Commercial Loans and Fun Blog

Today we are going to teach you how to underwrite a $50 million commercial construction loan.

C-Loans.com recently closed an $18.5 million commercial construction loan on a mixed-use project in Wisconsin.  The lucky broker who brought that deal to C-Loans earned a whopping $92,500 loan fee.  Wow.  I'll betcha that fee paid some bills.  Note to self:  Submit my commercial construction loans through C-Loans.com.

I recently wrote in one of my newsletters that for the past six years commercial banks have had a zero appetite for conventional commercial construction loans.  By conventional I mean a non-SBA, non-USDA, non-EB-5 loan.  In fact I described conventional commercial construction loan requests as being about as welcome as a male stripper at a (hetereosexual) bachelor party.  Ha-ha!

As a result, there has been very little commercial construction in the U.S. for the past six years.  In the meantime, many vacant and neglected commercial buildings have had their water pipes burst during a cold winter, making them essentially now almost worthless.  Other vacant commercial buildings have been vandalized and stripped of their copper wiring.  The roofs of other vacant commercial buildings have leaked, leading to dangerous black mold.  A great many productive commercial buildings are now unusable.

At the same time, the population of the U.S. has grown.  Workers are finally getting back to work.  The auto industry in America is booming again, leading to the return of many manufacturing jobs in the Midwest.  Shale oil discoveries have caused a significant migration of workers to North Dakota, Wyoming, Texas, and other oil-patch states.  All of these areas need new commercial buildings.

Therefore the hot new commercial loan product for the end of 2014 and for 2015 will be conventional commercial construction loans.  And where do you find hundreds of commercial banks hungry to make conventional commercial construction loans?  C-Loans.com.

But how do you know if the commercial construction loan lead in your hand is a hottie or a complete waste of your time?  You need to know how to underwrite commercial construction loans.  This article will serve as a primer.

Conventional commercial construction loans are underwritten using six financial ratios.  The most important of these ratios is the loan-to-cost ratio.  The loan-to-cost ratio must not be confused with the loan-to-value ratio.

The loan-to-cost ratio is the construction loan amount divided by the total cost of the project.  Traditionally this ratio should not exceed 80%.  In other words, the developer is responsible for contributing at least 20% of the total cost of the project - usually in the form of free-and-clear and entitled land, with most of the architectural and engineering costs prepaid for by the developer.  Since many commercial banks are still licking their wounds from the Great Recession, many banks are limiting their loan-to-cost ratios to just 70% to 75%.  This means that the developer must modernly cover 25% to 30% of the total cost of the project.

The next ratio is the loan-to-value ratio.  The loan-to-value ratio on a commercial construction loan request is computed by taking the construction loan amount and dividing it by value of the commercial property, when it is completed and fully-leased.  The bank's appraiser will compute this value for you.  The loan-to-value ratio on a commercial construction loan request should not exceed today around 70%.

The third ratio is look at when underwriting a commercial construction loan is the debt service coverage ratio.  The debt service coverage ratio is the property's Net Operating Income (NOI), upon completion and leasing, divided by the annual debt service (P&I payments) on the proposed takeout loan.  A takeout loan is just a permanent loan used to pay off a construction loan.  This ratio should exceed 1.25.  The good news is that with interest rates so low today, most commercial properties easily pass this test.

The next ratio to look at when underwriting a commercial construction loan is the profit ratio.  The profit ratio is the difference between the fair market value of the property, upon completion and leasing, and the total cost of the project, all divided by the total cost of the project.  What we are trying to determine here is whether the developer stands to earn any profit by building this commercial building.  If not, he might be tempted to just walk away at the first appearance of a cost overrun.  The profit ratio should exceed 20% to 22%.  In other words, the commercial property should be worth at least 20% to 22% more than it costs to build.

The next ratio to look at when underwriting a commercial construction loan is the net-worth-to-loan-size ratio.  The developer's net worth should be at least as large as the construction loan he is requesting.  A guy with a $1.5 million net worth should not be requesting a $6 million commercial construction loan.  This ratio needs to be at least 1.0.

The last ratio to look at when underwriting a commercial construction loan is the debt yield ratio.  The debt yield ratio is a brand new ratio developed after the huge losses in commercial mortgage-backed securities suffered by CMBS bond investors during the Great Recession.  The debt yield ratio is computed by taking the property's net operating income (NOI) and dividing it by the construction loan amount.  This ratio should not be less than 8.5% to 9% today.

Please note that the debt yield ratio is different from the debt service coverage ratio.  It does not look at today's low commercial mortgage interest rates at all.  In fact, this ratio was invented to rein in the excessive leverage that can occur in commercial mortgage finance when interest rates and cap rates are low.

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In addition to the 750 hungry commercial lenders you'll find on C-Loans, we also give away a free list of 2,000 commercial lenders.  The lenders on The Blackburne List are different from the 750 commercial lenders you'll find on C-Loans.

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!

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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.

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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.

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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