Commercial Loans and Fun Blog

The Government is Anxious to Help These SBA Loans Get Made

As a result of the sub-prime crisis and the resulting credit crunch, banks across the United States have greatly reduced their commercial real estate lending. The Federal government is desperate to pump money back out into the economy. One of the vehicles that they are aggressively using is the SBA loan program. As a commercial mortgage broker, you would be smart to get aggressively involved in SBA deals.

The Small Business Administration (SBA) does not actually make small business loans. Instead, the SBA merely guarantees up to 90% of the principal of certain business loans made by banks and other specialized SBA lenders. Two of the most popular SBA loan programs are the CDC/504 program and the SBA 7(a) program.

Under the SBA 7(a) program, an SBA lender will make a commercial real estate loan that is fully-amortized over 20 or 25 years. Right off the bat, this is a very attractive program because most commercial real estate loans have a loan term of only five to ten years.

The SBA will then guarantee up to 90% of this small business loan for the bank, and the bank will typically be able to sell the loan off in the secondary market at a handsome premium - often five to seven percent of the loan amount. A loan or a bond sells for a premium when it fetches more than the face amount of the debt, usually because the interest rate is higher than the market.

SBA 7(a) loans are written as adjustable mortgage loans tied to prime. The spreads will vary from a low of 1.5% over prime to a maximum of 2.75% over prime. The loan fee depends on the size of the loan and the type of collateral (equipment versus commercial real estate), but the fees usually run between 2 and 3 points.

Small business owners can borrow between $50,000 and $2 million using the SBA 7(a) program.

The really big advantage of the SBA 7(a) program is that the owners of existing small businesses can often get loans up to 90% of the purchase price in order to buy commercial real estate for their businesses. Commercial real estate loans up to 90% loan-to-value are pretty terrific today, especially when you consider that many conventional commercial real estate lenders have cut their loan-to-value ratios down from 80% to just 70% to 75%.

In order to qualify for an SBA 7(a) loan, the business owner must occupy, or intend to occupy, at least 51% of the commercial real estate being purchased. The commercial real estate cannot have a residential component. For example, if the target property consisted of an old home and a large warehouse, it probably could NOT be financed using SBA financing.

SBA 7(a) loans must be fully-collateralized. In other words, the SBA lender is likely to blanket all of the borrower's inventory, receivables and equipment. This makes it difficult for the business to obtain a business line of credit from a bank. In addition, the SBA lender will usually blanket the personal residence of the borrower.

Borrowers can also obtain SBA 7(a) loans for working capital, to purchase equipment or to acquire businesses or franchises. The required downpayments, however, are larger. Start-up borrowers will usually be required to put at least 20% down. More often they will be required to put 30% down.

Do you need an SBA loan right now? You can apply to over 100 SBA lenders for free in just four minutes using C-Loans.com.

Banks Are the Best Source for Commercial Loan Leads

If you are a commercial loan broker, your number one source for commercial real estate loan leads should be the local banks located close to your office. It's a great time to be trolling in these waters because commercial banks are turning down a lot of commercial real estate loan requests right now.

Start by going to maps.yahoo.com. Input your office address and then ask for a map. Then plot every commercial bank located close to your office. It's easy. In the Find a Business on the Map field, simply type in the word, "bank". Instantly every nearby bank will be plotted on the map.

After locating all of the bank branches close to your office, then drop in on one or two commercial banks every business day. Ask to speak to the loan officer who handles their commercial real estate loans.

Explain to the banker that you would like to provide commercial loan services to any of his customers who the banker has to turn down. Leave the banker a flyer, along with three or four of your business cards.

Follow up the visit with a handwritten thank-you note to the banker on your company stationary and in a hand-written company envelope. The idea here is to get the banker to recognize your logo and company name. Of course, be sure to include several more of your business cards. Make sure these business cards prominently display the words, "Commercial Real Estate Loans".

Then, every ten days, be sure to send the banker something. One time you might send a funny political cartoon, and the next you might send a folksy newsletter with lots of jokes. And, of course, always be sure to include three more of your business cards with every fun communication. Pretty soon the banker will look forward to your snail mail because you always send something fun.

Try to take each of your bankers out to lunch every couple of months. Invite them to play golf with you. If a banker sends you a referral, drop by the next day with a sleeve of golf balls or a gift certificate for a free lunch. Make these guys your friends. Remember, the typical bank loan officer probably turns down a half-dozen commercial loan requests every week. Often there is no real good reason for the turndown, other than the bank simply doesn't like motels loans or the loan is the wrong size (too large or too small).

If you religiously call on one or two bankers every business day, you will quickly develop a terrific flow of commercial real estate loan leads.

The Wise Commercial Mortgage Broker Will Aggressively Solicit These Loans

Many banks today are terrified of making conventional commercial real estate loans. They are afraid of losing money. Using the SBA 504 loan program, however, a bank is largely insulated from loan losses. As a result, many banks are still quite anxious to make these commercial loans. If you're a commercial mortgage broker, why not try to swim downstream? You should originate the kinds of loans that the banks want to see during this credit crisis.

Under the SBA 504 loan program, a borrower can finance up to 90% of the purchase of a piece of commercial real estate. He can sometimes also finance up to 90% of associated heavy equipment he might need for his factory.

These loans are typically made by banks, with the assistance of a local Community Development Corporation. A conventional commercial first mortgage of 50% loan-to-value is made by the bank, and a piggy-back second mortgage up to 90% loan-to-value is recorded concurrently.

For example, let's suppose a widget manufacturer wished to expand its business by buying an industrial building for $1 million. The bank would make a $500,000 conventional commercial first mortgage at market rates, typically amortized over 25 years, due in ten to twenty-five years, and with a fixed rate for at least the first five years. The bank would record concurrently a $400,000 second mortgage that would eventually be sold to a local Certified Development Corporation and guaranteed by the SBA.

The buyer would therefore get $900,000 in financing on this building. He would only have to put $100,000 down. In contrast, if he applied to a conventional commercial mortgage lender, he normally would only be able to finance $700,000 to $750,000. He would have to put down a whopping $250,000 to $300,000.

But wait! It's gets better. The second mortgage is fully-amortized over 20 years. There is no balloon payment. In addition, because the second mortgage loan is guaranteed by the SBA, the interest rate is typically 1.5% lower than the underlying conventional first mortgage. The borrower gets a blended rate, between the market interest rate on the $500,000 first mortgage and the lower, subsidized interest rate on the $400,000 second mortgage, that is around 1% lower than conventional first mortgage rates.

But that's not all! Both loans are also assumable. The loan fees are also low - typically 1.5 points on the first mortgage and 1 point on the second mortgage. The SBA 504 loan program is a great deal. Plus banks actually want to make these loans.

There are some limitations. First of all, the property must be at least 51% owner-used. Usually the borrower's credit score must be at least 600 - but even this is good compared to banks today, who normally require a credit score of at least 650 on conventional commercial real estate loans.

Finally, after adding back depreciation and existing rent payments, the borrower's net income from his business, according to his tax returns, must substantiate enough income to make the proposed new mortgage payment. The coverage ratio only needs to be 1.0. In contrast, conventional commercial real estate lenders require a 1.25 debt service coverage ratio.

So if you are a commercial mortgage broker, be sure to get involved with the SBA 504 program. You can apply to scores of SBA lenders using C-Loans.com. And C-Loans is free!

These Partially-Guaranteed Construction Loans Are Still Getting Done

As a result of current banking crisis, very few commercial construction loans are getting funded. I have warned commercial mortgage brokers extensively, in this blog and on the main C-Loans website, not to waste precious time trying to place commercial construction loans or residential subdivision construction loans. There is one exception to this rule.

If a commercial property will be 51% owner-used, it is still very possible today to obtain an SBA 504 construction loan. More precisely these loans are known as CDC/504 loans.

Despite the name, these loans are not made by the Small Business Administration. Instead, SBA 504 (CDC/504) loans are made as a conventional first mortgage loans with a piggy-back second mortgage that is recorded concurrently.

The first mortgage is actually made by a conventional lender, typically a bank. The piggy-back second mortgage is also typically the bank or 504 lender for about 45 days, but then the second mortgage is assigned to a Certified Development Corporation and guaranteed by the Small Business Administration.

After the construction period, the underlying conventional construction loan converts to a long term conventional permanent loan. This loan is often fixed for five to ten years and is typically amortized over 25 years. The conventional loan will typically have a term of 10 to 25 years.

The piggy-back second mortgage is always fully-amortized over 20 years and is written at a government-subsidized interest rate about 1.5% lower than the typical conventional commercial first mortgage.

The big advantage of an SBA 504 loan is that the owner only has to contribute 10% of the total cost of the project, including loan fees and other soft costs. The owner can often include some heavy equipment costs in his total project cost, meaning that he gets to buy some heavy equipment at low commercial real estate loan interest rates. In contrast, on a conventional commercial construction loan, the owner usually has to contribute 20% to 35% of the total project cost.

You can apply to 50 SBA 504 lenders using C-Loans.com.

Even Small and Regional Commercial Banks Have Cut Back Sharply on Commercial Real Estate Loans

As the sponsor of the C-Loans Commercial Mortgage Lender Databank, we have our fingers on the pulse of the commercial real estate lending market. The CMBS lenders started to die late last year and now they are not lending at all.

Most of the mega commercial banks got crushed in the subprime residential lending debacle. Their balance sheets are so underwater that they are making at most 2% of their 2007 volume of commercial real estate loans. Essentially the mega-banks are out of the market.

Until this last week, however, the smaller banks were still making some commercial real estate loans.  We were greatly disturbed last week, however, when several smaller commercial banks - lenders with no exposure to the subprime crisis - contacted us and confided that their balance sheets were so troubled that they too had stopped making any commercial real estate loans.

We are pretty sure that this is a trend that will continue among the surviving small and regional commercial banks. As their commercial loans to local industrial companies start to go bad (sales of widgets and other industrial products are cratering), soon most commercial banks will stop making commercial real estate loans completely - even permanent loans on standing commercial properties.

If any of your "A" borrowers are delaying their plans to pull equity out of their commercial properties, tell them that this is the last call for commercial loans from banks. If they don't close their loans in the next 90 to 120 days, they may have to wait five to ten years before commercial loans with decent interest rates reappear.

If you need a commercial real estate loan right now, please click here.

Don't Waste Your Time Trying to Place Land Loans Today

If you're a commercial mortgage broker and some real estate developer comes to you and asks you to find a commercial bank or a hard money lender to replace his existing mortgage loan on his land, you should probably decline the engagement. You're probably never going to get paid.

Most of the land development deals that blew up when the subprime crisis erupted were on residential land. On the order of 2 million homes are in foreclosure, and the United States is already awash in unsold homes. The United States needs new homes like we need a hole in the head.

A great many banks and hard money lenders - once a major source of loans on residential subdivisions - have already foreclosed on a ton of land. Many more land loans are in the process of foreclosure. Banks and hard money lenders are terrified of new land loans. The chances of selling some bank or hard money lender on making another land loan are almost nil.

There are only two types of land loans that have a chance in this market. Land zoned for commercial use might have a chance, but only at a very low loan-to-value ratio, say 35% to 40%.

The other type of land loan that might make sense is a loan to a very well-healed developer who is buying foreclosed land for pennies on the dollar and is putting down a huge down payment, say 45% to 50% in cash.

Guys, you need to feed your family. You're not going to do that if you waste precious hours trying to replace some $7 million land loan on some stalled housing project or residential land development deal.

Use your time instead to call on local banks for the small ($100,000 to $3 million) commercial permanent loans that they turn down.  These are the deals that close and feed your family.

All this being said, there will still be a few land loans made made on residential subdivisions this year. Your best chance of closing one of these land loans will be by applying to the 100+ land lenders on C-Loans. You might as well. C-Loans is free.

Click here to apply for a land loan.

If you're a commercial loan broker, please be sure to print out Blackburne & Brown's commercial hard money loan pricing matrix.

Advertise to Companies Who Are Spending Big Money to Market for Mortgages

If you're a commercial mortgage broker, you probably need more leads on borrowers seeking commercial loans. Eventually you will discover that marketing directly to the public for commercial real estate loans just doesn't work. If you send out 10,000 mail pieces, you'll usually only get around six leads and no closings.

So what does work? Residential mortgage brokers can be a wonderful source of referrals. Just pay them 20% of your loan fee in return for a name and telephone number of a prospective commercial real estate loan borrower.

Here's why advertising to residential mortgage brokers is so effective. The typical residential mortgage broker spends about $400 per month on some form of advertising - perhaps a small classifed ad in the Money to Loan section of the newspaper, a big Yellow Pages ad or a display ad in the Pennysaver or similar free grocery store magazine.

This advertisment by the residential mortgage broker probably reaches thousands of potential borrowers every month. Now if this residential mortgage broker is giving you all of his commercial loan referrals, this means that with a single $1 mail piece to the mortgage broker, you are reaching thousands of potential borrowers.

If the residential mortgage broker is spending $400 per month, then your $1 mail piece is getting leveraged by a whopping 400 times. This is marketing leverage.

Do you need to place a commercial real estate loan right now? You can submit your commercial real estate loan to 750 different commercial mortgage lenders in just four minutes using the C-Loans Commercial Mortgage Lender Portal.

Auto Repair is Hot and Retail is Not

I recently spoke on commercial real estate loan matters at the National Association of Mortgage Brokers Annual Conference in New Orleans. While at the conference, I wandered through the exhibit room and brain-stormed with the exhibitors.

Not surpisingly, commercial real estate lending was way down. Commercial lenders had scaled back their appetite for retail properties.

But one asset class was hot - of all things, auto repair! Apparently some of the larger commercial lenders had noticed that the best performing class of commercial properties in their portfolios was in fact auto repair. It makes sense. Americans are not buying new cars right now but are rather just repairing their existing cars.

One lender with whom I spoke had actually raised its loan-to-value ratios on auto repair loans from 65% to 75%, in order to encourage more commercial loan applications on such properties.

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

The Commercial Loans They Made Were Darned Good

Lehman Brothers got screwed. They filed for bankruptcy today because foolish regulators forced Lehman Brothers to mark the commercial real estate loans in their portfolio to market. Because the market for subprime commercial loans has completely frozen up, Lehman Brothers became insolvent.

It's a darned shame. For the last seven years my commercial mortgage company, Blackburne & Brown Mortgage Company, Inc., has been competing against Lehman Brothers for small, subprime commercial loans. Since their rates were better than ours, Lehman Brothers was able to cream the market for the best quality subprime commercial loans. I never knew them to make a foolish loan.

When the dust all settles and Lehman's assets are scattered to the four winds, history will show that this was a darned fine portfolio. They were earning around 9.5% on a portfolio of commercial first mortgage loans with an average loan-to-value ratio of 68% to borrowers with fairly decent credit. An investor could buy that entire portfolio at par and beat the pants off of most competing investments. These were not high-LTV loans to flakey borrowers on grossly over-valued homes. These are darned good assets.

If anyone wants to sell a portfolio of Lehman's subprime commercial loans, Blackburne & Brown is definitely a buyer. Please contact me, George Blackburne, immediately.

Need a commercial real estate loan? You can apply to hundreds of banks and subprime commercial real estate lenders in just four minutes using C-Loans.com. And C-Loans is free!

September 23, 2020

Below is the Advice I Gave To 
a Struggling Commercial Mortgage Broker

After writing this blog article waaay back in 2008, I actually sat down and wrote an entire training course devoted to keeping new commercial mortgage brokers from making the same bone-headed mistakes that I cluelessly made forty years ago, when I first entered this industry.  I call it my Practice Course, and I consider it my finest work.  It contains over sixty lessons.

Here’s my advice:

1. Stick to small commercial permanent loans. Do not work on anything larger than $3 million unless you have a special relationship with the borrower (former client). Small commercial loans are the ones that close and feed your family.
   
   
2. New commercial mortgage brokers almost never close large loans. Why would a filthy rich investor with perfect credit and millions of dollars in equity work with a mortgage broker who is obviously new to the business? He'll spot the new broker's inexperience in the first few minutes of conversation. So the large deals that new mortgage brokers get are almost always hopeless. And even if the perfect, large deal ever did fall in their laps (one chance in a million), most new brokers don't yet have a personal relationship with the top loan officers at the huge banks. These top dogs are very, very, VERY cliquish. They don't fight hard in Loan Committee for newbies. So don't waste precious time trying to place large loans ... unless you have 18 small commercial permanent loans in process that will feed your family.Give me a $300,000 lead over a $30 million lead any day!  Small deals close. Large deals waste your time.
   
   
3. Do NOT waste precious time working on construction loans. The world has more enough homes and commercial buildings right now. Ninety-nine percent of the time, when a developer approaches a mortgage broker for help placing a construction loan, the developer does not have enough cash into the deal to qualify for a construction loan. He can't cover 20% of the construction costs. Do not work on construction loans! The deals you want are the permanent loans and the bridge loans.
   
   
4. Never waste a minute on international loans. They never close.  Ever. Ever!  There is a huge tax issue.
   
   
5. Read my blog daily for tips. http://www.blog.c-loans.com.  Go back and read all 100 of the old articles.
   
   
6. Build a databank of referral sources (commercial brokers, residential mortgage brokers, bankers, property managers, estate planners, etc.) and advertise to them by snail mail or email regularly.  Pepper your newsletters with TONS and TONS and even more TONS of jokes and fun stuff.  Condition your referral sources to look forward to your emails.
   
   
7. Your newsletter does NOT have to fancy.  A funny pic (see above), along with your signature block, with the words, "commercial loans" prominently displayed, will work just fine.
   
   
8. Learn how to create your loan packages using PDF’s.  This saves on shipping and allows you to submit a deal to multiple lenders in seconds.
   
   
9. Start buying leads from C-Loans. They’re only around $2 apiece (plus 37.5 bps. on closing). http://www.c-loans.com/leads.html
   
   
10. Get a signed fee agreement on every deal, but don’t ask the borrower to sign it until you’ve run him around for weeks fetching documents.  Wait until the borrower is desperate and hungry before presenting your agreement.
    
    
11. Don’t waste time working on deals with a low probability of closing.  Instead, use every free minute to meet new bankers and commercial brokers (realtors).  Add them to your email list.
    
    
12. Realize that your closing rate will never exceed 30%.  This means you need to have 15 to 18 loans in process at all times. Do you have 18 loans in process right now?  If not, get busy building your email list.
    
    
13. Only work with strong loan officers.  Loan Committee is a process where the decision-maker almost always says, "No", initially.  Then the loan officer has to use logic, fundamentals, oratory skills, and strength of will to push the deal through to approval.  If the loan officer at the bank who has your deal sounds and acts like a wimp, ask for the package back and then submit the same deal to a stronger loan officer at the same bank.
    
    
14. Grasp the concept that commercial lenders make loans for their friends. Become buddies with the top loan officers at various banks.  They will then fight for your deal in Loan Committee.  This may be my most important tip.
    
    

Need a lender for your commercial deal?  You can submit your commercial real estate loan to to 750 commercial lenders in just four minutes using C-Loans.com. And C-Loans.com is free.  Click here.

*  I always loved that line.  It comes come from the Ghostbusters II movie, when a demon possesses the body of a very young (40 years ago) and beautiful Sigourney Weaver.  Sigourney is laying on the bed seductively, and she asks the whacky Bill Murray, "Do you want this body?"  Bill turns to the movie audience and famously replies, "Is this a trick question?" :-)