Commercial Loans and Fun Blog

I received the following email this week that I found extremely interesting and informative:

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Dear George,

Please save the date: Tuesday, May 19th, Exchange Bank and Upton Financial Group are hosting an exciting seminar for business owners and their advisors titled, “Utilizing SBA Financing Strategies for Business Acquisitions”

Possibly you and your clients might benefit from discovering some of the lesser-known ins and outs of using and structuring SBA financing to fund an ownership transfer to a family member · a sale to employees · selling to an outside buyer · or to fund a growth acquisition.  With one U.S. business owner turning 65 every minute, knowing how to use this source of capital, which can go up to $5 million dollars, to fund a business transition can be THE key to a successful transaction.

Upton Financial Group is honored to participate in this insightful presentation along with Exchange Bank, a locally recognized SBA lender for business acquisitions and transfers. Please see the invitation below for more detailed information regarding topics to be discussed. Please let me know if you can attend, I would enjoy seeing you there.

Sincerely,

David Ryan
Founder and President
Upton Financial Group, Inc.
www.uptonco.com
131-A Stony Circle
Santa Rosa, CA
Direct: (707) 523-9651

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Wow.  Think about this.  You can now earn loan fees on SBA loans - not just to finance the purchase of commercial real estate, but now also to acquire a business!

Remember what Dave said.  You can get an SBA loan today, up to $5MM, to fund an ownership transfer to a family member, a sale to employees, a sale to an outside buyer, or a growth acquisition (buying out a competitor).

I sense there is a lot of money to be made taking advantage of this little-known SBA loan program.

We paid our first broker this week on a closing where he brought us a bank and convinced them to join C-Loans.  He made $500 (under an older program).  Now you get a free training program immediately and $250 per closing.

This is the best time in my 40 years in the business to be a commercial mortgage broker.  There is a tidal wave of balloon payments coming due.  If only you knew what on earth you were doing.

My private money commercial mortgage company is starving for deals.

Got a deal that is much too perfect for private money?

Now for my weekly intelligence test.  Would you trade the contents of one banker's business card for a free directory of 2,000 commercial real estate lenders.  Hmmmm.  C'mon, Bubba, 2,000 for one?

You can now place business loans - not secured by real estate - with C-Loans.

The sales lesson that is today's blog subject applies to salesmen in just about any industry - be it commercial loan brokerage, commercial-investment property sales, or even car sales.  It sounds obvious - a salesman should call his leads quickly before a competing salesman reaches the customer first.  Duh.  As they say in the GEICO commercials, "Everyone knows that."

You would think so, but I just got off the phone with one of my loan officers, and I absolutely had to scream at him.  I gave him a world-class sales lead last night around 6:00 p.m., and when I spoke to him today around 4:30 p.m., he still hadn't call the lead.  Are you flippin' kidding me?!  I screamed so hard that my voice is now gone.  I mumble like the Godfather.  I'm  sitting here drinking wine at 5:00 p.m., just to calm my nerves and to keep from stroking out.  A salesman needs to call his leads quickly, before a competing salesman reaches the customer first.  Duh.  Everyone knows that.

Over the past 15 years I have invested around $1.5 million in our wildly successful commercial mortgage portal, C-Loans.com.  You have all heard me boast about the success of the site - over 1,000 commercial loan closings totaling over $1 billion.  What you don't know is that C-Loans has never paid one red cent for advertising.  We get all of our commercial loan applications from organic seaches - not from the paid advertisements that you see above and along side the search results.  C-Loans.com provides great content because at the time I was writing all of those articles to train my sons, I truly thought I was about to keel over from heart disease.  (Recently I got wonderful news on that front.) 

But it costs tons of money to run C-Loans.  Just to maintain the site costs me around $15,000 per month - not counting the improvements that we are constantly adding to the site.  Since the crash of 2008, last year was the first year we exceeded break-even.  Why would I be willing to lose $50,000 to $100,000 per year on a business for six straight years?  Because my hard money shop makes a ton of dough from the leads generated by C-Loans.

Wait a minute.  Blackburne & Sons is certainly one of the cheaper commercial private money lenders, but no private money commercial lender can compete with a bank.  And there are 450 to 500 different banks and credit unions participating on C-Loans.  How can Blackburne & Sons compete against these banks for commercial loans?

Now we have reached the point of today's blog article.  Success on C-Loans is all about being the first lender or broker to reach the borrower.  After that, the borrower stops returning phone calls.  (Please re-read those last two sentences.)  This is arguably the most important lesson we have to teach our participating banks.  It's all about calling commercial loan leads quickly.

My loan officers (except for the learning-disabled loan officer described above) have all learned to call their C-Loans leads quickly - immediately - even if they have a million distractions on their desk.  As a result, we have been consistently out-selling the sleepy, salaried loan officers at the bank.

The reality is that sales leads seldom come in when its convenient.  Leads come in when your kid is sick or just when you are about to take your beautiful girlfriend out for drinks.  Leads usually come in at the most inconvenient time.  The successful loan officer fields his lead calls immediately, even if it is extremely inconvenient.

Once a borrower has sent you a loan package - or once the buyer has signed a contract to buy the commercial-investment property - or once the car buyer has signed a contract to buy the car - he's not going anywhere.  Sure, you want to give the customer great customer service, but ultimately most of us are on commission.  Each of us needs to close sales, and the first salesman to reach a customer usually makes the sale.  So when a lead comes in, drop everything and work the stinkin' lead!  This way your Sales Manager doesn't stroke out, and you get to eat next month.  (I've just finished my third glass of wine, and I am mellowing.  I have decided to simply shoot my loan officer, rather than roast him slowly over a spit.  Sixteen hours to call a great lead?  Hmmm.  Maybe just a couple of hours over a spit first...)

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Everybody always looks at me as this great commercial real estate finance (CREF) guru, but it took me 35 long years to learn this business.  Remember, there were no nine-hour training courses in commercial real estate finance when I first started in this business.  Anyway, I still learn several new concepts about commercial loan brokerage almost every week.

I subscribe to an absolutely wonderful bi-monthly email publication called FinFacts by George Smith Partners.  As advanced in the industry as I am, these guys make me feel like a rookie.  These guys close the really large commercial loans.  (Don't be greedy-stupid.  Take a modest but numerically large referral fee!)

The folks at George Smith Partners are both life company correspondents (anybody out there remember 'ole George telling them that the real money in the commercial mortgage business is in loan servicing fees?) and commercial mortgage bankers for the really large commercial loans.

Anyway, in one of their newsletters this month, they used the term, "on-book capital providers".  So I asked my buddy, Bryan Shaffer of George Smith Partners, "What is an "on-book capital provider?  Is it the same as as a portfolio lender?"  

Bryan kindly responded:  "Yes. Using their own balance sheet. So, the same as a portfolio lender. Maybe a balance sheet lender may in the future sell the loan, but at least for now they are holding on their balance sheet. I only point this out because it not uncommon for balance sheet lenders to use docs that allow them to sell their loans into a pool in the future. Also today, several CMBS lenders use their balance sheets to do bridge loans that they hope to convert to a perm CMBS when it is ready."

Thanks, Bryan!

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I spent $50,000+ (in early-1980's dollars) on my Bachelor's Degree in Business and another $25,000 (in mid-1980's dollars) on my MBA.  I would do it again, but what really made me dough was learning commercial real estate finance (CREF).  Would you invest a lousy $549 and nine hours of your life to learn one of the most hoity-toity of all professions?  Only the rich own commercial properties.

Idiot-rookie commercial mortgage brokers think that it's all about finding the cheapest rate and the best commecial loan terms for their commercial mortgage borrowers.  The old veterans - who close most of the big commercial loans - understand that the borrower, most of all, needs money.  At Blackburne & Sons, we will issue a Loan Approval Letter (often within 36 hours) for free!  The rates offered by most banks sound fabulous, but they turn down most deals.  Suddenly the timely offer from Blackburne & Sons looks awfully attractive.  This is how the old veterans got to be old veterans.  They first get a Loan Approval Letter  from Blackburne & Sons, and then they approached nearby banks saying, "These private money guys want to make me a commercial loan, but you can beat these these stinky 'ole terms, right?"  It's human nature.  Everybody wants to make you a commercial loan when another lender has made you a serious offer.

Got a deal that clearly needs to be closed by a bank, conduit, or life company?

Here's my intelligence test.  Would you trade the contact information of one loan commercial real esate loan officer working for the seventh largest bank in Iowa for a list of 2,000 bankers across the U.S. making commercial real estate loans?  Hmmm.  Tough decision.  (Guys, the only reason I make this grossly-favorable offer is because 95% of all commercial mortgage brokers - not my trainees - will move on to another industry within two years.  If you have decent smarts, this will probably be the single best business deal you will make in your lifetime.)

You can now place business loans - loans NOT secured by commercial real estate - using C-Loans.  The super-nice thing about business loans is that they can close within twelve days, not four months!

What is a gateway city?  The term is all the rage in commercial real estate lending.  The largest banks only want to make commercial loans in these gateway cities.

If you look up the definition of "gateway city" on the internet, you'll get the following definition:  "Airport or seaport that serves as the entry point to a country by being the primary arrival and departure point." Under this definition, only Los Angeles, San Francisco, Miami, and New York qualify.  Clearly there is more to the term than that.  Commercial lenders are not limiting their commercial loans to just these four cities.

I've heard of other definitions of "gateway cities".  It's the cities with football teams.  Hellooooo?  Oakland, St. Louis, and Baltimore all have football teams.  If you were a commercial real estate investor, would you really want to own commercial property in one of these high-crime, high-drug-use cities?  In fairness, as to cities, the Most Improved Player Award would go to Oakland, California.  Rents in Oakland are rising sharply, as San Francisco Peninsula rents rise towards the stratosphere.

I have one more topic to consider as we develop a more realistic definition of "gateway city".  In Janaury of 2010 George Friedman published his landmark book, The Next 100 Years.  I consider it one of the most important books that I have ever read.

In his book, The Next 100 Years, Friedman advances the proposition that new industries are created when young men and women from Industry A meet for lunch, dinner, or drinks with young men and women from Industry B.  A young executive from Industry A happens to mention over drinks that, "Did you know that our company just figured out how to toggle a widget into the on and off position at the molecular level?"  Then the young executive from Industry B says, "Oh my goodness!  Do you realize that with that molecular switch we could do XYZ?  Would you be interested in forming a spin-off?"

Obviously the more people in a city, the more likely that such an important discovery will be made.  The more top-level universities in that city, the more likely that two well-educated young executives will hook up.  Bottom line:  Big cities full of educated young people are where new industries are most likely to be created.

Therefore, from the point of view of a commercial real estate lender, a gateway city is a large city, containing a number of first-tier universities, where young, ambitious executives are not afraid of getting shot.  These are the cities where new industries are most likely to be created and where new workers are most likely to be hired.

All it takes is for you to run across just one bank or credit union making commercial real estate loans.  You can then parlay that contact information into a databank of over 2,000 bankers making commercial real estate loans.

A tidal wave of commercial loans are coming due in 2015, 2016, and 2017.  The next two-and-a-half years will be the most profitable years in history for most commercial mortgage brokers.  Would you invest a lousy $549 to actually know what on earth you're doing?  Do you even know what a mezzanine loan really is?

The idiot, young commercial mortgage broker thinks its all about finding cheapest the cheapest commercial mortgage loan for his borrower.  The old veteran understands that his client needs money.  Sure, all else being equal, the borrower would prefer a cheaper rate; but ultimately his client needs money.  Helloooo?   The client needs money.  Therefore the old veteran will always submit this commercial loan to Blackburne & Sons.  The wonderful folks there will issue a Loan Approval Letter for free.  Then, if the bank leaves the borrower standing at the altar looking stupid, the broker can always say, "Maybe we should take the offer from Blackburne & Sons.  There is no prepayment penalty."

Okay, I'll admit it.  The lovely young actress who stars in Cinderella probably doesn't want to kiss stinky old George.  Any banker in town will take her to the ball.  Fabulous movie!!  I've seen it twice now, once with my lovely bride and granddaughter and once with my daughter.  Got a bankable deal that is waaay too good for stinky old Blackburne & Sons?

The world doesn't realize it yet, but three years ago Congress passed the most important piece of economic legislation since the Great Depression of the 1930's.  It's called the JOBS Act.  Both commercial brokers and commercial mortgage brokers can now use this new legislation to cheaply and easily raise money for their ventures.

First let me define the problem.  For the past seventy years it has been unnecessarily difficult for company owners and syndicators to raise investment money.  A businessman or syndicator could either register his new investment offering with the SEC - at a cost of 18 months and $300,000+ in legal and accounting fees - or he could quickly and cheaply do a private placement offering under Reg D.

The problem with a Federal Regulation D offering, however, was that the company or syndicator was not allowed to do any public advertising.  This meant no TV ads, no newspaper ads, no mass mailings, no flyers, and no Google ads.  The sponsor could only make the offer to friends and wealthy acquaintances with whom he had a prior personal or business relationship.  Hence the term, private offering.  The result was that it has been extremely difficult for small businessmen and real estate investors to raise equity.  Heaven only knows how many more new businesses would have been formed in America without this burdensome restriction.

Then the Great Recession hit.  Few have any idea how close the U.S. economic system came to failure.  In my opinion, former Fed Chairman Ben Bernanke is as much a national hero as Patton or MacArthur.  Eventually many of the greatest economic minds in our country gathered around a conference table and brain-stormed about how to get the U.S. economy rolling again.

"Hey, guys, you know what might really help new companies form and hire new workers?  What if new companies and new ventures could raise equity much more easily?  Hedge funds can easily raise money because they are allowed to publicly advertise to accredited investors.  Let's allow businessmen and syndicators to publicly advertise, as long as they take careful steps to make sure that each and every investor is accredited.  After all, accredited investors are rich.  Even if an accredited investor is personally clueless, he can afford to hire a CPA or attorney to check out the investment."

And so the JOBS Act was passed on April 15, 2012.  The acronym stands for Jumpstart Our Business Start-ups.  Under this act, companies, syndicators, and developers are now allowed to publicly-advertise to accredited investors to invest in their venture.  The big commercial brokers - like CBRE and Marcus & Millichap - are already using the JOBS Act to sell commercial real estate.  No longer do you have to buy the whole property.  Now you can just invest $100,000 in a new LLC formed to buy and operate the property.

But what about commercial mortgage brokers?  How can a commercial loan broker use the JOBS Act?  For one thing, a whole new class of hard money lenders is appearing on the scene.  These new hard money lenders raise their lending dough by syndicating a different group of accredited investors for each new loan.  

There is absolutely no reason why YOU can't start syndicating private investors and funding your own commercial loans.  I have been telling you for years that the real money in the mortgage business is in loan servicing.  Remember, you can always hire a subservicer to do the actual work of loan servicing.  You charge your investors $400 per month to service the loan, and then you pay the subservicer $50 per month to do the actual work.

But where are you going to find rich investors in invest in your loans?  Helloooo?  Aren't you a commercial mortgage broker?  Aren't almost all of your borrowers rich?  An investor is an investor.  The same guy who owns commercial real estate is the same guy who owns stocks, bonds, and first trust deeds.  Don't most of your commercial mortgage borrowers already have large IRA's or pension plans with money just earning 1% to 3% in bonds?  Folks, this is easy ... and the average commercial hard money broker makes five times more per hour than the average commercial loan hack.  After all, when you own a hard money shop, you are Loan Committee.

Got a commercial loan that is not quite perfect?  Is your client's commercial property partially vacant? 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 drop-dead gorgeous deal that is much too perfect for a private money lender?

Because of all of the commercial mortgage loans ballooning in 2015, 2016, and 2017, the commercial mortgage brokerage business may have the brightest prospects of any profession in the U.S. right now.  If only you actually knew what on earth you were doing...

I laugh to myself whenever I make the following offer - to trade 2,000 commercial real estate loan officers working at banks for just one of yours.  Turning down this offer is like saying to Giselle, "Its true, Giselle, that I'm not in a committed relationship right now, but I'm also not interested in taking you out to dinner after Tom Brady dumped you.  You'll have to find someone else to console you."  Really?????  BTW, I heard that on photo shoots Mrs. Brady (now retired) is one of the sweetest, most humble ladies you could ever meet.  Nice.

You can now place business loans - like equipment loans, inventory loans, etc. - using C-Loans.

We just paid our first $500 commission to a mortgage broker who convinced a banker buddy to join C-Loans as a lender!  I am so excited.

The most helpful business book that I have ever read is Robert Ringer's 1973 New York Times #1 Best-Seller, Winning Through Intimidation.  In fact, I remember flipping through a Playboy magazine - just reading the articles - when I came across a photo of a party at the Playboy Mansion.  There was Robert Ringer, sitting in a hot tub with two beautiful, topless Playboy bunnies.  Wow, was I ever envious.

Before we go any further, I want to stress that the "intimidation" that Robert Ringer was talking about was NOT physical intimidation.  He was NOT talking about employing brown-shirted Nazi thugs to browbeat people.  What he was really talking about was flamboyance - intentionally creating the impression that he was important, powerful, and a person not to be trifled with.

The really interesting thing about this book was that Robert Ringer was a successful commercial real estate loan broker.  What a coincidence!  Here the author writes a #1 best-selling business book, aimed at the general business audience, but all of the horror stories about how he repeatedly got screwed in business were from his experiences as a commercial mortgage broker.  Talk about relevant!

Robert Ringer - through his humorous war stories - teaches us that there are only three types of people in this world - the type of person who will cheat you out of your loan fee, the type of person who will tell you in advance that he will cheat you out of your loan fee and who will then proceed to cheat you out of your loan fee, and the worst type of of all, the type of person who will swear to high Heaven that he won't cheat you out of your loan fee and who will immediately proceed to cheat you out of your loan fee.

Mr. Ringer will teach you about Legal Man, the caped crusader trained in law school to intentionally kill deals on the two yard line.  He will teach the Expert From Afar Rule.  He will teach you many of the countless ways his commercial loans were killed or he was screwed out of his commission.

But then he will teach you how to put on a show that will impress your borrowers and convince them that you are this big, invaluable expert.   He once walked into a commercial loan closing with two attractive female assistants - one to carry his typewriter (this was long before computers) and the other to carry his briefcase - all so his hands would be free and to create the impression that he was far too important to carry a case.  He was just a loan hack, but he was a clever one.  (Know anyone else who comes across as this powerful expert in commercial real estate finance, but who, in reality, is short, chubby, and far from all-knowing?  Hint:  He is often seen in a dark blue suit and maroon tie.)

Robert Ringer gets screwed out of his loan fee so many times that he eventually starts bringing his own attorney to commercial loan closings.  Remember, he's not a fund manager or even the owner of a hard money shop.  He's just a loan broker!  The lender brings his attorney to the closing.  The borrower brings his attorney to the closing.  In past years, the two attorneys would often conspire to whittle down the size of Robert's fee; but not anymore.  You'll learn all about the Attorney-to-Attorney Respect Rule when he brings his own attorney to the closing.

Robert Ringer often charged five to six points on $5 million hard money loans, so the fees he was protecting were pretty large.  I don't really expect you to bring your own attorney to a closing.  Personally I solved the cost of an attorney by becoming one myself.  I was sooooo fed up with being cheated.

But the story illustrates an important point about business.  If you don't come from a position of strength and if you don't protect yourself, opposing businessmen everywhere will remove special parts of your body.  Robert Ringer called such surgeries, "commission-dectomies", and anesthesia was never administered  You will be immensely wiser (and richer) after having read this book.

My friends, outside of the Bible, I can think of no more influential book on my success in the commercial mortgage business than this book.  I've read it at least three times.  I am making my two sons read it, and I am docking one of them $50 if he doesn't finish it by next Monday.  I am not getting paid to hawk this book.  It's just a book that you abstitively posilutely need to read.  As us attorneys often say, the book is right on point.

The other day I received an email flyer from a commercial broker trying to sell an apartment building.  The commercial broker boasted that this potential investment offered a whopping cap rate of 14%.  The first thought that passed through my head was that this property was almost certainly in a war zone.

It's very hard for commercial mortgage brokers to close commercial real estate loans in war zones.  Few commercial lenders want to make commercial real estate loans in high-crime-rate, high-drug-use neighborhoods, if for no other reason than the justifiable fear that a vacant, foreclosed commercial property may be quickly vandalized and stripped of its copper.  (Been there, suffered this far too often.)  Therefore the wise commercial loan broker will be sensitive to any clues that might tip him off that he is unlikely to get paid for his hard work on a deal.

You will recall that a cap rate is simply the return on his money that an investor would earn if he paid all cash for an income property.   It's the Net Operating Income (NOI) from a rental property divided by its Purchase Price (times 100% to express the decimal as a percentage).

For example, suppose a five-plex generates $37,432 in annual Net Operating Income.  An investor pays $730,000 for this five-plex.  To compute the cap rate, simply divide $37,432 by $730,000.  The result is 0.051.  If you multiply this decimal by 100%, you get an answer that is easy to understand - 5.1%.  In plain English, the investor will earn an annual 5.1% return on his money.

Okay, if you were an investor, and all the properties were roughly similar, would you rather earn 5.1% on your money or 14.0%?  Uh... is this a trick question?  Obviously, if all else is equal, investors would greatly prefer to earn the higher return on their money.

But what if you personally had to collect the rent every month, and people were being shot down on a regular basis in that neighborhood?  "Oh.  In that case, I'll take the 5.1% return rather than the more dangerous 14.0% return.  The extra 9% return may not be worth dying for."

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True Story:  Thirty years ago I am doing a site inspection on an apartment building in San Jose.  I stepped back to capture more of the building in my camera.  As I did, my foot slipped in a mud puddle... except it wasn't mud.  It was a pool of congealed blood from a fatal knife fight the night before!  The victim's bloody handprints were even visible on a nearby car, as he slid to his death.  Eeuuuu!

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Therefore, when I saw the 14% cap rate on that apartment building being marketed, my first thought was, "I'll bet this is a high-crime-rate, high-drug-use area."

Here's another concept I learned only this year.  Just like poor-credit car buyers often have to pay much more for cars than good-credit car buyers, apartment renters in the ghetto often pay more per square foot in rent than far more affluent folks in middle class areas.  Here's why:

Renting an apartment on the safer, more affluent side of the tracks requires a steady job and good credit.  A great many ghetto residents lack a steady job and good credit, so they don't qualify.  They therefore have to  live in an apartment where poor credit will be accepted.  It is ironic, but often apartments in the poorer areas of town will rent for more money per square foot than those in the rich areas.

In defense of the landlords, collection losses from poor-credit renters are often very, very high - as much as 30% to 40% of the scheduled rent.  New tenants may pay their rent for a few months, but then they often stop paying.  These poor-quality tenants next live in the apartments rent-free for 90 to 120 days, as the eviction process slowly inches its way through the courts.  When they finally leave, they often cause far more property damage than the size of their meager security deposits.

The landlords therefore have little choice but to charge poor-credit renters a sizable rent premium.  A 2-bedroom, 1 bath apartment might rent for $800 per month in a safe, middle-class area.  The same-sized apartment might rent for $975 per month in the ghetto.

Therefore, whenever you are working on a commercial loan, be very careful of properties that sell for high cap rates or which have impressive-looking debt service coverage ratios.  These properties may be located in neighborhoods where the landlords are charging a big rent premium.  Such properties may have impressive rent rolls, but the landlords seldom collect more than 60% to 70% of their scheduled rent.

If you're the typical commercial loan broker, you work 100% on commission.  Right or wrong, commercial lenders will look for any legal excuse not to lend in high-crime-rate, high-drug-use neighborhoods.  When you get a commercial loan on a property selling at a very high cap rate or which cash flows unusually well, you are on notice.  This commercial property is probably in a high-crime-rate, high-drug-use area.  This commercial loan will be hard to place.

Commercial loan demand is both seasonal and predictable.   Busy Season for commercial loan originators starts around September 15th and ends by late November.  Forty percent of all of the commercial loans closed by Blackburne & Sons each year are originated during the brief two months of Busy Season.  This is why we have a two-month stretch, like retailers during Christmas Season, during which vacations are prohibited.

Why does the commercial loan business have a Busy Season?  By the middle of September, summer vacations for the family are over, and the kids are back to school.  It's then time to get down to business.  Commercial real estate investors have balloon payments to refinance and more expensive commercial-investment properties to acquire, if for no other reason than the need for more tax shelter.

The second busiest time for commercial loan demand begins around the third week in January, and this brisk period continues for the next 70 days or so.  Why then?  Christmas Season is over, the family has gone home, and the Christmas decorations have all been boxed and packed away.  Its once again time to get down to business.  Commercial real estate investors need money to pay their income taxes, to expand their own businesses, or to buy other properties.  They can often get at some cash by refinancing their existing commercial buildings.

Commercial loan demand also has its Slow Season.  For commercial loan originators the pickings get pretty slim beginning around April 1st.  This lasts for about 40 days.  Why is commercial loan demand so weak during Slow Season?  The weather turns beautiful in April, and who wants to mess around with reams of paperwork when the sun is shining and the birds are singing?

This brings us to the point of today's training lesson.  There will be predictable times in the commercial mortgage business when commercial loan demand is going to be really, really slow.  You certainly don't want to just sit there twirling your thumbs.  A commercial loan officer can only process so many commercial real estate loans per year, if for no other reason other than he runs out of working hours.  If you let precious working hours slip away, you can never get them back.  That income-generating potential is lost forever.  So what's a boy to do?

This is why I am a huge fan of list advertising.  I started out 35 years ago sending out by snail mail thousands of newsletters printed on legal-sized sheets of copier paper.  My newsletters were simple and basic, but they worked pretty well.  Then I moved on to fax broadcasts, which worked cheaply and effectively for ten years.  Today I use fun email newsletters, complete with lots of jokes, funny pics, interesting videos, and training lessons in commercial real estate finance (CREF).  Maybe in the future I'll move on to video emails or talking avatars.  Who knows?

But my point is that I will probably always be a big proponent of list advertising.  By amassing a big list of buddies and contacts, I have a tool I can use to adjust the volume of my incoming loan applications.  When I'm buried, I can stop sending out newsletters for a few weeks.   When business slows down, I can double the frequency of my newsletters.  This way I can always keep our loan officers busy, without totally burning them out.

"But George, I don't have a marketing list."  Then use the next few weeks - they are going to be slow - to start building your list of contacts.  It's a slow process.  I almost never throw strangers on my list.  I only add those guys or ladies whom I meet in the regular course of business.  They either visit our website, write to me, or call into our office for a commercial loan.  But once I meet a good contact - you, for example - I try to maintain that friendship for the rest of our mutual careers.  There are several hundreds guys on our newsletter lists who have been my business buddies for over 30 years!

Doubling your newsletter volume doesn't always work.  Twenty-five years ago I remember calling my personal mentor - Bill Owens of Owens Financial Group - and complaining about the market being incredibly slow.  Bill is a huge fan of deep sea fishing, and I remember him saying, "Sometimes, George, all you can do is to go fishing."

Once again, thank you in advance for any social media atta-boys you can throw me, like Facebook Shares, Twitter Re-Tweets, Linked In Shares, and Google Plus-Ones.  Got any employees or industry buddies who might enjoy this training lesson?

Are you the employee or friend who was just forwarded this article?  (Thank you to the sender!)  About five years ago I started writing this blog to train my two wonderful sons in commercial real estate finance.  I was afraid I might suddenly keel over from my bad heart.  Suprisingly, I'm still kicking, but twice a week I still try to write another training article about commercial real estate finance for my sons and good friends.  It's free training in a very lucrative field.  Why not subscribe?

A huge wave of commercial loans will be maturing over the next three years.  Those commercial mortgage brokers who actually know what they are doing will make the windfall of their lives.

No one ever listens to me.  The real money in real estate finance is in loan servicing.  I know what you're thinking.  "OMG!  I don't know how to service a loan!"  Hellooooo?  My beautiful bride and I serviced our first 30 loans by hand using payment books from the title company.  Or you can just cheaply hire a sub-servicing company for $20 per loan per month.  You charge your investors $1,000 per month to service the loan (its actually your deferred compensation for originating the loan), and then you hire a sub-servicing company for $20 per month.  Is there intelligent life out there?

If you know just one banker who is making commercial real estate loans, you can parlay that information into a list of 2,000 commercial real estate lenders.  Don't want to give up your precious contact at the bank?  Then just buy the list for $39.95.

In the 2,000-year history of commercial real estate finance, there has never been a single commercial mortgage broker who has not been cheated out of a $15,000+ commission by a borrower who either lied about his qualifications or who unjustifiably cancelled his loan request after the broker had devoted scores of hours to processing it.  When you get really-really mad, don't commit mayhem or murder.  Instead invest a lousy $199 and actually learn how to economically collect your justly due commissions.  

The following commercial mortgage marketing course is one of my greatest works.

Got an "A" quality (best rate) commercial loan request that is far too good for Blackburne & Sons?  C-Loans.com is a free commercial mortgage portal, where borrowers and brokers just like you have closed over 1,000 commercial real estate loans.  Last year one of our brokers closed an $18.5 million commercial construction loan using C-Loans, and he earned himself a $92,500 commission.  Could you use $92,500 right now?

A few years ago we had the pleasure of calling up Alan Dunn of SpyderCube and informing him that the link  to C-Loans that he had placed on his site had worked.  The borrower had visited Alan's site while Alan was asleep.  We paid Alan $21,250.

I'm sure that you already know a great deal about commercial bridge loans, but I hope to add even more to that knowledge today.  If you are a commercial broker - a commercial real estate broker or salesman - today's training article will be particularly helpful.  By the way, it is the custom and practice in the industry to call commercial real estate salesmen "commercial brokers", even if these salesmen are not technically licensed as real estate brokers.

A bridge loan is a fast commercial real estate loan used to bridge a short period in time.  Years ago bridge loans were also known as swing loans, although this term has fallen out of common usage.  Typically bridge loans have a term of just 6 months or one year, but many bridge loans also provide for a 6-month or a one-year extension upon the payment of an additional 1/2 point to 2-point extension fee.

Bridge loans are used to bridge some short period of time.  Here are some examples:

1. Suppose a commercial property investor has listed his office building for sale, but the building hasn't sold yet.  In the meantime, the investor suddenly needs dough, perhaps to inject cash into his business.  A fast bridge loan solves his problem.
   
   
2. One of the unfortunate features about conventional commercial real estate loans is that they have balloon payments.  A conventional commercial real estate loan is a loan that is NOT guaranteed by the Federal government (SBA loans, USDA B&I loans, and FHA/HUD apartment loans are all guaranteed by the Federal government) or that is NOT guaranteed by a government sponsored entity (GSE's include Fannie Mae, Freddie Mac, and Ginnie Mac).  Since most conventional commercial real estate loans have balloon payments, what often happens right before the property is due to be refinanced?  Too often an important tenant moves out of the building!  Suddenly the property won't qualify for a bank refinance.  A bridge loan pays off the ballooning loan and gives the property owner six months to one year to find a new tenant.
   
   
3. Suppose a commercial property is well located, but it needs to be renovated, beautified, and re-leased at a higher rental rate.  The commercial property owner doesn't want to place a new fixed-rate permanent loan on the property yet because currently the rents are low.  For example, based on current rents, the property might only carry a $900,000 new permanent loan.  However, if the owner renovates the property and makes it look more modern and pretty, he might be able to rent it out for a much higher rental rate and qualify for a $1.5 million new permanent loan.  Who remembers the definition of a permanent loan?  A permanent loan is a first mortgage loan, with a term of at least five years, and which has some amortization (usually based on a 25-year schedule).
   
   
4. Bridge loans are often used to cover the cost of tenant improvements - those special improvements to the space required by a new tenant, like dividing walls, new paint, new carpet, bathrooms, etc.  Once again, the owner can't put a new permanent loan on the property yet because the space isn't yet occupied and because most new fixed-rate permanent loans today have a very painful prepayment penalty.

Bridge loans are designed are designed to bridge a gap in time but NOT a gap in the capital stack.  A lot of new commercial loan brokers mistakingly believe that if their client is trying to buy a commercial building for $1 million, the bank is only willing to make a $700,000 new permanent loan, and the buyer has just $150,000 (15% of the purchase price) to put down, that they need a bridge loan to bridge the $150,000 shortfall (15% of the purchase price).  No-no-no.  A bridge loan does NOT bridge a gap in the capital stack.  In most cases, only additional equity will bridge that gap.  Think of equity as the lender's protective cushion.  Someone else gets to lose a ton of dough (the entire downpayment) before the bank loses its first penny.

But this brings up an interesting question.  Is it possible to obtain a second mortgage bridge loan?  In the old days, there were lots of hard money lenders making second mortgages on commercial properties.  Most of these guys were wiped out in the commercial real estate massacre of 1986 to 1991, when commercial real estate fell by 45%.  The commercial second mortgage industry never really came back after that.  Most commercial bridge loans these days are therefore first mortgages.

Blackburne & Sons has a superb commercial bridge loan program.  We charge only one point, and our bridge loans have no prepayment penalty.  I am aware of no other private money bridge lender in the entire country who charges just one point.

I am always very grateful for your social media atta-boys, like Facebook shares, Twitter Re-Tweets, Linked-In shares, and Google Plus One's.  It's not possible for me to thank each one of you personally, but please know that these atta-boys inspire me to write and train again.  You can also now forward my commercial training articles to your co-workers, employees, and friends.

Did you just find out about this wonderful, free training in commercial real estate finance because a friend kindly forwarded this article to you?  Want to be sure that you'll never miss another free training lesson?

So you're a guy, you're single, and Jennifer Anniston walks up to you and says, "I'm feeling lonely tonight.  Want to go get a coffee with me?"  Best offer you'll ever get in your lifetime?  Nope.  The following offer is even better.  Ha-ha!  

I have a buddy, Les Agisim of TCRM Financial, who describes A-quality commercial loan requests as best rate deals.  If you have a best rate commercial deal sitting on your desk, a deal that is far too good for a private money lender like Blackburne & Sons, and this deal needs to get done by a life company, a conduit, or a bank, I urge you to submit it through C-Loans.com.

Don't forget that you can now close business loans - rather than just commercial REAL ESTATE loans - through C-Loans.

Are you wise?  If so, you will submit a copy of every small (less than $2 million) commercial real estate loan that you work on to Blackburne & Sons.  At NO COST, we will issue your borrower a Loan Approval Letter.  Go ahead and also submit your deal to a half-dozen banks in search of a best rate quote.  Banks issue great quotes; but they turn down a ton of great commercial loans for the goofiest of reasons.  If the bank leaves you standing at the altar looking stupid, you will be VERY grateful to be able to fall back on Blackburne & Sons.

The next three years promises to be the most profitable time in the history of commercial real estate finance for commercial loan brokers.  This assumes that you actually know the business.

If you don't lay awake at night dreaming of the day when you will enjoy $40,000 per month in loan servicing income, then you are missing the whole point of being in the mortgage business.  It's the loan servicing income, silly!  Last month Blackburne & Sons closed $4.5 million in loans.  This means that starting next month, we will earn an extra $7,500 per month in passive income for the next five years.  Helloooo?  Anyone catch the word, "extra"?  It's the servicing income, silly!

Wish you had a spigot that you could turn every time you needed more commercial loans?

Wish you could afford one of my training courses?

Seventy-five percent of the time when a developer calls a commercial mortgage broker to help him place a commercial construction loan - that deal is NOT do-able.  Why?  Because the developer doesn't have enough equity in the deal.  He doesn't have enough skin in the game.

"Gee, George, how can you make such a blanket statement like this?  How could you possibly know that the developer doesn't have enough equity? Are you the Great Oracle of the Indiana Cornfields?"

Answer:  Banks love-love-love to make commercial construction loans, assuming the world needs what the developer is trying to build - like more office space in San Francisco.  Banks love to make construction loans because they are short term loans and because they very profitable.  Why are construction loans so profitable?  Because the bank immediately earns one to two points up-front on the entire loan amount, even though the developer's first draw might only be for a few thousand dollars.

Therefore any developer with half a brain calls a local bank long before he calls a mortgage broker.  And if the banks wants to make construction loans, yet it turns the deal down anyway, there has to be a reason.  Ninety percent of the time that reason will be because the developer doesn't have enough of his own - or his partners' - money in the deal.  Rather than try to raise more equity, he tries a mortgage broker.

Therefore, if you are a mortgage broker, the first thing you have to do, before you waste a lot of time, is to determine if the developer has enough equity in the deal.  But what counts towards the developer's equity?  It is the sum of the following:

1. The developer's cash down payment on the purchase of the land.
   
   
2. It does NOT include the principal and interest payments on the land loan used to buy the land.  Payments on a land loan don't add value to the project.  In theory, a developer is supposed to pay cash for the land.
   
   
3. But definitely include any appreciation in the value of the land since the buyer purchased it, either because of time (maybe the developer wisely bought the property in 2009 at the bottom of the market) or because of the happening of some external event, such as the completion of a freeway off-ramp on the subject strip or the opening of a nearby Wal-Mart.
   
   
4. Any increase in land value due to a zoning change or use change.
   
   
5. Any increase in value of the land due to assemblage.  Sometimes an assembled parcel is worth far more than the sum of the purchase prices of the various parcels.  Imagine a developer who is able to buy six ugly, old rental houses along a busy strip and combine them into a site large enough for a modern new strip center (called a mini-mall in Southern California).
   
   
6. Any monies already expended for architect's fees.
   
   
7. Any monies already expended for engineering fees.
   
   
8. Any monies already expended for legal fees, especially when used to get the zoning or use changed.
   

So how much equity is enough?  Generally a developer has to cover 20% of the total cost of a project.

Don't forget, when you are computing the Total Project Cost, to include such Soft Costs as the Interest Reserve, any loan points, appraisal fees, toxic report fees. structural engineering reports, plan check fees, and utility hook-up fees.  Any of these fees that are prepaid count towards the developer's equity in the project.

Remember, the developer, or his equity partners, must contribute at least 20% of the Total Project Cost.  If the property is a business property, such as a hotel, restaurant, or marina, the developer may have to contribute 30% to 40% of the Total Project Cost.

If you learned something today, would you kindly give me a social media doggie treat, like a Facebook Share, a Linked-In Share, a Twitter Re-Tweet, or a Google-Plus atta-boy?  It's how I can judge whether or not our readers are digging these articles.  Thanks so much!

Got some loan agents working for you or some buddies who are also in commercial brokerage or commercial mortgage brokerage?  It would be terrific if you would please forward this training article to them.  And if someone was indeed kind enough to forward this article to you, you can sign up to receive these free training articles in commercial real estate finance by going to our blog and typing in your email address below my rump-ugly picture.  :-)

When I teach commercial real estate finance, I try hard to use simple terms (baby language), lots of repetition, and tons of examples.  Although I ended up graduating from law school with honors and passing the California Bar on my first attempt. I also remember driving my law school instructors absolutely crazy with questions.  "I'm sorry, Judge, but I don't get it."  So my training courses are intentionally aimed at folks of average intelligence (like me).  I truly believe the best thing you can do for yourself in this business is to take my classic 9-hour training course.  Countless successful brokers have sought me out at trade shows to shake my hand and thank me for this course.  Heck, I expected to be dead by now (heart problems), so I created this program with great care to train my two wonderful Eagle Scout sons after my death.  God bless modern medicine!  Ha-ha!

If you put two plastic bottles into a recycling container you get to take the lovely Jennifer Aniston out to dinner.  (If you haven't seen the Jennifer Aniston movie, We're the Millers, you are missing a true treat.)  The recycling bottles deal is the only deal on Earth better than the following.

C-Loans is now placing business loans, rather than simply commercial real estate loans.

How would you like to be able to turn on a flow of commercial loan applications like turning on a faucet?  Hey guys, do you think that I really get to live near my daughter's $45,000 per year high school because I am so handsome and charming?  Helloooo?  Look at the picture.  It's because I am a master marketer, and everything I do is repeatable.  My son, George IV, has taken my marketing course, and he is emerging as even more effective marketer than me.

Do you sometimes look at my marketing courses and say, "Gee, George, I don't doubt that you can teach, but I don't have any dough."  I'll give you the training course of your choice if you convince a bank to join C-Loans.  This is no big deal, guys.  Just send them the link to this sales page.  Duh.  Bankers are getting pressure today from their bosses to make commercial loans and SBA loans.

I don't get you guys.  You are so focussed on saving the borrower 1/2% on the interest rate that you forget that the borrower's business actually needs money.  If they had money right now, they could triple it in 18 months.  And you're risking everything to try to save them 0.50%?  Really?  Are you retarded?  Blackburne & Sons will issue your client a Loan Approval Letter for free!  We're thrilled to do this because we know that 60% of the time your best bank will leave your borrower standing at the altar looking stupid.  Your borrower needs money!

A handful of well-trained commercial mortgage brokers are about to make a fortune originating commercial construction loans over the next few years.  There are three reasons why this is true.

1. There has been almost no new commercial construction in the U.S. for the past eight years.  The U.S. needs a few more commercial buildings in certain areas - like office space in San Francisco and multi-use industrial space in many of the nation's gateway cities (jokingly described as cities with football teams).
   
   
2. Commercial construction loans are large, so the mortgage broker's fee will be large.  One point on a $4 million commercial construction loan is a handsome $40,000.
   
   
3. Banks love to make commercial construction loans because they are very profitable.  The bank earns one point ($40,000) to two points ($80,000) upfront on the entire loan amount (say, $4 million), even though the first draw or disbursement to pay for the demolition and grading might only be for $37,000.  Construction loans are also short-term loans.  Banks greatly prefer short-term loans.

Commercial construction loans can also be an enormous waste of time for mortgage brokers, if you don't know how to quickly separate the wheat from the chaff.  An untrained commercial loan broker could easily originate two dozen large commercial construction loans and never close a deal.

The reason why is because the vast majority of developers don't have enough equity or skin in the game.  They want the bank to take all of the risk.  The problem for beginning and intermediate level commercial mortgage brokers is that they can spend dozens of hours packaging a commercial construction loan, when the deal never had a chance in heck of closing from the start because the deal lacked enough equity.  Over the several blog articles, I intend to teach you how to quickly determine if a commercial construction loan has enough equity.

If a commercial construction loan does close, it is almost always made by a garden-variety commercial bank.  You'll recall that a commercial bank - as opposed to an investment bank or a merchant bank - is just a bank that accepts deposits and makes business loans.  The word "commercial" is just a fancy term for "business".

Construction loans have to be disbursed in stages; otherwise the developer could just skip town with his Barbie doll girlfriend and the bank's $4 million.  The bank will therefore insist on making frequent progress inspections to ensure that building is being constructed according to the plans and specifications.  Of all of the various types of commercial lenders - life companies, conduits, commercial banks, credit unions, and hard money lenders - commercial banks are the ones best equipped to issue a number of smaller disbursement checks.

Since construction loans need to be disbursed in stages, after frequent progress inspections, it follows that commercial construction loans are made by local banks.  It wouldn't make sense for a Chicago bank to make a $4 million commercial construction loan in Dallas.  You can't keep putting an inspector on a plane to Dallas every ten days.  It's not economically feasible.

Okay, so an $8 million commercial construction loan falls in your lap.  Do you accept the loan brokerage assignment.  Well, let's underwrite the deal.  To underwrite a commercial construction loan, you need to apply a number of tests and ratios.  We will cover each of these tests or ratios in more detail in upcoming blog articles:

1. Loan-to-Cost Ratio.  Is this deal less than 80% loan-to-cost?  Does the developer have enough skin in the game?  Most deals will fail this test.
   
   
2. Loan-to-Value Ratio.  When completed and leased out (stabilized), will the construction loan be less than 70% to 75% of the property's fair market value?
   
   
3. Debt Service Coverage Ratio.  Will the finished property, when leased out and stabilized, generate enough net operating income to give the takeout lender his required 1.25 debt service coverage ratio?
   
   
4. Debt Yield Ratio.  This ratio is new, and it is different from the debt service coverage ratio.  This ratio is typically only used for commercial loan requests larger than about $5 million to $10 million.  If the borrower defaulted on his first payment and the construction lender immediately foreclosed, will the leased and stabilized property produce a cash-on-cash return to commercial construction lender of at least 8% or higher?
   
   
5. Experience of the developer.  Has the developer built and managed a number of similar buildings almost this large?  Be sure to ask for a curriculum vitae ("CV").
   
   
6. Is the project ready to be financed?  Does the developer have his final working drawings?  Can he show you an architect's rendering?

We will cover each of these subjects in more detail in the coming weeks.  

If you learned something today, would you kindly give me a social media doggie treat, like a Facebook Share, a Linked-In Share, a Twitter Re-Tweet, or a Google-Plus atta-boy?  It's how I can judge whether or not our readers are digging these articles.  Thanks so much!

Got some loan agents working for you or some buddies who are also in commercial brokerage or commercial mortgage brokerage?  It would be terrific if you would please forward this training article to them.  And if someone was indeed kind enough to forward this article to you, you can sign up to receive these free training articles in commercial real estate finance by going to our blog and typing in your email address below my rump-ugly picture.  :-)

Do you need a commercial construction loan right now?  You can submit your application to hundreds of different hungry commercial construction lenders in just four minutes using C-Loans.com.  We recently closed an $18.5 million commercial construction loan on the mixed use project in Wisconsin seen below.  The mortgage broker who used C-Loans.com earned a $92,500 loan fee:

So please click here to enter your commercial construction loan.

Get a free directory of over 2,000 commercial real estate lenders here:

Because an enormous tidal wave of commercial loans are maturing, the next three years are likely to be the most profitable years for commercial mortgage brokers in the history of the industry.  This assumes that you know what you are doing:

We will pay you to recruit lenders for C-Loans, plus give you a free training course of your choice.

Have you delivered a $2.5 million commitment leter - representing a $25,000 fee to you - and had the borrower cancel yet without justification? This happens many times to every experienced commercial mortgage broker. Gotten really mad yet?  Had thoughts of violence?  Don't go to jail.  Get paid instead.

How would you like to have a faucet that you could easily turn on any time you needed more commercial mortgage leads?

C-Loans now offers business loans, as well as commercial real estate loans.