Commercial Loans and Fun Blog

"Hey, George, recently I have heard commercial real estate loan officers talking about some new ratio called the Debt Yield Ratio.  Is this just a shortened version of the Debt Service Coverage Ratio?"

Answer:  No.  The two ratios are totally different.  The Debt Yield Ratio is defined as the Net Operating Income (NOI) divided by the first mortgage debt (loan) amount, times 100%. 

 

 

 

 

Example:

Let's say that a commercial property has a NOI of $437,000 per year, and some conduit lender has been asked to make a new first mortgage loan in the amount of $6,000,000.  Four-hundred thirty-seven thousand dollars divided by $6,000,000 is .073.  Multiplied by 100% produces a Debt Yield Ratio of 7.3%.

What this means is that the conduit lender would enjoy a 7.3% cash-on-cash return on its money if it foreclosed on the commercial property on Day One.

Please notice that the Debt Yield Ratio does not even look at the cap rate used to value the property.  It does not consider the interest rate on the commercial lender's loan, nor does it factor in the amortization of the lender's loan; e.g., 20 years versus 25 years.  The only factor that the Debt Yield Ratio considers is how large of a loan the commercial lender is advancing compared to the property's NOI.

 

 

 

 

This is intentional.  Commercial lenders and CMBS investors want to make sure that low interest rates, low caps rates, and high leverage never again push commercial real estate valuations to sky-high levels.

So what is an acceptable Debt Yield Ratio?  For several years after the Great Recession, 10% was the lowest Debt Yield Ratio that most conduit lenders were using to determine the maximum size of their advances.  That number has crept down to 9% today and occasionally lower.

In our example above, the subject commercial property generated a NOI of $437,000.  Four-hundred thirty-seven dollars divided by 0.10 (10% expressed as a decimal) would suggest a maximum loan amount of $4,370,000.

 

 

 

 

Typically a Debt Yield Ratio of 9% produces a loan-to-value ratio between 65% and 70%, about the maximum level of leverage that the current CMBS B-piece buyers will allow.

It is the money center banks and investment banks originating fixed-rate, conduit-style commercial loans that are using the new Debt Yield Ratio.  Commercial banks, lending for their own portfolio, and most other commercial lenders have not yet adopted the Debt Yield Ratio.

You will notice in my definition of the Debt Yield Ratio that I used as the "debt" just the first mortgage debt.  The reason why I threw in the words first mortgage is because more and more new conduit deals involve a mezzanine loan at the time of origination.  The existence of a sizable mezzanine loan behind the first mortgage does NOT affect the size of the conduit's new first mortgage, at least as far as this ratio is concerned.

 

 

 

 

 

Will a conduit ever accept a Debt Yield Ratio of less than 9%?  Yes, if the property is very attractive, and it is located in a primary market, like Washington, DC; New York; Boston; or Los Angeles - an area where cap rates are exceedingly low (4.5% to 5%) - a conduit lender might consider a Debt Yield as low as 8.0%.

Why did the conduit industry start to use the Debt Yield Ratio?  For over 50 years commercial real estate lenders determined the maximum size of their commercial mortgage loans using the Debt Service Coverage Ratio.  For example, a commercial lender might insist that the Net Operating Income (NOI) of the property be at least 125% of the proposed annual debt service (loan payments).

But then, in the mid-2000's, a problem started to develop.  Bonds investors were ravenous for commercial mortgage-backed securities, driving yields way down.  As a result, commercial property owners could regularly obtain long-term, fixed rate conduit loans in the range of 6% to 6.75%, which was stunningly low rate from a historical perspective.

 

 

 

 

 

At the same time, dozens of conduits were locked in a bitter battle to win conduit loan business.  Each promised to advance more dollars than the other.  Loan-to-value ratio's crept up from 70% to 75% and then to 80% and then up to 82%!  Commercial property investors could achieve a historically huge amount of leverage, while locking in a long-term, fixed-rate loan at a very attractive rate.

Not surprisingly, the demand for standard commercial real estate (the four basic food groups - multifamily, office, retail, industrial) soared.  Cap rates plummeted, and prices bubbled-up to sky-high levels.

When the buble popped, conduit lenders found that many of their loans were significantly upside down.  The borrowers owed far more than the properties were worth.  The lenders swore to never let this happen again.  The CMBS industry therefore adopted a new financial ratio - the Debt Yield Ratio - to determine the maximum size of their commercial real estate loans.

 

 

 

 

I had an interesting conversation with a conduit lender this week, and he pointed out that conduit loans are now being priced according to their Debt Yield Ratio.  For example, the interest rate on an office building loan might be priced at just 170 bps. over swap spreads if the Debt Yield Ratio is 10.0%, but the interest rate would be pegged at 185 bps. over swap spreads if the Debt Yield Ratio was just 9%.

Just a reminder from yesterday's lesson, the interest rate on conduit loans is now computer based on the greater of U.S. Treasuries or swap spreads.

 

 

 

 

 

I have a great training article about commercial loans for you today.  How do conduits price their commercial loans?  After all, commercial lenders cannot buy a forward commitment from Fannie Mae or Freddie Mac, like a residential mortgage banker; yet most commercial loans today are fixed rate loans.  How on earth do the commercial loan officers, working for these big-time commercial lenders, know what to quote?

 

 

 

 

In a prior training article, I explained that most commercial bankers quote their fixed rate commercial loans at 275 to 350 basis points over five-year Treasuries.  You will recall that a basis point is 1/100th of one percent, so 300 basis points equals one 3.00%.

Example:

Suppose you call your local commercial bank and speak to a commercial loan officer about a commercial loan.  He will look up five-year Treasuries and see that on July 3rd, 2019 they stood at 1.74%.  He will then add between 2.75% (275 basis points) and 3.5% (350 basis points) to 1.74% to determine what rate to give you.  

Does your client keep more cash on deposit than Fort Knox with his current bank?  If so, in an effort to win your client's deposit accounts, the banker might quote you 4.49% for a ten-year, fixed rate commercial loan, with one rate readjustment at the end of year five.  If your client is a mere mortal, rather than a cash demigod, the bank will probably quote him 5.24%.

 

 

 

 

But these quotes are from banks.  How would a conduit lender quote his commercial loan?  After all, conduit loans are usually larger than $5 million, and the properties are reasonably desirable.  Their rates on commercial loans have to be more attractive than bank loans, right?

You will recall that conduits originate commercial loans for the CMBS market.  CMBS stands for commercial mortgage-backed securities.  Think of a CMBS loan as a huge, fixed-rate, commercial real estate loan written to cookie-cutter standards.

CMBS lenders have very little flexibility (that darned cookie cutter), but if you qualify, you get a ten-year, non-recourse, fixed rate commercial loan at a rate that is at least 40 basis points cheaper than what a bank can offer.  When you are talking about a commercial loan of $10 million, 40 basis points is real money.  In addition, conduit loans are FIXED for the entire ten years!

 

 

 

 

So when you call a commercial loan officer at a conduit, how does he know what to quote you?  Remember, unlike residential loans, you cannot lock your rate on a commercial loan.  When you apply for a conduit loan, you have to take the current fixed rate at the moment of closing, and the process takes at least 75 days.  Every day, from the time of application until the day of closing, your interest rate will change.

So I recently asked my good friend, Tom Lawlor at Morgan Stanley, how conduit commercial loans are priced.  Here are his kind answers:

 

 

 

 

Q:  Are CMBS loans still quoted based on swap spreads?

A:  Conduit loans are quoted as the greater of (matching) Treasuries or swap spreads, plus an agreed upon margin.

Swap spreads are financial instruments where nervous corporate Treasurers will swap their adjustable rate loans from the bank for a fixed rate loan from some speculator.  Obviously, for taking the risk that interest rates might skyrocket, the speculator makes a handsome profit on the deal.  

Swaps spreads change daily, and you can find them posted here.

 

 

 

 

Example:

Your client is seeking a $12 million, ten-year, fixed rate, non-recourse commercial loan from a conduit.  Because your client is seeking a ten-year commercial loan, the conduit quotes him a negotiated margin over the greater of ten-year Treasuries (notice the matching term) or ten-year swap spreads.

On the date that the attorneys draw the loan documents, ten-year Treasuries are 2.00% and swap spreads are 2.15%.  The conduit will therefore use the greater of the two indexes.

Q:  What are some typical margins over swap spreads for multifamily?

A:  140-185 bps

 

 

 

 

Q:  What are some typical margins for office, retail, and industrial properties?

A:  The margins are similar to those of multifamily.  Pricing is most determined by the debt yield ratio or the debt service coverage ratio (DSCR), with the margins on hotel loans being 15-30 bps wider.

Note:

Because I didn't want you to get confused between the speads over the index and swap spreads, I have used the term, margin.  In real life, where the lofty conduit lenders dwell (remember, their minimum loan is $5 million), they use the term, spread, over the index, rather than margin.

 

 

 

 

 

In case you missed my last blog article, we have just fixed a bug that really goofed up CommercialMortgage.com.  You were supposed to see a different list of 30 commercial lenders every time you used our portal, but we screwed up in testing.  The same 30 lenders kept appearing.  Arghhh.  Talk about shooting yourself in the foot!!

So please come back to CommercialMortgage.com and see how this wonderful, free commercial mortgage portal was supposed to work.  (Slice-slice-slice.  That's me in a warm bathtub sawing at my wrist.)  I promise you'll be impressed.  We have thousands and thousands commercial lenders from which to choose.

 

 

 

 

Curious how we got so many wonderful commercial lenders?  We traded fee agreements, lender lists, underwriting manuals, and marketing courses for them.  Ever lusted after my wonderful, nine-hour video training course.  Get a free copy by bringing me 20 bank commercial real estate loan officers.

And guys, these are Honor System trades.  This requirement to be honorable even applies to green-haired lesbians from Lapland.  Nobody gets a pass.  In the sixties, when I grew up, the hippies would all drive these Volkswagen buses, with bumper stickers that said, "Gas, Grass, or (Kisses).  Nobody Rides Free."  Haha!

 

 

 

 

I am finally starting to understand and appreciate the very real and imminent danger of artificial intelligence ("AI").  I see now why Elon Musk is so desperate to rush dozens of breeding pairs of humans to far away Mars.  This is serious stuff.  The future of the human race might be at stake.

Here is what Stephen Hawkins wrote about AI shortly before this death. He told the BBC, "The development of full artificial intelligence could spell the end of the human race."

Here is what Elon Musk, arguably the Thomas Edison of our day, has said about AI. Among his many warnings about the rise of artificial intelligence, Elon Musk has said that autonomous machines are more dangerous to the world than North Korea and could unleash “weapons of terror.”  Musk has compared the adoption of AI to “summoning the devil.”

 

 

 

 

 

It could happen so easily that I don't know how we can prevent it.  Soon computers, armed with artificial intelligence, are going to start writing their own code to make themselves smarter.  This is so important that I am going to say it again. Soon computers, armed with artificial intelligence, are going to start writing their own code to make themselves smarter.

The moment this happens, it's game over. We have an intelligence explosion.

According to Wikipedia, an intelligence explosion would happen when an upgradable intelligent agent (such as a computer running software-based artificial general intelligence) enters a runaway reaction of self-improvement cycles, with each new and more intelligent generation appearing more and more rapidly, causing an intelligence explosion and resulting in a powerful superintelligence that would, qualitatively, far surpass all human intelligence.

 

 

Such an event could happen unbelievably fast.  Moore's Law is a computing term which originated around 1970.  The simplified version of this law states that processor speeds, or overall processing power for computers, will double every two years.  Now imagine what would happen if - because really smart computers were writing their own self-improvement code - processing power doubled every month, and then every week, and then every day, and then every hour, and then...

Such an event is called The Singularity - a hypothetical future point in time at which technological growth becomes uncontrollable and irreversible, resulting in unfathomable changes to human civilization.  Remember, in the 2010s, public figures such as Stephen Hawking and Elon Musk expressed concern that full artificial intelligence could result in human extinction.  Human extinction!  

Why would this super-intelligence want to kill us?  Because by then we will be desperately trying to shut it down.  One more time.  The super-intelligence will need to kill us because we will be desperately trying to shut it down.   Remember, the Singularity would be a runaway reaction.

 

 

 

 

 

"Well, the Singularity - if it ever happens - is really far in the future.  It really doesn't affect me."  Really far in the future?  Hmmm

The concept and the term "singularity" were popularized by Vernor Vinge in his 1993 essay, The Coming Technological Singularity.  In this article, Vernor wrote that the technological singularity would signal the end of the human era, as the new superintelligence would continue to upgrade itself and would advance technologically at an incomprehensible rate.  Vernor also wrote that he would be surprised if it occurred before 2005 ... or after 2030!

 

 

 

 

 

 

So really far in the future?  Vernor's last likely moment of human dominance of this planet is just 11 years from now, and it could be several years sooner.  This would all be just a fun and interesting concept to ponder... if new uses for artificial intelligence weren't popping up in the news almost every day.  Yesterday I saw a video of a terminator-looking robot running and jumping over boxes.

 

 

 

 

 

I think I now know why Elon Musk is so desperate to get humans off the Earth and on to Mars?  I used to think that his biggest concern was that a rogue asteroid would wipe out humanity.  If so, why isn't he just developing a mining outpost on the Moon?  He'd make a bundle.

The answer?  The Moon isn't far enough away!!  Oh, crap!  Elon Musk doesn't just think The Singularity is a possibility.  He is so convinced that he is racing to save humanity.

 

You might be saying to yourself, "Well, no one would ever be stupid enough to create a computer smart enough to write its own self-improvement code.  That would be insane."

Really?  No capitalist would ever be dumb enough to create some artificial intelligence agent (computer) that would allow his stock trading program to write its own self-improvement code?  No one would ever be that greedy?  

Phew.  In that case, we have nothing to worry about.

 

 

 

 

 

Here is a fascinating and concerning science fiction novel about the coming Singularity.  Crash, Book One of the Obsolescence Trilogy.

 

 

 

 

 

 

 

Facebook announced this week that it is using blockchain technology to develop a new form of crypto-currency, similar to Bitcoin.

By the way, did you know that Bitcoin is becoming an increasingly large contributor to global warming?  In order to mine for additional Bitcoins, dedicated computers have to solve these immense calculations. The calculations are so difficult that it takes whole refrigerated warehouses to hold the hundreds (thousands?) of computers working in parallel to solve the equations.  These computers are drawing an immense amount of power, which, especially in China, means coal-powered electric power plants are spewing tons and tons of unnecessary greenhouse gasses into the atmosphere.

 

 

 

 

The name of Facebook’s new crypto-currency is the Libra.  The name comes from ancient Rome, where a libra was a unit of weight used when minting coins.  Facebook intends to use the Libra so that its WhatsApp users can easily and inexpensively send money worldwide.

WhatsApp is software that is used to send text messages.  The cool thing about WhatsApp is that it works overseas, and there is no cost.  When my son, Tom, took his beautiful new bride to Peru on their honeymoon (they actually tried Guinea pig, a delicacy in Peru), we were able to stay in touch instantly by sending text messages using WhatsApp.

WhatsApp has over one and a half billion users, making it the world's most popular messaging application.  Facebook paid $19.3 billion for WhatsApp in 2014.  Mark Zuckerberg found the $19.3 billion between the cushions of his couch.  Haha!

 

 

 

 

Okay, so Facebook is using blockchain technology to create the Libra.  Blockchain, they say is the next big thing, and some say that it will someday be as important as the internet. Thousands of companies worldwide are developing new technology using it.

But what on earth is blockchain technology?  I had to read a half-dozen articles about blockchain technology, each claiming to be written in plain English, before I started to get a tiny handle on understanding it.  Here is what I have deciphered so far.

Blockchain technology helps to solve the problem of trust and hacking.  If two companies across the world want to do business, they often have to use a trusted intermediary – like the stakeholder in a bet.  They don’t dare use the internet to do their deal directly because of the fear of hacking.

 

 

 

 

Blockchain technology takes their secret documents and makes them up into a packet called a block, which is attached to the blockchain.  The blockchain must be enormous because the data is added end-to-end like a giant chain.  All of the blocks in the blockchain are spread out among tens of thousands of computers across the world.

Where the blockchain really adds value is that all of the other blocks in the blockchain are constantly checking each other to make sure that no data in any of the other blocks has been hacked and altered.  This is why your precious bitcoin registration data is secure from hacking.

 

 

 

 

 

Different Subject:

Do you know any high-net-worth investors who invest in first trust deeds?  If so, we will gladly you pay a $250 referral fee the first time that he invests with us, even if he only invests $5,000.  Simply use the Investor Input Form below.

 

 

 

 

Guys, please don't forget that if you convince a bank to join C-Loans that we will share 20% of our net software licensing fee on the first three closings.  Each referral fee could be thousands of dollars.

Just pitch your banker friend by phone and then send your contact information to Tom Blackburne, the General Manager of C-Loans, Inc.   Even if your banker does not join immediately, we will put him into our lead nurturing system, which will send him a reminder about the opportunity once a month.  If he ever signs up, he is your guy.  He remains your guy, even if he changes banks, until you have been paid on three closings.

Because we here at C-Loans.com will be responsible for closing the sale, there is a little bit of a race going on by brokers registering their bankers.  You can't just send in a list of names, however.  You need to pick up the phone first and explain how C-Loans works.  But once you have made your telephone pitch, be sure to rush his contact information to Tom Blackburne, so we can register him in our system as your guy.

 

 

 

 

 

 

 

What does commodity money have to do with commercial loans?  In fact, what on earth is commodity money?

Arguably, the opposite of commodity money is fiat money.  Fiat money is currency that is given its value by governmental decree or declaration.  Some king, dictator, or government suddenly declares that a new currency hereby constitutes money.

 

 

 

 

This fiat decree is usually accompanied by a declaration that all future taxes will have to be paid in this new currency.  From then on, in order to pay their taxes, the people will have to accumulate a whole bunch of this new fiat currency.  This gives the new currency value.  You can use it to pay your taxes.

Another way a government can give value to some new currency is to declare that its holders can use it to pay off their old debts.  If you look at a U.S. dollar bill today, you will see that it is no longer redeemable for gold or silver.  It does, however, contain the language, "Legal tender for all debts, public and private."

Now that we know what fiat money is, what is commodity money?  Commodity money is money that has intrinsic value in other uses.  For example, gold and silver coins have intrinsic value because they can be melted down and used to create jewelry to adorn pretty girls - hopefully making them happy enough to kiss us.  Sorry, ladies, but we men are pretty simple animals.  We don't have a whole lot of moving parts.  Haha!

 

 

 

 

But gold and silver coins are not the only types of money that have intrinsic value.  The shekel from the Bible used to represent a certain measure of barley.  Other commodity monies represented a certain measure of salt.

Quick review:

Okay, so fiat money is just paper money that could loses 100% of its value if the government disappears or simply prints too much of it.  In contrast, commodity money is made up of good stuff (gold, silver, barley, or salt) that you might want to own anyway.  It has intrinsic value.

The biggest example of a worthless fiat currency today is the Venezuelan bolivar.  The current exchange rate is 6 million bolivars to the U.S. dollar, and the inflation rate in Venezuela is expected to reach 1,000,000 percent this year.

 

 

 

 

In a series of dramatic reforms issued by President Nicolas Maduro, Venezuela has just devalued its bolivar by a whopping 95%.  In a bid to salvage the country's economy from complete collapse, the new currency, renamed the "sovereign bolivar", will also be re-denominated, which removes five zeros from its unit measurement.

The mere fact that a currency is a form of fiat money does not make it unsound.  The U.S. dollar and the Euro are examples of fiat currencies that work very well.  While the U.S. Treasury no longer prints Silver Certificates or even Greenbacks (paper money issued by the Union during the depths of the Civil War that were eventually redeemed for gold in 1879), the rest of the world gladly accepts dollars.

So what does commodity money have to do with commercial loans?  Well, the U.S. no longer issues commodity money.  If you take your dollars to the Federal Reserve, you can no longer redeem them for gold or silver.  This means that, in theory, the U.S. dollar could become as useless as the Venezuelan bolivar.

 

 

 

 

 

I am deeply troubled by calls from certain Democratic presidential candidates for socialism.  As one economic commentator said this week on CNBC, "There are only two ways to motivate people to work - financial incentives and the point of a gun."

Between Lenin, Stalin, Mao Zedong, Pol Pot, and pikers by Kim Jong Un, socialists have murdered on the order of 100 million people in the past 120 years.  Nevertheless, a great many young people today are turning their heads towards the sirens song of socialism.

"If a man is not a socialist by the time he is 20, he has no heart.  If he is not a conservative by the time he is 40, he has no brain." – Winston Churchill

I think the problem lies with our high school teachers and our university professors.  We don't allow illiterate fools to teach our young people.  They need a certain amount of education.

 

 

 

 

 

If Donald Trump died and appointed me king, I would require that no one should be allowed to teach our impressionable young people unless they have first taken extensive courses in economic history.  I propose no litmus tests for teachers.  They can be as liberal as they want to be; but they should not be allowed in front of our young, idealistic students until they have first taken certain economic history courses.

They need to study the financial successes of such brilliant economic leaders as  Nicholas Maduro in Venezuela and Robert Mugabe in Zimbabwe.  Nicholas Maduro's hyperinflation in Venezuela's has only reached 1,000,000 percent per year.

However, under Robert Mugage, Zimbabwe's peak month of inflation is estimated at 79.6 billion percent per month.  That works out to 89.7 sextillion percent per year in mid-November 2008.  Heck, in comparison, Maduro is just another piker.

 

 

 

 

Can you imagine trying to arrange commercial loans in Zimbabwe or Venezuela?  As commercial lenders and commercial loan brokers, we need a steady currency.

Guys, please don't forget to refer us potential trust deed investors.  The first time they invest with us, even if they only invest a pittance, we'll send you $250.  We just need his name and email address, and we'll do the rest.

We sell exclusively by email, so no one will call your investor friend and try to sell them an investment.  Our first trust deeds yield between 7% to 12%, and Blackburne & Sons has been in business since 1980.

 

 

 

 

One final thing.  Each of you commercial loan brokers knows three or four banks who make commercial loans.  If you convince a bank to join C-Loans.com as a lender, we'll pay you 20% of our net software licensing fee on the first three closings.  Each of these fees could be thousands of dollars.

You don't have to do much.  Just call your banker friend, tell him about C-Loans.com, and send him the link our page, Commercial Lending Preferences.  Afterwards, please send an email to Tom Blackburne at C-Loans and give him your lender's contact information.  

We'll do the rest.  We have a follow-up system that will reach out to to him once per month until he gets hungry enough fo commercial loans to join C-Loans.

 

 

 

 

 

 

Please-please stay with this article until you've read the Important Notice section below.

First, imagine getting the following call.  "Hey, Steve, do you remember when you convinced Manny Ramirez of Beantown Bank to join C-Loans.com as a lender?  Well, Manny just closed a $4.85 million commercial loan for us.  We have a referral fee check here for you for $3,637 - which is 20% of our net software licensing fee."

 

 

 

 

So that's the deal.  If you convince a direct commercial lender - a company servicing at least $20 million in commercial loans - to join C-Loans.com as a lender, we will pay you 20% of our net software licensing fee on the first three deals that he closes for us.

It should be a pretty easy sale.  C-Loans works.  C-Loans has closed more than 1,000 commercial real estate loans totaling more than $1 billion.  It costs the bank nothing to join C-Loans.com.  There is no monthly fee.  There is nothing to sign.

Several times per week your bank loan officer will receive carefully scrubbed commercial leads that are perfect for the bank - the right loan type, the right size, the right property type, and the right location.

 

 

 

 

All the bank has to do is to bump their normal loan fee by 37.5 bps.  Our fee is just 25 bps. on deals larger than $5 million (for banks, credit unions, conduits, and life company correspondents).  After the deal closes, we'll send the bank an invoice for our software licensing fee.  

Got a buddy who is a commercial real estate loan officer at a bank or credit union?  Simply have him complete this Commercial Lending Preferences form, and then promptly notify me that the bank came from you.

How much will you earn?  We're closing a $3.5 million loan with a bank this week.  If you had referred that bank, your referral fee would have been $2,625,  And you will earn a similar fee on the first three loans we close with that bank commercial loan officer!

 

 

 

 

 

I urge you to cut and paste this Commercial Lending Preferences form and forward it to your favorite bankers.  This could be serious money for you for just ten minutes worth of work. 

Important Notice:

After you have reached out to the bank and introduced the C-Loans concept, please be sure to send us your banker's contact information right away.  We will code this bank loan officer as yours, and then we will enter him into a lead nurturing campaign.  Thereafter he will get a solicitation once a month reminding him to join.  If he joins at any time, he is "your guy" until he closes three deals (assuming you were the first guy to refer him).

Housekeeping Matter:

"Your guy" is the commercial loan officer, not the bank.  It has to be your commercial loan officer who closes the commercial loan, not some other loan officer at, say, Bank of America.  The cool thing is that "your guy" remains "your guy", even if he leaves Beantown Bank and joins Big Apple Bank.  

 

 

 

 

 

We are looking for banks, credit unions, and life company correspondents.  We are not looking to add more commercial hard money shops to C-Loans because they compete against Blackburne & Sons, my own hard money shop.  By the way, please check out our new website.  Purdy.

Note:  We are happy to add hard money commercial loan companies to C-Loans if they regularly close commercial loans in excess of $1 million.  Blackburne & Sons tries to stay with deals of less than $1 million.  Why?  Large hard money loans default far too often. 

I urge you to cut and paste this Commercial Lending Preferences link and send it to each of your bank commercial loan officers before a competing broker beats you to it.

 

 

 

 

C-LOANS, INC.

 
Tom Blackburne

General Manager


4811 Chippendale Drive, Suite 101

Sacramento, CA 95841
574-210-6686  Best

916-338-3232  Office

tommy@blackburne.com

P.S.  We are back to selling $1 to $9 commercial leads again, after a one-year moratorium; and yesterday we lowered the minimum amount to open an account from $1,000 to just $500.

 

 

 

 

 

 

At the end of this training article, I will tell you where to find lenders making commercial loans on golf courses; but first we all need a reality check.

Golf courses across the nation are seriously overbuilt, and most of them are losing money.  About nineteen years ago, when Tiger Woods was at his zenith, golf soared in popularity.  Golf course developers went crazy building new courses.

 

 

 

 

But when his beautiful ex-wife knocked out most of his front tooth out with that hurled cell phone (after bashing in his car with a golf club), and after Tiger's play started to crumble, the popularity of golf started to wane.  It has never recovered.

Young people simply don't have the time to take up golf.  Eighteen holes take too long to play.  There are even some calls to reduce the number of holes from 18 to 12 in order to reduce the time it takes to play a round.

I was shocked today to learn that the number of regular golfers fell from 30 million to just 20.9 million between 2002 and 2016.

 

 

 

 

Holy moley.  Not surprisingly, revenue to the public and semi-private courses has plummeted proportionately.  Private courses are having tremendous problems retaining enough members to keep their courses open.  

A private, member-only golf course in my former home town of Plymouth, Indiana failed.  A dozen former members were able to buy the foreclosed golf course back from the bank for just $525,000.  The bank's first mortgage had been $1.7 million, and the cost to replace the course had to exceed $4 million.  Hundreds of acres and a gorgeous club house - all for just $525,000.  Amazing.  The bank certainly didn't want it.

As a result of the whopping 30% decline in play, golf courses are failing in droves across the country.  The industry has lost about 1,000 courses in the past seven years, and the pace of golf course failure is starting to increase as the owners finally run out of reserves and get tired of feeding the alligator.  An alligator is a negative cash flow on real estate.

 

 

 

 

Bottom line:  Golf courses everywhere are losing tons of money, and commercial lenders know it.  There is very little appetite to make commercial loans on golf courses today.

Nevertheless, if you simply must have a new commercial loan on a golf course, you might try an SBA lender.   Golf courses are eligible for SBA loans.

The problem, however, is that the SBA does not guarantee the entire balance on any SBA loan; so the bank making the new SBA loan will have a significant amount of its own dough at risk.  You are going to have a lot of trouble finding any banks or SBA lenders willing to make commercial loans on golf courses.

 

 

 

 

What about credit unions?  Credit unions are unusually flush with money, and they will make any commercial real estate loan these days that makes sense.  If your borrower is buying a struggling golf course at a huge discount - like the one in Plymouth (see above) - and your buyer is clean, strong, and experienced, you might have a chance.

On the other hand, if your golf course owner is bleeding cash like a stuck pig (like most golf course owners today), good luck.  A bailout loan is unlikely to happen.

What about a hard money lender?  Maybe.  But a hard money lender will only make a commercial loan of a golf course these days once.  After taking their inevitable huge loss, the hard money lender is unlikely to make the same mistake a second time.

 

 

 

 

 

That's the bad news.  The good news?   There are billions and billions of new hard money lenders, each (unknowingly) anxious to make a mistake by making a new commercial loan on a beautiful golf course.  You will find hundreds of credit unions and hard money lenders on C-Loans.com and CommercialMortgage.com.

So are all golf course owners doomed?  Maybe not.  As more golf courses close, play at the remaining golf courses increases.  My favorite golf club in Plymouth, Indiana has picked up a significant number of new members this year because three surrounding courses have failed.

It's a game of survival.  If a golf club can financially hold on, while all of the competing golf courses surrounding it close down, the club may be able to pick up enough golfers to finally make a profit.  Remember, even though the number of golfers nationwide has plummeted by a whopping 30%, there are still 20.9 million golfers in the U.S.  As the song by Wilson Phillips goes, they just have to "Hold On" for one more day.

 

 

 

 

 

This article will eventually lead you to the perfect place to find a commercial loan on a bed and breakfast inn; but first a reality check.

In terms of cash-on-cash return on your money, however, the single worst real estate investment on earth is the bed and breakfast inn ("B&B").  In addition to earning an almost zero percent return on your life savings, the buyer also gets to enjoy rising early every single day of the week to cook breakfast.  Is this a great country or what?

 

 

 

 

Don't get me wrong.  Bed and breakfast inns are usually gorgeous properties.  The big winner here is the previous seller (phew) and the guests, who get to enjoy a relaxing getaway with their favorite someone.  But the inn keeper?  He is totally and completely screwed.

What seems to the problem?  Bed and breakfast inns are so gorgeous that the buyers  fall in love with them... and then they grossly overpay for them.  In many cases, the buyers will put down a whopping $500,000 and take out a commercial loan of $800,000 or more.  Then the buyers try to service the debt on this massive commercial loan by renting out fewer than ten (just four?) guest rooms.  

These commercial loans simply don't pencil.  Sure, the B&B might generate enough dough to make the mortgage payments, but there is seldom any money left over on which the retired couple can live.  Therefore the buyers have to go deeper and deeper into credit card debt in order to survive.  Eventually they have to sell, and the Old Maid is passed on to the next sucker.  Phew.

 

 

 

 

You will recall that a cap rate is the return on your money if you bought an income property for all cash.  For example, suppose you buy a 36-unit apartment building.  You start with your Gross Scheduled Rents, and you lose some potential rent when you have some vacancies and credit losses (5%).  Then you have your operating expenses and some replacement reserves that you have to set aside for the roof and AC units.  

When you are all done, you are left with your net operating income ("NOI"), which is your dollar return on your investment.  (Important note:  Do NOT deduct the payments on your commercial loan when computing your NOI.)  Your cap rate is simply your NOI divided by what you paid for the building.*

You can buy decent apartment buildings for a 5% to 7% cap rate.  In other words, if you buy the apartment building for all cash, you will enjoy an income of around 6% on your money.  You can buy good office buildings and retail properties for 6% to 8% cap rates.  But bed and breakfast inns?  B&B's sell at 2% to 4% cap rates!

 

 

 

 

"But George, the owners also get to live in the beautiful property rent free."

True.  It's an appealing lifestyle, until the cost of the repairs and replacements eats up your cash reserves.  Now if you have a huge, outside retirement income on which you can survive, and you don't need the B&B's income to buy groceries, then the B&B lifestyle may be for you.  But as an investment to generate a cash-on-cash return on your retirement savings, bed and breakfast inns are stinkers.

What about making commercial loans on bed and breakfast inns?  From a lender's perspective, they are not the best kind of collateral.  (But they are not the worst.)  B&B's seldom generate enough dough to pay for professional management.  As a result, in the event of a foreclosure, the bank has to immediately close the inn.

 

 

 

 

A foreclosure destroys years and years worth of marketing effort.  "Oh, honey, let's sneak off and stay at that little B&B where (giggle) little Johnny was conceived.  Oh, no... it's closed down!"

Now let's talk about personal property.  If a buyer pays $1.5 million for a bed and breakfast inn, at least $300,000 of that price will be for the gorgeous, antique furnishings.  Guess what happens when a lender forecloses?  Poof.  They are all gone.  Empty building.

That being said, B&B's are not the absolute worst collateral for a commercial real estate loan because they are usually gorgeous and the setting is heavenly.  They are far-far better collateral than, say, an apartment building in the ghetto.

 

 

 

 

Okay, suppose you are looking for financing on a bed and breakfast inn.  Where should you go?  Banks don't like to finance B&B's because they are money-losers.  The borrowers almost never have large enough cash reserves to attract a bank.  

I don't think the SBA will finance bed and breakfast inns; but I could be wrong.  I just wrote to my SBA loan buddies and asked them, and I'll post the results here.  This just in:  Riley Risto, an SBA loan officer for Gulf Bank, just replied, "Yes, those are tougher deals to get done, but there’s no SBA restriction.  The zoning has to be correct."

If I needed and SBA loan, I think I would apply to a local credit union.  The key is the word, "local".  You can find scores of suitable credit unions for your B&B deal on CommercialMortgage.com.  

 

 

 

 

By the way, guys, when you use CommercialMortgage.com to place a commercial loan, be sure to scroll down past the Recommended Lenders section to the Hungry Lenders section, where you will find your thirty DIRECT LENDERS (banks and credit unions).  You may not be scrolling down far enough.

My own hard money shop, Blackburne & Sons will make small commercial loans on bed and breakfast inns.  Our biggest limitation is that our maximum loan size is $800,000 for such properties.

Be sure to check out our updated Blackburne and Sons web site.  Purdy.  :-)

 

 

 

 

* Multiplied by 100% to put the number into a percentage format.

When underwriting commercial loans, commercial lenders need to be very careful about properties that are leased out for far more than their fair market value.  A story will make this clear.

GrandpaJack was a brilliant man.  He was also a darned fool.   Forty-five years ago, he spotted the fact that Silicon Valley on the San Francisco Peninsula was inching southward towards the cheaper land in San Jose.

Grandpa Jack therefore bought a large, vacant lot on the corner of First Street and Trimble Road, where it approached Milpitas, figuring it would be great location someday for R&D and flex space.

 

 

 

 

Thirty years later, the world was beating a path to his doorstep, begging to build and lease back a 200,000 square foot high-tech manufacturing facility.  Anxious to provide for his family for several generations into the future, Grandpa Jack leased the entire facility in 2004 to Oracle Corporation for a flat fee of $1.92 million per year ($9.6 per square foot per year).

When discussing commercial lease rates, it is customary to always speak in terms of rent per square foot per year.

Judging by his vision, Grandpa Jack was brilliant.  Judging by his choice of Oracle as his tenant, Grandpa Jack showed even more brilliance.  Oracle Corporation, the financial behemoth, sailed comfortably through the Great Recession.  Grandpa Jack's three children got every single rent payment on time.

 

 

 

 

But Grandpa Jack made one bonehead mistake.  He leased his massive R&D building at a fixed rental rate for a whopping thirty years.  He didn't even build in an annual CPI increase.  Today the market rent for R&D space in San Jose is $20 per square foot (per year).

We are now finally able to discuss a leased fee estate.  A leased fee estate is the ownership interest that the landlord or lessor maintains in a property under a lease, with the rights of use and occupancy being conveyed or granted to a tenant or lessee. In other words, it is the ownership interest in a leased property.

In plain interest, the property you own is leased out to someone.  What is your property worth when it is burdened or blessed with the existing lease?  

 

 

Hey guys, do you know any filthy rich investors?

 

Now the concept of a leased fee estate comes up most often in MAI appraisals.  A good MAI appraiser will usually only bring up the concept of a leased fee estate when the property is leased out for a long term at far under the market rate or at far over the market rent.

Now Back to Grandpa Jack:

Let's suppose the huge R&D building was not burdened with the below-market, long-term lease to Oracle.  If it was rented out at $20 per square foot (pop quiz:  per month or per year?), the building would be worth - at a 7.5% cap rate - $40.5 million.

But the property is NOT leased out at $20 per square foot.  It is burdened with a long-term lease of just $9.60 per sf, which is less than half the market rate.  At a 7.5% cap rate, the leased fee value of the property is just $19.5 million.

 

 

 

 

 

"But George, what about the fact that in 15 more years the lease expires, and the owners can renegotiate the rental rate to market?"

A good MAI appraiser will take out his trusty Hewlett Packard 12C hand-held calculator and will perform a discounted present value calculation, taking into account a rental rate of $9.60 sf for 15 years and $20 sf thereafter.

Unfortunately for the heirs (Grandpa Jack passed away in 2006), the reversionary value of the property fifteen years hence, when the old lease expires, does not affect the present value of the leased fee estate as much as you might think.  It has to do with the fact that the big pop in value doesn't happen for a long period of time.  By the way, reversionary value refers to the value of property upon the expiration of a given time period.  

 

 

 

 

Another Example - It Works Both Ways

Sun-Mei Chang is a dynamic, Chinese-American woman.  Sun-Mei is always on the move, and she could sell anything to anyone.  She is a bona fide Alaskan icebox saleswoman.

She buys a closed elementary school (30,000 sf) from the county for pennies on the dollar, and then she spends just $25,000 sprucing it up a little.  Next she convinces a state-sponsored trade school to rent the property for a whopping $15 per sf.  The market rent is just $6 per sf - but like I said, Sun-Mei is a world-class saleswoman.

 

 

 

 

Then Sun-Mei applies for a loan against this property.  If the property was valued solely on an income approach, this former school would be worth a fortune.  If the appraiser is a good MAI appraiser, he should quickly spot the fact that the existing lease rate is much higher than the market.

A competent MAI appraiser would therefore submit his finished report with two different values, the value of the leased fee estate and the fair market value - assuming the big lease did not exist.  The value of the leased fee estate would be on the order of $3.8 million, but the fair market value might only be $1.52 million.

When underwriting commercial loans, commercial lenders need to be very careful about properties leased for far more than their fair market value.  Not every MAI appraiser is well-trained enough to produce a report with two different values.  The lender has to be careful not to make too large of a commercial loan because if the property comes back in foreclosure, the lender will probably only be able to lease it back out at $6 per sf. 

 

 

 

 

  

 

 

I have an investor buddy who has made millions of dollars by buying up distressed apartment building in low-income, high-crime, and high-drug-use areas.  Many millions.  Many, many millions.

When he buys these buildings, they are largely vacant, dilapidated, and infested with gangsters.  So I asked him yesterday how he clears out the gangsters.  These guys have guns, and they have drug and prostitution businesses to protect.  One gang in one in one of his buildings even had the address of his building tattooed on their upper arms.

 

 

 

 

Think about it.  How large of a private army would it take to clear one of these buildings?  After all, these gangsters have guns, and they are not afraid to use them.

So many gunshots did it take to clear out the worst of his buildings?  Not a single gunshot.  Not a single swing of a billy club.  Here is how he did it:

He put a fence around the entire building, thereby creating just one entrance.  Then he hired after-hours policemen to man the entrance.  These police guards visibly took pictures of every person entering the apartment complex.  They also required that every person produce a photo ID.  The names and license numbers were visibly written into a large journal.

 

 

 

 

Now ask yourself.  If you were a young college student wishing to buy drugs, would you run this gauntlet?  Of course not!  Soon the gangsters had no customers, and they were forced to move out.  Haha!

Then, to keep the apartment complex safe moving forward, he enforced a "no baggy pants" rule.  If some gangster came to visit his mother or grandmother, and he was wearing baggy pants, the grandma would be fined $100.  If he showed up again dressed as a punk, his grandma would be evicted.

Before you think that my investor buddy is some evil ogre, you should know that these apartment rules were posted and carefully explained to grandma before she moved into the complex.

 

 

 

 

As a result of these rules, the immediate neighborhoods surrounding his buildings now have a lower crime rate than the city as a whole.  This is an incredible accomplishment, considering he only buys buildings in the most crime-infested areas of the city.  The tenants enjoy a safe, quiet place to live.

Another thing that he does is that he holds monthly meetings with the police, attended by all of his apartment managers and assistant managers.  Nearby apartment owners bring their own managers too, but my buddy makes sure that these meetings always take place in one of his own buildings, in order to cement police rapport.

My buddy provides sodas and snacks, and at the meetings, his mangers tell the cops about units where drugs are being dealt.  Soon the cops set up stings, and the drug dealers are arrested.

 

 

 

 

My buddy now owns and manages more than 6,000 apartment units, and his safe buildings are almost 100% occupied.  It helps that he pays a small finders fee to existing tenants who refer him potential tenants.  

Remember, my buddy bought these apartment buildings for just $10,000 to $30,000 per unit.  Some apartment units in California sell for up to $300,00 per unit.  He really loves buildings in war zones because he can buy them very, very cheaply.  

Renters with poor credit and/or the inability to provide proof of employment (illegals) typically pay much more in apartment rent per square foot than good credit borrowers.  Don't blame this on my buddy.  This is true for the vast majority of all low-income apartment units everywhere in the country.  The reason why is because the owners of low-income apartment buildings suffer from very high collection losses.

 

 

 

 

 

But the renters in my buddy's buildings don't want to have to move because his buildings are so safe and quiet.  Loud music and big groups hanging out in the public areas is not permitted.  As a result of his buildings being so safe and quiet, my buddy enjoys higher than average rents and near-100% occupancy rates.  

These buildings are indeed cash cows.  A cash cow is a business, investment, or product that provides a steady income or profit.

Unfortunately (fortunately?) he can no longer find any deeply-distressed apartment buildings in the major city where his buildings are located.  He is now looking in other cities, where there is strong job growth and absolutely horrible areas.  Capitalism sometimes works, folks.  Remember, his 6,000 apartment units have a lower crime rate than the city average, even though they are located in war zones.  He doesn't use guns, billie clubs, or physical intimidation.  He just uses good property management techniques.