Commercial Loans and Fun Blog

The Banks Don't Have Any Money

Every commercial loan broker will tell you that the banks are not making a whole lot of commercial loans these days. Surprisingly, the reason why isn't just because they are afraid to make new commercial loans.

Another important reason is that many banks are fully-invested. In plain English, they don't have the money to make new commercial loans.

This lack of liquidity is not the result of loan losses associated with the subprime meltdown. Few small banks were involved in the deal-flow of subprime loans. When the music suddenly stopped, the small banks were not left holding a huge volume of unsold subprime residential loans. It is easy, therefore, to assume that the small banks have plenty of money to lend.

In fact, the opposite is true. Banks have always preferred to make short term loans, like construction loans and bridge loans. This way they constantly have a few outstanding loans paying off every month, giving them the liquidity to make new short term loans. Unfortunately, ever since the financial crisis began, their outstanding loans have not been paying off. Borrowers with construction loans and bridge loans have been unable to refinance their loans with long-term lenders. The banks have been forced to extend these short term loans into longer term mini-perms.

To make matters worse, most small banks had a great many lines of credit extended to businesses that they served. Most of these businesses are now losing money, so the businesses are drawing down on their credit lines.  This has further drained liquidity from the banks.

Lastly, this is a very difficult time for banks to attract new deposits. The prime rate is a rock-bottom 3.25% right now. The 11th District Cost of Funds Index, a fair proxy for the typical bank's cost of funds, is a whopping 2.75%. Twenty years ago a small bank could not survive on a gross interest margin of less than 6%. With sophisticated new software and ATM's, a small bank can modernly make a profit on a gross interest margin of 4%. Helloooo? Small banks are being forced to survive right now on a gross interest margin of just 50 basis points. They certainly cannot raise interest rates to compete for more deposits.

I feel like an early pioneer, whose wagon train is surrounded by angry Indians, and who learns that the cavalry detachment sent to relieve him is itself under siege by Indians.  The small banks were one of the last sources of lending that might save this faltering economy, and it now appears they too are under siege. Yikes.

SBA Lenders Have Stopped Making Gas Station Loans

Because of the large number of SBA loans on gas stations that have gone bad, many SBA lenders are no longer making gas station loans. I think the issue may be a directive from the SBA itself - no more gas station loans.

Blackburne & Brown, my hard money shop, is still making gas station loans. You can apply for a gas station loan by clicking here.

I Had a Long Conversation With a Veteran SBA Originator

I have a buddy who has been originating SBA loans exclusively for over a decade. Yesterday we spoke about SBA lending for almost 40 minutes. Here are some of the highlights:

SBA lenders rely on selling the insured portion of their SBA 7a loans to bond investors in order to get their principal back with which to make new loans. During the nadir (lowest point) of the financial crisis last year, these bond buyers completely disappeared.

As a result, the huge finance company for which my buddy worked completely stopped making SBA loans for three months. Many other SBA lenders dropped out of the market as well. The only SBA lenders left in the market at the time were a few banks who had the luxury of holding newly-originated SBA loans in inventory.

Recently, however, my buddy's huge finance company converted to a bank and received over $2 billion in TARP money. As a result, his company is now aggressively back in the market to make both 7a and 504 SBA loans.

The SBA will not insure loans on apartment buildings and self-storage properties. These properties earn their cash flow from relatively long-term rentals. As a result, they do not create a lot of jobs and are therefore not eligible to be insured.

Hotel and motels, as my buddy pointed out, are suffering greatly as a result of the financial crisis. Few SBA lenders will make loans on hotels and motels right now.

My buddy's company will not consider gas stations as well right now. His company made a lot of bad gas station loans and lost tens of millions of dollars. Apparently few other SBA lenders will consider gas station loans right now because my own hard money shop, Blackburne & Brown, is seeing a ton of gas station deals.

To my surprise, my buddy told me that the SBA will make loans on mixed use properties. A mixed used property is one where there is both commercial space and residential income space (apartments). Being from New Jersey, he sees a lot of mixed use properties in downtown areas where there is an apartment upstairs and a commercial unit (storefront) downstairs. The only restriction is that the owner-used commercial space must be larger than the apartment space; however, since most of these properties have basements used by the owner of the commercial space, this condition is usually satisfied.

He also surprised me by saying that an SBA loan borrower does not have to have good credit. If the borrower's credit problems were a result of some situation that has subsequently been resolved (divorce, medical problem, etc.), the borrower will still qualify for an SBA loan. He just can't have a lot of delinquencies at the time of the application.

The biggest issue is that the borrower must be able to demonstrate from his tax returns that he has the ability to make the proposed payments. Of course he gets to add back any depreciation and interest payments on any loans that will be paid off from the proceeds of the SBA loan.

My buddy's company has plans to make between $400 million and $600 million in SBA loans this year; however, there has been a fundamental shift in the type of deals they will make.  No longer will they make loans where the underlying commercial real estate constitutes less than 50% of the size of the loan.

Prior to the financial crisis, SBA lenders were regularly making SBA loans with no commercial real estate as collateral at all. They would often finance the purchases of franchises and professional practices, for example. His own company will no longer make SBA loans without some commercial real estate as collateral.

I was surprised at the leverage that SBA lenders can achieve. Using the SBA 7a loan program, SBA lenders can finance not only the purchase of commercial real estate, but also furniture and equipment to use in the property. They can often finance up to 150% of the value of the commercial real estate!

Did you know that if an SBA loan goes delinquent for four months that the SBA lender can present the loan to the SBA, and the SBA will immediately return 75% of the SBA lender's original principal? The SBA lender is still responsible for foreclosing on the collateral and selling the property. Whatever the SBA lender recovers, it must give 75% back to the SBA; but it still gets to keep the remaining 25%.

Let's suppose a SBA lender makes a $1,000,000 loan. When the loan goes delinquent by four months, the SBA lender presents the loan to the SBA, and the SBA immediately gives the lender $750,000 (75%). If the property is later sold at foreclosure for a net sales price of $800,000; the SBA lender gives $600,000 to the SBA (75%) and keeps $200,000. The SBA lender therefore recovered $750,000 plus $200,000 on a $1 million loan, for a loss of only $50,000. This is a good deal.

Based on my buddy's comments, it appears that SBA lenders are likely to loosen up and make some loans this year.

Do you need an SBA loan? You can submit your 51% owner-used commercial property loan to scores of different SBA lenders in just four minutes using C-Loans.com. Ad C-Loans is free!

Title to Many Commercial Properties are Held by Subchapter S Corporations

About 25 years ago some thief was climbing on the roof of a commercial building in New York. He was trying to break into the store to steal stuff, and he had no business being on the roof. The roof was near the end of its useful life, and the thief fell through the roof and severely injured himself.

The thief must have had unbelievable audacity because he actually sued the owner of the commercial building for negligence for failing to maintain the roof. To the shock and awe of commercial property owners everywhere, this miserable thief won his lawsuit and was awarded over a million dollars in damages.

The property owner held title to the building personally, and he was personally wiped out when the judgment debtor took virtually everything the poor man owned.

From that moment on, commercial property owners across the country desperately sought a way to insulate themselves from liability. They could not hold title as a regular "C-corp" because they would be taxed twice - once as a corporation and another time when the owners drew out their profits as dividends. Limited liability companies had not yet been invented.

The solution was the subchapter-S corporation. A subchapter-S corporation can only be used for new business ventures, and there is a limit of 35 shareholders. You can therefore never take a subchapter-S corporation public.

The big advantage of the subchapter-S corporation, however, was that it was not taxed twice. The net income of a subchapter-S corporation passes directly through to the owners of the corporation without taxation. The shareholders only pay taxes once on the profits, as they are added to their personal income on their 1040's.

As a result, for about 15 years, title to a great many commercial properties was held by a subchapter-S corporation.

Modernly, subchapter-S corporations have been replaced by limited liability companies (LLC's). LLC's do not have to be new ventures, and ownership is not limited to 35 shareholders.

As a commercial mortgage broker, however, you will still occasionally see subchapter-S corporations. You will need to gather Articles of Incorporation (summary of the key organizational facts - like the name of the corporation, address, etc. - that is filed with the state), the Bylaws (detailed instructions on how to run the corporation), and a Corporate Resolution to Borrow (the minutes of the Board meeting authorizing the president to borrow money on behalf of the corporation).

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

If You're Trying to Sell a $5+ Million Commercial Property, Consider Real Capital Markets

If you are trying to sell or lease a large commercial property, consider the following: Real Capital Markets assists in the sale of a whopping 30% of all commercial properties worth over $10 million! This includes all property types, including multifamily, office, retail, industrial, and hospitality.

"Is Real Capital Markets a real estate broker?"

No. In fact, it is the listing commercial real estate broker who usually recommends to his client that he hire Real Capital Markets to assist with the sale.

"So what exactly does Real Capital Markets ("RCM") do?"

The two big services that RCM performs are marketing and supplying a document storage/display room to share the financial info with prospective buyers (more on this in a bit).

First of all, in order to sell a large investment property, you need to find a buyer. And just like a fisherman needs bait, the seller and the listing broker needs a very attractive Executive Summary (aka: teaser) to dangle in front of potential buyers. RCM prepares this teaser for the seller. I've seen a few of these teasers prepared by RCM, and they are gorgeous.

A stunning looking Executive Summary is great and all, but its not a lot of help if no one ever sees it. Therefore the next marketing service that RCM provides is a huge email list (2,000 to 4,000) of potential buyers, including opportunity funds, fund advisors, REIT's, trusts, developers, money managers, real estate operating companies and wealthy principals.

You can't send out all of the financial data at once to these prospective buyers because some of these data files are as large as 4 gigabytes. RCM therefore sends out the teaser by email, together with an encrypted link to a "virtual war room" containing the data. The encryption is 120-key ADS, the same level of encryption used by the National Security Agency. The prospective buyer first signs a confidentiality agreement before enjoying access to the property's financial data.

From the point of view of the listing broker, the email marketing system used by RCM is awesome.  A broker can view in real time just which prospective buyers nibble on the data, allowing the broker to make targeted follow-up calls.

The second major service provided by RCM is the virtual war room, where the listing broker stores the 30 to 50 data files on the property's financial condition. There are rent rolls, operating expense histories, leases, property photo's, Argus runs, and scores of other important but private documents. The listing broker, using the RCM service, can allow one potential buyer to have only a limited access to documents and another potential buyer to have full access to all of the documents. Access for each buyer can be set to low, medium or high, and of course the broker can see who is downloading which documents.

RCM is no longer just used in connection with the sale of commercial real estate. Increasingly banks are using RCM to assist in the sale of large mortgage notes on commercial properties. REIT's and large real estate operating companies are also using RCM to store all of their financial documents on all of the properties in their portfolio's. This way the data is easily available to branch offices, shareholders, equity partners, JV partners, staff and outside attorneys, investors and shareholders.

It's no wonder that that the services of Real Capital Markets is used in connection with the sale of 30% of all commercial properties worth $10 million or more.

But what does this service cost? Surpisingly, very little. The cost is typically only $2,500 to $4,500, depending on the level of service provided by RCM. Please be sure to tell Real Capital Markets that you found out about them from C-Loans because you get a 5% discount.

You can reach Real Capital Markets by calling Jay Knowles, Real Capital Markets, 760-602-5080 x 232.

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

Only SBA Lenders and Hard Money Lenders Make Them

In the early 1990's commercial real estate nationwide suffered through a depression. Commercial real estate values fell by 45%.

Prior to the early 1990's there were lots of commercial lenders who would make second mortgages and second trust deeds on commercial real estate. The commercial real estate depression on 1991 wiped almost all of them out. Since then very few commercial lenders have been willing to take the risk of making a second mortgage.

Certainly very few banks will make commercial second mortgages these days ... unless the loan is guaranteed by the SBA. If your company occupies more than 50% of your commercial property, you should definitely apply to C-Loans for an SBA second mortgage.

The SBA, however, will not guarantee commercial loans made on residential investment real estate, like apartment buildings and mixed used properties (for example, apartments over storefronts).

The only other type of lenders that might consider a commercial second mortgage or a commercial second deed of trust is a hard money lender. Hard money lenders will typically charge between 13% and 15% and five to eight points for a three to five year interest-only second mortgage. Like the old joke says, their apples may be expensive, but at least they have apples.

There is a very important ratio that applies to commercial second mortgages. It's the Old-Money-to- New-Money Ratio. In this ratio, the old money is the existing first mortgage. The new money is the gross amount of the new second mortgage. The ratio of old money to new money must never be greater than 3:1.

The reason why is that the second mortgage has to keep the first mortgage current as it forecloses; otherwise the foreclosure of the first mortgage will wipe out the second mortgage (very few buyers in real life ever bid at commercial foreclosure sales). If the second mortgage is too small in comparison to the first mortgage, then the second mortgage lender will have to keep far too much money sitting around uninvested and ready to carry the first mortgage for 18 months to complete the foreclosure and possible Chapter 11 bankruptcy of the borrower.

For example, if a lender foolishly makes a $100,000 second mortgage behind a $1 million first mortgage, the second mortgage lender may have to advance $180,000 (18 months of $10,000 per month payments on the first mortgage) in order to protect a measley $100,000. The ratio of old money to new money should never exceed 3:1.

You can apply to scores of commercial second mortgage seconds in just four minutes using C-Loans. And C-Loans is free.

Credit Unions Are Becoming an Important Source of Commercial Real Estate Loans

The commercial mortgage-backed securities industry virtually disappeared in late 2007 and 2008.  Commercial banks have fortunately stepped up to make a fair volume of commercial real estate loans; but unfortunately they are not approving a huge volume of commercial deals.

As a result, credit unions are beginning to emerge as non-trivial players in the smaller commercial real estate loan market.

Credit unions have several advantages when it comes to commercial real estate loans. First of all, credit unions were not involved in the meltdown of the sub-prime residential mortgage-backed securities market. Therefore they are, as a group, financially healthier than many of the larger banks.

Secondly, credit unions are portfolio lenders. As a result, they can make fixed rate commercial loans with prepayment penalties far less onerous than the defeasance prepayment penalties required by life companies, CMBS lenders and many commercial banks.

But doesn't the borrower have to be a member of the credit union in order to borrow? Yes, but in 1998 the Federal government relaxed the rules for credit union membership. Prior to 1998 only the largest companies had credit unions. In 1998 the Federal government changed the law to allow credit unions to accept members from outside their core group, as long as those people come from companies or groups with fewer than 3,000 people. Credit unions can also apply for exemptions to accept even larger groups.

The banks howled in protest. Credit unions are exempt from Federal taxation, and the rapid growth in credit union membership cut into their deposit-taking and loan markets. In 1999, however, a Federal appeals court rejected the legal challenge filed by the banks. Credit union membership has grown sharply since 1999.

As a practical matter, therefore, a great many borrowers now fall within some small group that would allow them to join a nearby credit union. Commercial loan borrowers and commercial mortgage brokers should therefore consider local credit unions when trying to place a commercial loan.

Right now credit unions are small players in the commercial real estate loan market. Fewer than 4% of all commercial real estate loans originated in the past twelve months were originated by credit unions. However, ten years ago this figure was less than 1%, and in three years it would not be surprising to see this figure grow to 7% or 8%. Credit unions are indeed becoming an important source of commercial real estate loans.

You can apply for a commercial real estate loan to scores of credit unions, as well as hundreds of banks, using C-Loans.com, the free commercial mortgage lender databank.

Includes George's Famous Pooh-Pooh Soup Story

You're a commercial mortgage broker. You've just quoted a commercial real estate loan to a borrower over the phone. The borrower appears interested, and you want to convince the borrower to send his commercial real estate loan application to you, as opposed to a competing mortgage broker or bank.

The key thing to remember is the Theory of Momentum. A body at rest tends to stay at rest. A body in motion tends to stay in motion.  A potential commercial real estate borrower is therefore going to want to keep sitting on his hands.

To convince a potential commercial borrower to send his loan package to you, never ask for too many documents at one time.

If you ask for a huge checklist of documents, the borrower will surely procrastinate, during which time he'll speak with a competing commercial lender or mortgage broker, and you'll lose the deal. Instead, ask for just two or three documents at a time. Gather the six-inch-thick stack of required documents slowly over a period of weeks.

"But George, it will take months to close a commercial loan at that pace."

We've all heard the story about the young bull and the old bull standing at the top on the hill and looking down over a herd of beautiful heifers. The young bull turns to the old bull and says, "Hey, Pops, let's run down and kiss one of those cows." The wise old bull replies, "Son, let's walk down and kiss them all."

The point of the story is that if you rush things, your success rate is often much lower. If you ask for a huge checklist of documents, you'll only close one deal in fifty. If you gather the required documents in small, easy waves, you might be able to convince all fifty borrowers to send you a package.

But you have to give the borrower reassurance that his commercial loan application is looking good ... and this leads us to my famous Pooh-Pooh Soup Story:

Have you ever noticed that whenever you order anything to eat at an expensive French restaurant that the snooty waiter always says, "Ah, good choice. The duck a la orange is delicious!" And when you order dessert, "Wonderful choice, sir. The Crepes Suzette are
delicious!"

I've therefore often wondered that if I ever asked for Pooh-Pooh Soup (you guessed it, a log floating is broth ..... eeuuuuu!) whether the French waiter would say, "Ah, the Pooh-Pooh Soup is delicious!"

Now back to our training. We've pointed out that you absolutely need to ask for the documents in five or six waves of three or four easy documents to fetch. But the borrower will need reassurance, before fetching a whole new wave of documents, that at least so far his commercial real estate loan application looks good.

So when you get the first wave of documents - his current schedule of leases (rent roll) and his last year's actual operating expenses - quickly scribble out a pro forma operating statement and do a debt service coverage ratio calculation. Then, assuming the numbers look good, you can tell him, "I've crunched the numbers, and so far your deal looks very do-able!"  (The pooh-pooh soup is delicious!) "Now all I need is a financial statement and two years tax returns."

With these documents you can pull a credit report and report back to the borrower, "I've looked at your financial statement, tax returns and credit report, and everything continues to look very favorable!" (The pooh-pooh soup is delicious.") "Now all I need is a copy of the leases and a financial statement and two years' tax returns on the LLC that actually owns the property." And so on, being sure to reassure the borrower that his loan package looks good (the pooh-pooh soup is delicious) after receiving each wave of documents.

So, to summarize, the object of the game is to convert a telephone lead into a loan package. To get your commercial loan borrower finally moving in your direction, you must not ask for a huge checklist of documents. Instead, ask for a very short list of easy documents to gather. After receiving each wave of documents, be sure to tell the borrower that his deal looks great (the pooh-pooh soup is delicious!). It will take you slightly longer to close a commercial loan this way, but you'll close far, far more deals (you'll kiss them all!).

Do you need to place a commercial real estate loan right now? You can submit your commercial deal to 750 different commercial real estate lenders in just four minutes using C-Loans.com. And C-Loans is free!

Perhaps as many as 10% of all of the practicing commercial mortgage brokers in the industry are my former trainees. If you would like to really learn how to broker commercial real estate loans like a pro, please click here.

C-Loans Just Introduced a Free, New Tool to Create PDF's

Let's start from the basic proposition that commercial lenders are picky and unpredictable. A commercial mortgage broker often has to shop his commercial real estate loan package to a dozen different commercial lenders before he finds a good home for the deal.

If you, as a commercial mortgage broker, have to pay Fed Ex charges to a dozen different lenders, your package delivery charges will cut deeply into your profits. In addition, shuttling your commercial loan package between a dozen different lenders will take weeks, during which time your commercial borrower may find a cheaper bank on his own. Wouldn't it be great to be able to submit your commercial loan package by email?

If you create your commercial loan package as a PDF, you can submit your deal instantly to a dozen different commercial lenders across the country by email. The problem is, however, is that you don't have the $350 version of Adobe software to create the PDF's. Even if you did have the software, you really don't know how to use it.

C-Loans.com has just added a feature that will allow you to create a gorgeous PDF presentation of your commercial loan for free. Just come to C-Loans.com and enter your commercial deal as usual. Go ahead and submit your commercial loan to six lenders.

On the departure page you will find a new button that will allow you, with one click, to "Create a PDF". Be sure to save the PDF of your commercial loan package on your desktop. You can then attach this gorgeous PDF to an email to a dozen of your best commercial lenders.

What does one of these PDF commercial loan packages look like? Simply click here to see a sample commercial loan package as a PDF.

Do you need a commercial real estate loan right now? You can submit your commercial real estate loan request to 750 different commercial real estate lenders in just four minutes using C-Loans. And C-Loans is free!

Are you the owner of a commercial property? Do you want to hire George Blackburne personally to place your commercial loan? George charges one point upon closing, regardless of the loan size, to serve as your mortgage broker. Please click here if you would like to contact him directly.

Free Online Demographics Tools Warn You When Your Loan is in a War Zone

Your commercial lender will be pretty sore at you if he spends two hours to drive out to inspect your client's commercial property, only to find out that his life is in danger because the area is a war zone, with hookers and drug dealers on every corner. That's your fault - the commercial mortgage broker - for not warning him in advance.

It's pretty easy these days to determine online whether or not a commercial property is located in a tough area. Just go to City-Data.com and read the free demographic information they provide. The income levels, the education levels, and the crime statistics will all help paint a fairly accurate picture of the neighborhood.

The wise commercial mortgage broker will turn down commercial deals in low-income, high-crime, high-drug-use areas. These loans are almost impossible to place. Instead, he'll use his precious time to work on his marketing and his mailing lists.

Need a commercial real estate loan right now? You can apply to 750 different commercial lenders for free in just four minutes using C-Loans.com.