Commercial Loans and Fun Blog

A lot of commercial real estate loans are floating rate loans, tied to LIBOR.  Large bridge loans from hedge funds and mini-perms from commercial banks are usually tied to LIBOR

A whopping $350 trillion (with a "T") in financial instruments worldwide reference LIBOR.  Holy moly, I had no idea until I started researching this article.  That's a whole lot of floating rate promissory notes.

Our new Facebook page is unlike any that you have ever seen.

LIBOR stands for the London Inter-Bank Offer Rate.  It's supposed to represent the interest rate at which commercial banks in Europe lend excess funds to each other, on an unsecured basis, for one week to one year, often so that the borrowing bank can satisfy reserve requirements.  

For example, let's suppose Credit Suisse in Zurich has deposits coming out of its wazoo; but HSBC in London just had a huge withdrawal and needs liquidity.  HSBC might borrow $50 million from Credit Suisse, unsecured, for 90 days days at a 3.25% annual rate.

LIBOR today is only around 0.25%, but before the Great Recession, six-month LIBOR often hovered between 3% and 3.5%.  Since the Great Recession, the European Central Bank has flooded the market with liquidity, and interest rates in Europe have plummeted.

After December 31, 2021, LIBOR will no longer be computed.  In a little over one year, the LIBOR index will be kaput.  Why are the authorities doing this?  

The problems with LIBOR first emerged during the Great Recession.  There was a time during the financial panic in 2008 when every major bank in Europe was insolvent.  

These European banks had all just lost billions in subprime mortgage-backed securities.  Many were active players in the subprime mortgage securitization business, so they were caught with billions of dollars in subprime mortgages on their warehouse lines, when the market for subprime mortgages collapsed.  Suddenly a $400,000 subprime mortgage had a market value of just $105,000.  Yikes.

Back in my bachelor days at the bars, I also suddenly got more handsome.

Each of the big European banks was suddenly desperate for cash.  So when a senior vice president of Deutsche Bank called up Barclays Bank for a $600 million loan, the reply was, "Heck, we were about to ask you for a loan!"  

In any case, the point was moot.  The European banks were all insolvent, and every bank knew that the other banks were insolvent too.  They sure as shootin' weren't going to make a huge, unsecured loan - only to watch the other bank go belly-up, like Lehman Brothers.

Since none of the European banks were loaning a dime to each other, how could the Intercontinental Exchange compute LIBOR?  They couldn't!  So they winged it.  They pulled some number out of thin air and published it.  While greedy attorneys later sued them because the number was clearly imaginary, at least the world remained round.

The next problem arose because the banks got greedy.  The way LIBOR is computed is that every day the 18 largest banks in Europe reported to the Intercontinental Exchange the rate at which they are willing to lend unsecured to other banks.   The lowest four and the highest four offers are thrown out, and the remaining ten offer rates are averaged.

The banks started cheating.  They would report an offer rate to the Intercontinental Exchange that was much higher than the rate at which they were actually lending.  The object was to push up LIBOR, so these banks could rake in billions of dollars in extra interest on their loans tied to LIBOR.

The attorneys nailed them again, and this time they deserved it.  Regulators nailed the largest banks in Europe... are you ready for this... with $9 billion in fines!  Oopsie.  These banks probably won't do that again.

Finally, we have the last problem with LIBOR.  In order to prevent a worldwide financial collapse in 2008, the European Central Bank ("ECB") flooded the market with liquidity.  “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.  And believe me, it will be enough,” said Mario Draghi, its Chairman.  Draghi saved both the Euro and all of the big banks in Europe.  Bless him.

With every bank in Europe drowning in so much liquidity that a depositor now has to pay the bank to accept his deposits, no banks are lending to each other because no bank needs liquidity.

LIBOR has become the interest rate at which no banks lend to each other.  Haha!  So how is the LIBOR index now computed?  Probably "PFA" - pulled from air.  Next week I will blog on SOFR, the new replacement for LIBOR.

Have you been tested for COVID yet?

Fun Stuff:

If you have been following my blog, you know I am a HUGE fan of the online network, IMDb.  I have learned recently that IMDb stands for Internet Movie Database. 

Now the thing about IMDb is that you have to watch a few commercials; but they are shorter than normal network TV commercials.  The shows and movies are also about ten years old; but dang, there are some terrific shows and movies.

My bride and I recently watched the entire Hunger Games series for the third time, and the three movies were wonderful!  Cisca and I also also enjoying the TV shows, Unforgettable and Fringe.

Okay, but now the really good stuff.  IMDb is producing its own original shows, and their first series is fantastic!  It's called Alex Rider, and it is soooo smart.  It's like a Daniel Craig 007 movie, but with a star that is still in high school.  Nothing unbelievable.  There is no "jumping of the shark".  His skills are absolutely believable. I promise that once you have watched fifteen minutes of the show, you will be hooked.

Disclosures:  I was paid 1 million Zimbabwean dollars to make this endorsement.  That's about a half-penny.  Haha!

C'mon, guys, I am NOT a Trump-hater.  Heck, I voted for Trump - twice.  I love our President; but I am going to give you Trump-haters some very interesting ammunition today.

Something happened yesterday that no one in the Press - more accurately, the various party propaganda agencies* - has yet to appreciate.  Yesterday President Trump fired the Secretary of Defense, Mark Esper.

*Where have you gone, Walter Cronkite - sung to the tune of Mrs. Robinson?

Yes, all of the press agencies reported the firing.  One more Trump firing.  [Yawn.]  So what?

Secretary Esper tried to tow the Trump line.  He never once fought with the President.  His critics even called him, Mark Yes-per.

But when Trump proposed using the U.S. Army, as opposed to the National Guard of the various states, to put down the rioting in our major cities earlier this year, Secretary of Defense Mark Esper refused.  This is why he was thought by many to be on the chopping block.

Do we really want a President using the U.S. Army to put down internal protests?  To do so would be to violate the Posse Comitatus Act, a Federal statute passed in 1878.

The below Facebook training is different from my blog.

The title of the Act comes from the legal concept of posse comitatus, the authority under which a county sheriff, or other law officer, can conscript any able-bodied person to assist in the keeping of the peace.  "Hey you, you are hereby ordered to join the posse to chase down Jesse James!"

The Posse Comitatus Act is a United States federal law which limits the powers of the federal government in the use of federal military personnel to enforce domestic policies within the United States.

The Act does not prevent the Army National Guard or the Air National Guard, under state authority, from acting in a law enforcement capacity within its home state or, in an adjacent state, if invited by that state's governor.

Can you imagine President Harris (see the funny meme above) using the U.S. Army to enforce a major expansion of Federal power, such as seizing our IRA's and 401k's so we can all share in a universal retirement program?  Yikes.

Using the U.S. Army to enforce such a socialist-leaning policy might have bloody consequences, especially in the red and heavily-armed state of Indiana.  Let's keep the U.S. Army out of law enforcement, okay?  

It is fair to say that there is a lot of bitterness in red states over the treatment of our President over the past four years by the press.  Joseph Goebbels, in his propaganda campaigns for Hitler against the Jews in the late 1930's and during World War II, would have been sooo proud of his American propaganda trainees.

Even those of you with a liberal bent know in your hearts that I am writing the truth.  The press just pounded relentlessly on the President.  "Donald Trump dived in front of a speeding truck today to save a kitten... but only because he wanted to eat the kitten for dinner."  Haha!

Perhaps Joe Biden was sent by God.  Perhaps this well-meaning, "mature gentleman" was sent to restore dignity to the office and to heal the nation's wounds.  Who could hate Joe Biden?  Today's blog post is not a rant against the election, Joe Biden, or Trump's loss.

It is actually a warning about the danger of Donald Trump.

Huh?  What?  I thought you loved Donald Trump, George.

I have funny meme below that is quite instructive, but it needs a little explanation.  Indiana University (the Hoosiers) is famous for its superb basketball program - for many years under the beloved, but uncontrollable, Coach Bobbie Knight.  "Don't mess with me, Bucko.  I'll throw a chair at you."  :-)

But the football program at IU, a perennial cellar-dweller for thirty years, has been steadily improving recently.  In their opening game against Penn State, ranked #10 at the time, Indiana University made an amazing comeback in the last two minutes of regulation to send the game into overtime, where it went on to win the game on an unbelievable two-point conversion now known as "The Reach."

Indiana University has gone on to win two more games, and it has risen to rank #10 in the country in the latest AP poll.  Their last victory was a beat-down of the perennial powerhouse, the University of Michigan Wolverines.  But please pay attention now:  The following meme reflects the conservative view that the Presidential election results in Michigan, Pennsylvania, and several other states may have been reversed by old-style, Tammany Hall corruption.  The meme below is therefore both hilarious... and a little troubling.

You have to admit that the results in the six or seven battleground states were incredibly close.  And corruption in politics is hardly new.  As the Tammany Hall pols in New York City used to tell the new Irish immigrants in the 1860's, "Vote early... and vote often."

Might corruption in the mail-in ballot process have thrown this incredibly close election to Joe Biden?  Perhaps.  Corruption in politics is hardly new.

So the right thing to do right now is to be patient with Trump and other die-hard Republicans, as they recount the vote in several close jurisdictions.  As everyone has been saying, let's count the vote.

Heavens, I just LOVE memes.

The Danger From Trump:

If the recount proves that Donald Trump actually won the election, my conservative friends are going to roast me forever for writing this article.  Haha!  

But what happens if the recount clearly shows that some shady things were going on with the ballot counting, but the final count still remains ever-so-slightly in Biden's favor?

So I ask today, why is Donald Trump bringing in a new Secretary of Defense in his final three months in office?  Why create confusion in our military when the Chinese are threatening to invade Taiwan?  Do we really need a new Secretary of Defense at this exact moment?  

Has President Trump brought in a new Secretary of Defense because this new one is willing to use U.S. Army troops to keep President Trump in office?

Millions of Americans love you, Mr. President.  You truly made America great again; but, for Heavens sake, please don't mess it all up by refusing to step down.  

World War I started in 1914, but as early as 1910, it had become clear that Germany and Britain would soon be going to war.  Each had embarked on a crash program to build dreadnoughts.  Dreadnoughts were massive battle ships that could throw huge shells accurately for miles.  The entire class of ships was named after the H.M.S. Dreadnought, Britain’s first battleship.

China and the United States are on a similar path, and China is constructing warships at a much faster pace.  Already China has 350 modern warships, compared to just 293 for the United States.  China is hard at work building its third aircraft carrier.  Their cruisers are already tougher than our ancient ones.  They are building new warships at a pace three times faster than the United States.

People still think of China as a communist country, but since President Xi had himself appointed President For Life, China has really become a dictatorship.  Just one guy is the total, uncontested leader of 1.35 billion people.  A ton of these guys are scientists and engineers.

If the Chinese economy ever started to slow down, and the Chinese people started to get restless, President Xi could order the invasion of Taiwan.  This would rally the people behind him, distracting the populace from any political challenge.

The outcome of the war will likely be determined by the accuracy of their missiles. Folks, modern missiles are so accurate that they are hitting targets dead-on from over 1,000+ miles away.  India - arguably not the world's leading technological military power - fired a test missile this week from a missile ship that hit an aging, steaming Indian frigate dead center from 130 miles away.

Now imagine the accuracy of Chinese missiles.  The crews of our aircraft carriers are toast.  Funny story:  In 1996, Ted Turner sold Turner Broadcasting to Time-Warner for $7.5 billion.  He announced the secret sale of the company to his family across the supper table.  One of his sons, a highly-paid executive with Turner Broadcasting, asked, "What happens to me?"  Turner reportedly replied, "You're toast."  Ouch.  

At the Battle of Midway, during World War II, the U.S. sank four of Japan’s aircraft carriers.  After that, the outcome of the war in the Pacific was in little doubt.  Could the U.S. lose three or four aircraft carriers in the coming Battle of the Taiwan Straits?  Yes.  Easily.  

Would the U.S. then back off and let the Chinese take Taiwan, Guam, and Okinawa?  I don’t think we could.  The war against China needs to be fought in the “second island chain” in the South China Sea, rather than off the coasts of Hawaii and California.

We are mustering allies, as President Xi keeps angering and alarming the entire world.  Heaven only knows why Xi picked a fight with the Indians over some frozen rocks on their mutual border; but the result has been the addition of Australia to the Quad “Alliance" of India, Japan, and the U.S.  Recently, even the pacifist governments of France and Germany have started pushing back against the Chinese.  They have now sent subs and destroyers to the Indian Ocean.

Who will win the coming war?  China.  The Chinese will strike first and without warning.  They will knock out much of our fleet and all of our airfields on Guam, before the centipede can even finish tying his shoes (old joke about the football game between the big animals and the little ones).

Then China would likely start island-hopping on its way to California.  When their missiles bases and missile ships got close enough, imagine powerful conventional missiles flying through the windows of Google, Microsoft, Intel, Lockheed-Martin, General Dynamics, Northrop Grumman, Raytheon, and Boeing.

What can we do?  We need new ship-building facilities on the East Coast, new oil processing plants scattered all across our coasts, and dozens of underground missile manufacturing plants scattered throughout the Heartland.  We need to buy up forty old container ships and convert them to missile ships, at about 1/50th of the cost of building new aircraft carriers.

What can you do?  A nice home in the Boonies would be smart.  What if you simply must live in California?  How about a combination wine cellar / bomb shelter in your newly-constructed partial-basement?

Remember, these incoming missiles will be both highly-accurate and conventionally-tipped.  The whole city is not going to be flattened - just the power plants, the dams, the reservoirs, the California Aqueduct, the water treatment plants, the freeway overpasses, the railway stations, and the major food distribution warehouses.  As the Church Lady used to say on Saturday Night Live, “Isn’t that special?”

The moment Elon Musk takes The Boring Company public, I intend to buy some shares.  It’s not hard to imagine a missile war that could drag on for a decade, forcing a lot of American companies to move their manufacturing facilities underground.

How soon before the war starts?  Well, when is China's next recession?  No economy ever goes straight up, not even that of the Chinese.  I would fall off my chair in surprise if the coming war with China didn't start within three years.

"Only the dead have seen the end of war."  --  George Santayana*

* 1886–1952.  The same guy who said, "Those who cannot remember the past are condemned to repeat it."

Make sure you follow me and C-Loans on our new Facebook page.  Please click on the three dots, "..." and then on, "Follow."

If you found this article to be interesting, would you kindly share it with your friends?  Thanks.

Make sure you follow me and C-Loans on our new Facebook page.  Click on the three dots, "..." and then on, "Follow."

For years, I struggled with Facebook.  Why on Earth would anyone ever bother to come to the Facebook page for C-Loans?  What was in it for YOU?  The whole idea of using Facebook for a commercial loan business seemed stupid and useless to me.

But recently I figured out how to use Facebook to help my clients and friends (you wonderful folks!) and how to help my commercial loan business.  You should do something similar with the Facebook followers of your own company:  Feel free to steal and use my Facebook training posts.

Bam!  You suddenly get a Facebook alert from C-Loans, Inc.  You click on it, you come to the new Facebook page for C-Loans, and you suddenly see a short lesson in commercial real estate finance or in how to broker commercial loans.

These are not long blog articles, like the ones I write once or twice every week.  Sometimes the training subject can be completely covered in just a few sentences.

Therefore these new commercial real estate finance lessons are quickies.  These mini-lessons are not much longer than the length of a Twitter post; but they are great-great lessons.

I have recently posted mini-lessons on CTL financing, certified development companies, fusion deals, burn-off's, pari passu notes, A/B notes, estoppel agreements, senior-stretch financing, TI/LC's, why banks hate blanket commercial loans, asset-backed securities, family offices, co-living properties, tuck-under parking, the net-worth-to-loan-size ratio, and an unknown, Federal government, mid-market PPP-like loan that can inject $5 million to $300 million into large businesses struggling to survive the coronavirus crisis.

But here's the deal.  When you come to the Facebook page for C-Loans, you have to follow the page, not just Like it.

Facebook does not make following a business page easy.  I think they should have a great big button that says, "Follow This Company."

Instead, you have to find a tab that has three dots, "..."  When you click this tab, a drop-down message appears, and the very first option is to "Follow."

Please don't laugh at me.  You probably use this drop-down link with other companies at least once or twice every week.  It took me forever to find this link.  Hey, I'm just an old man with long, shaggy, coronavirus hair.  Haha!  

After you follow the Facebook page for C-Loans, would you also please Like it?  It helps us on our SEO efforts.  Thanks!

Hilarious Joke:

It was last Wednesday night, and I was sitting in my room watching television when the phone rang.  "Hello?" I said.  A girl's voice came over the line.  "Can I speak to Ben, please?"  I live by myself, and my name definitely is not Ben.  It was probably a wrong number, and I was bored.

I replied, "I'm sorry, he's not in right now.  Can I take a message?"  "Do you know what time he'll be back?" she responded.  I said, "I think he said he'd be home around 10:00."  Silence on the other end... a confused silence.

"Is this Steve?"  My name isn't Steve, either.  This was definitely a wrong number, so I replied, "Yes, it is.  Do you want to leave a message for Ben?"

"Well... he said he would be home tonight and asked me to call him," she said in a slightly irritated voice.  I replied, "Well, he went out with Karen about an hour ago, and said that he would be back at 10:00."

A shocked voice now:  "Who's Karen?!"  "The girl he went out with."  "I know that!  I mean... who is she?"  "I don't know her last name.  Look, do you want me to leave a message for Ben?"

"Yes... please do.  Tell him to call me when he gets home."  She was sounding pretty irate at this point, and I could hear her temper flaring.  "I sure will.  Is this Jennifer?"  She exploded, "Who's Jennifer?"  Apparently she wasn't.

"Well... he's going out with Jennifer at 10:00.  I thought you were her.  Sorry... it was an honest mistake."

"Ben's the one that's made the mistake!  Tell him that Alice called him.  Tell him that she's very upset, and I would like him to call me as soon as he gets home."

I smiled and said, "Okay, I will... but Becky isn't going to like this."

-- Click --

In my last post about mini-perms, we learned that a permanent loan is a first mortgage, secured by a multi-family or commercial property, with a term of at least five years and at least some amortization.  A permanent loan cannot just have interest-only payments for the entire term.  There must be some principal pay-down during the loan, usually using a 25-year amortization

Permanent loans are made by - starting with the commercial real estate lenders with the lowest interest rates - life companies, conduits, commercial banks, savings banks, credit unions, ABS lenders, and finally hard money lenders.

You are reminded that a commercial bank, as opposed to an investment bank or a merchant bank, is that garden-variety institution on every street corner that accepts guaranteed deposits and makes loans.  A commercial bank has a big steel vault and maintains large amounts of cash on hand.

A big steel vault - please remember that.  I offer a free training course to any mortgage broker who introduces me to a commercial real estate loan officer working for a bank.  Guys, just please remember that this loan officer must work in an office with a great big, honking, shimmering, shinning, steel vault; otherwise, he is not a banker.  It's easy to to find these bona fide bankers to trade for my wonderful courses.

An investment banker is a stock broker on steroids, like a Merrill Lynch or a Morgan Stanley.  Investment bankers help companies to go public, and they also deal in securities.

Merchant bankers make actual equity investments in companies, as opposed to making loans to them.  You will recall that equity investments have no required interest payments.  Equity investors merely share in the profits, if any.  In real life, I have never met a true merchant banker.  If someone ever comes up to you at a trade show and calls him a merchant banker, be on alert.  He is almost certainly either a blowhard or a fraud.

So now that we understand permanent loans, we can now tackle takeout loans.  A takeout loan is just a permanent loan that pays off a construction loan.

Example:

David Developer builds an office building using an uncovered construction loan from Nearby Bank.  (I'll blog on uncovered construction loans this month.)   Upon completion, and after the building has reached 90% occupancy, David applies to Money Center Bank for a permanent loan to pay off his ballooning 12-month construction loan.  The permanent loan to pay off Nearby Bank's construction loan is therefore a takeout loan.

Please note that while all takeout loans are permanent loans, not all permanent loans are takeout loans.  For example, suppose ten years from now, David Developer has to refinance his ballooning takeout loan from Money Center Bank.  That new permanent loan from Mid-Market Bank would not be a takeout loan.

Clever, Clean Funny:

A first-grade teacher, Ms. Brooks, was having trouble with one of her more precocious students.  The teacher asked, "Harry, what exactly is your problem?"

Harry answered, "I'm too smart for the first grade.  My sister is in the third grade, and I'm much smarter than she is.  I think I should be in the third grade too."  Ms. Brooks finally had enough.  She took Harry to the principal's office.

While Harry waited in the outer office, the teacher explained the situation to the principal.  The principal told Ms. Brooks that he would give the boy a test.  If he failed to answer any of his questions, he was to go back to the first grade and behave.  She agreed.

Harry was brought in and the conditions were explained to him.  He happily agreed to take the test.  Principal:  "What is 3 x 3?"  Harry:  "9."  Principal:  "What is 6 x 6?"  Harry:  "36."  And so it went with every question the principal thought a bright third-grader should know.  The principal finally looks at Ms. Brooks and tells her, "You know, I reckon Harry can go to the 3rd grade."

But Ms. Brooks is still skeptical of the little bugger and says to the principal, "Not so fast.  Let me ask him a few questions."  The principal and Harry both agree.

Ms. Brooks asks, "What does a cow have four of that I have only two of?"  Harry, after a moment:  "Legs."  Ms Brooks:  "What is in your pants that you have, but I do not have?"  The principal wondered why would she ask such a question.  "Pockets," replied Harry, to the Principal’s great relief.

Ms. Brooks:  "What does a dog do that a man steps into?  Harry:  "Pants."  By now, the principal is sitting forward with his mouth hanging open.  Ms. Brooks:  "What does a man do standing up, a woman does sitting down, and a dog does on three legs?"  Harry:  "Shake hands."  (Dang, this kid is smart!)

The principal is now trembling with apprehension as Ms. Brooks asks the last question.  Ms Brooks:  "What word starts with an 'F' and ends in 'K' and indicates a great deal of heat and excitement?"  Harry:  "Firetruck."

The principal breaths a huge sigh of relief and tells the teacher, "Put him in fifth grade.  I got the last five questions wrong myself."  Hahahaha!

Personal Note:

The entire Hunger Games series is now available for free on IMDB.  May the odds ever be in your favor.

If you found this lesson to be helpful, would you please-please-please share it on Linked In, Twitter, or Facebook?  It is when you share my posts that I meet more subscribers for my blog.  Thanks!"

"A company in the U.K. is making news for developing a new vegetable called a Brussel-Kale, which is a hybrid of Brussels sprouts and kale.  They said, 'We got the idea from a child's nightmare.'"  -- Jimmy Fallon

In a recent tombstone, George Smith Partners, in their wonderful, free newsletter, FinFacts, wrote:

"George Smith Partners secured a $4,690,000 construction loan with a 2-year term, that converts to a 5-year permanent loan upon completion of construction, for a total term of 7 years.  The loan is for a medical office building in Oxnard, CA."

"The construction loan floats at Prime plus .5%, with a floor rate of 3.75%, and the mini-perm is expected to have a fixed interest rate of 3.65%. The mini-perm carries a step down prepayment, but there is no prepay during the construction term, allowing the borrowers to secure more advantageous capital depending on the capital markets."

You are reminded that a tombstone is a closing announcement describing a commercial real estate loan just closed or arranged by the publisher (lender or broker).  Yes, a broker can create and distribute tombstones!

Tombstones are a fantastic way to market for commercial loans because they show (1) that the commercial lender is "in the market" and actively making commercial loans; and (2) borrowers needing similar loans are drawn to the lender to close their own deals.

For example, if you were looking for a large construction loan on a medical office building right now, you would know to apply to my friends at George Smith Partners.  

The next time I update my commercial mortgage marketing course, I need to remember to add a section on tombstones.  Email tombstones have been fabulously successful for my own commercial hard money shop, Blackburne & Sons. 

Okay, but what is a mini-perm?  To understand a mini-perm, you must first understand a permanent loan.  

A permanent loan is a first mortgage, secured by a multi-family or commercial property, with a term of at least five years and at least some amortization.  A permanent loan cannot just have interest-only payments for the entire term.  There must be some principal pay down, usually using a 25-year amortization.  

It is still possible to have a permanent loan, with the first year or two (no more) having just interest-only payments.  Prior to Great Recession, conduits were making permanent loans with interest-only payments during the first two years.  A few such loans were actually made in 2007 with interest-only payment for the first three years.  

During the Great Recession, commercial real estate fell in value by 45%, and these high-leverage, partially-interest-only conduit loans got absolutely hammered.  As Dr. Phil might say, "How did that work out for you?"  Hahahaha!

I am expecting the Coronavirus Crash at any moment.  It's been 12 years since the Great Recession, and real estate seems to crash every ten to fourteen years.  When it does, it has historically crashed by almost exactly 45%.

Forty-five percent is how much commercial real estate fell during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  I have been preparing my private investors to start buying well-located commercial real estate once it has fallen by 35%.  You never catch the absolute bottom.

Okay, now that we know what a permanent loan is, we can now tackle the mini-perm.

A mini-perm is a first mortgage on multifamily or commercial real estate - made by a lender with low, A-quality, interest rates, like a bank, S&L, or credit union - that has a term of less than five years.

Most mini-perms have a term on two years, although terms of one year and three years are also reasonably common.  

In the old days, when interest rates varied, mini-perms were floating rate loans, typically tied to either prime or LIBOR.  Nowadays, commercial lenders are desperate for yield, and interest rates have been falling for more than a decade.  Therefore, many mini-perms are now written with a fixed rate.

Who makes mini-perms today?  Most mini-perms are made by commercial banks and their lookalikes - savings banks (S&L's) and credit unions.

When are mini-perms used?  You see them most often as part of a construction loan. The bank gives the developer a 12-month or 18-month construction loan, followed by a mini-perm takeout loan, made by the same bank, with a two-year term.  This gives the developer two additional years in which to find tenants.

From the bank's point of view, the bank gets to charge one point for the construction loan, plus another one point for the mini-perm forward takeout commitment.  The bank might charge another 1/2 point or 1 point if the mini-perm ever funds.

Bona fide Game of Thrones dragon

A forward takeout commitment is just a very expensive letter that promises to deliver a takeout loan in the future if the property is built according to plans and specifications and leased at the target rental rate.  The typical forward takeout commitment will cost a developer one to two points, plus at least one additional point if the loan ever funds.

Okay, what's the difference between a first mortgage bridge loan and a mini-perm?  The two loan types look very similar to me.  Maybe it's a prestige thing.  Yucky, shark-like hard money lenders and mortgage funds make bridge loans.  Hoity-toity banks make mini-perms.  

But perhaps there really is a difference.  Bridge loans are typically made quickly to borrowers in a little bit of a jam.  In contrast, banks just saunter down to make mini-perms, taking their sweet, 'ole time.

Centerfold in the latest Play Puppy.

Mini-perms are also about 2% to 3% cheaper than even the cheapest bridge loan.  The reason why is that even the largest bridge lenders borrow from bank to get their dough to make their bridge loans, so obviously the bridge lender has to charge a rate higher than the bank, in order to make a profit.

Anyone catch the mistake in the above tombstone from George Smith Partners?  In one paragraph, they call the takeout loan a permanent loan.  In the next paragraph, they call the takeout loan a mini-perm.  The correct term is probably a permanent loan because the loan has a term of five years.

Perhaps the takeout loan only had interest-only payments, making it a mini-perm.  Perhaps the rate is intentionally a little high for a permanent loan, in order to encourage the borrower to seek permanent financing elsewhere.  That would arguably make it a mini-perm too.

On a Personal Note:

I absolutely love the free network  on my Fire TV named IMDB.  The shows and movies are free; but you have to watch commercials.  The good news is that the commercial are very short, and IMDB does not overdo it.

Right now my wife and I are watching the old Western, The Quick and the Dead.  Sharon Stone, back twenty-five years ago, must have been one of the most beautiful women on Earth.  The ladies also get some great eye candy too - Leonardo DiCapprio, when he was just a few years older than when he made Titanic.  

Cisca and I are also watching the TV series, on IMDB, called Unforgettable.  The show stars Poppy Montgomery, as a police detective with a perfect memory.  Poppy really hit the gym before making that show.  Fit-and-toned arms and shoulders on a woman can be very attractive.

John, who lived in the north of England, decided to go golfing in Scotland with his buddy, Shawn.  They loaded up John's minivan and headed north.  After driving for a few hours, they got caught in a terrible blizzard; so they pulled into a nearby farm and asked the attractive lady who answered the door if they could spend the night.

"I realize it's terrible weather out there, and I have this huge house all to myself; but I'm recently widowed," she explained.  "I'm afraid the neighbors will talk if I let you stay in my house."  "Don't worry," John said.  "We'll be happy to sleep in the barn.  If the weather breaks, we'll be gone at first light."  The lady agreed, and the two men found their way to the barn and settled in for the night.
 
Come morning, the weather had cleared, and they got on their way.  They enjoyed  a great weekend of golf; but about nine months later, John got an unexpected  letter from an attorney.  It took him a few minutes to figure it out, but he finally determined that it was from the attorney of that attractive widow he had met on the golf weekend.
 
He dropped in on his friend Shawn and asked, "Shawn, do you remember that good-looking widow from the farm we stayed at on our golf holiday in Scotland about nine months ago?” "Yes, I do," said Shawn.

"Did you, er, happen to get up in the middle of the night, go up to the house and pay her a visit?"  "Well, um, yes!," Shawn said, a little embarrassed about being found out.  "I have to admit that I did." "And did you happen to give her my name, instead of telling her your name?" 
 
Shawn's face turned beet red, and he said, "Yeah, look, I'm sorry, buddy I'm afraid I did.  Why do you ask?"  

"She just died and left me everything."

Just helped my neighbor throw a rolled-up carpet in the dumpster...  Her boyfriend would have helped, but he is out of town.

Short Video - Husband plays gag on wife.

I have been telling you guys for years to subscribe to the FinFacts Newsletter from George Smith Partners.  The forerunner of this wonderful commercial mortgage banking company was ancient before I even started my own ancient commercial mortgage company forty years ago.

You will recall that a mortgage banker is a mortgage company that retains the loan servicing rights.  If you want to be wealthy in the mortgage business, you need to retain the servicing.

"But George, I need cash now."  Live more frugally, man!  Keep your overhead down, so you don't have to sell off your precious loan servicing rights.

Why is loan servicing income so vitally important?  

Every ten to fourteen years real estate suffers a major crash.  It normally crashes by exactly 45.000%.  Those of you who are math or engineering majors will chuckle at my silly insignificant digits, but the truth is that commercial real estate estate fell by almost exactly 45% during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

The next crash, almost surely to be known as something like the Coronavirus Crash, is now past due.  It has been twelve years since the 2008 crash.

Want to know why everyone thinks that I am this big brain?  The only reason is because my company didn't crash-and-burn during these three horrible crises.  Why didn't Blackburne & Sons crash-and-burn, like all of our hard money competitors, during these 45% commercial real estate meltdowns?

The answers is that my family lived frugally, and the company focussed, not on making a quick profit, but rather on building long-term loan servicing rights.  When the inevitable real estate crashes occurred, we were able to tighten out belts and live off of our loan servicing fees.  

I sell a course on becoming a hard money broker and developing long-term loan servicing rights.  I am only half-joking when I urge you to mug some nun, if necessary, to buy this super-important course.  Let me be brutally honest.  If you are not working towards building a loan servicing portfolio, get the heck out of of the commercial loan business.  If the Coronavirus Crash doesn't get you, the next one will.

Okay, so what have the super-experienced folks at George Smith Partners taught us this week?  David Pascale, their Senior Vice President, wrote this week:

Spotlight on Hotels:

The hotel sector has been hardest hit by the pandemic.  Recent weeks have seen permanent closures of high-profile hotels such as, The Luxe on Rodeo Drive in Beverly Hills and the “Crossroads of the World” Hilton on Times Square.  Experts indicate that without significant aid from Congress the wave of closures is just beginning.

CMBS has been the preferred loan execution for hotels for many years with $85 billion in outstanding hotel loans.  Statistics from Trepp, the leading CMBS analytics group, indicate unprecedented stress on the sector. 

Loan delinquency are at 23.4%, highest on record (December 2019 it was 1.3%).   The volume of delinquent loans exceeds the highest level reached during the Great Recession by 53%. 

Over 35% of CMBS loans are on servicer “watchlist”, with 24% in special servicing now.  The hardest hit MSA’s are New York/Newark, Houston, Chicago, Dallas, LA, and Atlanta.  All these metros were major convention and business travel hubs.

There are some bright spots in the industry, as many desirable drive-to destinations are experiencing high occupancy.  Travelers are getting comfortable with procedures such as contactless entry, intense cleaning procedures, etc.

It is apparent that a return to “normal” levels of air travel and business meetings will be dependent on the widespread distribution of an effective vaccine.   This is estimated to occur in mid-2021, at best, so Congress must act, or the industry will see waves of foreclosures over the next several months.

Yikes!

In economic terms, I think China has gotten massively battered in the past two years. The economic statistics coming out of China look fine, but I simply don’t trust them.  I think the statistics from China have been doctored.  Just think about all of the economic body blows that China has recently absorbed.

It started with President Trump making it outright unpatriotic to move any more U.S. manufacturing plants to China.  Maybe even a few manufacturing jobs have come back home.

Then the U.S. slapped sanctions on many Chinese imports. Suddenly a few U.S. industries, like steel, could start to compete with China.

Trump’s hammering of China has resonated in Europe and throughout the Pacific Rim.  You might hate Trump’s sharp New York tongue, but he has been very influential in shaping a worldwide distrust of China.

International factories that otherwise might have been constructed in China are now going to Vietnam and India.  On the margin, China has surely lost a few sales, if a reasonably-priced competing product was available.

And then came the Coronavirus Crisis.  Was the virus really created in a Chinese lab? Who knows?  But President Trump has achieved some success convincing both Democrats and Republicans that China was to blame.  This could NOT have been good for business in China.

On top of that, tens of thousands of Chinese small businesses must have failed during the Coronavirus Crisis.  Eighty percent of all urban Chinese workers work for private businesses.  Millions must have lost their jobs.

I am starting to see signs that China is running out of U.S. dollars, the currency the world uses to buy raw materials and to trade.  They had something like $3 trillion in currency reserves several years ago.  I think they are down to just $1 trillion.  Be careful here.  I could be totally wrong on these numbers; but I doubt seriously whether the Chinese have been able to add to their currency reserves in the past two years.

Hahahaha!

Why should you care?  I recently exchanged emails with a Hong King citizen, and he pointed out that in a war, the U.S. could kill one billion Chinese citizens, and they would still have more people than we have.

President Xi of China has made himself President for life, so just one guy controls all 1.35 billion of them.  The Chinese are graduating five times more engineering students than we are.  In a war of attrition, we lose.

But why should you care?  If the economy in China starts to suffer, the people could start to get restless.  President Xi might start to lose political support.

There is nothing like a war to rally people around the flag.  I therefore predict, in order to distract the Chinese people from their worsening economic woes, that China will invade Taiwan within the next two-and-a-half years.

The U.S. will have no choice but to enter into a full-fledged conventional war with China.  No nukes will likely be used because that would mean the destruction of all life on Earth.  If we lose that first row of islands - Taiwan, Guam, the Senkaku Islands (called the Diaoyu Islands by the Chinese), and Okinawa - then the Solomons, Midway, Hawaii, and possibly even California would be next.

Imagine Chinese missile ships raining conventional, but highly-accurate, missiles down on California.  Our military policy is to fight World War III out there on that first row of islands, not on our own soil.

Fanciful?  China now has more modern warships than the U.S. Navy.   They are halfway done on their third aircraft carrier.  As I often tell my sons, “History doesn’t always happen to the other guy.”

Okay, so what can you do?  My oldest son, George IV, lives in Sacramento.  I've told him that his next car needs to be powerful enough to pull a trailer out here to the water-filled, food-stuffed State of Indiana.  Need water in Indiana?  There is a veritable ocean just thirty feet down.  

He is also to look for a cheap trailer, in case he ever has to bail out of California before the missiles start falling.  He'll probably never use that trailer.  Dad is probably just a Chicken Little;  but like I said, history doesn't always happen to the other guy.  If you are going to buy a new car, make sure its large enough to carry your family to safety.

My second son, Tom (the good one who gives me grandchildren - IV, hint, hint), here in Indianapolis, is already looking for a larger home with enough acreage for more chickens and even a Victory Garden.  Make it happen soon, son.  Fortunately, here in Indiana, my lovely wife and my 22-year-old daughter were able to get carry permits.  Carry permits in California are virtually impossible to get.  Yikes.  I'd hate for these ladies to be in California when law and order starts to break down.

In the years leading up to World War I, there was an arms race going on between England and Germany.  Each country was rushing to build dreadnoughts (battleships) with larger and larger guns.  Whichever country could build battleships with larger guns could sink the enemy's ships before they ever came into range.  The famous Spy versus Spy cartoons in Mad Magazine were based on the spy warfare on each other's ship designs that took place between 1910 and 1914.

My point is that the educated of both countries knew with an almost certainty that war was coming.  The likelihood of war between the U.S. and Japan in 1941 was thought to be so obvious that many people believed that President Roosevelt dangled our battleships in Pearl Harbor as an invitation for the Japanese to attack, so that we could finally enter World War II.

Finally.  Haha.  Hooray for Acme Industries.

My father, an Army captain at the time, was stationed at Pearl Harbor in 1941.  He was in charge of the French 75 howitzers defending the harbor.  He told me a story of how he was one day sighting his guns, when he spotted a Japanese spy on a Japanese fishing trawler using a sextant to plot his own guns.

You know what?  My father had no ammunition for this artillery pieces!!!  The Japanese could have just waltzed right onto Oahu.  He went to his General so many times to complain that they finally encouraged him to take a medical discharge, and he was sent home.  (Thank goodness.  I might not otherwise have been born.)  Six months later Japanese Zeroes strafed and destroyed virtually the entire U.S. Air Force on Oahu.  Our planes were conveniently arranged in a row for easy strafing.

Still think old George is a whacko?  The U.S. military just did a simulation of a Red Chinese invasion of Taiwan.  We lost.  Want to know why?  When our fighters and bombers tried to return to Guam, the airfields had all been destroyed by Chinese missiles.  History does not always happen to the other guy.

Last week a novice commercial loan broker came to me and gave me the complete contact information for twenty commercial real estate loan officers working for banks and credit unions across the country.  Each one of these bankers worked for a different bank, and he included no other lender types, like hard money lenders, conduits, ABS lenders, etc.

Here is how he found these bankers.

In trade, I gave him a copy of my famous nine-hour video training course (online now), How to Broker Commercial Loans.  I say, "famous", because a decent percentage of all practicing commercial loan brokers have taken my course.

This guy who made the trade will learn how to market for commercial loans, how to underwrite them (five of the nine hours), how to package them, how to find lenders, and how to collect his fee.  It also includes my famous fee agreement.

Once you have taken this nine-hour training in commercial real estate finance, your confidence will soar.  You will have learned over sixty new terms of art specific to commercial real estate finance.

No longer will commercial brokers (commercial real estate brokers) and commercial lenders intimidate you with their sophisticated language and fancy terms, like cap rates, loan constants, and the debt yield ratio (different from the debt service coverage ratio).  In plain English, you will finally know what the heck they are talking about.  You will absolutely know this business inside and out, especially if you use my regular blog training articles as a source of continuous updates to this course.

Here is how to get this very valuable training in commercial real estate finance in a trade.

No-Cost Commercial Loan Software
For Newbies and Old Veterans

Every business day about a dozen commercial mortgage brokers come to C-Loans.com and enter a  commercial loan into the system.  At the very end, they click one button and create for themselves a beautiful PDF of their latest commercial loan package.  The PDF includes no reference to C-Loans, and our logo appears nowhere.  They then send this PDF to dozens of their own lenders.  The entire process takes just four minutes.

Below I will explain how to use C-Loans.com to quickly produce a commercial loan package that you can use to submit your commercial loan to fifty of your own lenders.  When you submit your handsomely-prepared commercial loan package to your own lenders, neither your nor your borrower will not owe a fee to C-Loans, Inc.  

Of course, if a C-Loans lender sees your deal, makes you an offer, and you or your client accepts it, C-Loans will earn its minuscule software licensing fee.  It's only fair.  This software took us over 20 years and cost us over $2 million to develop.

When you use our software to create a PDF, here is what your commercial loan package will look like:

Sample Commercial Loan Package

The PDF is small enough to be easily sent by email to your favorite fifty commercial lenders.

Where do you go to get access to this wonderful software?  And how much does it cost?  You will find this software on C-Loans.com, and the cost is... get ready... it's expensive... ready?  It's totally free.

"But, George, I have been to C-Loans.com before, and I don't remember ever seeing it."

When you visited C-Loans.com, you probably got distracted by the enticing blue call-to-action ("CTA") buttons on our home page offering a free commercial loan placement kit or a free list of 200 commercial lenders. (The buttons below are not live.)

Because you probably got distracted by these CTA buttons, you may have never actually entered a commercial loan into the six-step C-Loans System.  

Below is the first step, Step 1 of 6, that you'll find on the home page of C-Loans.com:

:

Had you done so, you could have placed a checkmark next to six lenders and pressed, "Submit".  Within minutes, hungry commercial lenders would have been contacting you with offers.

After submitting your commercial loan to six banks, you are given a chance to make your C-Loans app into a PDF:

Voila!  It's that simple. Now you have a PDF of your commercial loan package that showcases the property.  There was no cost, and perhaps a C-Loans lender will make you an offer that you cannot refuse.