Commercial Loans and Fun Blog

Just Learned an Interesting New Term of Art - Lien Clearing

As a hard money commercial lender, Blackburne & Brown has to foreclose on about ten to fifteen commercial properties every year. Contrary to what you may think, we never make money when we foreclose on property - never. I wish we didn't have to do it, but it's a necessary evil in this industry.

After foreclosing on ten to fifteen properties every year for the past twenty-five years, I have noticed an interesting fact. Hardly no one ever bids at commercial foreclosure sales. We have sold a commercial property at a foreclosure sale just once in twenty-five years.

Therefore, if you are the holder of a junior lien on a commercial property that goes to a foreclosure sale by the first mortgage ... well, you're toast. No one is going to over-bid the amount of the first mortgage. You will almost surely be wiped out by the foreclosure.

This week we foreclosed on an office in the foothills of the Sierras. It's a beautiful building. There was a $2 million second mortgage behind our $3.3 million first mortgage, and this second mortgage loan was completely wiped out.

We also wiped out a $350,000 mechanics lien that was junior to our loan.

As we prepared for the foreclosure, one of our attorneys used an interesting term: lien-clearing. Our successful foreclosure cleared off the title to the property and left us owning the property free and clear of any competing claims for the property.

The junior lienholders, in my opinion, made a fatal error when they failed to cure our senior loan. The second mortgage holder and the mechanics lien holder should have banded together and each chipped in enough dough to payoff our first mortgage.

Instead, they went to the foreclosure sale hoping that someone would over-bid our first mortgage. In real life, this never happens.

Just Bought a Discounted Note That Was Originated By an Investment Bank

When the secondary market for commercial loans suddenly disappeared in late 2007, a great many banks, investment banks, and mortgage bankers were caught with unsold commercial mortgage loans on their lines of credit. Many of these commercial lenders are now anxious to get the commercial loans off their books.

Blackburne & Brown, our hard money commercial lending company, just syndicated today a group of private investors to buy a commercial mortgage note at a discount. The loan was originally made at 7.35%, and we bought it to yield approximately 12.75%. We sold it out to our hungry network of private investors in just one afternoon.

Would you please let me know if your bank or your commercial mortgage company has any commercial first mortgage loans for sale at a discount? You can reach me, George Blackburne, at 574-360-2486 or at george@blackburne.com

The Rent Might Not Be What the Borrower is Representing

Suppose you're a commercial lender, and you foreclose on commercial building. The good news is that the building still has a tenant. According to the lease in your commercial loan file, the tenant is obligated to pay $10,000 per month. Hooray.

Now the bad news. The tenant advises you that the lease in your commercial loan file is fraudulent. In order to obtain commercial financing, the borrower submitted a dummy lease. The tenant's signature on the dummy lease was forged. The real rent is only $2,700 per month! Ouch.

Okay, what did the lender do wrong? The commercial lender should have obtained an estoppel agreement from the tenant before making his loan.

What on earth does estoppel mean anyway? Estoppel is a a rule of evidence whereby a person is barred from denying the truth of a fact that has already been settled. To understand this definition, let's take a look at our current situation.

Suppose we had sent an Estoppel Agreement to the tenant that said that the rent was $10,000 per month, the lease was still in force, the lease still had ten years to run, and the landlord had performed all of his required duties under the lease. If the tenant had signed the Estoppel Agreement, agreeing that the lease terms described in the Estoppel Agreement were the actual lease terms, then the tenant would have been bound by the fraudulent lease terms, rather than the terms of the true lease.

The lack of prepaid rent is another item that needs to be addressed in the estoppel agreement. Suppose the tenant recorded his lease, so the lease was senior to the mortgage. Right before the commercial property owner loses the property in foreclosure, the owner approaches the tenant and say, "Say, I'm in a cash crunch.  You owe me $100,000 in rent for the rest of the year. I will reduce my rent to just $60,000 if you prepay it now." The tenant would be sorely tempted to accept that offer.

If the commercial lender then foreclosed, the commercial lender would be forced to honor the deal made by the prior owner, even if the former commercial property owner took the $60,000 and spent it on cocaine for his trashy girlfriend.

This is one of the reasons why commercial lenders do not like to be subordinate to recorded commercial leases.

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What on Earth Does Attornment Mean?

Suppose ABC Rent-a-Car wants to build a commercial building on a specific, high-traffic-count lot in the City.  ABC Rent-a-Car offers to buy the land from the property owner, but the commercial property owner wants to leave this valuable commercial lot to his grandchildren and great-grandchildren. He refuses to sell.

The commercial property owner, however, is willing to lease the land to ABC Rent-a-Car on a long term basis. ABC Rent-a-Car tries to negotiate a lease of the land for 99 years, the longest term allowed by law. Had the commercial property owner unwisely leased the land to the car rental company for 100 years, the courts would have ruled that this lease was in fact an installment sale! Title to the property would pass to the car rental company. The maximum term of a land lease is 99 years.

The old man, however, refuses to lease the bare commercial land for longer than 75 years, which the car rental company decides is sufficient. The parties execute a land lease for 75 years at an amount that pays the old man a return of about 8% annually on the value of the land, with a cost of living escalator every five years. This would be a very typical deal.

The rental car company, however, insists on a land lease clause requiring any future lender to sign a Subordination, Non-Disturbance and Attornment Agreement. After all, it's only fair. The rental car company is going to spend $800,000 constructing a building on the property at the rental car company's own expense.

What a deal! The property owner gets $40,000 a year triple-net rent on his land lease AND when the lease expires, both the land and the building revert back to his heirs. (I recently ran across a wealthy family trust that has the land lease on an entire city block on Michigan Avenue - the hottest shopping strip - in Chicago. The land lessees built skyscrapers all along that block, and these skyscapers are poised to revert back to the grandchildren of the trust settlor after 99 years. Holy Smackeral! We're talking about a billion dollars worth of buildings!)

Okay, let's scroll forward about ten years. Suddenly the old man is in need of some dough. Maybe he just got a young, new wife. He takes his land lease to the bank and pledges it to the bank for a $500,000 loan. When the bank pulls a title commitment (preliminary report), they find out that ABC Rent-a-Car has recorded their land lease against the title. The bank contacts the attorney for the rental car company and says, "Hey, we want to record our mortgage against the property, and we have to be in first position. We please need for you to subordinate your land lease to our mortgage."

Counsel for the car rental company then responds, "Okay, we'll agree to subordinate, as long as you sign our Subordination, Non-Disturbance and Attornment Agreement." The attorney exchange documents and cut a deal. The new first mortgage is recorded, and the car rental company subordinates it's land lease.

The old man's new wife ends up being a spendthrift and drives him into bankruptcy. The bank forecloses on the property, which is now improved with a gleaming, modern automotive center. The REO property manager for the bank contacts ABC Rent-a-Car and tells them, "Hey, our foreclosure just cut off your lease. You were paying only $40,000 per year for this beautiful facility, but the fair market rent for the property is now at least $100,000 per year. You'll have to start paying us $100,000 per year if you want to continue to rent the property."

"Not so fast, Bucko," replies the attorney for the car rental company. Please check the Subordination, Non-Disturbance and Attornment Agreement that your bank executed. Under the terms of that agreement, your bank promised not to disturb our existing lease if you foreclosed. Now that you have completed the foreclosure, we certainly agree to attorn. Attornment is a word from feudal times that means acknowledging a new lord. In this case, the rental car company acknowledges that all future rent is owned to the new landlord, in this case the bank.

Need a commercial loan? You can apply to 750 different commercial lenders in just four minutes using C-Loans.com. And C-Loans is free!

Make a PDF of Your Commercial Loan Package and Email It to Scores of Commercial Lenders

If you are a commercial mortgage broker, you just have to use the new PDF-creator software on C-Loans to make your commercial loan packages. It's free!

Just input your commercial loan into C-Loans.com as usual. Go ahead and submit your commercial loan to six commercial lenders.

After you have submitted your commercial loan to six commercial lenders, an option will appear that allows you to create a PDF with just one click. After your commercial loan package has been converted to a PDF, simply save it to your desktop.

Once the commercial loan PDF is on your desktop, you can then create an email addressed to 40 or so commercial lenders and attach the PDF.

You can even attach color photo's to your commercial loan package, making it look very, very professional. And remember, both C-Loans.com and this software are free.

Pretty Scary Report from 60 Minutes

The television show, 60 Minutes, recently aired a terrifying report that suggests that the housing meltdown is less than 50% completed. The problem is that 2.5 trillion in Alt-A and Option ARM's are coming up for rate readjustments in late 2009 and 2010.

Here's a link to the report:
http://www.youtube.com/watch?v=iUuROWEMjm0&eurl=http%3A%2F%2Fwww.silverbearcafe.com%2Fprivate%2F05.09%2Fmeltdown.html&feature=player_embedded

A Broken Condo is a Project That Didn't Sell Out

Commercial loan brokers should be on the look-out for broken condo projects. There is a good chance to make a nice commercial loan brokerage commission.

A broken condo project is a residential condominium project that didn't sell out. The unsold units are usually converted back to multifamily rental housing.

I spoke with a major commercial loan officer at a large bank today. This bank makes portfolio apartment loans. I asked him if it is possible to finance broken condo's.

His reply surprised me. He indicated that, of course, that if none of the condo units were sold, that a normal apartment loan is a no-brainer.

But he also indicated that if only a handful of the units were sold that a portfolio loan on the rental units would be possible.

However, he stressed that if too many of the units were sold as condo's that such a deal would be impossible. How many is too many? Certainly if 25% of the condo units had been sold, the deal would be difficult to finance. I was left with the clear impression that if only 10% to 15% of the condo's had been sold that his bank would definitely consider financing the apartments.

Need a commercial or multifamily loan? You can apply to hundreds of commercial lenders in just four minutes using C-Loans.  And C-Loans.com is free!

It's Getting More Difficult for Hard Money Lenders to Raise Lending Capital

If you are commercial mortgage broker, you should not be trying to place large, hard money, commercial loans. Large commercial loans just aren't closing these days.

One of the reasons why is because hard money commercial lenders are having a difficult time raising money. Before the real estate crash of 2007, most hard money commercial loan brokers raised their money using mortgage funds. When the markets crashed, all of their depositors try to pull their money out of these funds. The situation has not improved since October of 2007.

Therefore very few hard money commercial lenders still have mortgage funds with which to make large commercial loans. Instead, if a hard money commercial lender wants to fund a commercial loan today, he has to syndicate a fresh group of private mortgage investors. This is a whole lot of work.

Therefore very few hard money commercial lenders are making commercial loans larger than $3 million today.

Need a commercial loan? You can apply to 750 different banks and hard money commercial lenders in just four minutes using C-Loans.

Cap Rate is Short for Capitalization Rate

You have probably heard the term cap rate many times, but what does it mean? Here's an easy way to understand the concept as it applies to commercial real estate. A cap rate is simply the return on your investment if you bought a commercial property for all cash.

For example, let's suppose that you buy for $1 million an office building that is leased out to an insurance broker. The insurance broker pays you $9,000 per month in rent, but there are also expenses, like real estate taxes, insurance, property management and a small reserve where you set aside money every year to eventually replace the roof and the HVAC system. Let's assume your net operating income (NOI) is $77,000 per year.

To compute the cap rate at which you bought the building, you merely divide your anticipated NOI by your purchase price.  In this case, $77,000 divided by $1,000,000 is 0.077. To express this cap rate as a percentage, we merely multiply 0.077 by 100% to produce a cap rate of 7.70%.

In plain English, a 7.70% cap rate means that you - as a passive commercial real estate investor - will earn a 7.7% annual return on your $1 million investment in this commercial property. Please also remember that for the purposes of computing a cap rate that you should assume that the buyer did not use a commercial real estate loan to finance the property.

You can't use the same cap for every commercial property. Some commercial properties are far more desirable than others. For example, let's suppose that Microsoft Corporation was the tenant on this property, and they signed a lease for 20 years. Arguably Microsoft is one the strongest credit tenants in America. If you - as the owner of the commercial property - had a lease with a strong, credit tenant, other investors would be very envious of you. In fact, they would offer you a lot of money for this property, perhaps as much as $1,800,000.

Now remember, the net operating income is still just $77,000 per year. If you sold the commercial building to another commercial real estate investor, who wanted a very reliable income stream, for a whopping $1,800,000 - he would be buying this same commercial property for just a 4.3% cap rate. Would someone really buy a piece of commercial real estate with a cap rate of just 4.3%? Maybe ... if indeed the property was leased to a major credit tenant for twenty years. By the way, a credit tenant is usually publicly traded or a large private entity with a strong S&P rating.

On the other hand, suppose you owned an old industrial building in a seedy part of town that was leased to an auto parts manufacturer. Suppose this auto parts manufacturer sold its parts mainly to General Motors, and the auto parts company wasn't making a lot of money. Let's further suppose that the neighborhood immediately surrounding your property was filled with prostitutes and drug dealers.

Even if this property was generating the same $77,000 in net operating income, you might not be able to sell the property for very much money. Any potential buyer might think to himself, "Geesh, if I drive over to collect the rents or to check on the condition of my property, I'm putting my life in danger. Yuck." This investor might not be willing to buy the property for less than a 12% cap rate.  Seventy-seven thousand dollars divided by 12% is just $641,000.

Remember, the more desirable the commercial property, the lower the cap rate a buyer will require before he buys it.

Scanners With Document Feeders Are Becoming Essential

Commercial mortgage loan brokers now only really need three pieces of equipment - a reliable cell phone, a laptop computer, and a combination copier / fax machine / scanner.

The need of a commercial loan broker of a good cell phone is obvious; but have you ever considered whose phone number you are promoting? Let's suppose that you send a thousand mail pieces and 3,000 emails every month for two years. Further suppose your marketing pieces encourage your clients to call the main office number for your broker.

Now suppose your broker goes belly-up. Oops! All of those clients and referral sources will be calling a disconnected phone number. Yikes.

Or suppose a commercial real estate agent really needs a commercial mortgage loan for his client. He calls your office and asks for you, but you're out of the office. "Is there another commercial loan agent there with whom I could speak?" You've just lost a commercial loan and potentially a good commercial real estate agent.

The moral of the story is this: Promote your personal cell phone number, not the office number of your broker.

Let's talk about laptop computers. I recently converted to an Apple MacBook, and I absolutely love it. No longer do you have to spend hours updating your virus protection software and malware protection software. Sure, an Apple MacBook costs an extra $600; but the machine so worth it.

Don't worry about software. Microsoft makes Office software for the Mac. This means that I can still use the fabulous Apple OSX software and still communicate with my office. There is Word, Excel and PowerPoint for the Mac, and my staff at our commercial loan office can easily open with their PC's any file I create on my Mac. It's heavenly.

But the machine that gets me hot and sweaty is my new, combination copier / fax machine / scanner with autofeeder. The other day a broker faxed a commercial loan package to me. Because the original commercial loan package had been faxed to him, I was working with a second generation fax. The copy quality was starting to decline.

I printed out the commercial loan package and then scanned it using the autofeeder. I then clicked a few times on my laptop and created a PDF, which I simply emailed to my office. The quality did not degrade, and my commercial loan officer at Blackburne & Brown was able to issue a loan approval letter the same day.

This combination machine was not expensive. It was less than $300 and I absolutely love it. It's a Canon MX700 and I even bought it using the reward points on my credit card.