Commercial Loans and Fun Blog

Stalking Horse Bids Arise in Connection with Bankruptcy Sales

Today I received an email announcing the bankruptcy court-ordered auction of a beautiful office tower in San Francisco. The flyer said the auction was subject to a $35 million stalking horse bid. What on earth is a stalking horse bid?

A stalking horse bid is an initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid.

This method allows the distressed company to avoid low bids on its assets. Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company's assets. In essence, the stalking horse sets the bar so that other bidders can't low-ball the purchase price.

Do you need a commercial loan to buy a commercial REO? Do you need to refinance your existing commercial mortgage? You can apply to 750 commercial real estate lenders in just four minutes using C-Loans.com. And C-Loans is free!  Click here to apply for a commercial mortgage loan.

I've Figured Out How to Make Commercial Borrowers Comfortable Enough to Sign Loan Broker Contracts

There is an old saying among horsemen, "If you haven't been thrown, you haven't ridden very much."

The same is true for commercial mortgage brokers. If you haven't been cheated out of a $20,000 loan brokerage commission, you haven't been brokering commercial mortgage loans for very long.

Obviously a commercial loan broker needs to get his principals to sign a mortgage broker fee agreement. The problem is that the borrowers are too scared to sign one. They think they are going to be forced to pay a fee that the commercial mortgage broker didn't earn.

This week I accidentally stumbled into a technique that helps to make the borrower feel comfortable enough to sign a loan broker fee agreement. Here is the technique:

Commercial borrowers will feel comfortable enough to sign a fee agreement ... if they are allowed to exclude five lenders from your non-circumvention clause.

Here's why it work: Borrowers will seldom come straight to a commercial mortgage broker. They will first submit their loans to a handful of banks. There is always the chance that one of these original banks will finally come through for the borrower, so the borrower is loathe to sign any agreement that seems to interfere with this possibility.

Now when I send my fee agreement to a borrower, I always tell the borrower, "Feel free to attach an addendum that excludes up to five lenders."

Are you a commercial mortgage broker who is having trouble collecting your fee? Order our 90-minute video training course, Fee Collection for Mortgage Brokers.

I Just Spoke at Crittenden's Commercial Financing Conference and Even the Top Commercial Loan Brokers Are Closing Nothing

I am writing tonight from the Hard Rock Casino in Las Vegas, where I spoke on the chaos in the private money commercial loan market at the Crittenden Commercial Financing Conference.Ouch! The news on the commercial mortgage financing front was grim.

The Royal Bank of Scotland recently went to market with a CMBS (commercial mortgage-backed securities) offering totaling around $600 million. The good news is that the offering was oversubscribed 2.76 times. The bad news? There were only six loans in the pool, meaning the average loan size was around $100 million. Such huge loans seldom fall into the laps of guys like you and me. Could smaller CMBS loans soon become available to us mere mortals? From the sounds of it ... no.

The only commercial mortgage deals that appear to be closing are Fannie Mae, Freddie Mac and HUD apartment loans. The delinquency rate on such loans is still tiny. Apartment owners at the conference reported that over the last year their occupancy rates have increased from 85% to well over 95%. Apparently it has become fashionable to rent.

The only apartment construction loans that are being made are being made under one of the HUD programs. The problem is that these loans took 9 months to process at the best of times, and now the backlog has grown to a year. To slow down the number of apartment construction loan applications, HUD recently increased its required debt service coverage ratio from 1.10 to a whopping 1.30. This forces the developer to contribute 15% to 20% of the total project cost. Nevertheless, HUD is still the only game in town.

I spoke at length to a number of the country's top commercial mortgage brokers, and they are dying. A number of them confessed that they had not closed a loan in 12 to 18 months! This is a tough time to be a commercial loan broker. Fortunately Blackburne & Sons is a private money lender, and we are still closing deals.

Need a commercial loan?  Please call me, George Blackburne, at 574-360-2486, or email me at george@blackburne.com.

Loans Used to Buy Foreclosed Homes in Bulk

An enterprising hard money broker in Southern California is issuing lines of credit to homebuilders, investors and speculators to buy foreclosed homes in bulk. As the lender described it:

"We have private money available to provide homebuilders/investors with collateralized lines of credit to purchase, renovate, and sell SFR’s purchased out of foreclosure. These homebuilders and investors are typically are well capitalized (very wealthy) and are looking for 1st TD debt at an advance rate of +/- 60% of cost in order to increase their volume and overall returns as a less expensive alternative to finding equity partners. Credit line applications in process range from $1 MM to $12 MM. Structures include: acceptance of replacement collateral at unit reconveyance, or short term loans which are re-written with new collateral at payoff. We are currently doing this business in both California and Arizona."

"How this works is that we have customers in the business of acquiring entry level single family homes at trustee sales throughout California. Following acquisition of these wholesale, in-fill purchases, the homes are renovated and listed for sale. In-house brokers within our borrower’s company than list those homes on the MLS and work with buyer brokers to sell them. Typical cash-on-cash returns in this operation are currently +/- 20%."

"Depending on deal structure, we lend between 60% - 80% of the purchase price of the homes purchased, and the borrower puts in all the renovation costs in cash. Total annualized cost for the credit line is between 15% - 22% all-in. The loans are usually, non-recourse depending on the advance rate.  The lines typically run in 6 month segments to one year. Origination points are paid when the line is used and houses are purchased. The line collateral is a 1st TD on all homes purchased within the line.

"The leverage is substantially accretive. Levered returns can increase to well above 100% as long as the product is turned (purchased/renovated/sold) within a 90-120 period and the money can go back to work purchasing new homes. Sale of the homes pay down the line 105% of the wholesale purchase price."

"There is a lot of action in this business currently. Particularly, in those states that have been hard hit and have tremendous foreclosure volume like CA, AZ, NV, FL. I have one borrower who has purchased over 350 homes in the last 9 months and moved over $85 MM of product. The profit in this borrower’s realm of operation, Southern California, is approximately +/- $40,000 per unit."

If you are a homebuilder or an investor and would like an introduction to this lender, please call me, George Blackburne III, at 574-360-2486 or email me at george@blackburne.com. I get bombarded with emails (but I love to hear from borrowers and brokers), so its easy for me to miss an email. I recommend that you use the title of this article, Commercial Lines of Credit from Hard Money Brokers, in your subject line.

Even Old Veterans Will Learn From This Brilliant Article

I didn't write this wonderful article. Instead, it was sent to a group of mortgage brokers to solicit business. I begged Brian O'Shaughnessey for permission to publish it. I want my sons - and their kids someday - to read and study it.

How to Properly Pitch and Submit a Loan Request to a Bridge Lender/Fund Manager

As you know banks are barely lending in these uncertain economic times. So the Bridge Lenders/Fund Managers that are still lending are seeing an increase in submissions that are overwhelming them. You must be aware that most Bridge Lenders/Fund Managers are usually a 1 to 5 man operation and are not used to receiving 100 calls a day and 3 to 6 hundred emails a day with scenarios.

Though Athas is larger than most Fund managers we still suffer from the same problem. When a Fund Manager gets overwhelmed he usually defaults to saying "No" to any deal that is poorly presented; and let me tell you 50% to 70% of deals presented to our firm are presented poorly. So from a Fund Managers perspective let me guide you to presenting your file in a professional and attractive way thus enhancing the possibility of getting interest in your loan request.

The Preparation Before Presentation

75% of commercial and 25% of residential deals I am pitched are from a broker chain. Let’s face it. Brokers, in my opinion, are the life blood of our industry no matter what the banks are trying to do to them. But deals that are presented to me from a broker on the back side of a broker chain I don’t take very seriously nor do I spend much time on. So if you are in a broker chain…penetrate it professionally and speak directly to the borrower, with permission of all brokers of course.

You want to make sure of what the borrowers needs are and there is only one person that can express it to you and that is the borrower. Make sure the borrower is ready for a Bridge Loan. Be candid and upfront with the borrower about what typical bridge loans costs are and what the condition of the capital markets are. Let’s face it borrowers want to avoid getting a Bridge Loan at 9% to 13%, 2-5 points and terms from 1 to 5 years if they can avoid it…don’t blame them! So many brokers submit and procure LOI’s from us just to have a “back up”. Don’t do this for you are not making friends with the Bridge Lender/Fund Manager! Make sure the borrower is ready, if they are not don’t waste your time or the Fund Managers time.

Know Your File

There is nothing worse than a broker pitching a deal to a lender and the broker truly has no clue. This is a quick step in the direction that will not be fruitful for you and certainly is not a relationship building experience. As a fund manager I must tell you I will go higher LTV’s and farther outside my box for a broker that knows his way around his deal! If you add the fact that I have closed deals with that broker in the pass I am more willing to stretch for that proven relationship. So you as a broker always want to build that relationship and that usually starts with a proper presentation and intimate knowledge of your file.

Be Prepared to Answer a Myriad of Questions

The Bridge Lender/Fund Manager will have many. Once again I can’t stress enough, know your file. If your loan request is a commercial down, know the total of all income of the project. Also know the type of leases that this property has. Are they full service, modified gross ore triple net leases? If there is credit issues finds out if there are any believable excuses behind it. If the income on the rent roll is more than on their schedule E (rarely a deal killer) be prepared to answer why that is. If there is cash out know what they are going to use it for.

The Presentation

When getting on the phone with the lender he or she will want to ask the questions so they can make sense of the deal that best suits their needs. Don’t tell a story; just answer their questions in a quick and professional way. Don’t hide the negatives about the deal because the lender will look sideways at you and your future deals. So always express the negatives upfront and then follow it up with the positives and sell the positives without telling a 5-20 minute story. If the borrower has other collateral that has lendable equity in it express that to the lender quickly and don’t save it for the last second. If there are special needs of the borrower, like but not limited to, the borrower doesn’t want to sign a personal guarantee, express this to the lender before he makes his decision. If the lender doesn’t like your deal and turns it down don’t get upset or confrontational! If you want to learn why he turned it down don’t give him attitude just ask him why he turned it down so the next time you can learn what he or his fund likes and doesn’t like. If the lender likes your deal then great and be very prepared to email him the file quickly. This is not the time to collect conditions because that takes time and your lender will hear 100 deals after yours that could be better/safer or he will have forgotten your good deal because of all the bad deals he has to listen to. So submit your file immediately after the positive conversation!!!

Prepare to Submit Your Loan Request

OK you have a lender that is interested in your file, don’t blow it by submitting him a crazy discombobulated, and unprofessional file via email! A well submitted package is paramount to keeping you professional image alive and a lender interested in YOUR file over the others! A list of items most lenders will need to make a proper decision are as follows…

-Executive Summary - Yes I know you have already explained this all over the phone conversation but it is paramount that the lender can go back to the executive summary and get the story again.

-PFS (personal financial statement) or 1003 – It is paramount that your PFS or 1003 be professionally and fully filled out. Nothing is worse than a hand written and barely legible PFS or 1003!

-Credit Report – A recent Credit Report (not that FreeCreditReport.com stuff) or a detailed explanation of what the borrower’s credit is like (must come from the Borrower). That description should touch on FICO’s, mortgage lates, BK’s, Judgments, etc.

-Pictures of property –Believe it or not this is so important! A deal can go from hot to not or more importantly from NOT to HOT from quality pictures of the outside and inside of the property. So have them ready.

-2 years Personal and Corporate (if applicable) Tax Returns – “But I want to go stated” Is a usually response to this request. The Stated days are for the most part over. Every Fund Manager wants to see the Returns. Maybe just for the reason that he wants to make sure they are filing them. A lot of Fund Managers don’t use them and they wind up in the trash can but the fact that you showed them makes us Neanderthal fund managers feel comfortable. Remember Bridge loans can get creative with borrowers that don’t show all their income or show too many expenses………It’s OK to show us the returns!!

-Rent Roll – A clear and concise rent roll that shows tenant’s full name, unit number, monthly rent amount, beginning and end dates of lease is the best!

-Last years or Year to Date Income and Expense Statement- A quick P+L on the property is usually good. Yes we can add back in the mtg expense, depreciation and sometimes a lot of expenses we know the borrower is just writing off to write off.

Submitting Your Loan Request

There are some rules you should follow to submit your loan request. These rules will make your submission stand out from the rest…which in this market is paramount!

-The subject line of the email – Many times you have to email a file broken up into many emails because all the attachments are too big to fit on one email. So the subject line will keep the continuity of your submission. The subject line should have the borrower’s last name or name of the project then the word “Part” then the number of the email. For example Smith – Part #1 next email would be Smith – Part #2 so on and so forth.

-The attachment names – Name each attachment properly so that the lender knows what is in that attachment. Nothing is worse than getting 20 attachments and all of them have crazy names like *0473#-C or something like that. No one wants to go thru 20 attachments to figure out what they are. Once again separate yourself from all the other brokers……….for your better than the rest!

-The attachment size – Be cognizant of the size of the attachment for no email you send out should have more than 5 megabytes of attachments. Just because you can send it doesn’t mean your lender can receive it. Now some lenders can receive very large attachment groupings but just because they can receive it doesn’t mean you can send it. Most email systems have a limitation of 5 to 10 megabytes. Remember some Bridge lenders/fund managers are just small shops and don’t have a large emphasis on technology and might be using a restrictive email carrier that can bounce files just for attachments that are too big and no one is notified.

-Follow up – Call the lender within 1 hour of submitting your file to see if he or she has received all your emails. This serves two purposes, #1 you make sure he received all your emails, #2 the lender knows you proactive and if you don’t get an answer within 24 hours you’re going to follow up again. He or she will defiantly work on your file first!

Tips for Those Who Are New to Bridge Lending

-Stick to “The Good Deals” - What is a good deal? The current answer is a deal that closes! In this marketplace there are so many deals out there that just are never going to get funded or will take a monumental effort just to get a maybe. Examples of these deals are out of country request, land loans, development deals, theme parks, golf courses, retreats, coal mines or precious metal mines, quarries, electrical plants, hospitals, casinos, marinas, ski resorts, biodiesel plants, parking garages or white elephants. These deals you might get a person to say yes to but I would be willing to bet there will be a $25,000 to $250,000 upfront due diligence fee that you will never get back!

Good Deals look like the following. Plain vanilla Residential properties, multifamily, mixed use, student housing, fractures condos, office buildings, retail shopping centers, light industrial, warehouse and rehab or finish construction deals of the above properties. Some hard to fund asset classes that are still getting attention are gas stations or any auto related project, small hotels or motels, assisted living facility, daycare centers and restaurants. Try to stick to the “Good Deals” because in this marketplace those are the deals that are actually closing.

Upfront fees – Now my company does not charge upfront lender fees but sometimes I wish I did. If you get a LOI that is requesting upfront fees make sure the company producing the LOI is legitimate! In this marketplace there are a lot of “upfront fee scammers”. It’s not the end of the world just proceed with caution

-Make sure the LOI is coming from a legitimate source – There are many ways to get a comfort level with your LOI and the company that produced it. Letter of Testimonials are one way. Make sure the person writing the testimonial is a real company and call them. If a lender wants to earn your business they should have testimonials upon their website that shows the broker or borrowers name and number. This way you can verify them. Funding lists are also something you should be able to ask for and more importantly be provided with. Any real lender should be able to provide addresses of properties they have lent on so that you can run a property profile on and see the Trust Deed or mortgage in the name of the lender. Deal plaques, if the “lenders” website does not show deal plaques then they are making no effort at showing you what they funded in the past. Why would a real lender not want this up on their website? Just be careful for unfortunately there are a lot of scammers out there and it is your duty to your borrower to get them involved with a real lender.

Sincerely,

Brian O'Shaughnessy
CEO/President

PRESIDENT

26901 Agoura Road. Suite 250
Calabasas Hills, CA. 91301
P: 877.877.1477 x555
F: 818.647.0175
Brian@AthasCapital.com
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Neither Banks Nor Borrowers Want Commercial Loans

I have been in the commercial mortgage business for 30 years now, and these are the worst of times.

I used to think that 1982 was bad. In 1981 Fed Chairman Paul Volcker, determined to break the back of inflation, raised the prime rate to 21.5%. Surprisingly, borrowers still sought commercial loans. Real estate was still appreciating, and cash-hungry borrowers were still willing to accept a commercial loan at 16% to 23%. At the same time, the banks and thrifts (savings and loan associations) would still consider a commercial loan, if the commercial loan made sense.  Nevertheless, business was horrible.

But as bad as things were in 1981, the commercial loan market simply disappeared in 1982. By then the Fed had broken the back of inflation. The inflation rate tumbled from 16% to less than 6%. At the same time, the Fed started to quickly ease. The prime rate began to fall at the rate of 1/2% to a full 1% per month.

I hate it when interest rates fall! No one wants to borrow. Why borrower at 15% today when the rate will be 14% or maybe even 13% in six more months. So borrowers procrastinated. Our commercial loan office became a tomb. I called my old buddy, Bill Owens of Owens Financial Group, and begged him to tell me what I should do. "George," Bill commented with his wry humor, "sometimes all you can do is go fishing." For the rest of the year commercial lending activity was almost non-existent.

But at least in 1982 the problem was just on one side.  Borrowers were procrastinating.

What about today? "It's deja vu all over again."  Except this time, neither lenders nor borrowers want commercial loans.

The banks don't want any more commercial real estate loans for obvious reasons. They've lost tens of billions of dollars as thousands of commercial loans nationwide have gone bad. In addition, commercial real estate has already fallen 35% to 40% in many areas. Many experts expect the declines to get worse.

Borrowers don't want commercial loans because they are not investing. Why buy commercial real estate today when prices will only be cheaper tomorrow? Business owners aren't pulling cash out of their buildings because they are already cutting back on their existing manufacturing capacity. Why invest more in plant and equipment?

"But George, what about the hundreds of billions of dollars in ballooning commercial loans that we keep reading about?" The banks and conduit loan servicing agents are simply extending these loans for a few years.  Why foreclose on an otherwise performing loan? Commercial lenders don't need any more commercial properties to manage.

So where does this leave us? The commercial loan market is now frozen to a standstill. Very few new commercial permanent loans are being written, and commercial construction lending is essentially non-existent.

If you do happen to need a commercial loan:

1. If it's a bankable deal, you can submit your deal in just four minutes to hundreds of commercial lenders by using C-Loans.com.

2. If you need a commercial permanent loan of less than $1.5 million, please call me, George Blackburne III, on my cell at 574-360-2486 or email me a package at george@blackburne.com

Commercial Mortgage Lenders Are Requiring Larger Down Payments

Since the start of the Great Recession, commercial real estate lenders have become more cautious. Before the economic downturn, commercial lenders would regularly make commercial loans to 75% loan-to-value on office buildings, retail centers, and industrial buildings. In fact, in 2006 and early 2007 some conduit commercial lenders were even making commercial mortgage loans as high as 80% loan-to-value.

Today few commercial lenders will make new permanent loans much higher than 60% to 65% loan-to-value. In addition, they will not allow sellers to carry back a second mortgage behind their new first mortgage loans.

This means that real estate investors wishing to purchase commercial buildings must now put down 35% to 40% of the purchase price in cash. No surprisingly, far fewer commercial properties are changing hands.

There is a technique, however, that commercial real estate investors can use to reduce the size of their required down payments.  Instead of carrying back a second mortgage on the commercial property being purchased, the seller can carry back a second mortgage on a different piece of commercial property owned by the buyer.

For example, let's suppose that an investor wants to buy a commercial center owned by a seller. The parties agree on a price of $2 million. Without using this technique, the investor would probably be required by the bank to put 40% down - or $800,000 in this example. That's a lot of dough.

However, the parties might make the following agreement. The investor (buyer) will put down $500,000 in cash, which is still a significant amount. We, in the business, might say that the investor (buyer) has more than enough "skin in the game" to assure that he is motivated to make his new commercial loan payments and maintain the property. The seller - and this is the key - could carry back a second mortgage on an apartment building, a property different from the one being purchased, owned by the investor (buyer). This arrangement would probably pass muster with the vast majority of commercial lenders today.

Need a commercial loan right now? You can apply to hundreds of commercial lenders with a single, four-minute, mini-app using C-Loans.com, the nation's most popular commercial lender portal. And C-Loans is free!

Also a A Primer on the Farmer Mac Program

Our hard money mortgage company, Blackburne & Sons, is actively making hard money loans on farm land and cropland nationwide.  Our sweet spot is loans between $100,000 and $1.5 million.

Our farm land loans and cropland loans are typically priced between 9.9% and 12.9%, depending on the risk, with 11.9% being the most common rate. Our typical fee is 2.5 points + $950 to 3 points + $950.

Because we are so bullish on farm land, Blackburne & Sons will lend up to 65% loan-to-value, even if the farmer/operator is losing money or has poor credit. Our hard money farm loans have no prepayment penalty.

The farm land cannot usually have a house on it because the loan could then be classified as a home loan, a type of loan we are not licensed to make. However, if the purpose of the loan is clearly commercial in nature - as opposed to intended for personal, family or household purposes - and the tillable acreage exceeds 30 acres, it may still be possible for the loan to considered commercial in nature. The value of the tillable acreage must clearly exceed the value of the home.

In order to promote Blackburne & Sons' new farm land loan program, I started calling on mortgage brokers who specialize in farm loans. One of them was kind enough to give me a primer on the Farmer Mac program:

Farmer Mac is an acronym for the Federal Agricultural Mortgage Corporation, a government-sponsored enterprise (GSE), similar to Fannie Mae or Freddie Mac. Farmer Mac buys farm loans and ranch loans from banks and correspondents and then sells the loans off as mortgage-backed securities. Farmer Mac never got crazy with their underwriting standards, so they are not suffering from waves of defaults, like Fannie Mae and Freddie Mac.

The underwriting standards of Farmer Mac are very conservative:

Minimum credit score of 680.
The loan cannot exceed 50% of the farmer's total assets.
The farmer's net income must exceed 130% of the proposed payment.
The farmer must have no late payments on prior Farmer Mac or other bank mortgage loans.

Blackburne & Sons' new farm loan program is designed for "near-miss" Farmer Mac borrowers - farmers who fall slightly outside of Farmer Mac's underwriting standards.

Got a farm land deal?  Please call Mike Thurman at 916-338-3232 or email him at thurman@blackburne.com.

Lenders Use Release Clauses So Developers Can Sell Off Lots, Homes or Condo's

Let's suppose a commercial lender - a bank - makes a $2 million commercial loan to a developer on a residential subdivision. The developer uses the proceeds of this commercial loan to obtain an approved subdivision map, to install the horizontal improvements (streets, curbs, gutters, water, sewer, power, etc.) and to market the 100 residential home sites. Now the developer is done, and he is ready to sell off his first residential lot for $40,000.

But wait. The lot buyer isn't going to fork over his $40,000 unless the developer is prepared to hand over the lot free and clear of any mortgages. The bank has a $2 million loan against the lot (and admittedly the other 99 lots). How do we get rid of the $2 million bank loan with the proceeds of just a $40,000 lot sale?

The sale will be accomplished using a partial release clause in the loan documents. A partial release clause is an agreement between the commercial lender and the borrower whereby a mortgage that blankets two or more parcels will be released from a particular parcel upon the payment to the commercial lender of a previously-agreed amount of money. For example, "The commercial lender agrees to release its mortgage against residential lot number 17 upon the payment $20,000." The bank gets $20,000 from the sales proceeds of lot number 17 (a nice culs-de-sac lot), and the developer gets to pocket the remaining $20,000 as his profit.

But be careful here. What if this new residential subdivision has just 15 culs-de-sac lots and 10 nice lots with views? What if the rest of the lots are stinky? Suppose the developer is able to sell all 25 premium lots for $40,000 each and gives the bank half the proceeds. That's $500,000 for the bank and $500,000 for the developer. Now the bank is owed $1.5 million, and its loan is secured by the 75 remaining lots.

What happens if the non-premium lots cannot be sold for any more than $18,000 each? If the initial release price per lot was set at $20,000 the problem soon becomes apparent. The developer cannot sell any of the remaining lots. Even if the bank cooperated and let him sell the lots for $18,000 each, this would only bring in another $1,125,000. The developer would still end up owing the bank $375,000, and all of the collateral would be gone!

Okay, obviously the bank needs to do something in order to protect itself. One way the bank will protect itself is that it will ask the appraiser to assign an anticipated sales price per lot. The release price per lot will no longer be a uniform $20,000 per lot. Instead, the premium lots might have a release price of $30,000 each and the non-premium lots might have a release price of $17,000 per lot.

But what if some of the lots cannot be sold for any reasonable price? What if consumers pick over the subdivision and leave 35 non-premium lots unsold? The developer would still owe the bank almost $600,000 and the bank would only have as collateral a bunch of undesirable lots.

To make sure that the bank does not end up with a bunch of unsalable lots (or condo's), the typical partial release clause will have a provision whereby the developer must pay down the construction loan or land development loan by 115% to 125% of the release price before the bank will release a unit. Therefore, in our example, the developer will have to pay down the land development loan by 120% of $30,000 ($36,000) in order to get a premium lot (culs-de-sac or view lot) released. This way a developer does not get to keep a lot of the profit and leave the construction lender with a bunch of crumby, unsellable lots or units.

Large Commercial Loans Today Are Being Written as Floaters with Collars

The days of long-term, fixed rate commercial loans are gone for awhile. Sure, a few life companies will still make commercial real estate loans between $5 million to $25 million at a long term, fixed rate; but commercial loans from life insurance companies seldom exceed 55% LTV today.

Most large, commercial loans getting funded these days are floaters - adjustable rate mortgage loans - on standing properties. Very few large commercial construction loans are getting funded these days, unless the loan is an apartment construction loan from the FHA.

Large land loans (over $2 million) are essentially impossible today too. No one is making them. In the years leading up to The Great Recession, large land loans were usually made by hard money lenders with large commercial mortgage pools. Unfortunately, almost every large commercial mortgage pool in the country is now either in bankruptcy or winding down.

The only large commercial loans being made today are loans on standing and almost fully-leased commercial properties.

When these loans are made, they are using being made by the money center banks as floaters. Floaters are adjustable mortgage loans with a term of usually only five years. They are usually readjusted monthly according to changes in one-month LIBOR. A typical margin is 300 to 400 basis points.

The borrower will usually want some sort of interest rate ceiling or cap. The lender will usually want some of floor on the loan. These interest rate caps cost money - usually an extra point or two. Sometimes a borrower can "pay" for his cap by agreeing to a floor. For example, a borrower can pay two extra points for a 4% ceiling; but if he agrees to a floor equal to the start rate, the lender might waive the two-point cap fee.

A loan with both a cap and a floor is said to have a collar.

If you need a large commercial loan today on a standing property, please write to me, George Blackburne, at george@blackburne.com or call me at 574-360-2486.