Commercial Loans and Fun Blog

Perhaps you sold a small commercial building, and you carried back a commercial loan; or perhaps you bought a run-down house, renovated it, and sold the house to a couple who had lost their home during the Great Recession.  Their poor credit is why you had to carry back a first mortgage or a contract of sale.

These private first mortgages and contracts of sale can be a wonderful source of wealth and cash flow.  Let's suppose you own a first mortgage note or a contract of sale.  How much is your note or contract of sale worth?

First of all, is your contract of sale worth less than a regular first mortgage?  Naw.  The buyers of discounted notes are pretty sophisticated investors, and they are far more concerned about about the interest rate, the monthly payments, and the term of the note they are buying.  From a practical point of view, there is little difference between a mortgage and a contract of sale, assuming we are in a mortgage state.  (Trust deed foreclosures are much faster.)  

One of the first things that a note buyer is going to want to see is the closing statement.  What was the purchase price of the property?  How much did the buyer put down?  Obviously, the smaller the downpayment, the less the note is worth; however, if the note is several years old and the borrower has demonstrated a good payment history; i.e., the note is seasoned; the real estate recovery since the Great Recession may have created enough protective equity to satisfy the note buyer.

Now let's talk about how the terms of your note affect its value.  Obviously, the higher the interest rate on your note, the more valuable it is (within reason).  Would a note buyer actually pay a premium for a high-yield first mortgage note?  A premium is paid when a note or a bond has a higher-than-market interest rate, and the buyer pays more than the face value of the note or mortgage.  

Example:

Smart Sammy bought a foreclosure during the Great Recession, and he fixed up the home very nicely.  Bonnie Buyer and her husband, Dave, looked at the property, and Smart Sammy noticed that Bonnie, an attractive woman whom Dave obviously adored, was clearly in love with the property.  

Dave then confided to Sammy that he and Bonnie had lost their home in foreclosure during the Great Recession.  They therefore could not qualify for a conventional mortgage.  Would he, Sammy, carry back the first mortgage?

Now Sammy loved notes, and he would ordinarily carry them back at 11%; but Smart Sammy was convinced the pretty Bonnie desperately want this home, and Dave could never deny her.  "Yeah, I'll carry back a first mortgage for 85% of the purchase price, but because of the extra risk, I want a 14% interest rate."  The Buyers jumped at the offer.

Later Smart Sammy needed cash, and the ideal note to sell was his $100,000 first mortgage at 14%.  Indira Investor, a note buyer, showed herself too willing, so Smart Sammy said, "Gee, Mrs. Investor, I hate to part with it.  After all, its yielding a whopping 14%.  Where else can you earn 14%.  I'll tell you what.  I'll sell you this $100,000 note for $105,000 - a $5,000 premium - because the note rate is so much higher than the market."

Indira Investor thinks to herself, "Hmmm, I'll earn an extra $3,000 per year in interest, and in a little longer than a year-and-half I will have recouped my $5,000 premium.  After that, I'm golden."  "Okay, Sammy, I'll buy your $100,000 note for $105,000."

Six months later, a clever mortgage broker (named Sammy) took his former buyers to a subprime mortgage company and got them a new mortgage at 7.5%, making himself a cool $2,000 loan fee.

Indira Investor was horrified, but there was nothing she could do.  She had paid a $5,000 premium and only recouped an extra $1,500 in interest during the six months that she owned the note.  Arghhh!

Where did Indira Investor make her mistake?  She should not have paid a premium if the loan lacked a prepayment penalty!

Note:  One of the largest loans that C-Loans.com closed over the past two years was a USDA Business & Industries loan, kinda like an SBA loan but for lowly-populated areas.  The government recognized that it needed to bring jobs to the Boonies.

But the single most important reason of all to use C-Loans.com is when you are looking for an SBA lender.  Remember, a SBA lender must put at risk a ton of their own capital, even though most of the loan is guaranteed.  Different banks on different SBA loan requests see the risk differently.  Forty banks can turn down a particular SBA loan request - only to have the 41st bank approve the loan!  Got an SBA loan request?  Think of C-Loans.com first.

Blackburne & Sons will buy your discounted notes!

Contracts of sale come up modernly when fix-and-flippers sell their recently renovated houses to buyers who lost their prior home during the Great Recession.  These receivables are a terrific source of cash flow and wealth, and in my next blog article we are going to talk about how to value them, how to sell them, and how to borrow against them.

A contract of sale is simply a contract to transfer title to real estate or goods once the purchase price has been paid in full.  The key words here are, "... once the purchase price has been paid in full."  In other words, bare legal title to the renovated house remains in the name of the seller until the buyer pays him off.

When the buyer of a renovated home signs his contract of sale, he enjoys all of the other rights in the bundle of rights that is fee title.  Think of the bundle of rights as a quiver of arrows.  One arrow is the right to occupy the property.  Another arrow is the right to exclude other.  "Get the heck off my property!"  Another arrow is the right of quiet enjoyment, free from obnoxious noises and unwanted intrusions by others.   Another arrow is the right to rent out the property and keep the proceeds.

The last arrow is the right to own the property in fee simple.  Fee simple absolute title to real estate, according to Wikipedia, is "a permanent and absolute tenure (length of occupancy of a position) of an estate in land with freedom to dispose of it at will, especially in full fee simple absolute a freehold tenure, which is the main type of land ownership."  You and I want to own our real estate in fee simple absolute.

This last arrow is kept by the seller in a contract of sale until he is paid off.  The seller is known to hold bare legal title.  The seller may have a claim to the property until he is paid in full, but he does not have the right to occupy the property, to trespass on the property, to exclude others, or to collect the rents.  The seller no longer possess those rights.

Modernly there is very little difference between a normal mortgage and a contract of sale.  In the old days, sellers would write their contracts of sale so that if the buyer fell behind in his payments by as little as 45 days, the seller could declare the buyer in breach of the contract of sale and reclaim the property (evict the buyer).

This is still true today if you buy a vacuum cleaner using a contract of sale. If you fall behind by even one day, the store can knock on your door and repossess your vacuum.

The courts, however, could not allow such injustice to stand.  Imagine a buyer under a contract of sale who had spent many tens of thousands of dollars fixing up his home, only to lose it in 45 days when his employer went bankrupt and failed to pay his wage.

In every state, courts have ruled that the foreclosure of a contract of sale must be conducted in a manner identical to that of a mortgage, and most states have actually codified this ruling.

So why do sellers still use contracts of sale?  In many cases, neither the seller, nor the buyer, knows the law.  In addition, the buyers, who cannot qualify for a home loan from a conventional lender, are usually very anxious to close the deal and are unwilling to "rock the boat".

Sophisticated sellers will often use contracts of sale as a hammer with which to extract monthly payments out of their borrowers.  "Listen, Bucko, it says right here in our contract of sale that I could evict you from the property right now, so you better send in your payment today!"

But if push comes to shove, the seller can foreclose no faster under a contract of sale than a mortgage.

The Huns were not the same race of people as the Mongols.  Genghis Khan led his hordes into China, across Russia, and into Europe in the 13th Century (1210-1260).  The Huns were from a much earlier time.  The Huns were a nomadic people who lived in Central Asia, the Caucasus, and Eastern Europe, between the 4th and 6th century AD.

The Huns and the Mongols, however, were the same type of people. They were steppe people.  Steppe people spent their lives on horseback, moving their vast flocks and herds across the steppes (vast grasslands) of Eastern Europe, Russia, and Mongolia, according to the season.

Now the tribes of the steppe fought on horseback using recurved, composite bows, each of which took more than a year to build and cure.  These powerful bows could punch an arrow right through the shield and armor of an opposing warrior and continue out his back.  Young Hun warriors would train from childhood to put an arrow through a coffee can-sized target from the back of a galloping horse.  These bows and this training made the armies of the steppe virtually unstoppable.

Have you ever heard of the expression, “Richer than Crassus?”  Crassus was the richest man in Rome, and he was a frustrated Roman general.  It was Crassus who put down the famous slave rebellion lead by Spartacus; but his glory was stolen by a competing general, Pompey, who put down a smallish army of slaves and raced to Rome first to claim the big victory over the slaves.

At the same time, Julius Caesar was conquering province after province in Gaul (France).  His legions captured hundreds of thousands of slaves, who were later sold in Rome, making Caesar incredibly wealthy as well.  Pompey got his triumph (a lavish parade through the center of Rome); and Caesar, who paid for lavish gladiatorial games, was the darling of the people.  Crassus was pea green with envy.

My favorite cartoon of all time shows two vultures sitting in a tree. One turns to the other and says, “Patience, my (rear end).  I’m gonna go out and kill something.”  A frustrated Crassus therefore assembled and trained, at his own cost, an army of 46,000 Roman legionnaires - the best foot soldiers in the world – and marched out into the desert to conquer the Parthians.

Uh, oh.  The Parthians, a desert people who bordered the steppe, fought in an identical manner as the steppe people - from horseback with recurved, composite bows.  The proud army of Crassus – 46,000 of the best Roman foot soldiers on earth – met up with just 11,000 Parthian horse archers at Carrhae, a small town in what is now southeastern Turkey. The Parthian archers drowned the Romans in arrows.  The Parthians brought with them vast trains of camels carrying spare arrows, and the arrows would pin the arms of the Roman soldiers, after piercing their shields, to their body.

The slaughter was complete.  After losing his first-born son [George IV – sob], the elder Crassus was captured and killed by pouring liquid gold down this throat.  (I’ve found that gargling with salt water works better on a sore throat.)

This leads to the first of three messages today:  You don’t mess with a race of people with recurved, composite bows.  A recurved, composite bow can even punch a hole through a bullet-proof vest.

In the latter part of the 4th Century, the Huns came roaring out of Hungary, sacking and burning everything in their path. They marched south through the lands of the barbarians, north of the Danube River.  The Danube River, which runs East and West, marked the northern boundary of the Roman Empire, just as the Rio Grande River marks the southern boundary of the United States.

Directly in the path of the Huns were the Visigoths.  The Visigoths were of Germanic stock, part of a race of people called the Goths.  The Visigoths had fled from southern Denmark in the Great Migration to settle in southern Romania, just north of the Danube River.  The Visigoths tried to bravely stand in their shield walls facing the Huns, but they were repeatedly cut down by the Hunnish archers.  (Can you imagine kissing your sons goodbye as they marched off to die under a cloud of Hunnish arrows?)  City and after city fell.  The men were typically all killed, and the younger women were enslaved.  The Huns were unstoppable.

The Visigoths were in a real pickle. They were stuck between the raging Huns coming down on them from the north and the Roman Empire and the Danube River to the south.  To the south of the Danube River was the Roman province of Thrace, which is now the country of Bulgaria.

The Visigoths had little choice, so on a misty morning in the year 376 AD, the Roman commander guarding the norther border of the Empire woke up to find tens of thousands of Visigoths streaming across the Danube River and establishing a beachhead on Empire territory.  Assembling his legion, the Roman commander marched out to repel the invasion.

But it wasn’t an invasion.  It was a migration.  The Visigoths were landing more women and children than warriors.  The Roman commander, almost certainly a Christian, was forced with the decision to either send these people back to their certain death (or rape and enslavement) or to allow them to settle in the vast, lowly-populated areas of Thrace.  He just couldn't send these people to their deaths.  He had compassion.

This leads to the second message of this letter:  Sometimes, through no fault of their own, people become desperate refugees.  They deserve our compassion.

This tale would have made make a great Hallmark movie, except for one thing.  War broke out between the Visigoths and Romans just two years later, and the Romans were defeated in one of their worst and final defeats in their history at the Battle of Adrianople.  The Roman Emperor Valens was even killed.  In 406 AD the Visigoths sacked Rome.

This leads to my final message of this letter:  As prosperous Americans, we should be compassionate about immigration; but a migration is different than immigration.  As sea levels rise in the coming decades, hundreds of millions of people worldwide will be on the move.  Bangladesh, for example, with its population of 150 million people, will be underwater by the end of the century.  Yikes.

In my last two blog articles, I have been pounding on the theme that a commercial loan broker must not waste his valuable time working on goofy loans.  Instead, he must spend his precious time building and expanding his list of 4,000+ referral sources.

What makes a commercial loan goofy?  It depends on the type of loan.

Bridge Loans:

A bridge loan is goofy if it is large, and the borrower's net worth is small.  Remember, in all of commercial real estate finance ("CREF"), the Net-Worth-to-Loan-Size Ratio says that the net worth of the borrower must be equal to, or larger, than the loan amount requested.  In other words -

Net Worth of the Borrower / the Loan Amount  >  1.0

Example:

Charlie the Commercial Loan Broker gets a commercial loan request for a $10 million bridge loan to buy and renovate an old commercial building in a pretty good downtown location.  Right now the building is leased out to Goodwill Industries at a very low rental rate, and the lease is expiring.  

Bill Borrower wants to buy the building, renovate it, and re-lease it at a much higher market rate.  Conceptually the idea is good, but Bill Borrower only has a $1.5 million net worth.  Should Charlie the Commercial Loan Broker spend a lot of time trying to place the deal?

Probably not.  It is true that most bridge loans are made by hard money lenders, and hard money lenders are not locked into a rigid 1.0 Net-Worth-to-Loan-Size Ratio.

However, $10 million is still a lot of dough, and it is impossible to imagine any hard money bridge lender loaning $10 million to a borrower with a net worth of only $1.5 million.  What if there are horrible cost overruns, such as a lumber shortage or a lack of skilled workers (rebuilding after the fires in California)?  Out of which deep pocket will the borrower be able to come up with an extra $2 million?  Do you see the problem?

Charlie the Commercial Loan Broker should therefore tell his borrower to go find some high-net-worth partners before he invests any time in the deal.  Even though Bill Borrower's project is well-conceived, until he finds borrowing partners with a combined net worth of, say, $7 million, his $10 million bridge loan request is goofy.

And yes, you can combine the net worth of the borrowers / personal guarantors to satisfy the net-worth-to-loan-size ratio requirement!

In other word, we can add the $2 million net worth of Dennis Dentist to the $3 million net worth of Darlene Doctor to the $3.5 million net worth of Charles CPA to satisfy the $10 million required by the lender.

Land Loans:

Most land loans today are made by hard money lenders, and as I mentioned above, hard money lenders are not locked into a strict 1.0 net-worth-to-loan-size ratio.  Nevertheless, the ratio better be at least 0.70.  In other words, the combined net worth of the borrowers / personal guarantors should be at least 70% of the land loan amount.

Example:

Lucky Lefty inherited some desert land from his father.  The good news is that the land, while producing no income, is in the path of growth of an expanding nearby city; but it will be 15 years before the land is ripe for development.  Arguably the land is worth $15 million today.

Lucky Lefty owns a $150,000 tract house, and he makes $70,000 per year working as a scheduler for Amazon.  Now he wants to borrow $7.5 million for an unspecified investment.

Is this a goofy land loan request?  You betcha.  How on EARTH is Lucky Lefty going to make the monthly payments?  And what about an exit strategy?  An exit strategy is how the borrower will pay off the loan at maturity.  Without a rock solid exit strategy, the idea of building in an interest reserve is goofy.

Construction Loans:

The total cost of a project is the sum of the land costs, the hard costs (brick and mortar), the soft costs (interest reserves, report costs, insurance costs, government fees, etc.), and the contingency reserve (5% of hard and soft costs).

Modernly - after the Great Recession - construction lenders (almost always a bank) require that the borrower contribute 30% of the total cost of a construction cost.  Now it's true that an aggressive bank will loan 80% of the total project cost to an experienced, filthy rich developer, but this borrower is coming to YOU, a mortgage broker for help getting construction financing.  He is almost never the ideal construction loan borrower.

Therefore, in real life, you, as a commercial loan broker, should almost never work on a commercial construction loan.

Invariably, if a developer comes to a commercial loan broker for a commercial construction loan, that developer CANNOT raise the required 30% of the total cost of the project.

For you, the commercial loan broker, commercial construction loans are goofy loans.  You should not waste even one minute working on such deals.

Example:

Johnny Lightbulb owns a reasonably successful wire manufacturing business.  He has been in business for ten years, and until now he has been leasing his space.  He finds a good piece of land and comes to you for a commercial construction loan.  

Lightbulb Wiring is making decent money, but Johnny Lightbulb doesn't want to spend too much of his company's precious working capital to build the new building.  He certainly doesn't want to invest 30% of the total cost of his new building.

Can you help him?

Yes!  Lightbulb Wiring is a perfect candidate for a construction loan / SBA loan combo, where the construction loan is taken out with a SBA 7a permanent loan, which features a 25-year term. 

Many banks will make a construction loan of up to 90% of cost, if they get the privilege of making the SBA loan.  SBA loans are very profitable for banks.

You should take your owner-user construction loans to a bank because you need a bank to make the construction portion of the deal.  Remember, almost all construction loans are made by banks.

Conclusion:

The smart commercial loan broker does not waste his time working on goofy loans.  He does not waste his time trying to force a round peg into a square hole.  Instead he invests his precious time building his network of 4,000 referral sources.

I got an email today from one of my former students, and he was starving as a commercial loan broker.  In order to help him, I sent him a little questionnaire about his struggles as a commercial loan broker.  My initial thought was that if I could pinpoint at which step he was struggling, then I could help him.  Then I realized, why I don't I help a whole bunch of commercial loan brokers?  So here we go.

What I am about to say is going to sound like a giant sales pitch, but it's the truth.  If you are struggling as a commercial loan broker, you really should take the course that I wrote just for struggling commercial loan brokers - The Practice of Commercial Loan Brokerage.  Theory is great.  So are the financial ratios and the commercial real estate finance ("CREF") terms of art.  But if you starve to death because you don't know where to focus your time, then it's all for naught.

Now on to the questionnaire:

1.  Is your problem that you simply aren't getting any commercial loan leads at all?  

You need to learn how to market for commercial loans.  What does NOT work - at all - ever - not even a little bit - I really mean NEVER - is the advertise to potential borrowers for commercial loans.

What DOES work is to advertise to potential referral sources, such as banks, commercial brokers, property managers, other commercial lenders, residential mortgage brokers (on a name and number referral fee basis only), residential real estate brokers, CPA's, attorneys, and financial planners (life insurance salesmen).

If money is tight and marketing for commercial loans is big problem for you, you should take my course, Marketing for Commercial Loans.  If you are are flat-out starving, you can trade one banker for our commercial mortgage marketing course.  

2.  Is your problem that you are not getting enough leads?

You are probably wasting valuable time trying to place crumby commercial loans.  I'll cover crumby commercial loans in more detail below.

If you need more commercial leads, you need to realize that 70% of a commercial loan broker's time should be spent marketing to bankers, commercial brokers (commercial real estate salesmen), property managers, other commercial lenders , residential mortgage brokers for referrals only, residential real estate brokers, CPA's, attorney's, and life insurance agents.  In plain English, use the time you might spend chasing crumby commercial loans to add to your list of referral sources.

By the way, for $1,000 per year, you can buy one to five commercial leads per day.

3.  Is your problem that the commercial loan leads you are getting are crumby?

First of all, you need to quickly spot a crumby commercial loan - big land loans (the borrower's net worth has to be at least as large as the loan amount), construction loans for developers who can't cover 30% of the total cost of the project, international loans, and loans involving some sort of "special financial instrument" (letters of credit, bond financing, tax credits, etc.).  You will never buy even a package of Ramen to feed your family if you work on such loans.

Instead, quickly reject such loans and go back to spending nine hours per day marketing to your referral sources.  If you are adding fewer than a dozen new potential referral sources to your email list every day, you are not working smartly.

Seventy percent of a commercial loan broker's time should be spent on marketing for commercial loans.

4.  Is your problem that you can't convince the borrowers to send you the package?

If so, you must sound unknowledgeable on the phone.  Your borrowers must think that you are a bumbling idiot.  Its time to learn the profession of commercial loan brokerage!  Learn your stuff.

Now ideally you can afford a modest $549 to learn a profession.  Four years of tuition to get a bachelor's degree in finance costs $225,000.  I can teach you the entire profession of commercial mortgage brokerage in one incredibly long day for just $549.  Just one day.  This course was videotaped before a live audience, and I taught the entire course in one day.  Phew.  I would sleep for twelve hours afterwards.

But let's suppose you are a starving commercial loan broker.  You can't afford $549.  Then at least trade for my commercial loan underwriting manual.  All you have to do is to call a bank located near your office, get the name, contact information, and email address of their commercial real estate loan officer, and trade that one banker for my wonderful Commercial Loan Underwriting Manual.  At least you'll learn the ratios and the terminology of the commercial loan business.

5.  Is the problem that you can't find banks to approve your commercial loan?

Have you tried entering your commercial loan into C-Loans.com?  C-Loans is 100% free to commercial loan brokers to use, and it will identify 20 to 30 hungry commercial lenders suitable for your particular commercial loan.

The advantage that C-Loans has over CommercialMortgage.com ("CMDC") is that C-Loans lists a ton of subprime commercial lenders.  CommercialMortgage.com is best for finding banks and credit unions for "A" quality deals.  C-Loans.com has those weird, loosy-goosy commercial lenders that actually feed a commercial loan broker.

If you like the idea of having your own list of commercial lenders, you can trade one banker for a list of 750 commercial lenders.

6.  Is your problem that your borrowers won't sign your lender's term sheets?

Fudge them.  You might just need to move on to the next deal.  I know it's heart-breaking, but you can't force a borrower to need a commercial loan.

In order to close two to three commercial loans per month, you need to have ten to twelve loans in process at all times.  To have 10 to 12 loans in process, you need to be working at least eight good leads per day.  

To have receive eight good leads per day, you need to have a list of referral sources of 4,000 (?).  To have a list of 4,000 referral sources, you need to be adding a dozen new referral sources to your email list every day.

A very wise old commercial mortgage broker once said, "Seventy percent of a commercial loan broker's time should be spent on marketing for commercial loans."

7.  Is your problem that borrowers are cheating you out of your fee?

You and I have different definition of "cheating you out of your fee."  You think I am referring to commercial loan borrowers who close the deal and don't pay you.  That very seldom happens.

What happens far more often is that the borrower cancels on you on the 5-yard line.  "My wife won't let him take the loan," even though he has signed some lender's term sheet.  You worked your butt off delivering that term sheet, and now this multi-millionaire borrower wants to walk and away and tell you to, "Make it up on the next borrower."  Or the SOB lied to you about the property being leased.

Fudge him.  If you were not absolutely starving, you should take my invaluable 90-minute video training course, "Fee Collection Course."  It is fair to say that I have made over $1 million during my career collecting loan fees from defaulting, lying, and fraudulent borrowers.  I collected $37,000 just last week.

Did you know that I got so fed up with lying, fraudulent borrowers that I went to law school at night, with two kids in diapers, and never missed a single class in four years of law school, passed the California State Bar Exam (40% pass rate), and never practiced law.  I went through this torture just to develop this fee agreement.

But you may be starving.  If so, you can trade me one one banker for my famous fee agreement.

8.  Are you smarter than the average commercial loan broker?

If so, rather than just finding me four bankers, you'll find me 20 bankers.  I will trade you a free copy of my famous 9-hour course, How to Broker Commercial Loans.  Just send me, George Blackburne III (the old man), an email with the subject line, "Trade For 20 Bankers."  I get 1,350+ emails per day, so it will be easy for me to miss your trade.  After sending your email, please text me at 574-360-2486, "I just sent you 20 bankers."

And once you start building a list of bankers, you have begun the all-important task of building a huge network of referral sources.  Remember, advertising directly to the public for commercial loans absolutely does NOT work.  You need referral sources to get commercial loan leads.

You really should pay close attention to what I am teaching you here.  This is the meat-and-potatoes of commercial real estate finance ("CREF").

Let's suppose you're a starving commercial loan broker, and you can't afford my wonderful nine-hour course, How To Broker Commercial Loans.  Maybe you can't even afford to buy the written training manual, Underwriting Commercial Loans.  I have good news.  You can now access much of this wonderful training for free on C-Loans.com.

C-Loans is slowly making this wonderful training manual available for free online.  We covered the first ten chapters in a recent blog article, How To Underwrite Commercial Loans - Part 1.  Today's training article continues with Chapters 11 through 20.

Before we get into today's training, I want you consider the absolute cheapest way to receive commercial leads.  For just $1,000 per year, you'll receive on average one to five commercial leads per day.  Because you pay upfront, all commercial mortgage brokers and lenders qualify to buy leads from CommercialMortgage.com.  (Our other portal, C-Loans.com, uses a different model.  C-Loans only gets paid when deals close, so any lead buyer has to be rich and pristine.)  Do you own a bridge lender?  Leads from CommercialMortgage.com are the Deal of the Century.

Chapter 11:  As you branch out into commercial real estate finance ("CREF") for the first time, your early loans should be apartment loans.  This chapter explains how to prepare a Pro Forma Operating Statement (a budget for the next twelve months, while setting aside reserves for future replacements) on an apartment building.

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/how-to-prepare-an-apartment-pro-forma


Chapter 12:  Here is what an apartment Pro Forma Operating Statement should look like:

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/sample-apartment-pro-forma-operating-statement







Chapter 13:  When you are ready to expand into commercial loans, you will need to know how to prepare a Pro Forma Operating Statement on a commercial building.  This chapter explains how.

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/how-to-prepare-a-commercial-or-industrial-pro-forma

Chapter 14:  Here is what a sample Triple-Net Pro Forma Operating Statement looks like:

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/sample-triple-net-pro-forma-operating-statement







Chapter 15:  One of the hardest Pro Forma Operating Statements that you will ever have to prepare is one where some of the tenants are triple-net tenants, and some of the tenants are full service tenants.  This situation occurs when a hot, brand new shopping center opens and leases out on a triple-net basis. Later, as the shopping center ages, new tenants will only sign if the lease is full service.  Here's how to handle it.

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/sample-partial-net-pro-forma-operating-statement


Chapter 16:  What is a Reserve for Replacement?  You're rushing to get a package out, and you know that you must include one; but how on earth do you compute a Reserve for Replacement?

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/reserves-for-replacement

Chapter 17:  What on earth is a cap rate?  What do you do with it?  You've wondered about this for years, haven't you?

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/cap-rates

Chapter 18:  The Net-Worth-to-Loan-Size Ratio is an extremely important ratio in commercial real estate finance.

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/net-worth-to-loan-size-ratio

Chapter 19:  Toxic contamination liability is a HUGE issue in commercial real estate finance.  What is a Level I toxic report?  What is a Level II?

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/toxic-liability

Chapter 20:  This is one of the most important chapters of this Underwriting Manual, and it is a great primer on the subject of commercial construction loans.

https://www.c-loans.com/knowledge-base/how-to-underwrite-commercial-loans/the-construction-loan-process

Does the SBA have a minimum credit score?  What if I was forced to declare bankruptcy during the Great Recession?  Is it still possible for me to get an SBA loan?

You will recall that the Small Business Administration does not make commercial loans.  Instead, the SBA merely guarantees a portion of certain commercial loans secured by commercial real estate and/or business equipment.  I want you to please remember that word, "portion".  We are going to come back to it later in this training lesson.

So an SBA loan request came into C-Loans.com this week.  C-Loans.com is a commercial loan portal where commercial mortgage borrowers can quickly create a commercial loan application and then submit that same mini-app to 750 different commercial lenders.  If six lenders turn your deal down, within seconds you can ship off your commercial loan application to six more lenders.  You continue this until finally some commercial lender says, "Yes."

Now this SBA loan applicant was a physician.  He was trying to buy a medical office building, but the problem was that he had declared bankruptcy less than two years earlier.  Could he get an SBA loan?  What was the SBA's minimum credit score?  I honestly didn't know.

So I posed this question to some buddies of mine who specialize in SBA loans, and here are their replies:

Scott Coleman, the Business Development Officer for Harvest Small Business Finance, replied, "The minimum credit score to obtain an SBA loan from Harvest is 600.  Past bankruptcies must be at least three years old."

Erik Shorey, a Credit Analyst for Celtic Bank, replied, "As to credit scores, I would say that applicants with credit scores of 640 or below are going to have an issue; but such (low scores) are not always a deal killer.  Bankruptcies get really tough regardless.  The SBA says that they need to be discharged by at least 24 months I believe.  We have done a couple, but its few and far between."

Riley Risto, a Vice President for Gulf Bank, replied, "The SBA does not take a formal position on either bankruptcy or credit score minimums.  These decisions are left to the lender within the bounds of prudent lending.  The only requirement is that the lender spell it out in their credit policy and apply the policy uniformly."

Thank you, guys!

Now its time to go back and revisit the word, "portion", in the expression, "the SBA merely guarantees a portion of certain commercial loans..."  The SBA does not guarantee the entire loan.  Under the 7(a) guaranteed loan program, the SBA typically guarantees from 50% to 85% of an eligible bank loan.  If a borrower defaults and the lender takes a loss on the loan, it submits the loss to the SBA to honor its guarantee. The SBA guarantees up to 85% on loans of $150,000 and less, and up to 75% on loans over $150,000.

So if a bank makes a $1,000,000 SBA loan, and it ends up losing $400,000, the bank will submit the $400,000 loss to the SBA to honor its guaranty.  Because the original loan was over $150,000, the SBA will reimburse the bank for just 75% of the $400,000 loss; or, in this case, $300,000.  The bank will have to eat a $100,000 loss.

The reason this is important is that the lender making the SBA loan, often but not always commercial bank, stands to lose some serious dough if an SBA loan goes bad.  Therefore different Loan Committees at different SBA lenders will perceive the risk differently.

An SBA loan applicant could easily be turned down by 40 SBA lenders, only to get funded by the 41st SBA lenders.  For example, maybe the loan was to upgrade an old, money-losing bowling alley with new equipment.  A member of the 41st lender's Loan Committee might have a brother in bowling alleys.  "Oh, I know that Brunswick equipment.  It's such a pleasure to use.  Your borrower is going to smoke the competition."

So if you have an SBA loan, you might have to submit that SBA loan request to dozens of different SBA lenders.  Gee, if there was only an easy way to submit commercial loans to dozens and dozens of different lenders...  Hellooo?  C-Loans has 218 different SBA lenders!

"China is already challenging the US for technological and geopolitical primacy and flaunting its authoritarian capitalism as an alternative to democracy.  Communism couldn’t pose a credible challenge to liberal democracy, but authoritarian capitalism might.  In that sense, China’s model represents the first major challenge to liberal democracy since the rise of Nazism.” — Brahma Chellaney, Project Syndicate

Authoritarian capitalism is characterized by the enforcement or advocacy of strict obedience to the authority of the state at the expense of personal freedom, coupled with an economic system in which trade and industry are controlled by private owners for profit, rather than by the state.

Authoritarian capitalism has been tried at least three times in the modern era, and each time it has worked pretty well, for awhile at least.  Is authoritarian capitalism, in fact, better than liberal democracy?

By 1922, the Russian Civil War (1918-1922) had reduced the economy of Soviet Russia to tatters.  Vladimir Lenin therefore implemented the New Economic Policy (“NEP”) as a temporary expedient.  Lenin characterized the NEP in 1922 as an economic system that would include "a free market and capitalism, both subject to state control", while socialized state enterprises would operate on "a profit basis". 

The NEP represented a more market-oriented economic policy to foster the economy of the country, which had suffered severely since 1914.  The Soviet authorities partially revoked the complete nationalization of industry (established during the period of War Communism of 1918 to 1921) and introduced a system of mixed economy which allowed private individuals to own small enterprises, while the state continued to control banks, foreign trade, and large industries.  In addition, the NEP abolished forced grain-requisition and instead introduced a tax on farmers, payable in the form of raw agricultural product.

The result? The Russian economy rebounded strongly.  Food production, for example, soared because Russian farmers were now allowed to sell some of their production for cash and thereby had an incentive to produce more.  Unfortunately for the Russian people, Lenin died in 1924, and Joseph Stalin discontinued the program in 1928.

In 1932, in the dying days of the Weimar Republic in Germany, 5.6 million Germans were unemployed – many of whom gave their support to the Nazi Party as the only party that offered them hope.  By 1934, this unemployment figure had fallen to 2.7 million – a seemingly impossible decrease.  By 1936, only 1.6 million people were unemployed, and by 1938 the figure was 0.4 million. Therefore in five years, unemployment had fallen by 5.4 million – 96%.  No other west European country came anywhere near this figure – hence it was labelled the “German economic miracle".

In 1990 the GDP of China was just $360 billion.  By 2017, the Chinese GDP had skyrocketed to $12.24 trillion - that's trillion with a "T".  A reasonable man might ask, "Is authoritarian capitalism a better economic system than social democracy?"  Well, we can reasonably say that its a heck of a lot better than pure communism.

We'll never know how well Lenin's New Economic Policy would have performed in the long run because Joseph Stalin terminated the policy in 1928.  The kulaks were the high-income farmers of Russia.  In 1929 Stalin ordered the elimination of the kulaks as a class, and 1.3 million kulaks were deported, starved to death, and murdered.  This kind of casts a pall over the term, "authoritarian".

The German economic miracle was not quite what it seemed either.  First of all, between 1933 and 1939, a series of laws were passed that effectively made it impossible for Jews to hold a job in Germany.  As Jews fled Germany, they left behind jobs that were eventually filled by the unemployed.

Women were also excluded by the Nazi's from many areas of work, creating more job opportunities for men.  Aryan women were expected to stay home and make babies.

While many millions of more Germans men found jobs, their average rate of pay in the middle 1930's was considerably less than before the 1929 Stock Market Crash.  Staying home unemployed was not an option either.  If you chose not to accept a low-paying, manual labor job on the autobahns, you risked being labeled as "work shy" and sent away to a concentration camp.

Lastly, and most importantly, Germany was rearming.  In 1933, Germany spent just 3% of their GDP on defense.  By 1939, 32% of Germany's GDP was spent on their military build-up, and 22% of all German workers were employed in some form of defense work or steel production.

In the past thirty years, the Chinese Communist Party has made a concerted effort to interfere as little as possible with the growth of capitalism in China.  During the Cultural Revolution, which lasted from 1966 to 1976, however, the opposite was true.

The Cultural Revolution was launched in May 1966, after Mao alleged that bourgeois elements had infiltrated the government and society at large, aiming to restore capitalism.  To eliminate his rivals within the Communist Party of China, Mao insisted that these "revisionists" be removed through violent class struggle.

China's youth responded to Mao's appeal by forming Red Guard groups around the country.  The movement spread into the military, urban workers, and the Communist Party leadership itself.  It resulted in widespread factional struggles in all walks of life.  There was a mass purge of senior officials.

In the violent struggles that ensued across the country, millions of people were persecuted and suffered a wide range of abuses, including public humiliation, arbitrary imprisonment, torture, hard labor, sustained harassment, seizure of property and sometimes execution.  A large segment of the population was forcibly displaced, most notably the transfer of urban youth to rural regions.

Mao officially declared the Cultural Revolution to have ended in 1969, but its active phase lasted until the death of military leader and proposed Mao successor, Lin Biao, in 1971.  After Mao's death and the arrest of the Gang of Four in 1976, reformers led by Deng Xiaoping gradually began to dismantle the Maoist policies associated with the Cultural Revolution.  In 1981, the Party declared that the Cultural Revolution was "responsible for the most severe setback and the heaviest losses suffered by the Party, the country, and the people since the founding of the People's Republic".  (Source: Wikipedia)

Bottom line:  The "capitalism" part of the term, "authoritarian capitalism", seems to work very well.  Its the "authoritarian" part that seems to always spoil the party - in a very bloody way.

We just completed an extensive upgrade to CommercialMortgage.com ("CMDC") that now allows us to immediately deliver commercial loan leads directly to commercial lenders and commercial mortgage companies by email.  The cost to receive these leads is only $1,000 per year.

The cost of $1,000 per year is absurdly cheap. Any commercial lender who has ever paid for Google Adwords or display ads in digital magazines or e-zines will tell you that his company paid MUCH more than $1,000 per year.

You will receive these commercial loan leads instantly, so you can catch the borrower while he is still sitting in front of his computer.  Here is what a sample lead looks like:

Guys, please don't call this lead.  I appreciate your work ethic, but its just an imaginary sample lead.  Please note that imaginary borrower is me.  Watch, I'll still get three or four calls.  "Hey, I hear you need a $1.5MM loan on an industrial building in New York."  Ha-ha!

When a commercial lender advertises on Google Adwords or in some digital magazine, the commercial loan leads are likely to be pretty poor.  Why?  Because there is no way to fine tune the leads that he's receiving.  A commercial lender might pay Google $3,000 per month, only to get leads like a $42,000 bridge loan on a commercially-zoned house in Detroit or a $2 million mezzanine loan on a parking garage in Maine.

When you advertise on CommercialMortgage.com, you get to specify the exact type of commercial loan leads that you want to receive.  For example, if you only make bridge loans on the four basic food groups, plus hospitality, in the five states located close to New York City, from $1 million to $15 million, this is exactly the type of commercial loan leads that you will receive.  (The four major food groups are multifamily, office, retail, and industrial.)

If you are unfamiliar with CommercialMortgage.com ("CMDC"), this commercial mortgage portal contains a searchable list of 3,159 different commercial lenders.  By the way, I paid $100,000 to get that wonderful domain name, CommercialMortgage.com.  The vast majority of these commercial lenders are commercial banks.

Here is what the search results look like:

The site is 100% free to use by borrowers, mortgage brokers, and commercial brokers.  The banks listed do NOT increase their loan fee to pay any fee to C-Loans, Inc., the owner of CommercialMortgage.com.  Banks and credit unions get a free listings.  Until now, no other commercial lenders could gain a listing on CMDC - only banks and credit unions were allowed to join.

As a result, there are very few competing bridge lenders listed on the portal.  This lack of competition for bridge loans should be very good news for bridge lenders who are considering an investment of - gasp - $1,000 per year to receive a steady supply of pre-qualified bridge loan leads.  (Can anyone guess why I have added the picture of Dr. Evil here?  We will hold the world to ransom for - gasp - $1 million!  Ha-Ha!)  How much do you make if you close a deal?  And remember, unlike on C-Loans.com, you do NOT owe us 50 bps. if you close a deal.  (If your boss will never authorize an investment of $1,000; you can always join C-Loans.com for free.)

The cost to receive these leads is $1,000 per year per loan type.  For example, if your hard money mortgage company makes both permanent loans and bridge loans, the cost to receive permanent commercial loan leads would be $1,000 per year, and the cost to receive bridge loan leads would be another $1,000 per year.

Small bridge loan lenders will be disappointed to learn that we do NOT sell permanent loan and bridge loan leads of less than $1 million.  There are reserved for Blackburne & Sons, my own hard money shop.  Between loans fees and loan servicing income, I make over $300,000 on a loan of $1 million.  Blackburne & Sons, however, doesn't make either permanent loans or bridge loans larger than $1 million, so these are the leads that are available.

What if you are an SBA lender?  Yes, you can buy the smaller SBA and USDA leads.  Blackburne & Sons does not make SBA loans, USDA loans, or construction loans of any size.

What if you are commercial mortgage broker?  Can you get listed on CMDC for $1,000 per year?  Only if you do not call me up and ask a lot of questions.  If $1,000 per year is a lot of money to you, you are just not the size of commercial mortgage company that I would allow to slip onto CMDC.  Moral of the story:  If you are a small operation, do NOT call George.  Just send in your dough.

Owners of hard money shops and approved SBA lenders are, of course, absolutely invited to call me, the old man, George Blackburne III, at 574-360-2486.

Now there is a bit of a race going on.  Let's look again at the results of a Lender Report:

Do you see the the section above entitled Recommended Lenders?  Blackburne & Sons will, on perm's and bridge loans of less than $1 million, always be listed first.  After that, the order depends on how soon you send in your dough.  Red Star Mortgage has already sent in their dough, so on deals larger than $1 million, they will be listed first.  The next lender to send in his dough gets listed second, etc.  (Remember, this update to CMDC that allow us to send leads out to lenders was just completed last night, November 1, 2018.)

Next year, if Red Star doesn't renew, then the #2 lender moves into the #1 spot, and every renewing lender moves up one place.

Fair warning.  If the site takes off, and a new lender offers me $1,500 per year, he grabs the #1 spot.  I will probably just go up in $500 increments.

Let's suppose you're sold.  You've known of 'ole George Blackburne III for decades, and you trust that he is proven rainmaker.  If so, you need to rush your check or wire, made payable to C-Loans, Inc., to Justine Manzo, our Controller, at 4811 Chippendale Drive, Suite 101, Sacramento, CA 95841.  Justine's number is 916-338-3232.

Today's article is targeted at commercial loan brokers, and its about where to market for commercial loans.  Please stop.  Are you a commercial broker?  In other words, do you list and sell commercial real estate?  If so, please hear this before you sign off:  

You should open a commercial mortgage company using that empty desk in the corner!

Why?  Because I own commercial loan company, I market regularly for commercial loans.  The people with whom I speak are commercial property owners.  As a result, I meet a half-dozen wealthy real estate investors every single day.  After all, poor people don't own nice apartment buildings and office buildings.  And once the commercial loan officer working your commercial loan desk meets a high-net-worth client, then your realty brokerage company should and must continually market to that investor to buy your listings and to give you new listings.

The following video is only 42 seconds long, and it shows you how you can make a $21,250 referral fee while your are passed out on the couch, stuffed with turkey, and watching a football game.

Okay, now on to the point of today's training article for commercial loan brokers.

Marketing directly to commercial property owners for commercial real estate loans simply does not work.

I have been soliciting commercial real estate  loans for almost forty years.  I can honestly say that I cannot remember ever closing a single commercial loan that came from a flyer, a postcard, a direct mail piece, a (digital or Stone Age) magazine ad or a newspaper ad (back in the day) that was aimed directly at commercial property owners.

Marketing directly to commercial property owners for commercial loans simply does not work.  Pound that concept into your head!  Marketing directly to commercial property owners for commercial loans does not work.

You could spend $10,000 on a direct mail campaign or (digital) magazine ad to commercial property owners.  You'd probably get no more than ten leads, and most likely not a single one of these commercial loan deals will close.

Now I know that this reality is not obvious to the casual observer.  In my lifetime I have probably spent over $200,000 on about 70 marketing campaigns aimed directly at commercial real estate estate investors for commercial loans.  Every one of these campaigns was a complete and total bust.  Zip-zilch-zero.  Nada.

If I had saved and invested that money instead, I would be writing to you today from the beaches of Aruba.  Arghhh.  Over and over again I tried.  What a bonehead I was!  In the end, once I had learned how to build loan servicing income, I turned out very okay; but I just kick myself for taking so long to learn this lesson:  Marketing directly to commercial property owners for commercial loan simply does not work.

The best way to market for commercial loans is to market by email (and occasionally by snail mail) to people who, because of their jobs, are in a good position to refer you commercial mortgage borrowers.  I call these guys referral sources.

The people who, because of their jobs, are in a good position to refer you commercial loans - the best being listed first - include (1) commercial bankers, (2) commercial real estate brokers, (3) property managers, (4) other commercial lenders, (5) CPA's, (6) attorneys, (7) residential mortgage brokers, (8) residential real estate (sales) brokers, and (9) life insurance agents.

Don't put too many property managers, residential real estate brokers, CPA's and attorneys on your snail mailing list because each of these classes of referral sources gets a huge volume of junk mail daily.  Instead, you should only advertise to these four classes of referral sources if they would recognize your name and your company name.  At least then they might open your envelopes.

Residential mortgage brokers are a great source of commercial leads, but never try to become a commercial mortgage wholesaler. You'll only get rejects and deals that are not do-able.  Instead, work with residential mortgage brokers on a name and number referral basis only.

The best referral sources for commercial loan leads are by far commercial bankers and commercial real estate brokers (both leasing and sales specialists).