Commercial Loans and Fun Blog

There are two different ways to analyze commercial loan production - the total dollar volume of commercial real estate loans and the number of individual commercial real estate loans made.  From now on, whenever I say "commercial loans" I really mean "commercial real estate loans".

In terms of total dollar volume of commercial loans, the life companies, the conduits, and the ten largest money center banks combined probably originate about 60% of all commercial loans.  This makes sense.  These behemoths make the really huge commercial loans - the deals over $5 million.  Commercial loans of $40 million+ are not unusual for these Big Boys.

However, in the land of mortals, where you and I reside, the small banks (under $1 billion in assets) and the regional banks (under $30 billion in assets), make the vast majority of individual commercial loans; i.e., they make the largest number of commercial loans.  In plain English, small banks and regional banks make thousands and thousands of small balance commercial loans.  A small balance commercial loan is one that is less than $5 million.

In contrast, the life companies, the conduits, and the money center banks combined might only make a paltry 600 major commercial loans in an entire year.  Therefore small banks and regional banks are where you and I will place most of our commercial loans.

I have also often told you that you must match the size of your commercial loan request to the size of the bank.  In other words, take your small commercial loans to small banks and your large commercial loans to large banks.

It also helps immensely to bring your commercial loans to the banks located close to the subject property.  Most banks greatly prefer to lend in their own backyard; i.e., to make local loans.

To find the perfect lender for a commercial loan, I like to go to maps.yahoo.com and type in the address of the commercial property that I am trying to finance.  The property will be flagged on a map.  Then in the field entitled "Find a Business", I type in "Banks".  Yahoo will then plot all of the banks and credit unions (credits unions love commercial loans these days) located close to the subject property.  I then submit my deal to these local banks.

"Okay, George, that all sounds great and everything, but how on earth am I going to know the size of a particular bank?  Let's suppose I'm doing a commercial loan in far off Arkansas, and the Bank of Arkansas shows up as having a branch close to my property.  Is the Bank of Arkansas a small bank or a large regional bank?  Will my commercial loan request be too large?"

To find the size of any commercial bank, simply go to BankFind, a wonderful tool developed by the FDIC.  Type in the name of the bank and then press "Search".  When the bank comes up, click on the Financials tab to see the asset size of the bank.  Be sure to bookmark this great tool right now.

We are now finally getting to the point of today's training article.  Regulators want banks to have a diverisified portfolio of loans, not just one giant loan upon which the bank rests all its hope.  Can you imagine the risk to the financial system if a $250 million bank were to make a single loan of $250 million on an office tower in New York City?  Banks are therefore limited as to the size of any single commercial loan that they can legally make.

It is much easier to place a commercial loan if the loan amount is well below that bank's maximum loan size limit; otherwise the Board of Directors will be wringing its hands and demanding an absolutely perfect loan.  In the history of mankind, there has never been an absolutely perfect commercial loan.

So what is the maximum commercial loan size that any particular bank can make?  It all depends on the asset size of the bank.  The assets of a bank are its cash on hand, its cash on deposit with the Fed, and its investments, which includes all of its outstanding loans.  As I have shown you above, you can easily find the asset size of any commercial bank in America using BankFind.  By the way, the liabilities of a bank are its customer deposits, which have to be paid back upon request.

Now Federal regulators require a bank to have a capital account equal to at least 6% of assets, and most banks enjoy a capital account of between 6% to 8% of assets.  The capital of a bank is the sum of the dough the founders originally put into the bank plus all of its accumulated retained earnings (profits that the bank has made and not yet sucked out).  A well-run bank operates fairly close to that 6% number because it maximizes the profit to the stockholders.

Example:  The Bank of Arkansas has $250 million in assets (found on BankFind).  What is its minimum capital?

Minimum Capital = Total Assets x 6%

Minimum Capital = $250,000,000 x 6%

Minimum Capital = $15,000,000

Hilarious note:  I picked the name Bank of Arkansas out of the blue, but it turned that there really was a Bank of Arkansas.  Unfortunately, probably during the Great Recession, the bank took so many losses that its capital dipped below 6% of assets.  The Feds closed the bank down!

Just in case you've forgotten, we're trying to find out the largest loan that the Bank of Arkansas is allowed to make.  This is a gross simplication, but in general, the maximum loan that any bank can make to a single borrower is 15% of its capital.

Example:  To find out the largest loan that the Bank of Arkansas can make, assuming it hadn't crashed and burned during the Great Recession:

Maximum Legal Loan Size = Bank Capital x 15%

Maximum Legal Loan Size = $15,000,000 x 15%

Maximum Legal Loan Size = $2,250,000

Therefore, if you needed a $3 million commercial loan, you would probably wouldn't apply to the Bank of Arkansas.  In practice, I would limit the size of my commercial loan request to just 60% of a bank's maximim loan size limit; otherwise the Board of Directors is likely to be all freak-deaky, picking at every flaw.

It's time for you to finally learn commercial real estate finance.  You can learn most of it in one long day (9 hours).

If you can't afford $549, you should at least download my free $199 Commercial Mortgage Underwriting Manual.  All you have to do is register on C-Loans.com.  (Once you've registered, you're far more likely to enter your next commercial loan into C-Loans.com) 

Be sure to save the business card of any banker you meet who makes commercial loans.  You can parlay the contents of that business card into a free directory of 2,000 commercial lenders.  (We solict these guys to refer their turndowns to C-Loans.com.)

Need a commercial loan?  Why not submit it to the hungry 750 commercial lenders on C-Loans.com?

Learn something today?  Never miss another article:

I genuinely appreciate Facebook shares, Linked-In shares, Google Plus Ones, and Twitter Re-Tweets.  Thanks!

Suppose you are trying to refinance your client's balloon payment on his office building, but you run out of time. At the advice of his attorney, he files a Chapter 11 Bankruptcy. The moment he does this, the foreclosing lender becomes subject to an automatic stay. In other words, the foreclosing lender must immediately freeze in his tracks. "Sit, Oboo. Stay!" He can't call and harangue the borrower, nor can he continue his foreclosure until a bankruptcy judge grants his Motion for Relief From the Automatic Stay. (C'mon, Judge, let me finish off this foreclosure.)

If this was a Chapter 7 Bankruptcy - a complete liquidation of the debtor's assets in order to (partially) repay his creditors - a bankruptcy trustee would be appointed to marshal the debtor's assets. Liquidation is just a fancy legal term that means "sell the asset and convert it into cash". A bankruptcy trustee is typically an attorney paid by the court out of the assets of the debtor's estate (and who almost never returns phone calls). To marshal the assets means "to gather up the stuff that the debtor owns", like a French general assembling his troops before he attacks.

Sometimes it is not necessary to sell off everything that the debtor owns in order to satisfy his creditors. Sometimes the debtor just needs some time to reorganize his assets; i.e, to sell off some assets (maybe a rental house or a valuable stamp collection) or to refinance some buildings. In such a case, your borrower will merely file a Chapter 11 Reorganization Bankruptcy

Even though a bankruptcy trustee will still be appointed in a Chapter 11 case to be the eyes and ears of the court, title to all of debtor's assets still remains in the name of the debtor.  This is in stark contrast to a Chapter 7 Bankruptcy. In a Chapter 7 case, the instant the debtor files his bankruptcy, his assets immediately become the property of the bankruptcy estate.  This is why the debtor in a Chapter 11 Bankruptcy case is often called a debtor-in-possession.  He still technically owns his stuff.

In our imaginary example, your client is now in bankruptcy. He needs to find a commercial lender who will refinance his balloon payment while he is in bankruptcy, thereby allowing him to dismiss his Chapter 11.  Unfortunately very few commercial banks (practically none) will finance a debtor who is in bankruptcy, even if the cause is merely being late to pay off a balloon payment.

The debtor needs to find a bridge lender to refinance his balloon payment.  Once the ballooning loan is paid off and the Chapter 11 Bankruptcy has been dismissed, then the debtor can go back to an understanding bank and refinance the more expensive bridge loan with a cheaper bank loan.  Blackburne & Sons (my own firm) is an example of a private money lender that will make commercial real estate loans to debtors in bankruptcy.

Okay, so you find the debtor a commercial lender willing to make him a quick loan to pay off his ballooning commercial loan, even though your debtor is still in bankruptcy. You can now simply trot your commercial borrower down to the title company and have him sign off, right?

No! If a borrower is in bankruptcy, the new lender needs the bankruptcy court's permission to make the debtor a new loan. "But the bankruptcy trustee said it was okay!" The bankruptcy trustee's permission is not enough. Lots of small hard money shops make this mistake.  They get the bankruptcy trustee's permission to refinance but not the court's permission.  No commercial mortgage loan signed by the debtor in bankruptcy is enforceable unless the bankuptcy judge has signed an order granting the debtor permission to sign the loan documents.  The debtor's bankruptcy attorney will handle this order in a motion format that includes the term sheet of the commercial lender (Blackburne & Sons).

Earlier I used the term debtor-in-possession.  This is the debtor in Chapter 11 who retained title to his stuff.  There is a special kind of bankruptcy financing called debtor-in-possession financing (DIP Financing).  This refinance of a past-due balloon payment by Blackburne & Sons is technically NOT debtor-in-possession financing.  Why?  Because when we close our refinance, the debtor is no longer in bankruptcy.  We've paid off the balloon payment, so the debtor has no reason to remain in bankruptcy.  The bankruptcy is dismissed.

Anybody out there know the difference between a bankruptcy discharge and a bankruptcy dismissal?  When you dismiss a bankruptcy, you're saying that the time-out is over.  The automatic stay of your creditors is instantly lifted.  Oboo no longer has to keep sitting.

In contrast, debts are discharged in a Chapter 7 Bankruptcy.  They are wiped out.  The debtor no longer owes those debts.

Okay, now let's finish up with debtor-in-possession financing.  (Blackburne & Sons makes these commercial loans too!).  DIP Financing is when the debtor stays in the Chapter 11 Bankruptcy, and some existing lenders are forced to subordinate to a fresh injection of cash.

Example:  The Blackburne Bakery has been in business for 50 years.  We make good money.  Sadly one of our bakers chops off a finger, and the finger ends up in the pie of Nervous Nellie.  Nellie bites down, swallows half the finger, and then faints.  Even though it was healthy protein, the jury awards Nellie the Swooner a whopping $750,000.  In the meantime, our reputation is temporarilly damaged, and sales plummet.  (My goodness, it was just a finger!)

Unable to make payroll, the company president puts the bakery into a Chapter 11.  The good news is that our specialized pie factory is huge, and we only owe $500,000 against it.  The bakery needs $750,000 to pay Nellie, $250,000 for payroll, and another $300,000 to carry the bakery until all of our loyal customers forget that our baked goods come with surprises inside.

If a lender made the bakery a $1.3 million new first mortgage on the factory, and the existing first mortgage holder was ordered by the bankruptcy court to subordinate, this would be an example of debtor-in-possession financing.

Here's a great deal for you:

Are you registered on C-Loans yet?  Here's the reality.  You are far more likely to enter a new commercial loan into C-Loans.com if you have already registered on the site (filled in your name and address).  In order to bribe you to finally register on the site, I will send you a free copy of our $199 Commercial Mortgage Underwriting Manual if you register.

Keep looking for the business card of a bankers making commercial real estate loans.  We'll trade you the contents of just one business card for a free directory of 2,000 commercial real estate lenders.  We solicit these bankers to refer their turndowns to C-Loans.  Or you can buy this same directory here for $39.95.

In the 300-year history of commercial real estate finance (CREF), there has never been a better time to be a commercial mortgage broker.  More commercial loans are ballooning in 2016 than in any year in history.

Everybody loves atta-boys.  If I've taught you a little today, how about a Facebook share, a Google Plus one, a re-Tweet, or a Linked-In share?  Thanks so much!  :-)

What is a money center bank?  You've heard me use the term before, as in the statement in my recent blog article about securitized commercial loans, "The money center banks - huge banks like Bank of America, Wells Fargo Bank, J.P. Morgan Chase - and the conduits would originate about $1 billion worth of commercial first mortgages on the four major food groups: multifamily, office, retail, and industrial properties."  But what turns a garden-variety commercial bank into a money center bank?

A money center bank is defined as a very large commercial bank, usually headquartered in a gateway city, which earns a substantial portion of its revenue from transactions with governments, big businesses, and other banks.  A large share of the deposits in money center banks come from foreign investors and foreign companies.  It is this access to foreign capital that gives money center banks an essentially unlimited access to capital.

Most money center banks have either their headquarters or a major footprint in such economic hubs as New York City, Los Angeles, San Francisco, London, Zurich, or Hong Kong.

Examples of money center banks include JP Morgan Chase, Bank of America, Citibank, Wells Fargo, US Bank (a lot of Asian deposits), Bank of New York Mellon, HSBC (London), Deutsche Bank (Frankfurt), and Credit Suisse (Zurich).

What makes money money banks so special - in addition to their access to virtually an unlimited amount of foreign capital - is that they help to sell U.S. Treasuries.  Have you ever wondered why only Lehman Brothers (an investment bank rather than a money center bank) was allowed to fail during the Great Recession?  At one point most of the money center banks and all of the major investment banks (think stock brokers) were technically insolvent.  Why not let them all fail and finally be done with them?  Without the money center banks and the major investment banks, there would be no one left to sell U.S. government bonds!

Okay, as commercial real estate investors and brokers, why do we even care about about money center banks?  Answer:  They are the lenders who have the dough to make the really large commercial construction loans.  If you need to build a residential tower in Brooklyn or a regional distribution center for Amazon.com or Wal-Mart outside of Houston, these are just about the only lenders who are perfectly comfortable making $50+ million loans.

Considering that these banks have an (essentially) unlimited deep pocket and a huge appetite for good loans, you can understand why they greatly prefer BIG loans.  They are not going to be terribly interested in a $400,000 commercial loan to buy a bar in Trenton.

Here is a great piece of advice:  Match the size of your commercial loan to the size of the bank.  Take small commercial loans to small banks and large commercial loans to large banks.

What is a small commercial loan?  Anything less than $2 million is know as a small balance commercial loan.  Take such loans to small banks.  What is a small bank?  Any bank with less than $1 billion in assets.

Take your mid-sized commercial loans to mid-sized commercial banks.  What is a mid-sized commercial loan?  Any commercial loan between $2.1 million and $10 million.  What is a mid-sized bank?  Answer:  Any bank between $1 billion and $10 billion in assets.

Take your large commercial loans to large banks.  What is a large commercial loan?  Any commercial loan larger than $10 million.  What is a large bank?  Any bank with more than $10 billion in assets. 

"That all sounds great, George, but how could I possibly know the asset size of a bank?"

You can quickly find the asset size of any bank in the country using BankFind, a wonderful search engine created by the FDIC.  (Loan Officers for Blackburne & Sons, please click on this link and bookmark BankFind right now.  Then please send me an email that says, "I bookmarked this tool.")

As you go about your business, be sure to hang on to the business card of any banker you meet who makes commercial loans.  You can parlay the contents of that one business card for a list of 2,000 commercial real estate lenders.  We solicit these bankers to refer their turndowns to C-Loans.  Or you can just buy that list for $29.95.

Do you have an "A" quality commercial loan that is simply too squeeky clean for my private money mortgage company?  You can run your commercial loan by 750 different banks with one click using C-Loans.com. And C-Loans is free!

The following scenario plays out all of the time:  

Two commercial mortgage brokers are competing to place a commercial loan for the same borrower.  The borrower wants the best rate possible, but ultimately he needs the money pretty soon to pay off some overdue company bills.  The rookie mortgage broker stubbornly keeps submitting the deal to banks, who keep turning him down for admittedly goofy reasons.  The veteran mortgage broker also has several banks looking at the commercial loan package; but just to be SURE he has some loan for his borrower (remember, this borrower needs money), he also submits the deal to Blackburne & Sons.  After all, Blackburne & Sons doesn't charge a penny to prepare a (conditional) commitment letter.  Sure enough, all of the veteran's banks flake out on him too, but the veteran ends up closing the deal and earning a nice commission because the borrower decides to accept the SURE DEAL on the table from Blackburne & Sons.  You submit your commercial loans by email anyway.  It will take you just three minutes to also submit a duplicate copy to the one commercial lender who is always in the market and always in the mood to make commercial real estate loans.  Blackburne & Sons was in the market every day of the Great Recession.

Did you learn something today?  Am I helping you?  Everybody appreciates atta-boys.  :-)  How about a Google-plus one, a Linked-In share, a Facebook share, or a ReTweet?  Maybe you might even forward this article to one of our buddies in commercial real estate investment or commercial real estate finance.  I sure would appreciate it.  

And thanks for your kind words of support during my heath scare!!  All appears well right now.

Years ago the interest rates on commercial loans offered by life insurance companies were much-much-MUCH lower than those offered by any other commercial lender.  By the way, in commercial real estate finance (CREF), life insurance companies are known as life companies.

Man, if you could obtain a commercial loan from a life company, you were sitting in clover.  Your interest rate would be almost 80 basis points (0.80%) lower than a commercial loan from the next best lender.  On a loan of $10 million, that's real money.  The problem, of course, is that only the top 2% of all commercial loans can qualify for a life company loan.  I blogged on this reality recently.

Then, about 15 years ago, Wall Street figured out how to securitize commercial loans.  Here's how the process works.  The money center banks - huge banks like Bank of America, Wells Fargo Bank, J.P. Morgan Chase - and the conduits would originate about $1 billion worth of commercial first mortgages on the four major food groups: multifamily, office, retail, and industrial properties.  These mortgages would then be sold to a trust, and the trust would then issue bonds to the investing public backed by the commercial loans held by the trust.  These bonds were known as commercial mortgage-backed securities (CMBS's).

Now we come to the key step.  These CMBS bonds would then be rated according to risk by one of the rating agencies, like Fitch, Moody's, Standard & Poors, a new rating agency named Kroll Bond Ratings, and Morningstar.  Once rated, many of these CMBS bonds become eligible for purchase by pension trusts.  Yummy.  Pension trusts love-love-love investment grade CMBS bonds, and therefore the yields that the underwriters have to offer in the marketpace to sell these bonds is super-low, often less than 3%.

Bottom line, when commercial loans are securitized, they can be sold off at really low interest rates.  Hooray!  Now we have a true competitor to the life companies.  Conduits today are offering large commercial loans today (1/7/16) at around 4.125%, only about 25 to 35 basis points higher than the low rates offered by life companies.  More importantly, the loan does not have to be absolutely perfect.  The building can be a little older.  The property could be in a smaller city.  The location doesn't need to be the single best location in the city.  Conduits can make loans in secondary locations.  Not every car driving by has to be a Lexus or a Mercedes.  CMBS lenders (money center banks and conduits) make about 23% in dollar volume of all commercial loans today.

By the way, a conduit is defined as a specialized kind of mortgage company that originates large, plain vanilla commercial mortgages for their eventual sale to a CMBS trust.  The word "conduit" is short for real estate mortgage investment conduit (REMIC).

Now we are finally able to discuss the point of today's training article.  There is a big problem with securitized commercial loans.  Securitized commercial loans include the CMBS loans being made by conduits, the subprime commercial loans made by Bayview Financial in the early 2000's, and the non-prime commercial loans being made by Velocity and Cherrywood today. The good news is that these securitized commercial loans have a very low interest rate and very low monthly payments.

The problem with securitized commercial loans is that they burden the borrower's commercial property for ten years - making the property difficult to sell and economically impossible to refinance.

Here's why: The buyers of commercial mortgage-backed bonds are insistent that these bonds have a fixed interest rate. The reason why is because life insurance companies and defined benefit pension plans need to know exactly what they are going to earn, so they can be sure that they have enough dough to meet their actuarial projections (a certain number of people die or retire every year).

Therefore securitized commercial loans have enormous prepayment penalties (sometimes almost impossible to believe). To make matters worse, they all prohibit junior financing

Let's suppose a borrower accepts a $6.8 million securitized commercial loan on a $10 million building. Six years later, the building is worth $13 million. Did you know that a prospective buyer would have to put $6.2MM (48%) down!  Remember, the seller is not allowed to carry back a second mortgage.  The purchase has to be cash-to-loan.  In other words, the buyer has to put enough money down so that there is only a first mortgage.

The alternative is equally unattractive.  The seller could simply suck it up and pay the prepayment penalty on his existing first mortgage.  But the problem here is that defeasance prepayment penalties are enormous.  In our example here, the seller might have to pay a $1.2 million defeasance prepayment penalty.

Either way - trying to sell a property when the buyer has to put 48% down or making the seller pay a $1.2 million prepayment pealty - yikes!

I would argue that bank commercial loans - or even private money commercial loans with no prepayment penalty - are much better than securitized commercial loans.  The interest rate and monthly payments will admittedly be higher, but at least the seller is not tied to a chair.

Many commercial loans are made to trusts.  How well do you really understand trusts?  Investopedia defines a trust as follows:  A fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.  [Yawn]  I am falling aslseep here!  C'mon, George, how about a jazzier explanation?

Suppose I am a filthy rich robber baron.  A robber baron is a popular finance expression to describe an unscrupulous American capitalist who acquired his fortune and power by ruthless means. Famous examples of robber barons include J.P. Morgan (banking), Andrew Carnegie (steel), Andrew W. Mellon (banking), and John D. Rockefeller (oil).  These are the guys who broke the heads of union strikers with bats and who used insider information and dirty deals to build their fortunes.

"Behind every great fortune lies a great crime." -- Honore de Balzac

As a filthy rich robber baron, I win the affections of a beautiful wife.  My wife is 25 years younger than me. She is gorgeous and loving; and she bears me three wonderful young children.  I adore her.  Unfortunately my sweet trophy wife is as dumb as a rock, and I worry about what will happen to her and our young kids when I die.  (I am not talking about my own beautiful wife, Cisca, who was once our company's Controller and who is far-far-FAR quicker than me.  I am talking about our imaginary robber baron with the daffy wife.)

Therefore, I, the filthy rich robber baron, go to Ron, my trusted friend of 45 years, and ask him if he will please manage my family's money after I die for the benefit my wife and kids.  He agrees.  In my will I set up a testamentary trust into which I transfer all of my bank accounts, stock accounts, real estate, and ownership of my companies.

In this story, the rich robber baron is the trustor or settlor (same thing) of the trust.  I set up the trust.  Hence the name, "settlor".  My trusted friend, Ron, is the the trustee.  The trustee follows my instructions contained in the trust agreement.  He does this to provide a comfortable living for my lovely widow (who is now dating our handsome chauffeur) and a college education for my kids (the last of whom looks an awful lot like the chauffeur).  My wife and kids are the beneficiaries of the trust.

Per the trust agreement, Ron invests all of my great wealth into a diversified portfolio of investment grade bonds.  An investment grade bond is defined as a bond rated BBB or better by Standard & Poors.  By the way, a great many (tons and tons of) trust agreements only allow the trustee to invest in investment grade bonds.  This is why a BBB bond rating is so coveted.  These bonds will provide the income for my hapless wife and our three minor children.

In my story, you will recall that I created this trust in my will.  Such a trust is called a testamentary trust, as in "Last Will and Testament".  Now such a trust is obviously irrevocable because - helloooo? - I am dead.  A trust that cannot be changed is known as an irrevocable trust.  

But a settlor or trustor (same thing) does NOT have to be dead to create an irrevocable trust.  A huge benefit of an irrevocable trust is that it provides substantial protection from creditors. Once assets are transferred to the trust, they no longer belong to the settlor; rather, they become the legal property of the trustee to hold for the beneficiaries.

For example:

Let's talk about me, George III (the old man).  I own a commercial hard money mortgage company, and I assemble syndicates of wealthy private investors to make subprime, commercial first mortgage loans.  Back in 2005 I saw the crazy loans that my industry was making, and I greatly feared that a deflationary depression was coming.  I had been warning my investors for a decade that real estate values were poised to take an enormous dive, but the exact timing was unknown.  I even wrote a book about it.  My biggest fear was that my investors would blame me for the Great Recession and sue me.

Now if I had enjoyed great wealth at the time (I didn't), I would have created an irrevocable trust (I didn't) for the benefit of my three wonderful kids that would have been beyond the reach of creditors.  They would have had money for college and a small downpayment on a house.  By the way, my frank and dire warnings, along with my alarming book, probably saved my company.  Blessedly I wasn't blamed.  Almost all of my hard money competitors were sued out of existence.

Now let's have some fun.  Suppose I - I'm back to being the rich robber baron - had woken up in the middle of the night, and I had wanted to grab one of my cigars hidden in the garage.  To my horror, I find my young trophy wife doing the wild thing with my chauffeur in the back seat of my big, black Mercedes.  (Remember, this is just a story.  In real life I drive an immaculate, ten-year-old, white Infiniti.) 

Furious, I divorce my wife and change my will.  At the advice of my attorney, this time I create a living trust.  A living trust, which is also known as intervivos trust, is a trust that can be modified during the lifetime of the settler (trustor).   The beneficiary of this living trust is my curvaceous secretary, with whom I have been having an affair for ten years.  The nice thing about a living trust is that if I ever catch her "kissing" the UPS guy, I can easily change my trust again.

A great many wealthy couples today hold title to their assets in the name of a living trust.  This has the advantage of avoiding probate.  For underwriting purposes, lenders simply ignore the existence of the living trust.  A lender is not going to ask for a copy of a financial statement on the living trust because, in most cases, its the exact same thing as the borrower's personal financial statement.  When the loan is approved, a commercial lender will ask for a copy of the living trust, or an abstract of the living trust, just so he can verify who has the authority to sign on behalf of the trust.  An abstract is just a one-page or two-page summary of the important terms.

I keep telling you guys, be on the lookout for the business card of a banker making commercial loans.  You can parlay that single card into a free list of 2,000 commercial lenders.  We solicit these bankers to refer their turndowns to C-Loans.com.

Are you a commercial loan broker?  If you are pre-registered on C-Loans.com, you are far more likely to enter your next commercial loan into C-Loans.

There has never been a better time to become a commercial mortgage broker.  More commercial loans are ballooning in 2016 than in any year in history.

Do you need a commercial loan right now?  When you use C-Loans.com, you fill out a single, super- short loan application.  You can then submit that one application to hundreds and hundreds of different commercial lenders to find that one lender who is hungry to make you a commercial loan today.

Girls are not attracted to boys who have the word, "Desperate", written across their forehead.  They are, however, VERY attacted to boys with a pretty girl on their arm.  It's the same thing with bankers.  If another bank is chasing you, suddenly the bank is VERY interested in making you a loan.  Why not go into your bank with a commitment letter from Blackburne & Sons already in hand?  We charge absolutely nothing to issue you a loan approval letter, and we'll happily issue it in just 48 hours.  We're big boys.  We know you're shopping us.  We also know that fickle banks leave a lot of commercial borrowers standing at the altar looking stunned.

Who makes land loans today?  Where is the best place to find a good land loan?  Will you or your borrower qualify for a land loan?  How large of a land loan can you get?  Today we answer these questions, as well as discuss inadequately capitalized developers.

In the years leading up to the Great Recession, real estate developers were making a fortune  developing raw land.  They would buy farmland or scrub land, get it re-zoned, complete the horizontal improvements, and then quickly sell off the individual home-site lots for a small fortune to home builders.  Horizontal improvements are defined as grading the property, bringing utilities to each lot, and putting in streets, sidewalks, curbs, and gutters.

At the time, commercial banks were making lots and lots of land loans and A&D loans.  An A&D loan is defined as an acquisition and development loan structured like a construction loan, where the construction budget includes the purchase price of the raw land, the hard costs of the horizontal improvements, the soft costs - including an interest reserve and sales commissions, and a contingency reserve of around 5% of hard and soft costs.

During the bubble in real estate prices leading up to the Great Recession, commercial banks were drinking the Kool-Aid and making A&D loans up to 70% of Total Cost.  Sometimes commercial banks were even going as high as 80% of Total Cost!  Insane.  No wonder there was a bubble.

You can guess how this story turned out.  The Great Recession destroyed the housing market, and land prices plummeted.  The banks foreclosed, the banks took huge loss, and Federal banking regulators slapped the snot out the banking industry for being so stupid.  Truly folks, the losses in land development lending were often 80% to 90%.

Why do we care?  Regulators have a long memory, and the absolute last loan that banking regulators want commercial banks to make today are land loans.  Therefore, unless a developer is as rich as Donald Trump and has a banking history with a particular local bank going back for 15 years, he is probably NOT going to be able to get a land loan or a land development loan from a commercial bank.

So who is making land loans today?  Answer:  Hard money lenders, like Blackburne & Sons.  Hard money lenders are true capitalists.  We'll make hard money loans, even when blood is running in the streets.  In fact, Blackburne & Sons was in the market making commercial loans every day of the Great Recession.

But you don't have to apply strictly to Blackburne & Sons.  On C-Loans.com there are at least 75 different commercial and land loan hard money lenders.  You fill out one short mini-app, check off six suggested lenders, and then press, "Submit."

Will you qualify for a land loan?  How large of a land loan will you be able to get?  During an average market, hard money lenders will typically only advance up to around 40% loan-to-value on raw land.  In a rising market like today, Blackburne & Sons, for example, is pretty bullish on land loans.  We'll lend up to 50% loan-to-value on land to a good-credit borrower, and perhaps up to 60% of the land purchase price on a land development deal to a well-capitalized, experienced, and good-credit borrower. We're probably not unique among hard money lenders in terms of our bullishness on land today (12/13/15).

Now we FINALLY get to the point of today's training article.  I would like my own executives and loan officers (Ed!!) to pay special attention to the point that I am about to make.  We at Blackburne & Sons often see developers applying for a land.  They want a loan of 50% loan-to-value, and their exit strategy is to pay us off with a construction loan.

But wait a minute.  In my last blog article I pointed out that real estate developers are usually required to cover at least 20% of the Total Cost of the project.  They usually do this by bringing the land to the closing table (almost) free and clear.  If a developer has a big mortgage on his land, he won't be able to bring the land to the closing table free and clear.  He will never qualify for a construction loan to pay off his ballooning land loan!

Now, of course, if the developer has a BIG net worth, he can sell off some property to come up with the equity required by the construction lender.  Many developers also have a stable of passive investors who invest the equity in their deals in return for a share of the profits.  Other developers are very experienced at issuing private placements in order to raise their required equity.

But absent one of these three potential sources of equity, the land loan underwriter needs to be very careful about making a big land loan to a developer who claims that his exit strategy is a construction loan.  In order to qualify for a construction loan, most developers are supposed to bring the land to the construction loan closing table pretty much free and clear.

Do you enjoy my down to earth style of instruction?  Now is the time to become a commercial mortgage broker.  More commercial loans are ballooning in the next 12 months than in any similar period in history.

Keep looking for a business card from a banker making commercial loans.  We'll trade you a list of 2,000 commercial lenders for the contents of that one business card.  We solicit these bankers to refer their turndowns to C-Loans.com.

Have you registered on C-Loans.com yet?  I am just talking about inputting your name, company, address, etc.  If you are pre-registered, you are far more likely to enter your next commercial loan into C-Loans.com.  If you pre-register, we'll give you a free $199 commercial mortgage underwriting manual.

Developers, now is the time to apply for a commercial construction loan.  Mortgage brokers, now is the time to resume brokering commercial construction loans.  The economy is pretty healthy, and commercial banks are hungry to put their $2.7 trillion in excess reserves to work.  By the way, if you want a commercial construction loan, you will want to apply to a commercial bank, rather than to a mortgage company.  Commercial banks make 98% of all commercial construction loans.  However, developers, you need to have some skin in the game.

One of my commercial construction loan officers called me yesterday.  He had a developer who is building a $33 million apartment building in Florida.  The developer is buying the land for $2.7 million, and he has a term sheet for a purchase money first mortgage for $1.7 million.  He wanted a second mortgage on his purchase of the land for $800,000.  Who out there immediately spotted this as a goofy loan request?

A term sheet is defined as a loan proposal or conditional commitment letter (same thing) from a commercial real estate lender.  Appraisals and toxic reports are so expensive in commercial real estate finance that borrowers want at least a moral commitment from the bank before shelling out $4,500 to $8,000 for these third party reports.  A term sheet is legally worthless, but in real ife it means that the borrower is probably going to get the loan at the proposed terms, as long as the third party reports come back okay.

Now back to my story.  Why was this a goofy loan request?  Answer:

1. No one makes second mortgages on land (other than sellers carrying back part of the purchase price).
   
   
2. The bank is going to insist that the developer contribute at least 20% of the total cost of the project.  Normally - but not always - this means that the developer has to bring the land to closing table (almost) free and clear.  More on this below.

Before we go any further, let's define a few terms.  The Total Cost of a commercial construction project is defined as the sum of the land costs, the hard costs, the soft costs, and the contingency reserve (normally equal to 5% of hard and soft costs).

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

The Loan-to-Cost Ratio is the most important ratio in commercial construction loan underwriting.  The Loan-to-Cost Ratio is defined as the Construction Loan Amount divided by the Total Cost, times 100%.

Loan-to-Cost Ratio = (Construction Loan Amount / Total Cost) x 100%

Example:  Let's suppose a developer wants to build a three-unit industrial center in Austin, Texas.  He needs a $3.2 million construction loan, and his total cost is $3.8 million.  What is his Loan-To-Cost Ratio?

Loan-to-Cost Ratio = ($3,200,000 / $3,800,000) x 100% = 84.2%

This ratio is too high.  Unless the developer can raise more equity, the loan will be turned down.

For most commercial construction lenders, the Loan-to-Cost Ratio must not exceed 80.0%.  In other words, the developer must cover at least 20% of the Total Cost of the project.  This kind of makes sense.  The bank doesn't want to take all of the risk.  The developer must stand to lose some serious dough if the project goes South.  The developer must have some skin in the game.

Okay, now let's go back to the goofy commercial construction loan request I cited at the very beginning of this training article.  You will recall that it was a $33 million apartment construction loan request.  Well, we know that the developer and his investors are probably going to be required to contribute 20% of the $33 million Total Cost; i.e., $6.6 million. 

Now the developer is buying the land for $2.7 million.  He has a term sheet for a $1.7 million new first mortgage, and on top of that, he wanted an $800,000 second mortgage.  In other words, he was only contributing a $200,000 downpayment on a $33 million project.  His Loan-to-Cost Ratio was 99.4%!  Somebody has been partaking of that Colorado medicinal tobacco.  Ha-ha!

Remember, most commercial construction lenders want the developer to bring the land to the deal free and clear, or at least pretty close to free and clear.  In most commercial construction deals, the land represents between 20% to 25% of the Total Cost, and that, along with architectural and engineering fees, is where most developers have spent their required equity.

Do you know a banker who is making commercial real estate loans?  We'll trade you the contents of one banker's business card for a list of 2,000 commercial real estate lenders.  We solicit these guys to refer their turndowns to C-Loans.

The vast majority of all large commercial real estate loans today are made to single asset, bankruptcy remote entities.  This article will explain why.

About 30 years ago a lowlife scumbag was climbing on the roof of a retail building in New York City, looking for a way to break in and steal some of the inventory.  The roof was old, and this poor-poor lowlife scumbag fell through the roof and was severely injured.  This lowlife scumbag then had the audacity to sue the property owner for $6 million for negligently having an older roof and not warning him of the danger of collapse.  The brain dead jury found for the the lowlife scumbag!

The property was not sufficiently insured for this kind of personal injury, and the older couple who owned the building held title in their personal names.  The lowlife scumbag was therefore able to seize the life's savings of this honest, hard-working, older couple.

After this astounding case, most commercial real estate investors transferred title to their properties into some sort of entity that had a corporate shield, initially a Subchapter-S corporation and later, after the limited liability company was adopted by the states in 1978, an LLC.

However, it wasn't enough to have title vested in an entity with a corporate shield, as the following imaginary story will explain.

Peter Printer owned the world's largest illustrated Bible printing business in the world.  His Bibles contained scores of full color illustrations, far more pictures than his nearest competitor.  Customers loved his Bibles, especially parents who read the Bible to their young children at night.  For thirty years Peter Printer made a wonderful income, and he invested his millions into a series of office buildings in Los Angeles.  He held title to both his successful printing business and his latest office building (he sold his smaller buildings and traded up) in the name Peter Printer Enterprises, LLC.

In 2017 Amazon came out with the Kindle VII, which allowed book printers to embed numerous short videos right into their e-books.  Clever Printing, LLC was the first Bible printer to embed short videos, scenes culled from scores of old Biblical movies, into their Bibles.  Their new Bibles were a smash hit, and Peter Printer's Bible sales plummeted.  Suffering from immense losses, Peter was even forced to use the rents from his investment property, the big office building, to prop up his Bible printing business.  He stopped making payments on his $8 million first mortgage from Statewide Regional Bank.

When Statewide Regional Bank stopped receiving payments, it filed foreclosure.  Ten days before the foreclosure sale, Peter Printer Enterprises, LLC filed a Chapter 11 (Reorganization) Bankruptcy.  For sixty days, Statewide Regional Bank was not allowed by the automatic stay of bankruptcy to do anything; but when the sixty days had run, the bank immediately filed a motion for relief of stay or, in the alternative, for the immediate appointment of a receiver to collect the $75,000 in rent generated by the beautiful, big office building.

To the bank's absolute horror, Peter's bankruptcy attorney was able to convince the bankruptcy court that the $75,000 per month in rent generated by the big office building was absolutely essential to Peter's plan of reorganization.  The company needed that $75,000 per month to pay the salaries of the printing company's employees while the company developed its own video-embedded Bible.  

For three years the bankruptcy court forbade the bank from foreclosing, during which time the leases of 70% of the tenants came up for renewal.  With no money to pay for repairs and upgrades to the office suites and no money to pay for leasing commissions, a Biblical Exodus of tenants ensued.  By the time the bank was finally granted relief from the stay, the building was severely rundown and almost empty.  The bank had originally made an $8 million loan.  It lost all of its interest income and limped home with just $5.25 million of its original principal.

Are you learning anything today?  This is how I teach commercial real estate finance.  I try to use lots and lots of "real-life" stories.  In the 200-year history of the industry, this year is the single best year to becomes a commercial mortgage broker.  More commercial loans are ballooning this year than any year in history.

What mistake did Statewide Regional Bank make?  They made a large commercial loan to an entity that that owned more than one asset.  They got caught up in the bankruptcy troubles of Peter's printing business.  The bank did not make a loan to a single asset, bankruptcy remote entity.  Had Peter, as a condition of the loan, transferred title to the large office building into a stand-alone LLC with no other assets, the troubles of Peter's printing business would not have delayed the bank's foreclosure.  The bank would not have taken a financial bath.

It amazes me that more people don't take advantage of the following offer.  Give us the contact info of a banker making commercial loans, and we'll give you a list of 2,000+ commercial real estate lenders.  2,000+ for one.  Helloooo?

Life insurance companies offer by far the lowest interest rates on large commercial permanent loans. You will recall that a permanent loan is just a garden variety first mortgage on a commercial property, with a term of at least 5 years and with at least some amortization, typically 25 years.

Interest rates on commercial real estate loans from life insurance companies are typically 25 to 37.5 basis points lower than those offered by conduits, and they are often only 25 basis points higher than the prime residential mortgage rate.  In other words, if an A-quality borrower can obtain a conforming, 30-year, fixed rate loan of 3.5% on his home today, a life company might make a 10-year, fixed rate, commercial permanent loan at around 3.75%.

In most cases, a borrower will NOT be able to obtain a new permanent loan from a life insurance company by applying directly to the life insurance company.

When you are the prettiest girl at the dance, lots and lots of guys want to ask you to dance. Screening twenty loan requests per day takes a lot of time. In addition, it doesn't make sense for most life insurance companies to open regional offices throughout the country, especially when the typical life company makes fewer than 30 loans per year.  Please note, however, that when a life insurance does make a new commercial permanent loan, it is usually a very large loan.

Therefore most life companies employ correspondents. A correspondent is a commercial mortgage company that has the exclusive right to make commercial loans in a given region for a particular life company. The correspondent does all of the site inspections for prospective loans in that region for that life company.

The correspondent then services the loan (collects the payments and handles any foreclosures) for that life company.  The amount of the loan servicing fee is tiny - typically just 12.5 basis points per year - but life insurance company loans are typically huge.  For example, 12.5 basis points on a $20 million loan is a healthy $25,000 per year.

As I mentioned in another recent blog article about life insurance companies, most borrowers and brokers could live three life times and never have a commercial loan attractive enough for a life insurance company.  Life insurance companies are looking for the following types of commercial loans:

1. The commercial loan must be secured by one of the four major food groups - which is just commercial mortgage lingo for (1) Multifamily; (2) Office; (3) Retail; or (4) Industrial.
   
   
2. The property should be either brand new or in pristine condition.
   
   
3. The property needs to be located in a primary location.  A primary location is one of the very best locations in a gateway city in terms of traffic count, accessibility, and affluence of the neighborhood.  In other words, a lot of Lexus'es, Mercedes, and BMW's need to be driving by.  You will rarely find a life company lending in a city of less than 400,000 residents.
   
   
4. The loan amount must usually exceed $5 million.  You will occassionally see life companies making commercial real estate loans as small as $3 million, but these small deals are usually made on properties leased on a triple net basis to some incredibly strong tenant, like Walgreens, CVS, Rite Aid, or some other national credit tenant.  A national credit tenant is a company rated BBB or better by Standard & Poor's.
   
   
5. Life company loans rarely exceed 55% to 58% loan-to-value.  They are designed for deals where the buyer is exchanging into the property with an enormous down payment.

Remember, if you were to call a life insurance company directly, the company receptionist will usually ask you for the location of the property and then refer you to the appropriate correspondent. Don't get a broken nose over this.  This is just how life companies originate their commercial loans.  They almost always use exclusive correspondents.

You can apply to a dozen different life company correspondents using C-Loans.com.