Commercial Loans and Fun Blog

Tom Goodfather was worried about his kids.  His beloved wife, Susan, had died last year of breast cancer, leaving Tom as the sole guardian of their three children, ages 9 and 7 (the last two were twins).  Ten days ago Tom's doctor delivered even more bad news.  Tom's thyroid cancer, which had been in remission for six years, was back.  The doctor had tried to be optimistic, but Tom understood his underlying message.  "Make your final arrangements."

The only good news is that Susan had died with $1 million in insurance, and Tom had not needed to touch any of it.  Another positive was the fact that Tom's burgeoning real estate empire of 147 apartment units was performing well.  The lack of new construction had left apartment rents climbing.

So Tom make an appointment with a trust officer at Bank of America and arrived there today to set up a trust for his three kids.  Have you ever noticed the NTSA at the end of Bank of America's name - Bank of America NTSA?  NTSA stands for National Trust and Savings Association.  This tell you that Bank of America has a trust department, as do many commercial banks.

Investopedia defines a trust company as follows:  A trust company is a legal entity that acts as a fiduciary, agent or trustee on behalf of a person or business entity for the purpose of administration, management and the eventual transfer of assets to a beneficial party.

Huh? What?  Sorry, I nodded off.  How about a definition in English, George?  A trust company is a company that is super-honest and reliable.  It is also a company that follows written instructions to the letter.  A rich person, known as the trustor or settlor, hands over cash, stocks, bonds, real estate and other assets to the trusteeeeee (trustee) who receeeeeeives (receives) the assets.  The trustee then follows the written instructions in the trust agreement for the benefit of the beneficiary, in this case the kids.  The total of all of the cash, stocks, bonds, and real estate handed over to the trust is called the corpus (body) of a trust.

Tom instructs the trustee, Bank of America's trust department, upon his death, to deliver to Tom's sister-in-law, Mary, $4,000 per month to pay for the three kid's care and welfare.  Tom also instructs the trust company to invest $2 million in S&P-listed stocks and investment grade bonds in order to pay for their college.  Finally, upon the last child reaching the age of 25, the trust is to dissolve and divide the assets between the three kids.

Pop quiz:  What is an investment grade bond?  An investment grade bond is one that is rated BBB or better by Standard & Poors or Moody's.  Investment quality bonds are usually from large, old, and established companies.

The reason this whole subject came up this week is because we recently added a new bank to C-Loans that does not even have the word "Bank" in their name - U.S. Trust.  Remember, folks, the majority of all banks have trust departments, so you will see banks names such as First Bank & Trust and Guaranty Bank & Trust.  Now you know what the word, "Trust", means.

There is another hot term sweeping through the secondary market for hard money loans - "buy-to- rent".  Buy-to-rent loans are loans made to real estate investors who buy up single family homes and just rent them out for the long term.

This all started around 2009, when the Blackstone Group, the huge private equity firm, realized that it could buy up REO's, fix them up slightly, rent them out, and earn cash-on-cash yields in the range of 6% to 9%.  Initially this financial sector was known as the REO-to-rental industry.

Cash-on-cash yields of 6% to 9% were huge, considering that CD's were paying less than 1% and ten-year Treasuries, curiously known as the long bond, were paying less than 2.75%.  We have all heard of stories of New York investment bankers, flying out to the suburbs of football team cities, driving around for five hours, and then buying 30 to 50 homes in a single day.  These were the Blackstone guys, and this brilliant move by the Blackstone Group marked the bottom of the Great Recession.

Want to know just how brilliant?  Many of these rental homes went on to appreciate 25% or more, on top of the 6% to 9% cash-on-cash returns. This is capitalism in its most admirable form.  "Greedy capitalists" played a major and very beneficial role in ending of the Great Recession.  They created a floor on housing prices, when housing prices were in a free fall.  They replaced fear with greed.

By the way, REO stands for Real Estate Owned.  It is a term used by banks to record on their books properties upon which they have foreclosed.  There is a huge accounting penalty imposed upon commercial banks for maintaining REO's on the books.  This is why commercial banks are desperate to dump their REO's as soon as possible, even though it means the bank has to take a painful haircut (a painful loss of part of its initial investment). 

A cash-on-cash return is your cash return on your downpayment or on your purchase price, if you pay all cash.  The Blackstone boys paid all cash; hence their very handsome cash-on-cash returns.

Example:

Herb Black buys a rental home for $100,000, putting down $40,000 in cash and obtaining a $60,000 first mortgage from a bank.  He rents the house out for $1,100 per month.  His real estate taxes, insurance, repairs, and other expenses amount to $300 per month.  His mortgage payments are $400 per month.  He therefore has a positive cash flow of $400 per month or $4,800 per year.  His cash-on-cash return is therefore 12% ($4,800 divided by $40,000 times 100%).

Today the number of bank foreclosures is way-way down.  Gone are the days when millions of homes were in foreclosure, and houses could be purchased for a fraction of their replacement cost.  The REO-to-rental industry to winding down to just a memory.

However, bond yields remain at very low levels.  Certificates of deposit are still paying less than 1%, and the long bond is still yielding less than 2.75%.  It therefore still makes sense for an investor in search of yield to buy homes and rent them out.  An investor can still earn a handsome 5% to 7% return on his money.

Just as fix and flip loans are all the rage right now, Wall Street is gearing up to buy billions of dollars in buy-to-rent loans.  Wall Street is becoming the secondary market for private money loans.  A secondary is where mortgage loans that have already been originated are bought and sold. Be sure to grasp the concept that the loans have already been made.  Title has closed.  The borrower and the seller already have their dough.  Only then are these loans bought and sold in the secondary market.

The secondary market for buy-to-rent loans is starting to blossom.  Wall Street is salivating, so you will now hear the term, buy-to-rent loans, everywhere.  I urge you to get ahead of this tidal wave.  Blackburne & Sons is looking to make buy-to-rent loans almost nationwide.

To succeed in commercial real estate sales and/or commercial real estate finance (CREF), you need to know the lingo.  Here's a new one for you - adaptive re-use.  Here's what Wikipedia has to say on the subject:

Adaptive reuse refers to the process of reusing an old site or building for a purpose other than which it was built or designed for.  Here's another definition that I stole from a fine article on the subject:  

Adaptive reuse, or adaptive re-use architecture, is the process of re-purposing buildings — old buildings that have outlived their original purposes — for different uses or functions while at the same time retaining their historic features... A closed school may be converted into condominiums. An old factory may become a museum...  A rundown church finds new life as a restaurant — or a restaurant may become a church.

Adaptive Reuse is a way to save a neglected building that might otherwise be demolished. The practice can also benefit the environment by conserving natural resources and minimizing the need for new materials.

A buddy of mine owns a mortgage REIT and proudly announced recently the closing of a $4.6 million bridge loan to convert a former K-Mart building to a self-storage facility in Indianapolis.  This is a good example of an adaptive re-use.  

I sent my buddy an email congratulating him on the closing and his use of the interesting term, adaptive re-use.  "Hey Bill, helluva term, adaptive re-use!"  He replied, "Yeah. Buy a vacant K-Mart for $40 per square foot. Fill it with self storage racks. Sell it for $100 per foot."

By the way, a magazine advertisement or big email blast boasting of a nice commercial loan closing is called a tombstone.  Tombstones are an unusually effective manner to advertise for new commercial loans.  Seriously guys, you should blast out a tombstone every time you close a commercial loan.  They really produce results.

You should always pay attention when other commercial lenders blast out tombstones too.  Tombstones reveal the areas of comfort and preference for the lender.  Commercial lenders tend to carve out niches.  For example, my hard money shop, Blackburne & Sons, is getting more and more comfortable making commercial loans on cannabis facilities.  We're doing four cannabis deals this month.

My wife and I just got back from a short cruise to Cuba.  What a poorly-run country!  Under the communists, the average citizen makes just $50 per month.  Fifty dollars!  Havana was filled with beautiful, French colonial homes... that haven't seen a penny of repair since 1959.  The masonry walls were literally crumbling.  The Cuban people, though, were pretty warm and friendly towards Americans, and we as tourists felt very safe.

Trump and the Republican Party want the Cuban votes in South Florida, so President Trump just reversed many of President Obama's executive orders designed to improve relations and to open trade with Cuba.  The Cubans of South Florida want their country back, so they want to keep the pressure on the communists.  Its hard to argue with the proposition that the communists have grossly mismanaged the country.

You will recall that a fix and flip loan is a loan used to acquire a run-down home and to renovate it in anticipation of a quick sale.  When a fix and flip lender orders the appraisal, he will ask the appraiser for two values - the current "as is" value of the property and the after repair value ("ARV").

The after repair value is the value of the home after the renovation has been completed.  This number is also the single most important number in the whole underwriting process.  If a fix and flip deal passes the after repair loan-to-value ratio test, a lot of flaws in the deal can be overlooked.

Okay, so what must the loan-to-value be based on the after repair value?  For most fix and flip lenders, this ratio must be 70.0% or lower.  Many fix and flip lenders will not exceed 65% of the after repair value.

Ultimately the after repair loan-to-value test is a measure of the profit in the deal and of the wisdom of even doing the deal at all.  At a recent conference, several fix and flip lenders reported that they had had investor-flippers actually thank them for turning down their deals because the projects lacked profitability.  The appraiser and the lender had caught a big mistake that the investor-flipper was about to make.  In several cases, the investor-flipper was able to go back to the seller, show him the numbers, and convince the seller to lower his asking price!

I hinted earlier that some flaws might be overlooked if there was a enough potential profit in the deal.  For example, normally a fix and flip lender will require that the investor-flipper contribute (put down) 20% of the purchase price of the run-down home.  If the after repair loan-to-value ratio was less than, say, 65% then the investor-flipper might be able to convince his fix and flip lender to allow him to put down just 15% of the purchase price of the run-down home.

If the project has lots of potential profit, in other words, the after repair loan-to-value ratio is less than 65%, the investor-flipper might get approved with a credit score of less than 600 or with better credit but with no experience.  No matter the size of the potential profit, it is unlikely that the investor-flipper would be approved if he both lacked experience and had poor credit.  Potential profit can only do so much to help.

I just finished an extended article on fix and flip loans, and I encourage you to read it.  The guys making the big money in finance these days are the ones either using fix and flip loans or originating them.  Fix and flip financing is a target of hot money on Wall Street.

One of the most important questions asked by fix and flip borrowers is, "How much cash do I have to bring to the closing table?"  The good news is that fix and flip loan borrowers ("renovators") need far less cash than home builders or commercial real estate developers.  In fact, I promise you that you will be thrilled and pleased with how little cash a renovator has to bring to the table. Hooray!  Just be patient.

Before we get into exactly how much cash a renovator needs to qualify for a fix and flip loan, let's use this opportunity to review commercial construction loans and the Loan-to-Cost Ratio.

The Total Cost of a commercial construction project is calculated as follows:

Land Cost plus
Hard Costs (brick and mortar) plus
Soft Costs (governmental fees, interest reserve, etc.) plus
Contingency Reserve (5% of hard and soft costs) equals
_______________________________________________

Total Cost

When underwriting commercial construction loans, banks usually require that the Loan-to-Cost Ratio not exceed 75%.  In other words, if the total cost of the project is $1 million, the developer must contribute at least $250,000 in cash to the project.  Ouch.

Prior to the Great Recesssion, when banks got killed on their commercial construction loan portfolios, most banks would happily lend up to 80% loan-to-cost.  In other words, the developer only had to come up with 20% of the Total Cost of the project.  Some banks were even going 90% loan-to-cost.  After commercial real estate collapsed by 45%, Dr. Phil might have asked the banks, "How did that work out for you?"  Ha-ha!  

Having learned their lesson painfully, banks now require that commercial real estate developers contribute at least 25% to 35% of the Total Cost of the project.  But you and I don't care!  Our fix and flip loans are residential loans, not commercial loans, and the secondary market is absolutely ravenous for fix and flip loans.  You or your renovator will NOT need to contribute 25% to 35% of the Total Cost of the project.  No-no-no.

So how much cash will a renovator need to contribute to qualify for a fix and flip loan?  Well, the first wonderful thing to appreciate is that fix and flip lenders do not even use the Loan-To-Cost Ratio.

To qualify for a fix and flip loan, the renovator only has to come up with
 20% of the price of the dilapidated house being purchased!

Please note that we are NOT talking about 20% of the Total Cost of the project.  We are only talking about 20% of the property purchase price.

Example:

John Renny is buying a rundown house in a nice area for $100,000.  He will need another $60,000 to renovate the property.  John only has to come to the closing with $20,000 - 20% of the purchase price of the rundown house!  His fix and flip lender will loan him 100% of the dough to effect the repairs and upgrades.  Wow.  Is this a great country or what?

Just for fun, let's compute the Loan-to-Cost Ratio of John Renny deal above - a fairly typical residential fix and flip deal.

House Purchase Price (in a dilapidated condition) plus
Hard Costs (of renovation) plus
Soft Costs (closing costs, report fees, 4 mo's interest reserve) plus
Contingency Reserve (5% of hard and soft costs) equals
______________________________________________________

Total Cost

Now let's plug in the numbers.  C'mon, guys, don't zone out on me here.  This is fourth grade math.  Maybe third grade math.

House Purchase Price = $100,000
Hard Costs = $60,000
Soft Costs = $16,000
Contingency Reserve = $3,800
__________________________

Total Cost = $179,800

In our example, John Renny is bringing only $20,000 in cash to the closing table, which is the magical 20% of the cost of the dilapidated house.  Therefore his fix and flip lender will make him a loan for the difference - $179,800 minus the $20,000 downpayment equals $159,800.

Okay, so what is the Loan-to-Cost Ratio of John Renny's imaginary fix and flip loan?

$159,800 / $179,800 x 100% = 88.9% Loan-to-Cost!!!

Wow.  Nowhere else in the civilized world can a real estate developer get this kind of leverage.  This is why successful fix and flippers are making incredible retuns on their money.

I met a nice lady from Alaska a few years ago who lives in Anchorage.  Every year several people in Alaska are stomped to death by a moose, so finding one in your swimming pool is not really a laughing matter.  A college classmate (interestingly she is white) of my daughter is from Swaziland, and she is crashing with us over the Thanksgiving holiday because its too far to travel back to Africa.  When I asked her about wild lions and tigers and bears, she said that the hippo's are the big killers in Africa.  Huh.  Who would have thunk it.  Such friendly looking animals.  And don't even get me started on the dangers of Porky Pig...  :-)

My son, Tom, and I just returned for the 5th Annual American Association of Private Lenders Conference in Las Vegas.  At the conference, fix and flip loans were all the rage.  Everyone was talking about them.  Several of the break-out sessions were about fix and flip financing.  There were even hedge fund managers and Wall Street investment bankers prowling the conference floor in search of hard money shops (private money mortgage brokers) to sell them more fix and flip loans.

There is a lesson to be learned here:  Give the investment community what it is seeking.  If you are not already active in fix and flip financing, you need to start focusing your efforts there.

There are a number of reasons why the investment community is so hot-to-trot to make fix and flip loans:

1. Debt buyers are desperate for yield.  Treasuries, corporate bonds, and even junk bonds offer only very low yields.
   
   
2.  Fix and flip loans are secured by real estate.  In start contrast, corporate and junk bonds do not offer this kind of collateral.
   
   
3. Wall Street has learned that a portfolio of rental homes provides an excellent source of cash flow and potential appreciation.  Its is far from the end of the world if an investor has to foreclose on  a home.
   
   
4. Homeownership rates have plummeted to levels not seen since the 1960's, thereby creating a huge demand for rental homes.  Once again, if a fix and flip lender forecloses on a newly-renovated rental home, it is far from the end of the world.
   
   
5. New home construction is far below the levels of the early 2000's, so home buyers are attracted to newly-renovated properties.

The typical fix and flip loan is a first mortgage loan to a renovator to buy and renovate a one-to-four residence and then to quickly sell it for a profit.  The typical fix and flip loan is a 12-month, interest-only loan, and it has no prepayment penalty.

Virtually all hard money lenders making fix and flip loans will require that the renovator cover at least 15% of the acquisition price of the unrenovated house.  Then most hard money lenders will lend to the renovator 100% of the funds needed to renovate the property.

Example:

John Renny plans to buy a $100,000 house and then to spend another $60,000 in renovations.  The hard money lender will require that he put down at least $15,000 on the home purchase.  The hard money lender will then lend him $85,000 of the acquisition price plus the $60,000 cost of renovation plus the loan points and sometimes even plus a four-month interest reserve.

"I applied for an SBA loan but they turned me down."  Okaaaay, but what did the second SBA lender say?  How about the third?  Today's article is pretty long, so if you don't get to the end, please remember this important lesson:

Every SBA lender is different, and just because one SBA lender turns you down, this doesn't mean that another might not still approve your deal.  By using C-Loans.com to  apply for your SBA loan (the orange button below), you can quickly shift your SBA loan application to six more of our 218 different SBA lenders. 

A lot of commercial mortgage borrowers think that the SBA is the lender, and therefore if the SBA turns them down that they are toast.  The SBA does not make commercial loans.  It only insures a part of the loan.  The actual lender is the bank making the loan.

Example:

Bank of Wyoming makes a $900,000 new SBA loan to renovate a successful but aging truck stop on I-25.  Because the business was an existing one, rather than a start-up, the borrower was able to qualify for an SBA loan of 90% loan-to-value.  Had the business been a start-up, the maximum loan-to-value ratio would have been limited to just 70%.

Now the Small Business Administration is not going to guarantee the entire $900,000 loan.  The SBA wisely demands that the bank have some skin in the game.  The general rule is that the SBA will only guarantee between 50% and 85% of the loan made by Bank of Wyoming, depending on the SBA program (7a versus 504) used and other factors. 

For the sake of this example, let's assume that the SBA agrees to guarantee 70% of the $900,000 truck stop loan made by Bank of Wyoming.  This means that Bank of Wyoming has 30% of $900,000 at risk in this loan or $270,000.  Requiring the bank to have some skin in the game helps to makes sure that banks don't make SBA loans willy-nilly.

In real life, Bank of Wyoming has less than $270,000 at risk.  The bank can sell off the insured portion for a substantial premium.  The insured portion is 70% of $900,000 or $630,000.  Now a premium is the amount that a loan buyer or a bond buyer will pay in excess of the face value of the note.

In this case, lets suppose that Bank of Wyoming can sell off in the secondary market the insured portion of this truck stop loan at a premium of 10%.  Why would bond buyer pay a 10% premium?  An SBA loan yields 2.75% over Prime.  Since Prime is 4.25% today, that's a whopping government-guaranteed yield of 7%.  Thirty-year Treasuries today are only yielding about 2.8%.

Now a 10% premium on $630,000 (the insured portion of our $900,000 loan) is a whopping $63,000!  Therefore Bank of Wyoming doesn't really have $270,000 at risk in the deal but it quickly sells off the insured portion for a $63,000 premium.  Now the bank has only $207,000 at risk in our $900,000 truck stop loan.

In doing my research for this article, I discovered that SBA lenders earn a handsome loan servicing fee of 1% per year.  Therefore the bond buyers are actually only netting 6% after loan servicing fees, but they are still quite happy to pay a 10% premium.  Heavens, I sure love-love-love loan servicing fees.  Every month my own hard money shop enjoys $90,000 in loan servicing fees, whether we close a new loan that month or not.

Okay, we are closing in on the point of today's article.  It is quite possible that the Bank of Wyoming was the third Wyoming SBA lender to look at this deal.  The first two lenders might have turned down the deal because of the fuel tanks or because the deal depended on fuel sales increasing after the renoavtion.  The deal was too speculative in the eyes of the first two banks to look at the deal.

In stark contrast, the President of Bank of Wyoming loved the deal because his dad had owned a trucking company, and his dad had complained for years that this section of I-25 desperately needed a truck stop.  

Remember, despite the large premium paid for SBA loans in the secondary market, Bank of Wyoming still had some serious skin in the game - $207,000.  Therefore the approval of any SBA loan is NOT guaranteed.  It depends on whether or not the bank reviewing the deal is willing to put a ton of their own dough at risk.

If you are trying to get your SBA loan approved, be sure to submit it through C-Loans.com to our 218 SBA lenders.  If one our SBA lenders turns you down, you'll be invited to submit the same application to six more SBA lenders, with no additional paperwork on your part!  One, short SBA loan app works for all 218 of our SBA lenders.  Start by using the orange button below.

Have you guys ever heard of a smartphone app called TuneIn.com?  I stumbled across the app recently, and I am enjoying it so much that I thought I'd share it with you.  I am not getting paid for this article, ha-ha.  I am simply sharing my wonderful experience with TuneIn.com because you guys are my buddies.  I teach my loan officers to write to their contacts, not as some stuffy, boring "professional", but rather as if they were buddies sharing a beer at the end of the day - so pop open a brew and prepare to be wowed.

I am a huge Notre Dame football fan, but my daughter plays soccer for Earlham College, and the Saturday games always start about the same time.  Therefore I obviously can't watch the Notre Dame game on T.V.  But what about radio?  Couldn't I listen to the game?  Well, if my daughter was playing her soccer games in Northern Indiana, and if I could find an old fashioned transistor radio, I might be able to pick the game broadcasting out of a local radio station in South Bend.  Unfortunately Jordi plays her games in Ohio and Eastern Indiana.  Hmmm.  Stay with me, folks.  This gets good.

So I googled "Notre Dame football radio and discovered that I could stream an audio version of the games using a smartphone app called TuneIn.com.  The premium service is only $99 per year, so I bit the bullet, paid the $99 annual fee, and thoroughly enjoyed my Notre Dame games.  You can listen to 50 or 60 different college football games using TuneIn.com, including the Alabama Crimson Tide games, the Georgia Bulldogs games, the Ohio State Buckeyes games, the Clemson Tigers games, etc.

But wait, there's more!  You can also listen to every NFL football game, every NBA basketball game, and every Major League Baseball game.  Wow.  All for just $99 per year.

Now I am a huge audiobook fan, and rather than listen to my music tunes or to music on a local radio station, I am constantly listening to historical fiction audiobooks.  I am a big fan of Napoleonic War naval yarns, like the Horatio Hornblower series.  The problem is that my monthly bill at Audible.com is on the order of $60.  Ouch!

So I was playing around with TuneIn.com and discovered that they also offer free audiobooks!  Right now I am listening to Bill O'Reilly's (the former anchorman on Fox News) smash hit, Killing England, about the Revolutionary War.  It's a fascinating yarn, with exciting, vivid battle scenes, including Indians scalping British redcoats while they were still alive.  Yikes.  After that I am going to listen to Origin by Dan Brown (DaVinci Codes) and then The Cuban Affair by Nelson DeMille (The General's Daughter).

But wait, if you order now... haha, remember I'm not getting paid for this.  I am just a thrilled user of TuneIn.  The app also offers all of the major news shows on radio, like CNN, CBS News, NBC News, Fox News, etc.

Lastly TuneIn offers free podcasts.  Podcasts are pre-recorded audio shows of 30 minutes to 10 hours in length.  I was personally thrilled to note that TuneIn.com offers scores of history podcasts; but if you are a politics junkie or an economics junkie, you will swim in a warm pool of scores and scores of such podcasts.

When you write to your buddies and contacts, you do NOT always have to talk about business.  The idea is to get in front of them and reward them with fun or interesting stuff if they read your marketing piece.

I have been marketing for commercial loans for 37 years, and the most successful marketing piece that I ever wrote was entitled, The Ebola Virus Is Going to Kill Us All.  That piece tells the true story of The Hot Zone, where the Ebola virus mutated in a lab in Restin, Virginia in 1989 to become transmissible by air!  Hellooo?  You no longer have to touch the blood.  You just had to breath the same air as the sick person to become infected with Ebola.  The infected person didn't even need to cough on you.  Apes in totally separate rooms became sick and died.

That marketing piece generated more commercial loan leads for Blackburne & Sons than any other piece in 37 years, and nowhere in the marketing piece did I even mention commercial loans.  As for that mutated strain of Ebola, it turned out that the same genetic mutation that had made it transmissble by air also made it harmless to humans - even though it had spread all throughout the lab, and it had killed 30 different apes and monkeys.

That's it for today.  Did any of you note that Notre Dame, despite losing the first game of the season, has climbed to #3 in the college football playoff rankings?  Go Irish!

Let's suppose that you hear that Rick Savoy is working as a commercial real estate loan officer at Mason Bank, and he is closing a lot of commercial loans.  The problem is that you don't know his email address, and he seems a little weird about giving it out to some new commercial mortgage broker.  Bankers tend to hate unsolicited email and hence his reluctance.

The first thing you should do is to Google his bank.  You would search for "Mason Bank".  Banks are very, very good at hiding their commercial real estate loan officers so they never make commercial loans (pretty stupid, huh?).  Therefore you almost certainly will NOT find Steve the Wonder Loan Officer listed on their website.

Sombody help me!

But what you will find is the URL of the bank.  Maybe the URL of the bank is MasonBankTexas.  For the sake of simplicity, we'll assume the URL is just MasonBank.com.  By the way, I just made up the name of Mason Bank for purposes of writing this commercial loan training lesson, but there actually is a Mason Bank in Texas.  Ha-ha! 

Really, sombody help me!

Then, in order to find his actual email address address, simply send him an email with a subject line:  Three Quick Questions About Your Commercial Loans.  Then you address your email to -

rsavoy@masonbank.com

or

rick.savoy@masonbank.com

There seems to be a convention in banking to use either the first letter of his first name, followed by his last name OR the first name dot last name.  Ninety-five percent of the time one of these two email addresses will work.  You send your email to both email addresses, and the one that does not bounce is his real email address.  Voila!

Well, this isn't actually awful.

I keep reminding you guys that you need to reach out to every banker within 15 miles of your office and start soliciting him for his turndowns.  Remember, the first place that most borrowers call when looking for a commercial loan is their own bank.  And since most bankers are sleepy fellows, the typical commercial real estate loan officer working for a bank turns down five to ten commercial loan requests every week.  The loan is too small, too big, too far away, or the wrong type of property.  You want those turndowns!

 The baby is clearly digging it.

Don't just get one commercial loan officer per bank.  Get three, four, or five of them.  After all, EACH commercial loan officer turns down five to ten commercial loan applications per month.

If the email address works, ask for his minimum and maximum commercial loans, lending area, and whether or not he makes SBA loans.  Always remember that virtually all 6,799 commercial banks in America make the same kind of commwercial loans at pretty much the same interest rate.  Bankers are herd animals.  Moooo.  My kingdom for a capitalistic banker!

Everybody needs to spoon a little.

This brings up another point.  If commercial loan officer Suzie Smith summarily turns down your commercial loan request, don't give up on that bank - especially if the bank is located close to the subject property.  Try presenting your commercial loan to John Jones at the same bank.  Remember, banks are far more likely to approve a commercial loan if the property is located close to one of their branches.

But this is just plain wrong.

Once upon a time, Steve Coach owned a large bus line company, Coach's Coaches.  His company owned 1,200 semi-luxury coaches that they hired out for various tours and sporting events.  Business was good for many years, but a series of unfortunate decisions left the bus line deeply in debt and with only 300 buses fit for use.  Steve had no choice but to put his 30-year-old company into Chapter 11 Bankruptcy.

His creditors consisted of a $1,000,000 first mortgage on his bus storage and repair facility from his bank, a $6,000,000 equipment loan on his 1,200 buses, and another $2 million in various payables, including a seriously-delinquent fuel bill of $800,000.  No fuel company in the area would even sell him fuel, except of a cash basis.

Everyone knows that when a personal property lender, the lender who loaned on the buses, executes on his collateral, he will be lucky to get forty cents on the dollar.  By the way, a real estate lender forecloses on its collateral.  A personal property lender executes on its collateral; i.e., seizes the collateral, advertises its sale, and then liquidates it.

When a lender sells a property, it is called liquidating; i.e., turning an illiquid asset into liquid money.  One final review of my terminology:  Real estate is land and everything that is (permanently) attached to the land.  Every other asset that is not land is personal property.

The interesting thing about Coach's Coaches, however, is that there is a huge demand for the company's buses.  Sports teams and travel agencies are calling every day, desperate for a company to rent them a bus and driver.  Steve's main problem is that unfortunately 900 of his buses need essential repairs before they can be used, but Steve just doesn't have the dough to fix them.  His local bank, which has the first mortgage on his special use facility, and the specialty finance company that has a chattel mortgage on all of Steve's buses don't dispute this essential fact.  If Steve had $2 million to repair his buses and regain his trade credit, he could soon bring current, and eventually pay off, all of his creditors.

By the way, personal property is also called chattel, just like men think of their wives as chattel.  (Just kidding, ladies!!!  Ouch-ouch-ouch!  Ha-ha.)  In the old days, a security lien on chattel was called a Chattel Mortgage.  We don't use these terms anymore.  We use such newer terms and documents as Security Agreements and Financing Statements; but sometimes its easier just to think of just real estate mortgages and chattel mortgages.

Therefore Steve's attorney submits a Chapter 11 Plan of Reorganization to the bankruptcy court that calls for $2 million in additional financing from a new debtor-in-possession (DIP) lender so that Steve can fix his buses and regain his good trade credit; i.e., pay his delinquent fuel and engine parts bills.  Under the plan, the local bank will subordinate its first mortgage and the specialty finance company will subordinate its first chattel mortgage on the coaches as collateral for the new DIP financing. 

Why is a commercial loan to a debtor in bankruptcy called debtor-in-possession financing?  When a borrower or company is hopeless in debt, the bankruptcy is called a Chapter 7 bankruptcy.  Title to the assets (temporary ownership) is transferred to a trustee, who marshals the assets (gathers them all together) and then sells them off to pay the creditors.  In 90% of the cases, the unsecured creditors get completely wiped out.

Some debtors, however, are NOT hopelessly in debt.  Their companies can be saved, if only they are given a little time to reorganize their assets.  In cases like this, the debtor files a Chapter 11 reorganization bankruptcy.  In a Chapter 11 bankruptcy, title to the assets is NOT transferred to some trustee to sell.  Instead, title to the assets remains in the name of the debtor.  He remains in physical possession of the assets.  He is called a debtor-in-possession.  Hence the term, debtor-in-possession (DIP) financing.

In this case, the story ended well for all concerned.  Steve repaired his trucks and paid off his $2 million DIP loan from Blackburne & Sons within two years.  He eventually brought his bank first mortgage and his bus loan current, and he is still operating today.

I keep telling you guys that the real money in commercial mortgage finance is in loan servicing fees.  Blackburne & Sons is up to almost $90,000 per month for servicing just 200 hard money loans.  The easiest way to become a loan servicer is to become a hard money lender.  Raising money is sooo easy these days.