Commercial Loans and Fun Blog

On Friday, March 17, 2087, the Federal government in Washington, D.C. will order the State of California to levy a duty on the import of sophisticated android robots from Mexico.  California will simply ignore this order, and by this act the de facto succession of the former Southwestern States from the U.S. will have been finalized.

The states of California, Arizona, and New Mexico had long since developed closer ties to Mexico City than to Washington, D.C.  By the year 2040, Spanish had become the official language of the Southwestern States.  Just a decade later, trade with Mexico exceeded the trade between the Southwest and the rest of the union.

Restrained by a birthrate far less than replacement, innovation and the economic vibrancy of the United States had at first waned and then plummeted.

Mexico, a Catholic country, had long enjoyed a birthrate that was more than twice that of the United States. By the 2050's Mexico was turning out far more young, hungry engineers, mathematicians, computer programmers, and scientists than the U.S.  By 2075 Mexico even surpassed China - itself a country suffering from a declining birthrate - as the world's economic engine and the largest producer of the world's most sophisticated computers and androids.

Fanciful you say?  These are not my original ideas.  I recommend to you the landmark 2010 book, The Next 100 Years: A Forecast For the 21st Century, by George Friedman.  Many of his earlier predictions have already come true.

What the heck does Mexico have to do with commercial loans on cannabis facilities?  If the Southwest ever does secede from the U.S. and join Mexico, according to George Friedman, there will probably be no civil war.  The three states may simply stop listening to Washington.

Hmmm, hasn't this already been happening recently?  Sanctuary cities?  Governor Brown of California refusing to cooperate with INS?  States permitting medicinal marijuana?  Now more and more states are legalizing pot.

Hellooo?  Marijuana is illegal under Federal law, and the Federal govermnent cannot allow the states to continue to flaunt Federal law (see paragraph one above).  President Trump made a brief comment at the end of a press conference in February, "Marijuana is still illegal under Federal law."  What worries me was his tone, which seemed to imply that he was just waiting for a good time to lower the boom.

To those of us in the hard money business making loans on cannabis facilities:  Its still illegal.  If Trump decides to fight this war, some decent people may be imprisoned to serve as an example.

Most commercial real estate loans - other than apartment loans - have a balloon payment due in just 5 or 10 years.  If you're a commercial mortgage broker or a lender, this is a very wonderful happenstance.

If you're a commercial real estate investor, however, this balloon payment can be an object of absolute terror.  What if your commercial loan balloons during a horrible recession?  It's like the only watering hole in 50 miles being infested with hungry crocodiles.  Sooner or later you have to drink.

C-Loans.com recently closed a $6.5 million refinance on a health club.  The loan was funded by one of the many, voracious (notice the poor gazelle in the above picture) credit unions participating in our free commercial mortgage portal. The good news was that commercial real estate right now is enjoying a bull market.  Phew.  The bad news was that the holder of just a 5% membership in the LLC that owned the property had filed a lis pendens against the property.

A lis pendens (pronounced: lis pendenz) is a formal notice, filed in the county where the property is located, that a legal action action is pending against the property.  Because a lis pendens appears as a lien against the title of the property, the existence of a lis pendens effectively makes it impossible to sell the property or refinance it.

Example:  

Grandpa and Grandma Blackburne identify a lovely 3,500 ranch style house within walking distance of their son and granddaughter.  They love-love-love this house, so they put in an offer.  The seller accepts the offer in writing.  The market is hot, and a week later the seller receives another offer to buy the same house for $35,000 more.  The seller notifies the Blackburne's that he is repudiating their earlier contract.  He offers to give the Blackburne's $7,000 for their trouble.

But the Blackburne don't want more money.  They want this particular house because it is only one block from their son and granddaughter.  Spoiling their granddaugher is far more important than money.

Therefore the Blackburne's file a lawsuit for specific performance against the seller, and they file a lis pendens against the property.  Specific performance is an order by the court to perform some contractual duty, in cases where money damages would not be adequate remedy.  In this case, the Blackburne's were seeking a judge to order the seller to sell the property to the Blackburne's and not to the other buyer.

Displayed only for its humor value.  :-)  My next funny pic will roast Donald Trump.  Now back to the Blackburne's attempt to become Raymond's parents, as in Everybody Loves Raymond.

The second buyer is a wealthy Chinese national wishing to buy a home for his son and daughter-in-law.  He is an all-cash buyer, and he figures that the Blackburne's will eventually tire and settle their suit for some cash.  Therefore the seller completes the sale of the house in question to the Chinese dad, subject to the the lis pendens lien.

Unfortunately for the Chinese father, the Blackburne's are insistent of being able to walk over, appear at Tom's house uninvited, and then criticize Tom's cooking.  The Blackburne's refuse to settle, the case goes to trial, and the Chinese family is ordered to hand over both title and possession of the house to the Blackburne's.  Before you feel sorry for the Chinese dad and the young Chinese couple, the lis pendens put them on notice of the Blackburne's lawsuit.  They chose to ignore it.

There!  Now people on both sides of the aisle hate me.  Ha-ha!

Back to the health club story:

The holder of that 5% ownership of the health club was unhappy with his return on his investment.  He figured that by filing the lis pendens, just when the LLC desperately needed to refinance its past-due balloon payment, he could squeeze a preferential return or a buyout from his "partners".   

Now here is what shocked me.  The other members of the LLC filed a countersuit and a motion to expunge the lis pendens; i.e., make the lis pendens disappear from the title!  I've been a real estate attorney for twenty-five years, and I had no idea that a lis pendens could be expunged; ie., peeled away, in this manner.  Hooray for the good judge!

You can search our database of 3,159 commercial lenders for free.

Do you have a complicated title issue?  Do you need a commercial lender that will work with you?

Do you need a purchase money lender who will actually go to 75% loan-to-value? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? 

Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other invest-ments, etc.? Do you need a loan against a portfolio of single family homes?

Buy a list of 2,500 commercial lenders:

Is money tight?  We'll trade you a list of 750 commercial lenders for just one banker who is making commercial loans.

Banks and credit unions are getting hot to make commercial real estate loans again.  This is a superb time to learn commercial real estate finance and make your living as a commercial mortgage banker.  You can pay $120,000 for a liberal arts degree or just $549 to learn how to become a commercial mortgage banking professional.  No college degree is required.

No one ever listens to me, but I have been telling my readers that the real commercial in commercial real estate finance is in loan servicing fees.  My company currently enjoys $1,040,000 in loan servicing fees annually.  The fastest and easiest way to build a loan servicing portfolio is to become a hard money lender.

You can get both programs for just $849.  

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George Smith Partners is one of the oldest commercial mortgage banking firms in the country. They had already been in the business for decades when I was just a puppy.  They are also pretty good marketers.  They publish a wonderful weekly newsletter called FINfacts.  In this week's newsletter the mortgage banking firm had a number of tombstones, one of which justifiably boasted of a $35 million closing:

"George Smith Partners secured $35,000,000 in capital for the conversion of the Norton Building, located in the Fashion District of Downtown Los Angeles. The capital is going to be used to convert the existing mixed-use asset into creative office space with ground floor retail."

Huh?  What on earth is creative office space?  I had to look up the term because it was brand new to me, although it has apparently been a hot buzzword in the commercial real estate development and leasing industry for several years.

The term, creative office space, is a slippery little devil, and I had to read five long articles before I could get a handle on it.  There was no single definition that jumped out at me, so the best I can do is to list some of the characteristics of creative office space:

1. Perhaps the best way to define creative office space is to say what it is not.  Gone are the days where an office consisted of a reception desk and a number of traditional office cubicles for the employees.  Cubicles can be very solitary and lonely, and they’re definitely not the most encouraging of environments in which to spend nine hours a day.
   
   
2. Creative office space allows flexibility about where you sit and how you work.  Cubicles are so 2001. These days it’s all about an open plan office. Not only does an open plan offer a more welcoming environment, it can also increase communication among colleagues.
   
   
3. Creative office space may feature comfortable chairs and couches arranged in a circle to encourage collaboration.  Creative office space may also have several conference tables set up for short, impromptu meetings among workers.  There will also be plenty of private work stations for when quieter work space is needed.
   
   
4. Creative office space will often enjoy colorful and pleasing wall colors, hardwood floors, comfortable upholstered chairs around a coffee table, and flowers displayed throughout.
   
   
5. Notwithstanding the above, open space, without ceilings and flooring, (think: warehouse loft) is often found in creative office space.
   
   
6. The most important characteristic of creative office space is that it is office space designed to be as comfortable as a home.  After all, workers spend much of their lives in the space.  When talking about creative office space, it is common to use the term, "Bring life to work."
   

7. Co-working spaces are gaining traction as the number of independent contractors and freelance professionals continues to rise. According to a study by Intuit, it is estimated that by 2020, 40% of the American workforce will be comprised of such independent contractors and freelancers. Going beyond the traditional “executive suite”, these co-working spaces are about creating a community to collaborate.

8. Lastly, successful creative office space buildings will often offer such amenities as fitness centers, bike rooms, conference centers, and tenant lounge areas.  They also incorporate outdoor spaces, such as rooftop decks or grass lawn areas, in order to create a more residential feel.  Pets are even sometimes allowed.  Such space strives for a better, more productive, work-life balance.

If you're not down to your last dime, you can but a list of 2,500 commercial lenders for just $79.95.

Or you can trade one banker for 750 of ours.

You can pay $120,000 for a liberal arts degree or you can pay $549 for a nine-hour course that will teach you the profession of commercial real estate finance.  The course includes marketing, underwriting, packaging, placement, and fee collection (includes both a fee agreement and 90 minutes of video training on fee collection).  Heck of a course.  

I keep telling you guys that the real money in the mortgage business is in loan servicing fees.  My own firm (I own 100%) earns $1,040,000 per year in loan servicing fees whether we close any new loans or not.

The best deal is to buy both courses for just $849.

Get free training in commercial real estate finance.  I write two training articles about commercial real estate finance every week.

Apartment buildings wear out over time.  As apartment buildings become dilapidated, the good-quality tenants move out and the riff-raff move in.  Superbly-located apartment buildings can, over time, become an eyesore and a breeding ground for crime.

The Department of Housing and Urban Development ("HUD") was created to prevent just such a deterioration of the country's housing stock.  Do you remember the Republican presidential debates?  That very likable African-American brain surgeon, Ben Carson, was appointed by President Trump to be his Secretary of Housing and Urban Development.

Under HUD is the Federal Housing Administration ("FHA").  The FHA is a United States government agency created in part by the National Housing Act of 1934. It sets standards for construction and loan underwriting, and it insures loans made by banks and other private lenders for home building.  Among its many programs to promote the construction and renovation of apartment units is the FHA 221(d)(4) program.

An FHA 221(d)(4) loan is a FHA-insured, long-term, fixed-rate loan used for new construction or substantial rehabilitation of multifamily projects nationwide. FHA 221(d)(4) loans are usually made by large mortgage banking firms, although a few commercial banks specialize in making such loans.

Who remembers the difference is between a mortgage banker and a mortgage broker?  A mortgage banker retains the loan servicing rights. A mortgage banker might earn 10 bps. to 12.5 bps. per year for servicing a large FHA apartment loan, which can be serious money if the loan amount is large enough.  Folks, the real money in the mortgage business is in loan servicing fees.  What's the fastest way to become a servicer of commercial real estate loans?  Answer: Become a hard money lender.

After making an FHA 221(d)(4) loan, the mortgage banker will sell off this insured loan to the Government National Mortgage Association ("Ginnie Mae") at a premium of 4 to 8 points.  Ginnie Mae is a Government Sponsored Enterprise ("GSE"), just like Fannie Mae and Freddie Mac.  Ginnie Mae will later sell the loan to a trust and then syndicate the loans in the trust.

In the paragraph above, I used the term, "premium".  A premium occurs when a bond or a loan is sold for more than its face value.  Huh?  More than its face value?  Yup.  Many times investors will happily pay $1,080,000 for a $1 million bond or loan, if the interest rate is sufficiently higher than the market rate.

Now back to FHA 221(d)(4) loans:  These are 40-year, fixed rate loans, after the new construction period or the renovation period.  In addition, the interest rate is delicious because the loan is insured by the FHA, an agency of the U.S. government.

On renovation loans, the developer must spend more than $15,000 per unit fixing them up.

Perhaps the single most attractive feature of FHA 221(d)(4) loans is that the lender will advance as much as 85% of cost!  Remember, I have written over the past few weeks about how large construction lenders are limiting their new apartment construction loans to just 60% of cost.  Eighty-five percent of cost - wow!

Are you finally ready to learn commercial real estate finance?

You can get both my famous 9-hour training course on commercial mortgage brokerage AND my four-hour course on becoming a hard money broker for just $849.

Do you have a perfect deal?  Do you just need some banks to call?

Might you need more than just 200 possible lenders?  Buy a list of 2,500 commercial lenders for just $79.95.

Learn commercial real estate finance for free.  I write at least two training lesson in commercial real estate finance every week.

When the Great Recession hit in 2008, commercial banks suffered enormous losses (read: they lost their butts) in land loans, A&D loans, and construction loans.  As part of the Dodd-Frank Act bank reforms, the FDIC established a new category of high-risk bank loans called HVCRE loans.

The term, "HVCRE loans" is short for a High Volatility Commercial Real Estate loans. The FDIC defines a HVCRE loan as follows: "With respect to commercial real estate... as a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property."  I promise that before we're done here today I will explain why you should give a hoot.

In plain English, this means that a loan made by a bank to finance the purchase of commercial land - including the future site of a multifamily project or a residential subdivision - is considered a HVCRE loan.

An A&D loan is another example of a HVCRE loan.  An acquisition and development (A&D) loan is a loan used to buy a piece of raw land, makes the horizontal improvements, and then sell off the building sites.  Typically the finished project is either some shovel-ready home sites or some finished commercial or industrial building sites.  While 50% loan-to-value is considered the maximum prudent loan on raw land, A&D loans of 60% loan-to-cost are common.

A&D loans are structured just like construction loans; i.e., they have interest reserves and sales commissions (as you sell off each lot) as separate line item costs in the construction budget.  By the way, the term, horizontal improvements, means to clear the land, to grade it, to bring utilities to the site, and to construct roads, curbs, and gutters.

Example:

Denny Developer owns an option to purchase a 20-acre parcel in the suburbs of Chicago.  Right now the land is vacant, but for a run-down old farm house.  He applies to the bank for a $2 million acquisition and development loan (A&D) to buy the parcel, to make the horizontal improvements (see above), and to sell off 36 finished home sites to the public and to custom builders.  Included in the $2 million construction budget is a $60,000 interest reserve and a $90,000 line item for sales commissions to the real estate brokers who bring him individual lot buyers.  The above is an example of an A&D loan.

Okay, now let's get back to the list of three types of loans that constitute HVCRE loans.  So far we have garden variety land loans and A&D loans.

The third and final type of HVCRE loans are commercial construction loans.  This includes category includes the construction of apartments and residential subdivisions, even though you might be tempted to consider them to be just residential loans.

Important note:  If the bank finances the construction of a strip center, and, upon leasing, the construction loan rolls over into a permanent loan, the loan is no longer considered to be a HVCRE loan.

"Boring! Why should I care about HVCRE loans? I'm not a bank. I'm falling asleep here, George.... zzz."

Here's why you need to know this term:

(1) If you are trying to place a HVCRE loan, you need to know that the loan will be much harder to close than in the past. Federal regulators are really trying to discourage banks from making many more HVCRE loans.

(2) If a bank makes a HVCRE loan, it must now set aside a very high amount of reserves against losses.

(3) Many banks, if not most, will now require the developer to contribute a whopping 40% (!!) of the total cost of construction. In the past, banks would only require that the developer contribute 20% of the total cost (80% loan-to-cost ratio).

(4) The developer must contribute at least 15% of the total project in cash - actual paid architectural, engineering, and land purchase costs.  Let's suppose a developer is cash poor, but he inherited a prime piece of land in downtown San Francisco that - at fair market value - represents a whopping 40% of the total cost of his proposed multifamily development.  According to the new HVCRE rules, the developer will not qualify for a construction loan from a bank because he has not contributed 15% of the total project cost in cash.  (Note: While the land cost of most commercial construction projects is normally around 20% of the total project cost, if the land is located in the very heart of a thriving city, the land cost can represent 40% to 45% of the total cost of a low-density project.)

(4) Banks can no longer give the developer credit for the fact that the land has appreciated greatly since he purchased it. Suppose you're a smart developer. You purchased the apartment land in 2009 for $1 million, at the very bottom of the crash when blood was running in the streets, and the land is now clearly worth $3 million. The bank can no longer count the $2 million worth of appreciation as equity that the developer has contributed to the project towards that required 15%.

(5) The bank can no longer give the developer credit for the huge increase in the land's value because he got the property re-zoned from agricultural to residential - at least as far as this 15% requirement is concerned.

That being said, tons of commercial construction loans are still being made.  Do you need an A&D loan or a commercial construction loan?  C-Loans.com is jam-packed with hungry commercial construction lenders.  Important note:  C-Loans.com intentionally does not list Acquisition and Development Loans as a separate Loan Type option in its drop-down menu.  Instead, if you need an A&D loan, please choose Construction Loan in the Loan Type drop-down menu and then Residential Subdivision or Land in the Property Type drop-down menu.

You can now buy a list of 2,500 commercial lenders for just $79.95.  Is money tight?  Buy a smaller Regional List for just $39.95.

CommercialMortgage.com is actually a free, searchable version of this larger list of commercial lenders.

What is the difference between CommercialMortgage.com ("CMDC") and C-Loans.com?   CMDC is a quick and easy way to look up some potential commercial lenders, but it does NOT provide a way for you to apply online to any of them.  C-Loans.com, on the other hand, provides you with a way to actually submit your commercial loan to wave after wave of hungry commercial lenders, six lenders at a time.

Free list of 200 commercial lenders.

Are you an accredited investor?  A recent law change now allows you to invest directly in 8% to 12% first mortgages with as little as $5,000.  These are fractionalized investments, NOT a mortgage pool.  You actually pick the loan you want.  Blackburne & Sons is owned by an attorney licensed in both California and Indiana, and we have been in business since 1980.

Do you know of a banker who is making commercial loans?  We'll trade you a list of 750 bankers for just your one.

Want to receive free training in commercial real estate finance?  I try to write at least two training articles every week.

Got a friend or co-worker who would benefit from learning commercial real estate finance?

Over two-hundred new hard money mortgage funds have arisen from the ashes of the Great Recession. After all, its relatively easy to hire an attorney to create the legal documents to form a new mortgage fund, and private investors are flocking to these brand new outfits for a chance to earn double-digit returns. Unfortunately many of these private mortgage investors may be doomed to suffer large lossess when these new mortgage funds almost inevitably fail.

Here's why: Most hard money mortgage funds only make bridge loans - loans with terms of two years or less. The sponsor makes two to three points for originating each loan, plus maybe 75 bps. for servicing. The bottom line is that the sponsors of these mortgage funds make 70% of their dough from originating new loans, as new deposits flow into their pools and as old loans pay off. Okay. There is nothing morally wrong with this, right? Right?

Unfortunately, horrible real estate slumps seem to hit every seven to twelve years. Blackburne & Sons has been in business for 37 years, and we have suffered through three commercial real estate crashes of 45%.

When real estate values fall 20% to 45%, the losses to these hard money mortgages funds start to mount. Once the investors start to smell these losses, they panic and demand their money back. Millions of dollars flow out of these mortgage funds, and hardly a penny flows back into them.

Soon the Sponsor has no new money with which to lend, so his loan fee income virtually disappears. This last sentence is so important that I ask you now to please read it again. Remember, this loan fee income used to constitute 70% of the Sponsor's income. Without nearly enough income to pay salaries, rent, and overhead, the Sponsor is eventually forced to close his doors.

Without the sponsor to shepherd the collection efforts- making collection calls, filing foreclosure, getting borrowers out of Chapter 11 Bankruptcy, hiring attorneys, hiring foreclosure companies, hiring contractors, hiring property cleanup crews and hiring real estate brokers - this portfolio of once decent loans invariably gets crushed. Eventually the government moves in to clean up the mess. Greedy attorneys, trustees, and accountants then feast, the investors get fleeced.

Am I exaggerating? There were aound 150 hard money mortgage funds in business before the Great Recession. Fewer than six survived. The next time you get solicited to invest a large portion of your retirement funds into a mortgage pool yielding 10%, ask the Sponsor, "Was the fund operating in 2007?"

Are you a very accredited investor?  Please write to me.

The Crittenden Real Estate Finance Conference is one of the most prestigious conferences in the entire commercial real estate finance industry.  Folks, these are the Big Boys.  They talk casually about deals with capital stacks (a first mortgage plus a mezzanine loan plus preferred equity plus joint venture equity plus the developer's equity contribution) as large as $100 million.  My son, Tom Blackburne, and I attended this conference last week.  Here are his observations:

May 8, 2017  

I recently attended a Crittenden Conference in Costa Mesa, CA, where all the big-wigs (Citi, Wells Fargo, Blackstone, etc.) spoke about the state of the current market and gave their projections on the future. To no surprise, just about every panel that spoke discussed what opportunities they are seeing in the marketplace.  Retail is on the out, because the "Amazon Effect" is well underway.  There is no longer a high need for retail space when e-commerce is dominating the industry.  Even companies like Wal-mart are now shipping groceries to your doorstep.  As a result, the shipping (trucks, boats, planes, etc.) industry is hot and projected to increase in the foreseeable future.

My dad asked the panel about a new term they were frequently using - Last Mile Retail.

Last Mile Retail is the latest topic buzzing through discussions of industrial real estate. It refers to the final stage of online purchasing and the travel of goods to the buyer from a distribution center. The obvious benefit is short lead-time delivery options for retailers/wholesalers to transport products to consumers at their place of business or residence.

Industrial is also hot.  Opportunistic lenders and investors should really be considering multi-tenant industrial properties in primary and secondary markets, especially in gateway and 24-hour cities.  C-Loans is also looking to capitalize on the opportunities presented in the current marketplace by adding lots of these new private bridge/construction lenders, unregulated family offices, etc. to our portal!

At the conference, there was an overarching sense of optimism, despite the obvious uncertainty of what to expect.  The Trump factor, I thought, would be a big topic and area of concern, but I was wrong. Everyone who spoke, shared the same opinion: Trump's regime will only have a marginal affect on the real estate market as a whole.  Trump plans to look at the current regulations affecting the banks and other regulated lenders, but even if he makes some changes, the Regulators (the companies doing the actual auditing) will be very slow in changing their practices and mentalities.

 
On this point, the most highly discussed topic was Construction Lending.  It is incredibly difficult to get conventional construction financing right now, because of the HVCRE requirement.  This is a term you need to remember: High Volatility Commercial Real Estate.  HVCRE has put restrictive stipulations on what is considered equity, amongst many other restrictions, in response to the Great Recession.  One-third of all community banks that failed in the last downturn were due to bad A&D lending practices.  There are 2,500 fewer banks now than in 2008.  Who is capitalizing on this gap in the marketplace?  Private, unregulated construction lenders.  Can anyone guess how many new small banks were formed in 2016?  Just one. 

The other major topic of the conference was the dichotomy of the mortgage broker's mind set.  What I mean here is that a broker working a lead has two factors driving him one direction or the other: Certainty of Closing or Easiness/Speed of Processing.  Good brokers will look at a deal and instantly know which direction to take.  Some guys default to the lenders who move the quickest.  While other guys stay loyal and bring deals to their lenders that they know close loans.  This is where Blackburne & Sons, our sister company, makes its name. 

Blackburne & Sons has never been the quickest, but you bet damn sure they close loans.  They were one of the few small-balance hard money lenders actually closing loans during the Great Recession. In large part to the leadership and wise underwriting of Angelica Gardner, the EVP, and the unrelenting nature of Alicia Gandy, the longest tenured employee and hardest working loan officer in the company. 

Private-money lenders like Blackburne & Sons are not competing with community banks anymore.  They are competing with unregulated private bridge lenders that close loans quickly.  Many of which, can be describe as non-prime, wall street lenders.  Please read my father's blog for more information on this type of lender, which you can find here. Blackburne & Sons has been in business for 37 years and will remain in business for a very long time, because of the concept of Certainty of Closing.

My final note on the Crittenden Conference: If you know my father, George Blackburne, and have read any of his work, then you will know the number 1 lesson in all CREF is that, "Bankers make loans to their friends."  What he means here is that banking is relationship-driven.  Banks only want to lend money to repeat customers, people whom they have a previous relationship with.  Remember this concept before asking Wells Fargo for a new construction loan.

On a different note, I want to take this time to publicly thank Michael (Mick) Carlson for his years of managing C-Loans effectively.  Mick has now moved on to bigger and better things, and we genuinely appreciate his service and wish him the best of luck.  Going forward, I, Tom Blackburne, will be your point of contact for all things C-Loans.  Please reach out to me for any help with your lending parameters, questions, or even for a simple introduction.  I appreciate your time and hopefully together, we can collectively make C-Loans more profitable this year, and in turn have more loans for you to close!

Sincerely, 

C-LOANS, INC.

Thomas H. Blackburne 
General Manager
(574) 210-6686 Best
(916) 338-2328 
tommy@blackburne.com

What is a land lease?  A land lease happens when a land owner refuses to part with title to a piece of ground, but he is willing to lease out the use of the land for a very long period of time. Typically the land is unimproved, and the land lessee - the guy leasing the property - proceeds to construct a new building on the property.

Land leases can have any term, but two common lease terms are 49 years and 99 years.  Land leases are also called ground leases.

Example:  Once upon a time, 60-year-old Tom Grumpy owned a wonderul, three-acre parcel located on the corner of Premier Boulevard and Affluent Way.  Every day 5,000 luxury sedans and SUV's drove by this corner.  Every developer in town wanted to buy this land and develop a high-end strip center, with shops like Gucci and Prada.  Old man Grumpy rejected every offer.  "The property is not for sale.  I am saving it for my grandchildren."

Enter Susie Raptor, a clever girl.  She approaches Tom Grumpy and proposes the following:  "Tom, I agree with you.  You should not sell this incredible piece of land.  It is only going to increase in value over time.  Instead, you should lease it to me for 99 years at $10,000 per month.  You can use the cash flow to supplement your retirement income, help out your kids, and to pay for college for your grandkids."  Tom agrees.  Once Happy Tom signs the lease, Susie brings in her architect and her engineer to draw up plans.  Eventually Miss Raptor (she drives a lizard-green convertible) brings the project to a local bank, who finances the construction of a gorgeous retail center.

When the construction loan matures, Susie obtains a $12 million takeout loan from a conduit.  You will recall that a takeout loan is just a garden-variety permanent loan that pays off a construction loan.  When the conduit underwrites the takeout loan, it treats the land lease payment as just one more required operating expense.

When a commercial lender underwrites a commercial loan against the land lessee's interest in a commercial property sitting on leased ground, the lender will insist on an amortization schedule that full-amortizes the loan over a term 10 years shorter than the remaining term of the ground lease.  Huh?

Example:  Let's suppose that a convenience store sits on leased ground, and the land lease expires in 32 years.  Now ordinarily a bank will amortize its loan over 25 years.  However, ten years earlier than the 32 years remaining on the land lease is just 22 years.  Therefore the bank will amortize its loan over just 22 years.

Example:  Let's suppose that a 99-year land lease was written 45 years ago.  There is now 54 years remaining on the land lease.  Fifty-four years less ten years equals 44 years.  Does this mean that some bank will amortize its permanent loan over a whopping 44 years?  Yes?  Yes?  Nice try.  Ha-ha!  The longest amortization schedule that most banks will ever use is 25 years for a commercial building.  Unfortunately this building was constructed 54 years ago.  This is an old-old building.  Because of the age of the building (its wearing out), the bank will probably insist on an amortization schedule of just 20 years.

"Hey, George, what happens to the $7 million building on the land when the ground lease expires?" Answer:  It reverts back to the land lessor.  The land lessor is the guy who owns the land now and whose father or grandfather (usually) originally leased out the land.

"But George, what if the apartment building adjoins Central Park in New York City?  What if the building is worth $100 million.  At the expiration of the ground lease, both the land and the building still reverts back to the land lessor.

Can the land owner get a loan against his leased fee interest?  A leased fee interest is ownership of land (and building) that is leased out to someone else.  To answer the question about whether the land lessor can get a commercial loan, the answer is yes, in about a nanosecond.  In real life we don't see many of these commercial loan requests.  The families that own the land underneath huge commercial buildings are typically richer than Crassus (often because their grandfather refused to sell the land).

Is it possible to get a land lease longer than 99 years.  The answer is no.  If a party leases land for longer than 99 years; say, 110 years; the land lessor is deemed to have sold the property to the land lessee.  It is against public policy to have real estate tied up for too many generations.

Obviously a perfect ground-lease deal is one with a very long remaining term and with a very small land lease payment.

Do you need a commercial loan against a property sitting on leased land?  This is an ideal time to use C-Loans.com.  Enter your commercial loan as if it was a garden variety first mortgage request; however, in the Special Issues section, be sure to write, "The subject property sits on leased ground.  The remaining term of the land lease is 48 years, and the monthly land lease payments are $5,820 per month."

Want to finally learn commercial real estate finance?  You can succeed as a financier with just a high school education, if (1) you have a pleasant, sales-type personaility, and (2) your English skills are excellent; and (3) you learn your material thoroughly.  Remember, when you are selling commercial mortgage financing, you are working with the wealthiest, most upper-crusty class of investors.  You can't fake it.

My courses are dirt cheap.  Buy them.  Inhale them.  I was thrilled to receive the following testimonial this month:

"I don’t know if you remember me but about 6 months ago I sent you a Thank You for selling me your VHS tape course back in 2003 when I first got into lending business. You and I both had no grey hair back then.  Here we are 15 years later and I am one of the most successful commercial, out of the box, hard money lenders in South Florida. You didn’t know it but I watched your VHS tape at least 10 times (obviously now DVD's) and you were my mentor back then. I still use your broker agreement."  -- Ron  Holy mackerel, Ron.  Thanks!

Be sure to note that Ron is now a successful hard money lender, not just a broker!  Those of you with brains will - sooner or later - finally grasp the secret of commercial mortgage finance:  It's the loan servicing income, silly.  My own hard money shop's servicing portfolio just passed $50 million this month.  That's s coool $1 million per year in loan servcing income - $ 83,333 per month, every month, whether we close a new loan that month or not.

Servicing loans?  I can't service loans, why... why... I'm left-handed!  Quit being a weenie.  My lovely bride and I serviced our first 20 loans or so, out of our house, using payment books.  Heck, if you want, you can hire a sub-servicing company to service your performing deals for around $10 per $30 per month.  The idea is to charge $600 per month for servicing a hard money loan and then service it at a cost of just $30 per month.  Comprende?

The best deal is to buy both programs at the same time for just $849, plus ($30?) shipping and handling.

Do you need a purchase money lender who will actually go to 75% loan-to-value?  Do you need a lender who will allow the seller to carry back a second mortgage?  Does your client have a balloon payment coming due on his commercial property?  Has your bank offered him a discounted pay-off?  Does your borrower have less-than-stellar credit?  Is your client's company losing money? Is your borrower a foreign national?  Do you need a non-recourse loan?  Do you need a commercial loan with no prepayment penalty?  Is your client's commercial property partially vacant?  Do all of your commercial leases run out in the next 18 months?  Do you need a lender who will allow a negative cash flow?  Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.?

Our hot, new product is a blanket loan against a portfolio of rental homes.  Rental homes?  Yup, as long as there are at least five homes or units, we consider this to be a commercial loan.  We even offer a partial release clause.  This loan is ideal for speculators.

Get free training in commercial real estate finance.  I try to blog twice a week, and its always training.  I use these articles to train my sons (and hopefully soon my daughter).  

Got a buddy or co-worker who would benefit from free training in commercial real estate finance.

How can you tell if a commercial construction loan request is dead on arrival?  The most common reason why a bank will reject a commercial construction loan is because the developer has not contributed enough equity.  Quick aside:  Ninety-nine percent of all commercial construction loans are made by banks.  What constitutes equity?  I recently wrote an excellent article on equity for development projects.

Here is a quick napkin test that will tell you whether or not you should waste your time working on a construction loan request.  Compute the Loan-to-Cost Ratio by simply dividing the Construction Loan Request by the Total Cost of the project.  The Loan-to-Cost Ratio must be 75% or less in the post-Great-Recession market.  Put another way, the developer must pay for at least 25% of the Total Cost.

Because I've been doing this for 37 years, I can compute a Loan-to-Cost Ratio in less than one minute; but maybe a quick review will be helpful for you. The Loan-to-Cost Ratio ("LTC") is defined as the Construction Loan amount divided by the Total Cost of the project (all multiplied by 100%).

Loan-to-Cost Ratio = Construction Loan / Total Cost

Historically banks were satisfied if the Loan-to-Cost Ratio was 80% or less.  In other words, banks were satisfied if the developer was paying 20% of the Total Cost.  That 20% of the Total Cost represented his equity or, in the parlance of commercial mortgage finance, his skin in the game.  Unfortunately after the huge losses suffered by banks in commercial construction lending during the Great Recession, most small banks today limit their loan-to-cost ratios to just 65% to 72%.

The big banks, when making the really large commercial construction loans ($20 million+), limit their loan-to-value ratios to just 55% to 60%.  Fifty-five percent???  Yup.  Ouch!  How can a developer come up with 45% of the Total Cost?  There is a type of equity called gap equity, that takes a developer from 55% LTC up to 80% LTC.  I hope to blog on the subject soon.

Now in order to compute your Loan-to-Cost Ratio, you will need to know the Total Cost. Total Cost is defined as the sum of the land cost, the hard costs, the soft costs, and the contingency reserve (5% of hard and soft costs).

Total Cost = Land Cost + Hard Costs + Soft Costs + Contingency Reserve

Most developers underestimate their Soft Costs.  The Soft Costs include such things as architectural fees, engineering fees, report fees (environmental impact reports, appraisals, toxic reports, geological reports, surveys, etc.), governmental fees (plan check fees, inspection report fees, sewer hook-up fees, etc.), bonding fees, title commitment fees, attorneys fees, loan fees, mortgage broker fees, and the interest reserve.  Everyone underestimates the interest reserve.   Soft costs usually range from 40% to 55% of hard costs.  If you don't trust the developer's soft costs, use at least 40% of the hard costs for soft costs.

The Contingency Reserve should be 5% of hard and soft costs.  Why not 5% of the Land Cost as well?  Most developers already know the exact cost of the land.  There is unlikely to be a cost overrun on the land.

Are you a wealthy developer or investor?  The sister company of C-Loans, Inc. is Blackburne & Sons Realty Capital Corporation.  We have been selling 8% to 12% first mortgage investments to wealthy private investors for 37 years.  We currently have around 1,500 private investors, and we are servicing a portfolio of over $50 million.  Due to a recent law change (JOBS Act), Blackburne & Sons can now accept investments from accredited investors (gotta be accredited) as small as $10,000 in each loan from anywhere in the country, not just California.

This is a family firm.  I'm George III, the founder and the dad.  I am a licensed attorney in both California and Indiana.  My sons, George IV (Ohio State) and Tom (Purdue), are both Eagle Scouts, as am I.  Cisca and I have been married for 34 years.  (My staff have nominated poor Cisca for sainthood.  Ha-ha!)  My point is that we are steady-eddie folks.

You should sit on our investor mailing list for a couple of years and then someday try us with a tiny investment (as small as $5,000 in your first deal) in one of our loans.  We are not a fund!  Hard money mortgage funds tend to (85% of the time) fold up with ugly consequences during bad recessions.  In contrast, if you invest with us you will actually own, say, 7%, of the first mortgage.  But you must be an accredited investor!

You need a commercial real estate loan, and you have diligently been doing your research.  Is it finally time to actually apply for that commercial loan?

For just $79.95 you can buy a recently updated list of over 2,500 commercial lenders.  If money is tight, you can buy a Regional List (750+), for the region that contains the property in question, for just $39.95.

Many commercial mortgage brokers are excellent salesmen, but they starve because they make a dozen preventable mistakes every single day.  This 5-hour course in the Practice of Commercial Mortgage Brokerage contains more than 60 practical lessons in commercial mortgage brokerage.  I consider it to be the crown jewel in my training series, the best of my life's work.  It is the only course I sell that comes with a 100% satisfaction guarantee.

Do you need a business loan secured by accounts receivable, inventory, or equipment.  Do you need a lease to acquire some piece of equipment?

We have a superb multifamily program with "A" quality rates for deals with a tiny black hair on them.

Blackburne & Sons, my own hard money shop, offers bridge loans for just 1 point.

Every commercial mortgage broker should use a fee agreement on every commercial loan.  Our agreement is quite short, and it is fair to both the borrower and the mortgage broker.  You commercial mortgage brokers will kick yourself when you lose a $20,000 fee.

Do you own a real estate or mortgage website?  By simply putting a "Commercial Loans" link to C-Loans.com on your web site, your web site can work day and night to generate referral fee income.  We once paid $21,250 to a guy named Alan Dunn.  Somebody came to his website, saw a "Commercial Financing" link, clicked on it, came to C-Loans.com, and then applied for $17 million loan.  Alan was asleep at the time!  (We actually have no way of knowing that, but Alan certainly could have been asleep, and it makes for a great story.  Ha-ha!) 

Have you tried our latest commercial mortgage portal?  CommercialMortgage.com has four times more lenders than C-Loans.com, and it is far easier to enter a deal.

Is it finally time to actually learn the profession that you practice?  Just sayin'...

Did you learn something today?  Get two free training lessons in commercial real estate finance every week.

Got a buddy or a co-worker who would benefit from free training in commercial real estate finance (CREF)?

This training article will teach you the difference between a commercial bank and an investment bank.  We will also discuss merchant banks.

Recently C-Loans.com introduced a pretty cool offer.  If you give us the contact information of just one loan officer at a bank making commercial real estate loans, we will give you a free list of 750 commercial lenders.  Heck of a deal.  But guess what?  Some rookie commercial mortgage brokers have been inserting their own names in place of a bank loan officer.  Huh?

There are two issues here.  First of all, unless you have your own money to lend, and unless you service these loans, you are not a lender.  Life companies get money to loan from insurance premiums.  Banks, credit union unions, savings banks, and hard money mortgage pools get their dough to lend by accepting deposits.  It seems simple, but people often forget that in order to be a lender, you actually need to have money to lend; otherwise, you're just a broker.  Secondly, a commercial bank is an institution that accepts deposits and whose deposits are insured against loss by the FDIC.  Hellooo?  Unless your deposits are insured by the FDIC, you are not a commercial bank.

Okay, so what is an investment bank?  Historically an investment bank was an institution that took companies public.  In other words, an investment banker, like Barings Brother (established in 1782), sells a company's stock to the public and maintains a market in the stock.  Maintaining a market in a stock means matching buyers and sellers, and in a sudden panic (e.g., Napoleon conquers Northern Italy), buying some shares itself to prevent a total rout in the stock price.

Investment banks aso sell bonds for large corporations and various governmental entities, like the Federal government, states, counties and large municipalities.  For example, suppose you're CIT Financial (a huge business lender), and you are bullish on the economy.  You want to borrow $1 billion from the public at, say, 3%, and lend it out to middle market companies at 7.5%.  By the way, a middle market company is a firm with annual revenues of between $50 million and $1 billion.  CIT Financial might retain Morgan Stanley, an investment bank, to issue and sell its bonds.

Examples of investment banks include Goldman Sachs, Morgan Stanley, Barings Brothers (bankrupt and dissolved), Lehman Brothers (bankrupt and dissolved), Credit Suisse, Merrill Lynch (now owned by Bank of America), Deutsche Bank, and Nomura.  In its simplest terms, you can think of an investment bank as a stock broker.

Okay, then what is a commercial bank?  First of all, the word "commercial" merely means "business". The garden-variety banks that you see on the main thoroughfare going through your town are called commercial banks, to distinguish them from investment banks and merchant banks.  A commercial bank is a company that accepts deposits and uses those deposits to make loans to companies and consumers.  These deposits can take the form of a checking account, a savings account, or a certificate of deposit (C.D.).  These deposits and C.D.'s, up to $250,000 per depositor, are insured against loss by the Federal Deposit Insurance (FDIC).

The name of every commercial bank contains the word, "Bank", 99% of the time at the end of the their name; e.g., Oak Bank or Granite Bank.  It is highly illegal for any other type of company to include the word, "Bank" or "Bancshares", anywhere in their name.  A lot of commercial mortgage brokers make this mistake, and they end up getting hit with a serious fine.

Now what is a merchant bank?  A merchant bank is a financial institution that provides capital to companies in the form of share ownership instead of loans.  The reason why a merchant bank wants to buys shares instead of making loans is because the types of deals that a merchant bank invests in are incredibly risky.  For example, in the late 1700's and early 1800's, a merchant bank might provide 100% of the cost to finance a trading ship to take British goods to India and trade them for Indian gold, Chinese silks, etc.  The merchant bank might expect to make 500% on its investment. Modernly a mechant bank might invest in a late-stage round of venture capital funding.

But here's the truth of it:  There are very few, honest-to-goodness, merchant bankers.  I would not fall off my chair if there were fewer than 200 legitimate merchant bankers in the entire country.  If you ever meet a guy at a mortgage conference, and he claims to be a merchant banker, there is a 90% chance that he is either a big blowhard (who has no clue what a real merchant bank is) or he is an outright con man.  If you ever meet a "lender" boasting that he is a merchant banker, there is a 99% chance that he is an advance fee scammer.  I once wrote an excellent article on how to spot advance fee scammers.

You need a commercial real estate loan, and you have diligently been doing your research.  Is it finally time to actually apply for that commercial loan?

For just $79.95 you can buy a recently updated list of over 2,500 commercial lenders.  If money is tight, you can buy a Regional List (750+), for the region that contains the property in question, for just $39.95.

Many commercial mortgage brokers are excellent salesmen, but they starve because they make a dozen preventable mistakes every single day.  This 5-hour course in the Practice of Commercial Mortgage Brokerage contains more than 60 practical lessons in commercial mortgage brokerage.  I consider it to be the crown jewel in my training series, the best of my life's work.  It is the only course I sell that comes with a 100% satisfaction gurantee.  

Do you need a business loan secured by accounts receivable, inventory, or equipment.  Do you need a lease to aquire some piece of equipment?

We have a superb multifamily program with "A" quality rates for deals with a tiny black hair on them.

Blackburne & Sons, my own hard money shop, offers bridge loans for just 1 point.

Every commercial mortgage broker should use a fee agreement on every commercial loan.  Our agreement is quite short, and it is fair to both the borrower and the mortgage broker.  You commercial mortgage brokers will kick yourself when you lose a $20,000 fee.

Do you own a real estate or mortgage website?  By simply putting a "Commercial Loans" link to C-Loans.com on your web site, your web site can work day and night to generate referral fee income.  We once paid $21,250 to a guy named Alan Dunn.  Somebody came to his website, saw a "Commercial Financing" link, clicked on it, came to C-Loans.com, and then applied for $17 million loan.  Alan was asleep at the time!  (We actually have no way of knowing that, but Alan certainly could have been asleep, and it makes for a great story.  Ha-ha!)

Have you tried our latest commercial mortgage portal?  CommercialMortgage.com has four times more lenders than C-Loans.com, and it is far easier to enter a deal.

Is it finally time to actually learn the profession that you practice?  Just sayin'...

Did you learn something today?  Get two free training lessons in commercial real estate finance every week.

Got a buddy or a co-worker who would benefit from free training in commercial real estate finance (CREF)?