Commercial Loans and Fun Blog

Lets suppose you're working on a commercial loan, and the lender has used a term with which you are unfamiliar or confused.  You can now ask me a question about commercial real estate finance, and I'll try to answer it that same night in a blog article.

Here are some examples of questions you might ask:

1. What is a flagged hotel?
2. What does CMBS mean?  Who are these lenders?  What kind of commercial loans do they make?
   
   
3. What is this new CREF term, "Debt Yield Ratio?"  Is it the same as the Debt Service Coverage Ratio?
   
   
4. Why is the net worth of the borrower so important to a commercial lender?
   
   
5. What is the highest loan-to-value ratio that I can get on a commercial real estate loan?

Let's suppose you're just surfing the web, and you don't need a commercial loan at this exact moment.

Every time you enter a different commercial loan into C-Loans.com, you will see a different set of lenders.  Let's suppose you once asked C-Loans.com for a $7 million construction loan on a dog kennel in Nome, Alaska, and you were disappointed with the small selection of potential commercial lenders.  Just remember, every commercial loan request will produce a different list of suggested commercial lenders.  The truth is that very few commercial lenders today are looking for huge loans on dog kennels in Alaska.

Do you need even more potential commercial lenders for your deal?  Be sure to try out our newest commercial mortgage portal, CommercialMortgage.com.  

Do you have a real estate web page?  How would you like to earn huge referral fees in your sleep?

We here at C-Loans, Inc. are always interested in meeting new commercial lenders.  If you meet a banker who is making commercial loans, we'll trade you the contents of one business card for a free directory of 2,000 commercial real estate lenders.

Are you ready to finally learn commercial real estate finance.  In one weekend (on video) I can teach you the entire practice of commercial mortgage finance.  There are a number of graduates of my 9-hour video training course who are now making more than their buddies who graduated from top colleges.

Do you need a commercial lender who will actually make a commercial loan of 75% loan-to-value, and not just boast of it?  Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? 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?

Are you already a practicing commercial loan broker?  How many large commercial loan fees have you lost because your current fee agreement stinks?

To understand our new feature, you need to understand tombstones.  A tombstone is an annoucement of the successful closing of some financial deal, like taking a company public or closing some large loan or bond issue.  Historically tombstones were placed in financial publications, like the Wall Street Journal, the Financial Times, or the New York Times.

The announcements were rectangonal in shape and oriented in a portrait mode.  They literally looked liked tombstones.  The content was always very dry.  "Goldman Sachs is pleased to announce the secondary offering sale of 2,000,000 shares of Chrysler Motors at $100 per share for a total equity raise of $200,000,000.  Morgan Stanley and Credit Suisse participated in the offering."

The Securities Exchange Commission ("SEC") for many years forbade the public advertisement of securities offerings.  Therefore tombstones were therefore always backwards-looking.  They announced the closing of some securities offerings.  Since the deal was already closed, and any reader of the tombstone could no longer buy a piece of the offering, a tombstone was not considered an advertisement.

So why would an investment banker, like Goldman Sachs in my example above, pay the Wall Street Journal $10,000 or more to publish a tombstone for a deal that was already closed?  The advertisment was not going to bring in new investors for the offering because the offering had already closed.  The offering was already fully-subscribed; i.e., sold out.  Answer:  The tombstone told other motor companies, like GM and Ford, that Goldman Sachs stood ready to raise a secondary offering for them as well.  It also told other investors to call Goldman Sachs if they had investment dough burning a hole in their pockets.

Modernly commercial real estate lenders publish their tombstones online on their home pages, in their newsletters to their clients and brokers, and in the online version of trade magazines, like the National Real Estate Investor or Globe Street.  It is always smart to study every commercial loan tombstone that you can find because by studying what commercial loans a lender has already closed, you will know what kind of new commercial loans that the lender is seeking.  In other words, be sure to read tombstones!  :-)

C-Loans.com has just added a new tombstone feature on our home page.  Ten seconds after arriving on our home page, a series of rotating tombstones will appear.  The one you will see today is for a commercial loan closed by Alicia Gandy, our top producer who we call our Loan Goddess.  You will notice that the tombstone brags about a $650,000 closing of a permanent loan on a strip center in Tulsa, Oklahoma.

If you click on the link that reads, "More Info and a Mini-App", you will be taken to a page that tells you more about this particular lender, in this case Blackburne & Sons Realty Capital Corporation.  You'll see the lender's preferences in terms of loan sizes, loan types, property types, and lending area.  You can also apply directly to this hungry commercial lender by filling out the mini-app.

Are you a commercial mortgage broker?  If so, you will be cheated out of countless loan fees.  When you have suffered enough...

Do you have an "A quality" deal that deserves to be funded by a bank, life company, or conduit?

Are you finally ready to learn commercial real estate finance (CREF)?  You can learn this entire profession in one long weeked, and most states have no licensing requirement to broker commercial loans.

Have you checked out our latst commercial mortgage portal?  CommercialMortgage.com is far easier than C-Loans.com, and it enjoys four times as many lenders.

Be on the lookout for bankers making commercial loans.  We'll trade you contents of one business card for a free directory of 2,000 commercial real estate lenders.

Do you need a business loan secured by something other than commercial real estate?

Want to learn commercial real estate finance for free?

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

TILA and RESPA are Federal laws designed to give borrowers advance disclosure of the costs of the loans for which they are applying.  Under the new Dodd-Frank regulations, the TILA-RESPA Rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two just forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.

The question today is whether the Loan Estimate and the Closing Disclosure must be provided on a commercial loan?  The answer is not as clear cut as one might think.  Under certain circumstances, both TILA and RESPA apply to loans secured by commercial real estate, and the two new disclosure statements must be provided.

We have spoken to our California counsel regarding the use of funds on a commercial loan, and the issue turns on whether or not the funds will be primarily used for personal, family, or household purposes or whether the funds will be used a business, commercial, or agricultural purpose.  If the funds will be used for a business purpose, then the TILA-RESPA rule do not apply.  

As a lender, our attorney advised us to request a use of funds letter and to verify that the primary use of funds being received for the loan is going to be used for business purpose. He wrote:

Both the Federal Truth in Lending Act and the Real Estate Settlement Procedures Act specifically exempt business purpose loans (see below for exemption language):

RESPA: 12 CFR 1024.5 Coverage of RESPA

1. Applicability. RESPA applies to federally related mortgage loans.
2. Exemptions.
3. Business Purpose Loans. An extension of credit primarily for a business, commercial, or agricultural purpose, as defined by 12 CFR 1026.3(a)(1) of Regulation Z. Persons may rely on Regulation Z in determining whether the exemption applies.

TILA: 12 CFR 1026.3 Exempt transactions.

The following transactions are not subject to this part:

Business, commercial, agricultural, or organization credit.

1. An extension of credit primarily for a business, commercial or agricultural purpose.

With regard to closed-end credit applications received by your commercial department which will be secured by real property (including commercial or industrial property or vacant land), the transaction is subject to TILA disclosures if the primary purpose of the loan is consumer (personal, family, household) (12 CFR 1026.19 (e)).  Hellooooo?  Are you paying attention here?  TILA applies, even though the collateral might be an an office building!!!

It will not be subject to RESPA because RESPA applies to ‘federally related mortgage loans’ which are defined as loans secured by a first or subordinate lien on residential real property upon which there is a structure or structures designed principally for occupancy by 1 to 4 families (including individual condo or coop units) or there is or will be located a manufactured home.

The essential question is: What is the purpose of the loan? We respectfully recommend:

At time of application, request the applicant to prepare and deliver to you a handwritten, signed and dated letter which outlines the loan request and how the loan proceeds will be applied. Do not provide a preprinted form for this purpose; the letter should be the applicant’s statement of the loan purpose.

Review the letter to determine if the primary purpose of the loan is for consumer purposes or business purposes. When calculating primary purpose, calculate based on the funds received by the borrower. For example, if the loan amount is $100,000 and the loan fees are $10,000, the direct benefit to the borrower is $90,000. Calculate primary purpose on the $90,000.

If the loan is for a consumer purpose, deliver the appropriate disclosures.

Want to train your staff in commercial real estate finance?

Do you need a commercial loan right now?

Are you just browsing the internet right now?  If so, you may enjoy these freebies.

Be on the lookout for a bank making commercial real estate loans.  We'll trade you the contents of just one banker's buisness card for a free directory of 2,000 commercial real estate lenders.

Have you tried our latest commercial mortgage portal?  CommercialMortgage.com has four times as many lenders as C-Loans.com.

Want to learn commercial real estate finance (CREF) for free?  When you subscribe to this blog, you'll enjoy two free training lessons in CREF every week.

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

This is going to be a very short training article because the Chinese were right.  A picture is worth a thousand words.  Today a mortgage broker submitted the attached picture on his C-Loans.com commercial loan application.

Guys, I have often compared C-Loans.com to a speed dating site.  Like a speed dating event, we allow you to present your commercial loan to scores and scores of lenders in just minutes.  The idea is to catch the right lender lender at the right time with the right commercial loan.

But guys, if you show up for a speed dating event with a dirty shirt, uncombed hair, unbrushed teeth, and smelling like the bottom of a Marine's dirty laundry bag... well, you can't blame the dating service for not finding you the love of your life.

The moral of the story.  Wait until you can take your property pictures on a sunny day!

Have you tried out our brand new commercial mortgage portal?  It features 3,159 commercial lenders, four times more than C-Loans.com.

Want to receive free lessons in commercial real estate finance?

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

Interest rates on commercial real estate loans are definitely going up.  A reasonable commercial mortgage borrower might want to apply now, rather than wait, especially if he has a balloon payment coming due.

The problem is, however, is that most commercial real estate loans take several months to process.  The problem is not with the lender.  It's the commercial property appraisal.  Income property appraisers seem to take forever.

You can obtain a commercial loan faster than that, but most bridge lenders only offer short-term commercial loans, and the interest rate on bridge loans is usually much higher than on permanent loans.  It makes little sense to accept an interest rate that is 4% higher, just to close your commercial loan 45 days sooner.

By the way, a permanent loan is just a garden-variety first mortgage on a commercial property, with a term of at least five years and with some amortization.  Twenty-five years is the the typical amortization for permanent loans.

"Put your head back on your shoulders right now, young man,
and don't ever let me catch you taking it off again!" -- Mama

Soooo?  What's the answer.  Can I lock my rate on a commercial loan?

No.  I have met 5,000+ commercial lenders in my 36-year career in commercial real estate finance (CREF), and I have never met a commercial lender which will allow you to lock your interest rate while your commercial loan is in processing.  Sorry.  Now that being said, there are around 10,000 commercial real estate lenders in America.  I suppose there may be one or two which will allow you to pay a fee to lock your rate; but they are as rare and as hidden as the abominable snowman.  That's the bad news.

The good news is that very early in a commercial loan application process, most commercial lenders will issue a term sheet, which is also sometimes known as a loan proposal, proposal letter, or conditional commitment letter.  A term sheet is not a legally binding commitment to make a commercial loan.  It is merely a letter from a commercial lender expressing a bona fide interest in making the loan and a good faith estimate of the eventual terms.

Commercial lenders issue term sheets because appraisals, title commitments, and sometimes toxic reports, are very expensive.  Few borrowers would ever agree to pay for these third party reports, absent something in writing from the lender that is at least morally binding the lender to make the loan.

Continuing with our description of the good news, if a commercial lender issues a term sheet, and the third party reports come back satisfactory, the issuing commercial lender will almost always honor the interest rate on the term sheet, even if market interest rates have increased.  Remember, the commercial lender is not legally obligated to do so.  It's just the custom and practice in the industry.

There are a few exceptions.  Conduits, also known as CMBS lenders, sell their huge commercial loans to securitization pools.  They simply must close their commercial loans at an interest rate attractive to the securitization industry.  Therefore if the bond makets get roiled by some external event, for example, a military coup in Turkey, and investors flee from commercial mortgage-backed securities in favor of less-risky U.S. Treasuries, your CMBS lender may have to re-price your loan; i.e., raise the interest rate.

Do you need a commercial loan right now?  Are you strong financially - bankable or maybe even stronger?  If so, you should submit your commercial loan to our 750 hungry commercial lenders using C-Loans.com.  Our four-minute mini-app is accepted by all 750 of our lenders.  And C-Loans is free!

We recently released a competing commercial mortgage portal - also free - that enjoys four times as many commercial lenders as C-Loans.

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.?  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?  Blackburne & Sons is a private money lender, and we are much looser in our underwriting.

You can learn the practice of commercial real estate finance in one long weekend.

We'll trade you the contents of one banker's business card for a free directory of 2,000 commercial real estate lenders.

Do you need a business loan that is not secured by real estate?

Want to learn commercial real estate finance for free?  We'll send you two free training lessons every week for free.

Do you have a buddy or co-worker who would benefit from learning commercial real estate finance for free?

Many investors, when valuing similar apartment buildings in a similar area, use the Gross Rent Multiplier.  The Gross Rent Multiplier is defined as the Market Value divided by the Gross (Annual) Rents of an apartment building.

Put another way, you can roughly value an apartment building by multiplying the Gross (Annual) Rents by the correct Gross Rent Multiplier.  For example, let's suppose the Gross Rents of an apartment building are $100,000; and apartment buildings in that area are selling at a Gross Rent Multiplier of 9.  Then $100,000 time 9 equals a Market Value of $900,000.

Let's look at this valuation method algebraically and then at how you can compute the appropriate Gross Rent Multiplier yourself.  And guys, please don't zone out on me here just because we are using some 7th grade algebra.  Twelve-year-old's get A's in Introduction to Algebra!  (Heck, some pre-schools in New York City are probably already teaching algebra.  I'm kidding, right?)

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

Example:  What is the Gross Rent Multiplier for apartments in southwestern San Jose, California?  After looking at an old listing, you see that a particular 63-unit apartment building had a Gross Annual Rent of $1,512,000.  You also discover that the building eventually sold for $16,632,000.  At what Gross Rent Multiplier ("GRM") did this 63-unit apartment building sell?

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

GRM = $16,632,000 / $1,512,000

GRM = 11.0

After looking at several other apartment buildings, you discover that an inferior apartment building sold at a GRM of 10.5 and a superior building sold at a GRM of 11.5.  You conclude that the GRM of this area of San Jose is approximately 11.0.

Example:  You are told by experienced commercial brokers in the area that small apartment buildings in Palo Alto, California (home of Stanford University) are selling at Gross Rent Multipliers of 12.  You are informed that a six-plex in a nice area of Palo Alto has a Gross Annual Rent of $252,000.  What is this six-plex worth?

Gross Rent Multiplier = Market Value of the Apartment Building / Gross Annual Rents

Market Value of the Apartment Building = Gross Annual Rents x GRM

Market Value of the Apartment Building = $252,000 x 12

Market Value of the Apartment Building = $3,024,000

Confused?  Just multiply the Gross Rents by the appropriate GRM to get the Market Value of the apartment building.  Local commercial brokers will tell you the appropriate GRM for any area.

What triggered today's lesson on the Gross Rent Multiplier was a seminar put on by a major apartment lender.  Their rate sheets talk about a super-low interest rate for Tier I apartment buildings, a low rate for Tier II apartment buildings, and a higher rate (and lower LTV) on Tier III apartments.  But, geesch, how does one know whether an apartment building is a Tier I, II, or III property?

They gave some very helpful guidelines using GRM's:

Tier I Apartments:

Buildings selling at a GRM of 10, 11, or higher.  

In my examples above I used apartment buildings in Silicon Valley, California, arguably the most desirable real estate in the world.  Cap rates of 11 and 12 are almost unheard of in any other areas, outside of Long Island, New York, Washington, D.C., and the best areas of Chicago.  Most apartment buildings in the real world will sell today at GRM's of 6 to 8.

Tier II Apartments:

Buildings selling at a GRM of 7, 8, and 9.  

Tier III Apartments:

Buildings selling at a GRM of 4, 5, and 6.

The lesson to be learned here is that the nicer the building and the more desirable the area, the higher the Gross Rent Multiplier.

Have you visited our latest commercial real estate loan portal?  It is far-far easier and faster than C-Loans.com and it offers four times more commercial lenders:

When should use C-Loans.com?  The advantage of C-Loans is that you can create a simple commercial loan application form in just four minutes and then submit it to 750 different commercial lenders.  The hungriest commercial lenders are also usually found on C-Loans.com.  Both of our portals are free to borrowers and brokers.

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.? 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?

On the entire planet, there may not be a better deal.  We'll trade you the contents of the business card of just one banker making commercial loans for a free directory of 2,000 commercial lenders.

Are you just kicking tires today?

What is more valuable - a $200,000 degree in liberal arts or a nine-hour video course that will teach you the entire profession of commercial mortgage brokerage?  The course includes marketing, underwriting, packaging, placement, and fee collection - all taught with enthusiasm, humor, and juicy war stories.  When I recorded this course, I was on my game.  In one dedicated weekend, you could emerge as a near-expert in the profession.

Did you learn something today?  Want to receive two free training lessons in commercial real estate finance every week?

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

For those of you just getting started in commercial mortgage brokerage, this is a particularly important training article; however, even those of you who are very experienced in brokering commercial loans may find some useful nuggets.

The scenario:  You get a lead call for a commercial loan.  The borrower needs a $1.2 million refinance on his self storage facilty in Provo, Utah.  The borrower is on the phone right now, and he wants a loan quote.  What interest rate do you quote him?  If he likes your quote, he may want to get started right away.  What documents do you ask for?  As the mad bomber asked Keanu Reeves in the thriller, Speed, "Pop quiz, Hotshot, what do you do (quote)?"

This is a small commercial loan, one that is unlikely to be made by some big national lender.  You're located in Sacramento, California, and you have no idea to which commercial lender you will eventually take this deal, but you do know that the best lender for the deal will probably be located near Provo, Utah.  After all, banks greatly prefer to lend close to one of their branches.

1. Here's the good news.  Most banks across the country charge roughly the same interest rate on commercial loans.  They are almost always within 0.25% to 0.50% of each other.  Therefore you don't need to know precisely what some bank in Provo, Utah is going to charge.  You just need to know what a Sacramento bank would likely charge on a $1.2 million permanent loan on a self storage facility close to Sacramento.  In practice, the two different banks - even though they are one thousand miles away - will charge almost exactly the same thing.
   
   
2. Okay, but what would a Sacramento bank charge for a commercial loan on a property in Sacramento?  This one is simple:  Simply go to the Current Commercial Mortgage Rates page on CommercialMortgageRates.co.  (Note, this is a dot-co, not a dot-com.  The owner of the dot-com version wanted thousands of dollars for the domain.)  I update these rates weekly, so they are very current.  STOP!  Before you step away for coffee or you go to the bathroom, please be sure to bookmark this page.  Please do not read further until you have done this.
   
   
3. "Okay, George, I see from the rate sheet what interest rate I should quote, but how many points should I quote?"  Commercial banks typically charge only one point on commercial loans, so you, as a commercial loan broker, will need to add your loan brokerage commission on top.  Here is a training article I have written about the size of a reasonable loan brokerage commission.
   
   
4. What amortization should you quote?  A twenty-five year amortization is to commercial mortgage finance what a thirty-year amortization is to residential mortgage finance.  The vast majority of all commercial loans have a 25-year amortization.  If a commercial property is older than 40 years old, the bank may even insist on a 20-year amortization.  After all, a commercial property does not have an unlimited lifespan.  A thirty-year amortization, however, is common for multi-family properties.
   
   
5. What about the term of the loan?  Most banks would greatly prefer to write their commercial loans with a term of just five years, but if they are pushed, most banks will agree to a ten-year term.  Certainly most commercial borrowers will insist on a loan term of at least ten years.  Commercial real estate loans with terms longer than ten years are only possible on SBA loans and USDA loans - government guaranteed commercial loans which are eligible to be re-sold by the bank in the secondary market.  Remember, most conventional commercial real estate loans are portfolio loans.  In other words, the bank is stuck with that commercial loan for the entire ten years.
   
   
6. Will the interest rate be fixed or adjustable?  Almost all commercial loans these days are fixed rate loans.  (In two years, when the inflation rate and interest rates start to climb, this may change.)  You are NOT going to get a straight, ten-year, fixed rate commercial loan from a bank.  The loan will most likely be fixed for the first five years.  Then it will readjust just once at the beginning of year six "to a market rate." Then the typical bank commercial loan will be fixed for the remaining five years.  What will be the index and the spread over the index?  This may shock you, but most bank promissory notes are silent on the subject.  The bank will typically use language like, "Whatever rate the bank is currently quoting on similar commercial loans."  Don't worry about it.  I have never had a borrower raise the issue.
   
   
7. What about a prepayment penalty?  Most banks have a modest prepayment penalty on their portfolio commercial loans.  The one you will most often see - and the prepayment penalty that you should quote is - 5% in year 1, 4% in year 2%, 3% in year 3, 2% in year four, and 1% in year 5.  There will typically be a three-month window after the rate readjusts one time at the beginning of year 6, during which window the loan may be paid off without penalty.
   
   
8. What about assumability?  Bank commercial loans are NOT assumable and must be paid off when the property is sold.

You now know how to quote a commercial loan.  Voila!

Okay, the borrower is interested, and he wants to know what documents that he should send you.

1. Now an idiot would ask his borrower to send him a long laundry list of items, and that idiot loan officer, if he is on commission, would surely starve.  Borrowers don't enjoy fetching huge piles of documents.  They will look for any excuse not to gather it right away.  In the meantime, some  competing commercial mortgage company is likely to quote the borrower 2% interest, fixed for fifty years, with a negative two points, and 150% loan-to-value.  The competing quote is obviously BS, but guess which loan officer is going to get the borrower's loan application?  
   
   
2. Here is a rule that I pound into the heads of my loan officers, "The loan officer who asks for the least number of documents wins the deal."
   
   
3. Perhaps the best way to ask for documents is as follows, "Please send me whatever package you can send me right away, as long as it includes:  (1) a Rent Roll or Schedule of Leases; (2) last year's actual operating expenses; and (3) color photo's on the property."
   
   
4. The idea is to get the borrower moving in your direction.  He's at rest at the moment, and the Law of Inertia says that a body at rest tends to stay at rest.  If you can get him to send you the tiniest of packages, he becomes a body in motion, and a body in motion tends to stay in motion.
   
   
5. Once you get the income and expense numbers, you can whip up a quick Pro Forma Operating Statement.  At today's low interest rates, just about every commercial loan cash flows very adequately, so then you can call the borrower back and ask for the next round of documents.  "Great news, Mr. Borrower!  I crunched the numbers on your deal, and the numbers worked out well.  Now all I need is an old financial statement and two years' tax returns."
   
   
6. Remember this important rule, "The commercial loan officer who receives the borrower's tax returns first wins the loan."  But wait, George, shouldn't I then ask for tax returns right away?  No!  Borrowers dread standing in front of a copy machine for 20 minutes and making copies.  They need the postitive reinforcement of you crunching the numbers first to get fired up enough to copy their tax returns.
   
   
7. Armed with the cash flow numbers and the borrower's financial statement and tax returns, you now have enough of a package to start submitting your deal to lenders.  That will be the subject of a future training article.

Got a commercial loan sitting on your desk right now?  Do you need some commercial lenders for your deal?  You will love our brand new commercial mortgage portal, CommercialMortgage.com.  It is much faster and easier than C-Loans.com, and the new site works great on your cell phone.  This new portal also has four times more commercial lenders.

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.? 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?

How would you like a free directory of 2,000 commercial real estate lenders?

Want to learn the profession of commercial real estate finance?

Want to receive two free training lessons in commercial real estate finance every week?

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

In preparation on my big upcoming training article entitled, "How to Quote a Commercial Loan," you need to know what types of commercial property that banks will finance.  We can all guess that a commercial bank is unlikely to finance a gentlemen's club or a cannabis dispensary, but what about a used car lot or a bowling alley?

Here's the thing about banks.  Banks are portfolio lenders.  Portfolio lenders make portfolio loans.  A portfolio loan is loan that the lender has no intention of ever selling off.  The bank will hold the loan until maturity.  As a result, the bank is free to use common sense and special expertise in underwriting the deal.  It doesn't need to underwrite the loan or structure the payments in any standard way.

For example, suppose a successful young doctor wants to buy a medical office condo, but the deal does not cash flow at any higher than 52% loan-to-value.  This is common in office condo's because they sell for very high prices per square foot.  A commercial bank making a portfolio loan is free to make a 75% LTV loan on such a purchase because the M.D. might be making $600,000 per year.  The bank is free to use global income.  

Global income is a way of underwriting a commercial loan where the bank looks not at just the rental income the property is capable of generating, but the bank also considers the borrower's outside income, like his employment income or his investment income.

Here is an example of a bank making a portfolio loan based on its special expertise.  Suppose the owner of the bank is from New York City, where many apartments have been turned into co-op's.  Few lenders anywhere in the country will finance co-op's, but a commercial bank with special expertise is free to do so.

The second thing to understand about banks is that they will finance almost any type of income producing property - including bars, restaurants, used car lots, and bowling alleys - as long as the borrower is making lots of money and keeps a big horde of cash in the bank.  The bank most likely to finance a successful restaurant will either be the borrower's own bank or a nearby bank wishing to steal the banking business of this wildly successful restaurant owner.  Other than these two situations, business properties are seldom financed by banks.

So what is a business property?  A business property is one that is specialized and management intensive, where the property's ability to produce income depends on the owner being there every day to operate the business.  In the event of a foreclosure, it would be very expensive for the bank to hire any sort of management company to run the property.  Examples of business properties include, small unflagged motels, RV parks, campgrounds, miniature golf courses, and bowling alleys.

Keeping in mind that banks are portfolio lenders and will even finance business properties, as long as the operator is making lots of money and keeps a big horde of cash at the bank, below is a list of the property types that a commercial bank will finance.

BANKS WILL FINANCE THESE COMMERCIAL PROPERTIES 

Auto dealerships / Used car lots - If VERY successful
Agricultural or Ranch Properties - If the bank has special expertise in underwriting them
Assisted Living Facilities
Apartment Buildings
Auto Repair
Bowling Alleys - If VERY successful
Bed & Breakfast Inns - They cash flow very poorly
Congregate Care Facilities
Convalescent Hospitals
Commercial or Retail Buildings
Churches - Only filthy rich ones in superb neighborhoods
Cooperatives - Requires special expertise
Golf Courses - Tough to place.  Most are losing money hand over foot.
Hotels & Motels - Must be either flagged or making tons of money.
Industrial Condo - They cash flow very poorly
Industrial Buildings
Land - Purchase money deals for experienced developers greatly preferred.
Marinas - Must enjoy good occupancy and a good cash flow
Mobile Home Parks
Movie Theater - Better be making good money
Mixed Use Property - Apartments over retail or commercial very acceptable
Office or Commercial Condo's - They cash flow very poorly
Office Building
Parking Garage - Needs to be making reliable money
Restaurants - Needs to pay lots of taxes and the owner must keep lots of cash.
Residential Condo Subdivisions - Bankers lost their tails in 2008.  Better be perfect.
Residential Subdivisions - Bankers lost their tails in 2008.  Better be perfect.
Self Storage - Ideally they should be gated
Shopping Centers / Strip Centers (Mini-Malls)
Skilled Nursing Facilities
Special Use Property - If VERY succesful and owner has TONS of cash

BANKS WILL NOT FINANCE

Adult Bookstores
Casinos
Churches - Unless filthy rich in Beverly Hills
Gas Stations - Unless VERY new and VERY successful
Gentlemen's Clubs
Residential Care Homes - Houses used for old folks

Need a loan on an unpopular property type?

Got an A-quality deal that deserves to be financed by a life insurance company, conduit or bank?

Have you checked out CommercialMortgage.com, a faster and easier commercial mortgage portal?

Just kicking the tires about a commercial loan?

In a few days I am going to write an important blog article that will teach you How to Quote a Commercial Loan.  In that article I will need to refer to Rent Rolls and Schedules of Leases.  This training article will teach you the meaning of those two terms.

It is surprising, but when the typical commercial lender underwrites a commercial real estate loan, he will allow the borrower to use this year's scheduled rents and last year's actual expenses.  This is a surprisingly aggressive position.  Commercial lenders might easiy have underwritten their loans based on last year's actual income and last year's actual expenses.  Using this year's scheduled rents helps the borrower to qualify for a larger loan because this year's scheduled rents are usually higher than last year's actual receipts.

In order to compute this year's scheduled rents, the lender will ask for a Rent Roll if the property is an apartment building, a self storage facility, or a mobile home park.  A Rent Roll is just a list of the tenants by unit number and the amount of each tenant's monthly rent.

If the property is an apartment building, the Rent Roll will also contain the number of bedrooms and bathrooms in each unit and sometimes the square footage of the unit.  Apartment units are sometimes called doors.  "The property is a multifamily project with 138 doors."  If the property is a mobile home park, the Rent Roll will list whether the home on the pad is a single-wide, double-wide, or triple-wide.

If the property is a self storage facility, the Rent Roll will always contain the square footage of the unit.  By the way, mobile home park units are called pads.  After all, the tenant usually owns the mobile home.  The landlord only provides the pad upon which the mobile home sits.  [Hotels units are sometimes called keys.  "The subject property is a hotel with 86 keys."  Hotel units used to be called rooms until hotels started to build units with suites, each of which have multiple rooms.]

On any Rent Roll, it is very important that the Rent Roll contain the name of the tenant in the unit.  This is critical because a good appraiser will perform two or three audit checks of the Rent Roll.  "Good afternoon, Mrs. Rodriquez, my name is John Jones, and I am doing an appraisal of the property for Key Bank.  My Rent Roll here shows that you pay $750 per month in rent for this unit.  Is this correct?  It's not???  You pay only $600 per month??? Hmmmm."  Unfortunately, mortgage fraud like this is fairly common in commercial real estate finance.

Most other types of commercial property - like office buildings, retail buildings, strip centers, shopping centers, malls, power centers, lifestyle centers, industrial buildings, and industrial centers - will have longer term tenants.  To determine the current annual rental income, the typical commercial lender will ask for a Schedule of Leases.

A Schedule of Leases is a summary of the tenants in a commerial building that contains the (1) unit number or letter; (2) the name of the tenant; (3) the square footage of the unit; (4) the amount of the monthly rent; (5) the lease expiration date (and sometimes the starting date of the tenancy); and (6) any rent contribution paid by the tenant.

Important Tip:

The mortgage broker who gets his loan client the largest loan amount usually gets the deal, even though a competing lender's loan might be 0.25% or 0.50% lower.  To get the largest loan amount, be certain to include the market rent of any vacant units.  For example, let's suppose a 50-unit apartment building enjoys 18 2 bedroom-2 bath units rented at $1,500 per month and two 2-bedroom-2 bath units rented at $1,600 per month.  If a third 2 bedroom-2 bath unit is vacant on the rent roll, be sure to list that vacant unit as if rented at $1,600 per month, rather than $1,500 per month.

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.? 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?

Do you have a real estate or mortgage web site?  If you put a simple hyperlink to C-Loans.com, you could earn a $21,250 referral fee in your sleep.

Do you like the way I teach?  I try to use lots of examples and real life war stories.  Want to learn the entire profession of commercial real estate finance?

Keep looking for contact information (contents of a business card) of any banker making commercial real estate loans.  I'll swap you the contact information of that one banker for a list of over 2,000 commercial real estate lenders.

By subscribing to this blog, you can enjoy free training in commercial real estate finance twice a week.

Got a friend who would benefit from free training in commercial real estate finance?

This is the second most important training article about commercial real estate finance ("CREF") that I have ever written.  My most important CREF training blog article can be found here.

Most new commercial mortgage brokers start out arranging small balance commercial real estate loans.  These are the commercial loans of less than $5 million ($5MM).

Banks are by far the most active lenders for small balance commercial loans.  Unfortunately most bankers take the position that if a borrower has to hire a mortgage broker to help him get a commercial loan, that deal is proably a stinker.  After all, there are over 6,000 commercial banks in America.  Why couldn't the borrower find a bank on his own?  Why didn't the borrower's own bank make him the loan?  How many banks have already looked at this deal and turned it down?

A great many bankers are therefore highly prejudiced against commercial loans brought to them by commercial mortgage brokers.  Unfortunately this harsh environment is where most newbie commercial mortgage brokers must learn their trade.

By the way, it is the rare trade show that I attend where I am not greeted warmly and appreciatively greeted by at least one or two graduates of my nine-hour training course, How to Broker Commercial Loans.  When I first started out in commercial real estate finance 36 years ago, nobody taught this stuff!  It was all a closely guarded secret.

Okay, so bankers are distrustful of small balance commercial loans brought to them by commercial mortgage brokers.  Got it.  But what about the Big Boys, the commercial lenders who make the major loans, the commercial loans larger than $5MM?  By the way, in my last few blog articles I have been referring to the really large commercial loans - the deals larger than $5MM - as large balance commercial loans.  That is not really the best term.  They are more often called major loans by the lenders themselves.

Two weeks ago my oldest son, George IV, and I flew to Las Vegas to attend the Western States Commercial Real Estate Finance Conference, the biggest trade show of the year for the CREF industry.  At the show, John Hancock Life Insurance Company had a booth soliciting the really large commercial loans - in this case $10MM+.  George IV and I approached the loan officer, coincidentally named John, to pitch our wonderful new web site, CommercialMortgage.com.

After my 90-second pitch, John politely but unapologetically said, "No."  By the way, John Hancock was just about the only lender to say no to us at the conference.  CommercialMortgage.com was a smash hit.

"I'm an old man, George," continued John.  "I don't want to work that hard screening out deals.  My best brokers know what I want.  When one of my best brokers calls me, I know that there is a 50-50 chance that I am going to close a loan if I take that call."  Bam!!  An amazing epiphany hit me upside the head like a can of V8.

Commercial lenders making major loans actually WANT a good commercial mortgage banker involved in the deal in order to screen the deals.  They don't want to field the countless calls from direct borrowers.  They actually want a middle man, a good commercial mortgage banker to screen their deals.  (George IV and Tom, my sons, this is huuuuge!  Confused?  I write this blog mainly to teach my two great sons the family business, and you get to benefit by reading this invaluable training for free!  Make sure you subscribe!)

By the way, when a commercial mortgage broker starts regularly closing major commercial loans - deals over $5 million - he becomes, in the parlance of the industry - a commercial mortgage banker, even though his company doesn't actually service (collects the payments) on the loans he originates.

The vast majority of the major loans originated in the country are, in fact, actually originated by life company correspondents who come across deals not suitable for their stable of life companies.  You will recall that a life insurance company correspondent is a mortgage company that is the exclusive representative for a life insurance company in a particular region of the country and who collects the payments every month for their life company clients.  This is why the lenders making major commercial loans often call their best brokers commercial mortgage bankers, even when the moniker is slightly inaccurate.

So how do you screen a major commercial loan?  In most cases, the large commercial loans that you will be screening will be either construction loans or bridge loans.  Large permanent loans are pretty straight forward.  Pop quiz:  Define a permanent loan.  A permanent loan is a garden-variety first mortgage on a commercial property that has at least some amoritzation (25-years is the most common amortization for commercial loans) and a term of at least five years.

When screening a construction loan or a bridge loan, there are four important questions for which you will need answers:

1. What is the net worth of the borrower?  Remember, according to the Net-Worth-to-Loan-Size Ratio, the net worth of the borrower should be at least at least as large as the loan amount.  In other words, the net-worth-to-loan-size ratio should be at least 1.0.  If the two developers have a combined net worth of just $3 million, and they are trying to get an $8 million construction loan or bridge loan, they are smoking too much of that loco weed.
   
   
2. What experience does the borrower have owning, managing, renovating, and/or building commercial projects of this size?  The answer to this question will be found in the borrower's curriculum vitae ("CV"), which is a fancy term for the borrower's ownership, management, renovation, and/or building experience resume.
   
   
3. The single most important question is how much equity (skin) will the borrower have in the deal?  At an absolute minimum, the borrower will need to be able to cover at least 20% of the total cost of the project, and on the larger deals, 30% is far more likely.  The Total Project Cost includes land/acquisition costs, hard costs, soft costs (including loan points and an interest reserve), and a contingency reserve of 5% of hard and soft costs.
   
   
4. If the loan being sought is a bridge loan, what is the borrower's exit strategy?  The exit strategy is how the borrower intends to pay off a bridge loan, which is of vital importance to any short term lender.  Remember, a bridge lender's yield plummets when a bridge loan goes past maturity.  Will the borrower refinance the property with a permanent lender when the property is stabilized (when every unit is leased at market rates)?  The mere sale of the property is probably the weakest exit strategy that a borrower can propose.

Hey guys, keep looking for the contents of the business card of any commercial banker making commercial real estate loans.  You can trade the contents of that one business card for a free directory of 2,000 commercial real estate lenders.  We have one idiot who stays up every night trying to scrape the contents of our wonderful new commercial loan portal, CommercialMortgage.com.  He is trying to get our list of commercial lenders.  Hellooooo, Mr. Dodd Frank (the name he uses when he scapes our site for hours), you can get the same list by giving us the just one good banker!  Silly.

Guys, if you have not taken a free ride on our wonderful new commercial loan portal, CommercialMortgage.com, you are missing out on a treat.  Feel free to enter an imaginary loan just for your test drive.  C-Loans.com only has about 750 participating commercial lenders.  CommercialMortgage.com has 3,159+ commercial lenders, and there is no overlap!!!

"C'mon, George, you're not a complete idiot.  CommercialMortgage.com gives mortgage brokers a great list of commercial mortgage lenders who will compete against C-Loans.com.  WTFudge are you doing?"

The truth:  Every day two salesmen for C-Loans.com contact banks to invite them to join C-Loans.com.  The grumpy, sleepy old guys who really don't care that much about originating many new commercial loans we add to CommercialMortgage.com.  Need to actually close a commercial loan?  Submit your commercial real estate loan request through C-Loans.com.

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

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Do you have a commercial real estate web site?  If so, be sure to add a link (or the smarter move is to add 30+ links) back to C-Loans.com to your home and interior pages.  We have boasted for years of paying that one big referral fee of $21,250 to Alun Dunn.  But now there is another web site owner - a regular guy just like you - who referred five years ago a single hot commercial loan broker to C-Loans.com and who just earned his 9th referral fee.  He earned all of these referral fees from from that one hot commercial loan broker who found us from his site, and these referral fees have now totalled almost $19,000!  Guys, in truth, this is a true no-brainer.