Commercial Loans and Fun Blog

I am going to teach you a quick and easy way to get pictures taken of a commercial property that is more than 200 miles away - far beyond driving distance.

Today's training article was inspired by a real life commercial loan request on C-Loans.com.  The mortgage broker had a very do-able commercial mortgage deal in his hands.  It was a 44-unit office complex in Ohio, and the property was 100% occupied.  He was only looking for a $3.1MM permanent loan.  Just $3.1MM - wow!  This commercial loan request should have been a slam-dunk deal and a cool $31,000 commission to the mortgage broker.

The deal was turned down by over 30 different lenders.  Huh?

Yup.  And do you know why?  The mortgage broker attached the most butt-ugly picture I have ever seen on any C-Loans app.  Why was it ugly?  Let me count the ways:

1. The picture was horribly out of focus.  By the way, the picture above is NOT of the butt-ugly property, even though this picture is a little depressing.  Compared to the subject, however, the above office building is a supermodel.
   
   
2. The resolution was really low.  The picture looked liked a thumbnail that had been blown up 60 times.
   
   
3. The picture was taken on a dreary, overcast day.  Guys, blue sky sells.  Always make sure your property pictures are taken on a bright, shiny day with a beautiful blue sky.

Now this mortgage broker was not an idiot.  He had very competently completed his C-Loans app.  I'm sure he realized that his picture was atrocious.  His problem was that he was located in Michigan, and the property was located in Ohio - a six-hour drive away.  I'm sure this mortgage broker asked the borrower for better pictures, but the borrower just didn't appreciate the importance of the picture.

A good argument can be made that the single most important document in a commercial loan package is the picture(s) - even more important than the Pro Forma Operating Statement.

So what could this broker have done?  He should have hired a nearby real estate broker to take the pictures for $50 or so.  Here is how you do it:

1. Go to Google Maps -  http://maps.google.com
   
   
2. In the Search Google Maps field, insert the address of the property.
   
   
3. In many cases, Google has a nice front view of the property that you can download and use.
   
   
4. If not, click the Nearby button and a search field will appear.  Type in "Real Estate Broker".  There will usually be few within a five-minute radius.
   
   
5. Call the real estate office and offer one of the salesmen $25 to $50 to take a few pictures and send them to you by email.
   
   
6. Voila!

Yikes.  I'm a crazy cat lady.  We've got six of them.

Do you have a mortgage or real estate website?  We once paid a guy named Alan Dunn a referral fee of $21,250 for placing a Commercial Mortgages link on his website.

Keep looking for the contact information of a banker making commercial real estate loans.

Got a commercial loan that deserves a loan from either a life company, commercial bank, or conduit?

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.?

Want to learn commercial real estate finance for free?

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

The marketing trick that I will share with you today can be used to solicit commercial loans, find hungry commercial real estate buyers, find developers ready to order plans, identify bankers about to order a toxic report, or even real estate brokers ready to order a title commitment (called a preliminary report for those of you west of the Mississippi).

The trick:

Find another company - not a competitor - who advertises to the same potential customers and then split the cost of the advertisement with them.

Folks, product placement (when James Bond drives a BMW in the latest 007 movie) and cooperative advertising is the latest trend in marketing. Last night Cisca and I counted FIVE commercials in just two hours where two different advertisers shared the cost of a 30-second TV ad. Doritos shared an ad with the new Ice Age movie. Safeco shared an ad with Banana Republic. Now that I have pointed it out, you will see marketers from two different companies sharing the cost of marketing everywhere.

Another example:

I own 100% of both C-Loans, Inc. and Blackburne & Sons Realty Capital Corporation.  C-Loans, Inc. provides software to banks and other commercial lenders that allows them to receive commercial mortgage leads / mini-app's online.  The only twist is that our lenders only pay us if they actually close a deal.  That's fine with us because our lenders have closed more than 1,000 commercial real estate loans using our software.  Smart tip:  You make far more money if you are willing to work on a contingency (success only) basis.

Blackburne & Sons is a private money commercial lender - but with a twist.  We make long-term commercial loans (permanent loans), as opposed to bridge loans, and we make our dough, not from up-front points, but rather from a very profitable loan servicing fee (essentially an interest rate  spread).

My two companies are NOT competitors, yet they market to the exact same customer base:  commercial real estate brokers, mortgage brokers, lenders, and investors.

Therefore those of you who have received our fun newsletters have probably noticed that our C-Loans newsletters contain a lot of plugs for Blackburne & Sons and our Blackburne & Sons newsletters contain a lot of plugs for C-Loans.  Voila - a perfect example of co-op marketing!

And another example:

Bob and Steve are drinking buddies. Bob works for a sub-prime residential lender, and Steve brokers commercial loans. Bob gets 90% of his business by sending newsletters by snail mail to A-paper residential mortgage brokers, soliciting them for their turndowns. One day, between beers and ribald jokes, Steve complains to Bob, "I've got 500 residential mortgage brokers on my mailing list, but it costs me $1.50 per broker to send them a snail mail newsletter. As a result, I can only afford to mail to them once a month. If only I could get my cost down to $0.75 per newsletter. Then I could advertise twice per month, and I would make a lot more money."

Through a beer fog, Steve still sees an opoportunity. "You know, Bob, you and I are not competitors. You're a residential guy, and I'm a commercial guy. We both advertise separately to residential mortgage brokers. Why don't we share the envelope? You stick in a one-page flyer about subprime residential mortgages, and I'll stick in a one-page flyer about commercial mortgages. Then we'll share the cost of the snail mail postage and envelope. It's a huge win-win."

Mary, a hot, 39-year-old, recent divorcee, notices Steve (who is sort of butt-ugly) through her own beer googles and thinks to herself, "Well, he's not that bad." Later Mary invites him home "for coffee". It was a great evening all around for Steve.  Mary chewed her arm off rather than wake Steve in the morning.

One final hypothetical example:

A title company, a toxic report company, and an appraisal company should share their contacts, split the ad costs, and - if each firm paid one-third - each reduce their cost of advertising by 67%.

Sorry guys, but you must be a commercial real estate loan officer working for either a commercial bank or a credit union to take advantage of the following offer:

A perfect example of cop-op marketing is when a commercial brokerage company (they sell commercial-investment real estate) opens a small commercial mortgage brokerage operation.  The dough they spend advertising for commercial loan clients will introduce them to a tons of wealthy investors - to whom they can later obtain listings or sell commercial-investment property.  Verbal proof story:  I now manage $50 million in commercial real estate loans for my investor clients.  The vast majority of my early investors were commercial loan clients (borrowers!) for whom I worked on a loan.

Got a commercial loan that is clean enough for a life company, a commercial bank, or a conduit?

Does your commercial mortgage 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.? 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?

Did you learn something today?  Want to receive free training in commercial real estate finance?  I try to write two training articles per week.

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

Lots of companies have created glossaries of commercial loan terminology where they define fancy terms like debt yield ratios, defeasance, lockout clauses, and standby takeout commitments.  Our new glossary strives to be different.

Our new commercial loan terms glossary strives to explain these sophisticated topics using easy-to-understand, everyday English and lots of real-life examples.  I have always been a little slow-witted myself, and examples help me a ton.  "Suppose you're the Chief Investment Officer with a life company, and you need to know exactly what yield you will earn on your mortgage investments..."

Here is our new glossary:  http://www.c-loans.com/knowledge-base/commercial-loan-terms-glossary  You should bookmark it right now because it will get larger and more complete every week.

This new glossary is part of the new Knowledge Base section (you'll find it under the Knowledge Base tab) in C-Loans.  My goal is to eventually have this glossary and this Knowledge Base compendium in C-Loans.com so complete that a starving newbie, someone too poor to even buy my basic training course, can learn the entire business of commercial real estate finance ("CREF") just by studying it.  I am pretty much there already.

Are you confused about about some fancy commercial loan term, like the difference between a permanent loan and a takeout loan, please write to me, George Blackburne III (the old man).  I'll try to blog on the subject so that not only will you learn this fancy lingo, but also so will future visitors to C-Loans.com.

Did you bookmark our new Glossary of Commercial Loan Terms?  As the hillbillies say, "Git 'er done!"  :-)

Are you finally ready to learn commercial real estate finance?  Those of you who are commercial real estate brokers who sell investment properties are crazy not to open a little commercial mortgage company in your office.  You just need one guy, a desk, and a phone.  In most states he doesn't even have to be licensed.  Why open a little commercial mortgage company?  There is no better way to meet high-net-worth real estate investors than to own a commercial mortgage company.   Po' folks don't own shopping centers.  Every day your little ads will introduce you to four or five wealthy investors.

Hey guys, please keep looking for commercial bank loan officers who make commercial real estate loans.  We'll trade you a free directory of 2,000 commercial real estate lenders for the contact information of that one banker.  We solict these bankers for their turndowns.

Got an "A" quality commercial loan that deserves financing from a life company, conduit, or commercial bank?

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? Is your client's company losing money?

Just browsing today?

Did you learn something today?  Subscribe to our blog and get 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?

I just completed a new training article on how commercial construction loans are underwritten.  It was the hardest subject that I have ever attempted because bankers use five different financial ratios when underwriting commercial construction loans.  The article took me two weeks to write.

If you are involved in commercial real estate construction, development, sales or finance, you will greatly benefit from mastering this subject.  The Loan-to-Cost Ratio, Total Construction Costs, Hard Costs, Soft Costs, Contingency Reserves, the Profit Ratio, and the Net-Worth-to-Loan-Size Ratio will suddenly because part of your daily lexicon.  After reading this article, commercial real estate finance will hold few remaining mysteries for you.

And folks, this stuff is not that hard.  If you paid attention in fifth grade math, you can master this stuff.  Prepare to be wowed.  Read this great article here:

http://www.c-loans.com/knowledge-base/underwriting-commercial-construction-loans

Keep looking for the business card or the contact information of any banker making commercial real estate loans.  We'll trade you the contents of that one business card for a free directory of 2,000 commercial real estate lenders.

Have you registered on C-Loans (filling in your name and address) and gotten your free $199 commercial mortgage underwriting manual?

Do you sell commercial real estate?  If so, then by all means open a commercial mortgage company (a desk, a phone, and a body)!  Why?  Because there is no better way to meet high-net-worth individuals than to own a comemrcial mortgage company.  Poor people don't own $5 million shopping centers.

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? Do you need a non-recourse loan?

Got a commercial mortgage deal that deserves a life company, conduit, or bank loan?

Did you learn something today?  Want to recieve 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?

Today you will learn a new financial ratio, the New-Money-to-Old-Money Ratio.

Twenty-five years ago the commercial property second mortgage business was huuuuge.  Almost 100 private money (hard money) commercial mortgage companies nationwide would glady make you a second mortgage on your apartment building or office building.

Then a commercial real estate depression rolled across the country in the early 1990's.  It started with a bust in oil prices, and commercial real estate in Houston, Texas and in Denver, Colorado (the oil business was big business in Denver in those days) collapsed in value.  I use the expression, "depression", because commercial real estate in those days collapsed by a whopping 45%.  Interesting note:  I have survived three commercial real estate depressions in my career, and each time commercial real estate values collapsed by almost exactly 45%.  Forty-five percent.  Hmmmm.  I gotta remember that number.

This was the era of the see-through building.  A see-through building was a newly constructed commercial building, with no tenants and hence no tenant improvements.  It was just an empty shell, and if you looked through the windows, you could see all the way through to the other side.  Hundreds of huge, see-through, office towers could be found in Houston, Denver, and other large cities across the country.  Developers couldn't find any tenants for their beautiful new architectural monuments.  Commercial construction lenders - typically S&L's (savings and loan associations) - lost billions of dollars during the 1990-1991 recession, leading to the Savings and Loan Crisis, where almost 1,100 out of about 2,300 S&L's went bankrupt.

Anyway, in the early 1990's, everyone thought that the depression would be limited to just the Oil Patch states; but then the Eastern part of the country fell into a severe recession.  Everyone in California was sure that the rolling depression would never hit California because Silicon Valley was rocking and millions of people were moving to California.  "We are immune," said many Californians.  We weren't.  In 1991 the rolling commercial real estate depression hit California, and commercial real estate values fell by - you guessed it - 45%.

Now the thing about a second mortgage is that the second mortgage holder has to keep the first mortgage current; otherwise, the second mortgage holder will be wiped out when the first mortgage forecloses.  In most cases it doesn't even matter if the borrower has a ton of equity in the property, over and above the first and second mortgages.

The reason why is because no one ever bids at commercial mortgage foreclosure sales.  Lots of fix-and-flippers bid at residential foreclosures sales, but no one ever bids at foreclosures of commercial property.  Yeah, yeah, I am sure that over the years a few wealthy investors have actually bid at a commercial mortgage foreclosure sale, but such an event is extremely rare.  Why?  Any bids at a foreclosure sale have to be all-cash, and the numbers are just too big for bidders to show up with $3 million in cashier's checks.  The bottom line is that the commercial second mortgage holder absolutely must keep the first mortgage current while he forecloses on his second mortgage.

If a lender is actually going to make a commercial second mortgage, he needs to make sure that the first mortgage payments are not impossibly large.  Imagine if you made a $400,000 second mortgage behind a $10,000,000 first mortgage on an $18 million apartment building.  At first glance, this looks like a gorgeous deal.  It's only 57.8% loan-to-value.  Wow.

However, the monthly payments on a $10 million first mortgage, at 5.25% interest and amortized over 25 years, are $59,925.  If the second mortgage holder first learns that the borrower is delinquent when the borrower is five months behind on his first mortgage payments and then has to keep the first mortgage current for another 7 months while he foreloses, the second mortgage holder will have to advance almost $720,000 to protect his little $400,000 second mortgage investment.  Ouch!  In real life, no one has that kind of dough.

Therefore commercial second mortgage lenders developed a financial ratio to warn themselves away from making such a mistake.  It is called the New-Money-to-Old-Money Ratio.

The New-Money-to-Old-Money Ratio is defined as the size of the proposed second mortgage divided by the size of the first mortgage, the dividend (result) being multiplied by 100%.

New-Money-to-Old-Money Ratio = (Size of Second Mortgage / the Size of First Mortgage) x 100%

The New-Money-to-Old-Money Ratio should always be larger than 33%.

Let's plug in the numbers from the example above.

New-Money-to-Old-Money Ratio = (Size of Second Mortgage / the Size of First Mortgage) x 100%

New-Money-to-Old-Money Ratio = ($400,000 / $10,000,000) x 100%

New-Money-to-Old-Money Ratio = .04 x 100%

New-Money-to-Old-Money Ratio = 4%

Clearly 4% is way-way less than 33%.  It would be reckless to make such a second mortgage, even though the apartment building might be a very nice one and even though the loan-to-value ratio was less than 58%.

Okay, now back to our rolling commercial real estate depression.  In the early 1990's, most of the commercial second mortgage lenders were based in California.  When the depression finally rolled through California in 1991, commercial real estate fell by 45%.  Since most commercial second mortgage lenders were lending up to 65% to 70% LTV in the years leading up to the depression, they found themselves severely upside-down in most deals.  Faced with making the first mortgage payments for an uncertain amount of time, on a partially-vacant or vacant commercial building with very little remaining equity, most second mortgage lenders allowed themselves to be wiped out.

Poof!  Commercial second mortgage lenders lost billions of dollars and exited the business for good.  They have never come back.  To this day very few commercial lenders will therefore make second mortgages.

To make matters worse, a change in Federal law (the Garn-St. Germain Act) had recently clarified that the acceleration clause contained in the mortgages of virtually all bank first mortgages was enforceable.  An acceleration clause is the section in a mortgage that says if the borrower sells the property or places a second mortgage / mezzanine loan on the property that the bank can immediately demand to be paid in full.

Another huge reason why so few lenders will make commercial second mortgages is because the moment they place their mortgage on the property, the underlying first mortgage lender can accelerate his loan.  If that happens, the holder of a $400,000 second mortgage, for example, might suddenly have to come up with $1 million (or $10 million) to pay off an accelerated first mortgage.  Yikes.

So is it impossible to get a commercial second mortgage today?  No.  There is still a handful of rough-and-tumble commercial lenders willing to make a commercial second mortgage.  You can find these lenders by entering your deal into C-Loans.com.

"Gee, george, I get it.  I'm not going to find many lenders willing to make me a commercial second mortgage; but I don't need to find a lender willing to make me a commercial second mortgage.  I just need to find a lender who will allow the seller to carry back a second mortgage.  With banks being so conservative today, its hard to find a buyer capable of putting 35% down."

You would think that banks would be happy to have the seller carry back a second mortgage.  After all, if the borrower defaults, the seller would be motivated to bring the bank current and foreclose his second mortgage.

In real life, this doesn't happen.  Almost invariably the seller lacks the financial resources to keep the first mortgage current.  The bank ends up foreclosing and wipes out the seller's second mortgage.

But wait, it gets even worse.  When the bank does foreclose, almost invariably it finds that the property has been allowed to fall into a dilapidated condition.  How could this happen?  The borrower has been using the dough earmarked to keep the property maintained to make the second mortgage payments.

As a result, you will almost never find a commercial bank willing to allow the seller to carry back a second mortgage.  Banks always want cash-to-loan; i.e., no second mortgages.

This is one good reason to apply to Blackburne & Sons for your purchase money commercial loans.  While we will NOT make a commercial second mortgage, Blackburne & Sons will allow the seller to carry back a second mortgage behind our new first mortgage.

Are you a commercial broker; i.e., do you sell commercial real estate?  What I am about to tell you is the most important thing you will ever learn in commercial-investment real estate brokerage!  There is no easier way to meet high-net-worth real estate investors than to be a commercial mortgage broker.  After all, poor people don't own $5 million office buildings.  They are owned by the filthy rich.  Every commercial brokerage office needs to have a small commercial loan brokerage operation.  It could just be a desk and phone.  It doesn't even matter if you EVER close a loan.  Your ads for commercial loans will pull in hordes of wealthy investors to whom you can later sell commercial real estate.

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? Do you need a non-recourse loan?

Do you have a commercial loan that deserves to be financed by a life company, bank, or conduit?

Keep looking for bankers who make commercial loans.  You can parlay the contents of a single business card into a free directory of 2,000 commercial real estate lenders. 

We here at C-Loans, Inc. have a vested interest in getting you pre-registered on C-Loans.com.  Registration is just a fancy way of saying to give us your contact information, so future lenders can reach you.  We want you in a sprint start so that the next time you run across a commercial real estate loan, you can quickly enter it into C-Loans.com.  To encourage you to pre-register, we are giving away a free Commercial Mortgage Underwriting Manual, a manual we sell separately for $199.

Are you ready to finally learn commercial real estate finance?  It's a rare commercial lending conference when one of my former (video course) students doesn't come up to me and thank me for this course.

Did you learn something today?  Want to receive two free 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?

The following article has immensely helpful information for anyone in the commercial real estate business - be she a commercial loan broker, a commercial broker (you sell real estate), or an investor.  The article is short, but it hits you with great tool after great tool (all free), bam-bam-bam.  Prepare to be wowed:

Every broker or loan representative should know that timing is everything.  In an effort to get a deal off the streets, a loan approval letter needs to be issued quickly.  (George's comment:  I just love that expression, "Get the deal off the street".  That is so important!)

But what do you do when the borrower can’t get you every needed document in a timely manner?  Do you have to wait until you get everything?  Of course not.  But it does involves work on your part.

Nowadays information is readily available at our fingertips. We just need to make the effort to get it, and we need to be creative about it. The internet is an amazing tool (Thanks Al Gore) that can pretty much get you anything you need.

One of the most important items needed for an underwriter is pictures of the property. There is no reason to wait until a borrower gets you property pictures. You can find property pictures on your own just by using Google Earth.  Here, you are able to get not only street views of the property, but you also can get aerial views.  In just a few minutes you can have those pictures ready.  We also like to see the neighborhood, and Google Earth allows you to look down the street or across the street to see what is surrounding the property.

But be sure to watch out for the date of the picture.  Most are recent, but we have found that sometimes the picture may be a year or two old, and since then the borrower maybe updated, remolded, painted or made other improvements to the property.  If that is the case, be sure to explain that when you submit your deal (to a lender).  You can always get updated pictures later - once the deal is off the street.

Another important item is property details.  The borrower tells you he has an industrial building, but he doesn’t know the square footage or parcel size.  He needs to dig up that information in his records (hopefully he is keeping them).  Again, don’t wait if you can find it yourself. There are a few ways we have found to get this information. Our favorite is LoopNet.  Did you know LoopNet has entire reports on property history, tenants, sq. footage, parcel size, unit mix, tax history and more? Better yet, it is free to use. All you have to do is log on to loopnet.com, enter the location address and before you know it you will have a plethora of information. This is also a great tool that can help you filter out good deals from bad deals. Maybe your borrower hasn’t been completely honest with you.  LoopNet can provide you with history of mortgage defaults, unpaid property taxes and even tenant rental amounts.

In our office we also use Chicago Title Premier Services, another free service. Just go to https://premier.ctic.com/.  On this site you can search title records by name, address, APN’s and even street names. You can pull title reports that show mortgage history, defaults, property tax status, sq. footage, lien holders, etc. You can also get photos and plat maps on this site.  The reports also include comparable sales data, something an underwriter would greatly appreciate.

What else can you get online? Credit reports. Well, you can’t get one for someone else, but you can provide your borrower with different options to get a self-pulled credit report free of charge. Some sites that offer this are creditkarama.com, freecreditreport.com, Experian.com, Equifax.com and transunion.com. While the lender will still want to pull a tri-merge credit report in the future, providing one of these free reports will at least get the ball rolling and provide an idea of the credit worthiness of a borrower.

Last, but certainly not least is PACER, Public Access to Court Electronic Records. On Pacer you have to set up an account, but it is a relatively easy process.  We use pacer often.  On pacer you can get copies of any court documents needed.  Is your borrower in Bankruptcy?  If so, there is no need to wait for the borrower to request bankruptcy documents ffrom his attorney.  You can go online, search their name and find those documents on your own.  You can also find out about any law suit or even divorce proceedings. This is just another way to get needed documents quickly, so that you can get the deal off the street.

These are just a few tools to use to get what you need.  There are many options available, you just have to put in the effort.  If you are hungry to get your deals moving, this is how you do it.

I would love to take credit for this wonderful blog article; but it was written by the lovely and smart Angelica Gardner, the Executive Vice President of Blackburne & Sons, the head of our Loan Committee, and since I live in Indiana 2,000 miles away, arguably the de facto CEO of our company.

Keep looking for bankers who make commercial loans.  You can parlay the contents of a single business card into a free directory of 2,000 commercial real estate lenders. 

We here at C-Loans, Inc. have a vested interest in getting you pre-registered on C-Loans.com.  Registration is just a fancy way of saying to give us your contact information, so future lenders can reach you.  We want you in a sprint start so that the next time you run across a commercial real estate loan, you can quickly enter it.  To encourage you to pre-register, we are giving away a free Commercial Mortgage Underwriting Manual, a manual we sell separately for $199.

Do you have a commercial loan that deserves to be financed by a life company, bank, or conduit?

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? Do you need a non-recourse loan?

Are you ready to finally learn commercial real estate finance?  It's a rare commercial lending conference when one of my former (video course) students doesn't come up to me and thank me for this course.

Are you a commercial broker; i.e., you sell commercial real estate?  What I am about to tell you is the most important thing you will ever learn in commercial brokerage!  There is no easier way to meet high-net-worth real estate investors than to be a commercial mortgage broker.  Every commercial brokerage office needs to have a small commercial loan brokerage operation.  It doesn't even matter if you EVER close a loan.  Your ads for commercial loans will pull in hordes of wealthy investors to whom you can later sell commercial real estate.

Did you learn something today?  Want to receive two free 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?

This whole subject of mezzanine loans, preferred equity, venture equity, capital stacks, senior stretch financing, A/B Notes, and syndicated loans is called structured financing.  Relax.  I am going to give you a quick refresher course about each of these fancy terms.

Most of us human (as opposed to god-like) commercial mortgage brokers will seldom dwell in the lofty palaces of structured financing; but we don't want to look like complete newbies if the subject ever comes up at a commercial lending conference or in a conversation with a very wealthy commercial borrower.

Think of a mezzanine loan as sort of like a second mortgage, but its a type of second mortgage that a lender can foreclose in six weeks rather than six months.  A mezzanine loan is always junior to some huge first mortgage (typically $10+ million), and a mezzanine loan is secured, not by a mortgage, but rather by the stock of the corporation* that owns some trophy office building or huge shopping center.  If you foreclose on the stock, you then own the corporation as well as the property!  And since stock in a corporation is personal property (pay attention - this is on the test), normal mortgage laws don't apply.  Just like a finance company can repossess your car in just a few days if you miss a payment, so can a mezzanine lender foreclose on a billion dollar office tower in New York City.

*  More precisely, everyone uses LLC's these days, and the stock equivalent in LLC's is a membership interest. If you foreclose on 100% of the membership interests, you own the LLC and the $500 million shopping center.

Think of preferred equity as if it was a second mortgage as well, but technically preferred equity is not a loan.  It does not have regular monthly payments.  It's an investment in the ownership of the property; however, the most a preferred equity investor can earn is some agreed upon yield - typically 12% to 14%.  The bad news is that the preferred equity investor is not guaranteed to earn, say, 13%; but the good news is that if the owners of the property earn anything, those earnings go first to pay the preferred equity investors.  They're preferred.  Mother always loved them best.  As the Church Lady might say, they're special.

In my last blog article, I explained venture equity.  It's joint venture money.  The bank wants the developer to have invested 20% of the total cost of the project; but on the really huge deals, no one has $10 million in cash to put into a single deal.  Opportunity funds (think of them as go-go funds or the play money of the super rich)  will contribute 70% to 90% of the required equity in return for a preferred yield of, say, 8%, and 50% of the profit in the deal.

"Geez, George, my eyes are glazing over.  Do I really need to know this stuff?  I'm just doing $500,000 to $5 million commercial loans."

If you don't completely understand everything today, don't freak out.  I will try to review structured finance every few months; but yes, eventually you will want to master this stuff.  If not, then you will always lack confidence when negotiating larger commercial loans.

This verbal proof story will help you to understand.  My hard money mortgage company once made a loan on an office building in New York.  It tooks 18 months to foreclose!  That's how slow the courts were there.  Arghh!  Now, can you imagine if my loan had been a $200,000 second mortgage behind a $1 million first mortgage with monthly payments of $10,000 per month?  In order to keep my $200,000 second mortgage from being cut off by a foreclosure of the first mortgage, I would have needed to advance a whopping $180,000 to cover the first mortgage payments during that 18-month foreclosure process.  

Now think about a $50 million first mortgage on some office tower with payments of $290,000 per month.  If you made a $5 million second mortgage on this building worth $1 billion, and the borrower defaulted, you might have to make $290,000 monthly payments for 18 months while you foreclosed! In other words, you would have been required to advance another $5.2 million in order to protect your original $5MM loan.  Ouch!!!

This is why smart investment bankers invented the mezzanine loan.  They needed a way to foreclose FAST!  Some first mortgage documents forbid mezzanine loans.  This is why preferred equity was created.

Almost done for the day.  You may recall that I blogged last year on senior stretch financing.  It's when a single lender blends the rate of a conventional first mortgage with the rate of a mezzanine loan to come up with a single first mortgage loan with a higher blended rate and a higher LTV.  

The next to the last subject is A/B notes.  To prepare to write today's article, I had to go onto Google and search for "A/B notes and C-Loans".  I found a great blog article on A/B notes written by... me!  Remember this trick.  Suppose you wanted to understand hypothecations, but you like the way that I explain things.  You could simply go onto Google and type, "hypothecations and C-Loans".  [Sons, when I move on to that great party boat in the sky, remember this trick.]

An A/B note is when a lender spits up a giant first mortgage into a larger "A" portion and a smaller "B" portion.  The "A" portion has priority.  The "A" portion gets paid first.  The two different portions are then sold off to different investors. 

Last subject:  When fancy New York investment bankers finance the huge office towers, you might have a capital stack that looks like this in terms of priority:

$200 million first mortgage at 4.75%
$50 million mezzanine loan Piece A at 8.2%
$20 million mezzanine loan Piece B at 9.5%
$12 million preferred equity Piece A yielding 12.0%
$8 million preferred equity Piece B yielding 14.0%
$18 million venture equity investment with a yield expectation of 20%
$4 million buyer's downpayment

And all I want is a lousy 2 points of the entire $312 million in financing.  Am I asking so much?  :-)

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Need an A-quality commercial loan, suitable for a life company, conduit, commercial bank, or credit union:

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Want to learn commercial real estate finance?  Better yet, if you are a commercial broker (you sell commercial real estate), let me share a very interesting observation.  There is no easier way to meet high-net-worth investors than to be a commercial mortgage broker.

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Final funny:  Many pessimists got that way by financing optimists.

A gorgeous $50+ million commercial construction loan was entered into C-Loans.com today, and I personally brought it to the attention of the largest commercial mortgage company in the country.  These are the guys who close 40% to 50% of all of the commercial loans over $30 million.

I seldom personally place the commercial loans entered into C-Loans.com, but there are green flags that really get my greed gland - an ugly goider on the right side of my neck - pulsating and glowing with a florescent internet green.  "This deal smells like a BIG fee!"

Okay, so what did I spot?  What triggered my ugly but reliable greed gland?  I called my son, Tom, today, and I asked him, "Hey son, a big commercial construction loan request was just entered into C-Loans, and I am all hot and bothered.  What did I spot?"

Answer:  The developer attached an architect's rendering!

Guys, every commercial construction loan request larger than $10 million absolutely needs an architect's rendering if the developer really expects to ever get the deal funded.

The fact that this developer included an architect's rendering meant:

1.  This developer is experienced.

2.  The developer is not trying to pinch pennies; i.e., he has enough dough to pay $2,000 to $3,000 for an architect's rendering.

Then I asked my son, as a review, what four elements are included in Total Construction Cost?

Answer:  Land Cost, Hard Costs, Soft Costs, and a Contingency Reserve.

Okay, but how do you compute the Contingency Reserve?

Answer:  The Contingency Reserve should be 5% of hard and soft costs.  It's a special line item in the Construction Loan Budget designed to cover cost overruns.

But why only 5% of hard costs and soft costs?  What about 5% of the land costs?

Answer: By this point, the cost of the land has already been fixed.  It has either already been purchased, or it is already in contract.  There shouldn't be any overruns on the cost of the land.

Okay, Mr. Smarty Pants, what percentage of the Total Construction Cost do most banks expects a developer to contribute to the deal?  In other words, how much skin in the deal is the developer typically required to contribute?

Answer:  Typically the developer is required to cover 20% of the total cost of the project.  Usually this takes the form of equity / downpayment in the land, architect's fees and engineering fees.

The general rule is that construction lenders expect the developer to contribute the land to the deal free and clear.  After all, in most cases, the land cost equals about 20% of the total cost of the project.

In real life, this seldom happens; however, between the developer's equity in the land, his prepaid architect's fees, and his prepaid engineering fees, the successful developer does indeed contribute 20% of the total cost of the project.

Pop quiz:  A developer comes to you for a land loan.  He paid $1 million in cash for the land.  He needs a $400,000 land loan for the architect's fees and engineering fees.  He promises that he will pay off the land loan when he gets a construction loan.  (Angelica, my precious head of Loan Committee, this lesson is for you.)  Is this a good land loan?

Well, we said that the land cost is usually 20% of the total cost of a commercial construction project.  If the land cost is $1 million (20%), then the total project cost is probably around $5 million.  If the developer spends $400,000 on architect's fees and engineering fees (the real number will probably be less), then the developer is contributing $600,000 in equity in the land, $200,000 in prepaid architect's fees, and $200,000 for prepaid engineering fees.  The developer is therefore contributing $1 million or 20% of the total cost of the project!  This is a good land loan!  Yeah!!  :-)

By the way, the Great Recession is over.  Blackburne & Sons made very few land loans leading up to the Great Recession, but we are very bullish on land loans right now.

Okay, we are now going back to the $50 million commercial commercial loan request that just entered C-Loans.  The developer wrote that he had $5 million in cash to contribute to the project.

"Hey, wait a minute, George.  I thought you just said that the developer is required to contribute 20% of the total cost of a construction project?  This is a $50 million project.  The developer should be required to contribute $10 million, right?"

Well, on the really large commercial construction loans ($30MM+), most developers lack the cash required to cover a full 20% of the cost of the project.  C'mon, really, who has $10 million to contribute to a commercial real estate construction project?  I doubt that even Donald Trump contributes $10 million in cash to any of his commercial construction deals.

Okay, so what happens in real life on these huge commercial construction loan requests?  The developer will typically be required to cover 7% to 10% of the total cost of any $30+ million commercial construction project. The rest will typically be covered by venture equity.

Venture equity is like venture capital, except it is for real estate projects.  Venture equity investors provide the equity shortfalls to developers on large commercial construction deals.  Venture equity investors typically expect total returns of 16% to 20%.  A typical venture equity investor might require a 10% preferred return, plus 50% of the total profit in a construction deal.

Okay, I have my son, Tom , pinned against the ropes.  He has been reading my blogs for years.  He can't run.

So what is a capital stack?

Answer by Tom (that clever little devil):  A capital stack is the sum, on a huge commercial mortgage deal, of the first mortgage, plus the mezzanine loan, plus the preferred equity, plus the venture equity, plus the the developer's position in the deal.

Got a commercial mortgage deal that has the tiniest black hair (flaw)?

Keep looking for the business card of any banker who is making commercial loans.  You can parlay the contents of that one business card for a list of over 2,000 commercial real estate lenders.  We solicit these bankers for their commercial mortgage turndowns.

Are you a commercial real estate broker?  In other words, you sell commercial real estate.  What I am about to tell you is the most important thing that you will EVER learn about commercial real estate.  Are you ready?  The easiest way to meet high-net-worth real estate investors is to become - on the side - a commercial motgage broker.  After all, who owns $5 million shopping centers?  Poor folks?

Did you learn a lot today about about commercial real estate finance?  You can receive similar training articles about commercial real estte finance several times per week for free.

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Blackburne & Sons gets its dough to make small, sub-prime commercial loans nationwide by assembling small syndicates of accredited, California investors.  Every month I enclosed an Investor Letter with their interest checks.  Although today's Investor Letter has nothing to do with commercial real estate finance, I hope you will still enjoy it:

“Those who cannot remember the past are condemned to repeat it.” -- George Santayana

George Santayana (1863 in Madrid, Spain – 1952 in Rome, Italy) was a philosopher, essayist, poet and novelist.

To those of you who are fellow history buffs, I have a great recommendation. You can now download inexpensive but fascinating podcasts about history right onto your iPhone. I listen to them when I am working out or driving. These podcasts are produced by a gentleman named Dan Carlin (dancarlin.com), under the label of Hardcore History.

Today I listened to Dan’s two-hour story about the Spanish American War. The war took place in 1898, and it was a very one-sided affair. Just five days after the Declaration of War by the U.S., an American fleet under Admiral George Dewey sailed into Manila Harbor in the Philippines – then a Spanish possession - and sank the entire Spanish fleet. The Spanish suffered over 500 dead and wounded. The U.S. did not lose a man. Okay, one American died of a heart attack, and seven others were wounded. (Interesting note: The American gunners were so inaccurate that less than 3% of our shells hit a Spanish ship; but obviously the Spanish were even more inaccurate.)

If you were awake during history class, you probably remember that Lt. Colonel (and later President) Teddy Roosevelt lead a regiment of dismounted cavalry called the Rough Riders up San Juan Hill. To his credit, Teddy showed great courage during that difficult, but successful, uphill infantry attack. It was the one big battle of the war.

The American fleet bottled up a second Spanish fleet in Havana, Cuba. When they attempted a breakout, despite the amazing courage of the Spanish, it was another one-sided rout. When the Spanish admiral finally surrendered, the American sailors cheered and saluted to show their admiration of the courage shown by the Spanish.

But the actual conduct of the war is not my point today. The issue is the cause. Dan Carlin, the historian, spent the entire first hour of his program on the cause of the war. Now ostensibly the cause of the war was the sinking of the Maine, an American cruiser docked in Havana Harbor. At 10:30 at night, while the rest of Havana was enjoying the extensive nightlife in the city, the cruiser suddenly suffered an ear-shattering explosion. The ammunition magazine had exploded, sending an enormous fireball into the sky. Observers reported that the sky was blackened with falling steel and body parts.   The ship quickly sank, with very few survivors.

To this day there is no consensus as to what really happened, but America chose to believe that the Spanish had detonated a mine under the Maine. “Remember the Maine!” In truth that theory makes little sense. The Spanish were already battling a fierce insurgency in Cuba, and they were losing. Why start a war with a rising regional power (the U.S.)?

Another theory was that this brand new cruiser suffered from a design flaw. The coal bin was built right next to the ammunition magazine, and spontaneous flash fires in coal heaps were common. Okay, so the war had started. Another one of these fancy new coal-powered, armored cruisers was stationed off of Hawaii, and it was ordered to the Caribbean. As it was sailing around the Cape of Magellan, it too suffered a spontaneous flash fire in its coal bin that took several days to subdue. Yikes.

Another reason for the war was yellow journalism, the name for sensational, scandal-filled, and often-inaccurate newspaper articles that stoked the passions of the American people (and sold newspapers). William Randolph Hearst later bragged that his newspaper, the New York Journal, forced the U.S. to go to war. The Spanish were fighting a counterinsurgency in Cuba. The Journal had reported that the Spanish had rounded up the population and forced them into concentration camps, so they could not give food, shelter, and aid to the insurgents. The problem was that the Spanish were not providing enough food, and 400,000 confined Cubans had died of starvation. Okay, that’s a much better reason to go to war – to free the Cuban people.

But the trouble is that we really went to the war because America was looking to pick a fight with someone. Jingos – a fiercely nationalistic and militarist segment of 1898 society – were promoting the idea that Americans needed a war to hone their military skills and to prevent the population from going soft. Remember, the Civil War had ended in 1865, and much of the bloody horrors of the war – the deaths, maiming’s, and misery - were starting to be forgotten.   “Those who cannot remember the past are condemned to repeat it.”

Now we are finally getting to the point of this month’s Investor Letter. Fascism didn’t just arise in Germany. The movement started first in Italy under Mussolini, then it arose in Germany under Hitler, and next it arose in Spain under Franco.

Folks, don’t get me wrong. I will probably vote for Donald Trump, if only because he has the Teflon coating needed to declare that the king is actually naked. There is a lot of anger, however, among his core supporters, and that anger is now also being found in Europe.

“The larger forces that have propelled Trump to the brink of the Republican Party’s Presidential nomination—nationalism, nativism, disillusionment with the economic results of globalization, fear of terrorism, cynicism about career politicians—are just as strong in Europe, perhaps stronger… The rise of right-wing politicians in Europe, like Norbert Hofer, a member of Austria’s Freedom Party, reflects the same forces that have fuelled the candidacy of Donald Trump… In recent weeks, Nigel Farage, the beer-swilling leader of the anti-immigrant, anti-E.U. U.K. Independence Party, has been joined in arguing for a (Brexit) by Boris Johnson, the mayor of London.” (A Europe of Donald Trumps, The New Yorker)

Trump has promised to rein in the military encroachments of Vladimir Putin and to strongly renegotiate trade deals with China. “We are going to make America great again!” Okay, Mr. Trump, I’ll bite. I’ll vote for you; but hey, please don’t go picking another war. A missile exchange with China or a land invasion by North Korea could go badly for the U.S. Nuclear weapons are not a 100%-guaranteed deterrent against war. In World War II, for example, the warring parties simply chose not to use gas warfare.