of real estate.  Real estate in China is clearly over-built and, more importantly, misdirected.  They are taking cold, hard cash and building properties that the Chinese economy does not need.

A slowdown in real estate, where the Chinese people keep 60% of their wealth, is now a given.  The Evergrande default has exposed to the Chinese people that the emperor has no clothes, that real estate is horribly overbuilt.  A devastating real estate crash in China is also a very real possibility.  The Chinese Communist Party ("CCP") is powerful, but even the CCP lacks the economic wherewithal to stem a real estate crash, once a rout has started.

Since the Chinese keep 60% of their wealth in real estate, and since even the CCP can't force a nervous populace to buy things, a correction or a crash in real estate is almost certainly going to rein in this runaway Chinese economy.  At an absolute minimum, the Chinese people now suddenly feel much less wealth.  It's like learning that there are huge, previously unknown, blocks of Apple, Google, Facebook, and Amazon shares that are about to flood the market.  As my tiny and precious little granddaughter loves to say, "Uh-oh."

The Evergrande default also exposed a huge problem within China's "rapidly growing" economy.  They are building a lot of stuff that the world does not need and counting it towards their published GDP.  Suppose, for example, twenty million Chinese people spent years building buggy whips.  Western capitalist countries would never do this because the factory would fail within a year for the lack of sales, but in China...  Helloooo?  Fifty to sixty-five million unsold apartments.

China is not some economic miracle.  They have not discovered some secret sauce economic formula that makes their unique blend of governmental-private cooperation more economically successful that that of America.  Their economic miracle is merely the product of having 1.44 billion people and adopting a semi-capitalistic system.  

That brings up the fact that China is now shrinking.  Officially China's population grew by 7 million people last year.  That's nonsense.  The numbers were fudged to avoid embarrassing President Xi.   The fact that their population is declining means that future economic growth in China has to be the product of increased productivity.  Hmmm.

This brings up President Xi's war on big tech.  Threatened by the power of big tech (a legitimate fear in light of big tech's political damage in the last presidential campaign), President Xi has forced the recent retirements of a dozen heads of big tech companies - people like Jack Ma of Alibaba.  This would be like forcing Elon Musk, Jeff Bezos, and Tim Cook to retire.  Innovation would suffer.

Then there is the current energy crisis in China.  Here I can't blame President Xi.  He is trying to curtail the use of coal (air pollution, global warming); but the lack of power is slowing the Chinese economy.  Many Chinese factories are operating far below their capacity, despite demand.

Then there are the economic sanctions.  China claims they had no effect on them.  Don't believe it.  Add to this the growing dislike and distrust of China throughout the world.  If Wal-Mart can buy dresses from either Vietnam or China, guess who now gets the order?  Then there is President Xi's war on the Chinese stock market and foreign investment.  New foreign investment in Chinese factories has to be falling.

China is going to slow down - sharply.  Since non-peeing sections in public pools don't work, a worldwide recession is almost guaranteed.  How long do we have before it hits our shores?  Months, not years, I would guess.

Fortunately President Xi would rather be ripped from power and possibly shot, rather than invade Taiwan to unite his people.  I think I'll go buy an apartment on Taiwan or Guam.  :-)

Let me be very, very clear.  Even though China is our largest economic competitor, and even though there is scary chance we may soon go to war against China -

we do NOT want the Chinese
economy to crash.

If the Chinese economy were to crash, tens of millions of Chinese demonstrators would likely take to the streets.  Just imagine protests, like the pro-democracy protests in Hong Kong, taking place in every major city in China. 

They would protest the economic mismanagement of the country by the Chinese Communist Party ("CCP").  They would object to the CCP's authoritarian rule.  The protestors would demand freedom of speech.   The lifetime rule of Xi Jinping would suddenly end, almost certainly with his execution.

You can bet that President Xi would not be a huge fan of such an outcome.  Therefore, as soon as the Chinese economy started to tank and early protests started to appear, President Xi would order the invasion of Taiwan.  This would unite the Chinese people against a common enemy - the United States - and make them forget their economic frustrations.

President Xi would give no formal warning.  Those red Chinese jets that overfly Taiwan almost every day would suddenly continue on to real targets.  The Taiwanese Air Force would be wiped out on the ground.  Chinese DF-17 and DF-21 hypersonic missions would destroy U.S. airbases on Guam, as well as $150 billion worth of our F35-A's, still sitting on the ground.

Quokkas are real!

These same long-range missiles would likely destroy several, if not all, of our aircraft carriers in the South China Sea.  The U.S. Navy would never fully-recover.  If the Chinese were smart, Chinese submarines would surface off the coast of California and Washington State and destroy our shipyards.  Our ships destroyed in the South China Sea could therefore not easily be replaced.  Coincidentally a freighter passing through the Suez Canal will "accidentally" crash into one of the locks, making the Suez Canal unusable for the duration of the war.

Extremely accurate, submarine-launched, cruise missiles would fly into the windows of Northrup Grumman, Boeing, Lockheed, and Raytheon, crippling our ability to replace our tiny arsenal of conventionally-tipped missiles.  We lose this war.  Ten years later, China might even invade California.  China wants our land.  

Bottom line -

we do NOT want the Chinese economy to crash.

I admire clever, fun marketing.

Unfortunately, the Chinese economy is almost certain to crash in the next two years.  Imagine if 29% of the American workforce spent five years building anvils, and we stacked these unneeded anvils in huge piles north of the Arctic Circle.  This is what the Chinese have done.

The Evergrande default has revealed that the Emperor is buck naked.  China has built 50 million to 63 million unsold houses - more than enough unsold apartments (condo's) to house the entire populations of England, Italy, and Holland combined!  

Talk about some malinvestnments?  Wow.  A malinvestment is a boneheaded investment (think see-through office buildings, dot-com stocks, and subprime mortgages) that will never be repaid.

China financed all of this new construction with borrowed money, which of course the developers will never be able to repay.  President Xi and the CCP will bail out the banks, which is unfortunately the exact opposite of what they should do.  Xi needs to let the banks collapse.  He needs to allow dozens of large banks to fail.  Their presidents should go to jail.  Future generations of bankers need to remember with horror the consequences of reckless lending - but he won't.

The result of the bank bailouts will be the printing of more money, and painful inflation in China will follow.  But that's not the half of it.

The problem is not just with Evergrande, China's second largest residential builder.  Twenty-nine percent (29%) of China's GDP is new construction.  Almost certainly other large builders in China have made similar mistakes.  They have been borrowing huge amounts of money to essentially build anvils for the Arctic Circle.

"China is eating our lunch economically.  Their command economy is the better economic model."  Uh-huh.  This is certainly what we have all believed for years; but an 8% growth rate (now down to 6%) is not as impressive when a third of that so-called "growth" has been devoted to construction of anvils for the Arctic Circle.

And then one is tempted to ask, "If China's command economy was messed up enough to build 50 million to 63 million unsold apartments, what other boneheaded malinvestments have they made in other parts of the economy?"  Have they built 500 million buggy whips and counted their construction as "growth?"  

Since China has a command economy, can't they just print more money to cover their malinvestments?  China's Producer Price Index ("PPP") increased 9.5% in the past year, and that's the official rate.  A communist commissar would never lie about the PPP, would he?  I wonder what kind of inflation the average Chinese citizen is really enduring on his fixed salary?

The Evergrande default has made clear to me that China is not the economic miracle that has been touted in recent years.  Because the CCP will bail out Evergrande and the country's banks, the crash of the Chinese economy won't be some spectacular "Lehman Moment."

What is a Lehman moment?  Simply put, it's the fear that turmoil or crisis in one large company or country could spread to others.  When Lehman Brothers filed for bankruptcy, for example, it had a contagion effect on the other major financial institutions with which it had trading relationships.

I think a better definition of a Lehman moment is that moment when a bank, institution, or government suddenly realizes, "Oh, poop, we're NOT too big to fail!"  Haha!

But crash it will.  The CCP just can't keep creating more new money to paper over more and more boneheaded malinvestments (50 million unsold apartments - wtf?).  Eventually, this money creation binge will lead to raging inflation, and the average Chinese citizen will see his quality of his life plunging for the first time in decades.  

The average Chinese citizen will not be happy.  He will view the decline in living standards as a breach of his contract with the CCP.  He has tolerated the cruel thumb of the communists because the CCP promised to improve his life every year. 

I therefore make three predictions:  (1) Raging inflation will soon appear in China; (2) followed by massive, nationwide protests; (3) followed by a war against the United States.  Because our missiles absolutely suck and our arsenals of missiles are small, America will lose the coming missile war.

Still think I'm an amusing whack job?  Four Chinese warships sailed just 3.1 miles off the Alaskan coast ten days ago.  If I owned a home near a shipyard or a missile manufacturing plant in California or Washington State, I would at least buy a remote cabin in the mountains. 

Standing properties only, sorry.

My buddy and I were debating whether or not the U.S. will soon go to war against China.  His argument - an intellectually sound one - is that China would suffer horribly in such a war.  

Our bombs and missiles would destroy their harbors, shipyards, power plants, water treatment plants, railroad yards, and transport hubs.  Their international's trade would plummet by 50%.  (90%?)

In contrast, if the Chinese simply do nothing militarily, they will soon become the world's largest economic power.  Their people would only benefit from such restraint.  It's a compelling argument, right?

But here's the thing:  It won't be the Chinese people attacking us.  The Chinese people don't hate us.  Many of them would immigrate to America in a heartbeat.

No, the reason for the attack will be the ego of President Xi, their leader.  President Xi recently arranged to have himself appointed head of the Chinese Communist Party ("CCP") and the head of state for China for life.

The real money in CREF is in servicing fees.

President Xi has absolute power, and as the saying goes, "Absolute power corrupts absolutely."  Maybe this time is different, right?  Uh, huh.

Xi also has has very thin skin, and he angers easily.  For example, Chinese President Xi Jinping recently warned that, "Anyone who tries to bully China will face broken heads and bloodshed."  (July 1, 2021)

It's been thirteen months since I first made my prediction that the U.S. will be at war against China within three years.  I stand by that prediction.

Unfortunately, I also predicted that we will lose that war.  How can a democratic country like the U.S. or Germany defend itself against a sneak attack?  We are not likely to strike first.  This is why Russia and China are developing hypersonic missiles that can destroy our jets and missile launchers before they can even be used.

Russia is even working on a nuclear-powered (not nuclear-armed) hypersonic missile that can reach anywhere in the world.  Much of America's military might - aircraft carriers, airfields, jets, missile ships - will likely be wiped out in the opening minutes of the Taiwanese War.  Just remember what happened to the Egyptian and Syrian Air Forces in the opening hours of the Six-Day War.

Even if Biden died and appointed me king, I would have no solution to this first-strike vulnerability.  Missiles today are just too fast and accurate.  In a recent war game fought by the U.S. military, the Chinese Space Force quickly wiped out all of our satellites, leaving American forces blind.

After much of the American Fleet is decimated in the East China Sea, I have little doubt that the Chinese will come after our shipyards and missile factories on the West Coast.  That's what I would do.

Yes, we have shipyards on the East Coast, but the Panama Canal will be blocked.  It was no accident that both the Panama Canal and the Suez Canal were "accidentally" blocked by crashed cargo ships in the past 18 months.  Those were almost certainly Chinese (and/or Russian) trial runs for the coming war.

But the war won't affect you, right?  The war will be fought "over there" in the Second Island Chain, right?  You've got to stop smoking that California oregano.  :-)  Once our fleet is destroyed, Chinese subs and missile ships will be able to park 800 miles off the California coast and rain missiles down, with pinpoint accuracy, onto our power plants, our railroad yards, our water treatment plants, and our freeway interchanges.

Suddenly the American people will have no food, no power, and no water.  Please understand what I am saying.  When the Chinese win the huge battle for Taiwan, they are unlikely to stop.  

The Chinese want our land, and they are not afraid to use even biological warfare to eliminate our population.  COVID may or may not have escaped from that lab in Wuhan, but not 100% of that infectious disease lab was intended for civilian use.

Ancient Rome ruled the world for 800 years, until they lost just one battle - Andrianople in 378 A.D.  Just one battle doomed the entire empire.

It's not the Chinese people who hate us.  It's not that the Chinese people want war. The Chinese people will only suffer if they go to war.

Unfortunately, just one man - a man with absolute power over 1.4 billion Chinese - will decide whether or not China attacks. It is a terrifying truth that President Xi of China is becoming more aggressive and Hitler-like in his statements.  

And c'mon, once you've kissed 1,000 pretty girls and eaten hundreds of gourmet meals, wouldn't it be fun to play a Game of Thrones?  Kinda funny... and kinda not.

This is a fascinating story of how using a cap rate allowed us to value and sell a foreclosed golf course, and it helped my private investors avoid a loss and actually make a profit.

There are three methods of valuing income property - the cost approach, the sales comparison approach, and the income capitalization approach.  When the appraiser has arrived at a value using each approach, he then has to reconcile these three valuations to arrive at his final conclusion.

It is important to note that the appraiser must not just average the three results.  Instead, the appraiser should choose the most reliable approach to value and then temper that conclusion with the results of the two other approaches.

Now when valuing a fairly standard property type, like an apartment building, appraisers tend to rely the most heavily on the sales comparison approach.  For how much have other apartment buildings in the area sold?

Since there are bazillions of apartment buildings, the valuation process is generally straight forward.  How much did nearby apartment buildings sell for per door?  (Fancy CREF way of saying "per unit.")  What was their gross rent multiplier?

The real income in commercial real estate finance is in servicing
fees.  Work every day to build your loan servicing portfolio!

The cost approach is the valuation method least often used, mainly because it is too much work for appraiser.  Too often the appraiser just weenies out of using the cost approach, citing the bull stuff excuse that it is too difficult to "estimate depreciation."  

But now the tale gets juicy... and dark.

About four years ago, Blackburne & Sons made a $2.75 million loan on a gorgeous golf course in an affluent suburb of Chicago, a golf course course with a replacement cost of $13.2 million (according to the county).  Unfortunately the borrowers defaulted, and we foreclosed.

At first, the real estate brokers were telling us that our golf course was almost worthless.  Several thousand golf courses had already come back in foreclosure nationwide over the past decade, as Tiger Woods self-destructed and the sport waned in popularity. 

"This golf course sold for just $2 million," the real estate brokers would tell us  "This other one sold for only $1.5 million - about the value of Midwest farmland."

But wait a moment, we reasoned.  Those golf courses were all losing money.  They had lost money for a decade.  Our golf course was actually profitable.  (Our borrower had simply been over-leveraged.)

Those foreclosed golf courses were also located in inconvenient, middle-income areas.  The folks living in the surrounding neighborhoods of those foreclosed golf courses were mostly blue-collar folks who didn't make nearly enough money to join a golf club.

Far more importantly, however, the "sales comps" were all sales where the seller had a gun to his head.  Think back to the movie, The Godfather.  That movie producer did NOT want to to cast Jonny Fontaine (Frank Sinatra) in his movie... until he woke up to find the head of his beloved horse under the sheets of his bed.

Folks, you cannot use as a sales comparable a sale where the seller was just 48 hours from foreclosure.  Part of the definition of fair market value is the proviso that ... "neither the buyer nor the seller was under undue pressure." 

Okay, so we can't use foreclosure sales, REO sales, and sales on the cusp of foreclosure as sales comparable's.  These sellers were all under undue pressure.

But what do we do when very few profitable golf courses have sold in the preceding three years?  There were simply no un-pressured sales to use as comp's.

This is when I personally stepped in and started marketing the golf course based on the income approach.  "Buy this Course and Earn a Whopping 9.75% Cap Rate!"  You will recall that a cap rate is just the return on his money that a buyer would earn if he paid all cash for an income property (allowing for about 3% of Effective Gross Income to replace the roof and the HVAC units as they got tired).

Holy moly!  The course sold for $3.2 million within just 10 days of marketing. Prior to that, our idiot real estate broker was telling us that we had to sell this trophy golf course for just $1.6 million.  The real estate broker was a moron to rely entirely on the sales comparison approach to value.

I personally hope the deal falls through because the net profit to our golf club just keeps skyrocketing.  If we had waited just six more months, I am convinced that we could have sold the course for $4.8 million.

The lesson to be learned today is that the sales comparison approach is NOT the only way to value real estate.  People buy income properties for the income they generate.

By the way, I begged the buyer to allow me to buy part of the course based on that paltry $3.2 million purchase price.  I suspect that he laughed at me.  Clever boy.