Commercial Loans and Fun Blog

I recently encountered one of my own commercial loan officers at a commercial mortgage conference, and I was horrified at the way he was dressed.  You may recall that I personally live in Indiana (to be close to my daughter attending Culver Girls Academy), while the office of Blackburne & Sons, along with almost all of our employees, is located in Sacramento, California.  Therefore I don't personally get to see my own commercial loan officers very often.  Below is the image that I hoped our commercial loan officers would project:

Anyway, at an important conference of senior commercial bankers, one of my own commercial loan officers was wearing a tacky-looking, shiny, light-gray business suit.  His "modern" or "trendy" suit had three buttons, instead of two, and he had all three buttons buttoned.  To top off his hideous light-gray suit, he was wearing light-brown (blonde leather) shoes and matching belt.  Oh, my goodness.  This guy was representing our investment banking firm?

Folks, appearances matter in commercial banking, investment banking, and commercial mortgage banking.  In commercial mortgage lending, we deal in transactions often involving millions of dollars.  If you were a Senior Vice President of a bank or life insurance company, would you have a lot of confidence in a commercial mortgage broker dressed in a polyester suit from Sears?  Like it or not, if you want to succeed in this business, you have to dress for success.

Business suits should be either Navy blue, dark gray, or charcoal.  Black suits are inappropriate for business (too somber), but they are far better than light-colored suits.  Light-colored suits may be appropriate for a date with your girlfriend, if you live in Miami or San Antonio (a hot climate), but they are almost never suitable for selling to bankers.

Green suits make white guys look sickly and are never acceptable.  I've seen some black guys who looked quite decent in green suits ... but these guys were still "out of uniform".  Banking has a certain uniform.  Brown suits and green suits are definitely NOT a part of this uniform.

Solid-colored suits are good, and pinstriped suits are even better.  The closer the pinstripes, the richer the suit.

Some rich-looking (not too busy) plaid suits are acceptable, but they're tricky.  You don't want to look like a used car salesman.  If you do wear a plaid suit, make SURE you wear a solid-colored tie.

Regular 100% wool suits are greatly preferred for trade shows in New York and Boston.  Worsted wool is acceptable for trade shows in San Diego and other warm climates.  Worsted wool is not as hot or as heavy as 100% wool for warmer climates.  But remember, never-ever-EVER wear light-colored suits to meet bankers - even if the light color is gray.  Below is a handsome (darker) color of worsted wool.

A business suit should never shine.  My commercial loan officer's suit shone like a polished car.  Like I said, I was horrified.  And it goes without saying that you should never wear a polyester suit.  Even though my commercial loan officer's suit was actually worsted wool, and not polyester, his suit looked like it was polyester.  The suit below is both too light and too shiny.

Your leather (shoes and belt) should match, and they simply must be either black or a deep, dark cordovan (dark reddish-brown).  Brown shoes are never acceptable with blue or gray suits.  The below shoes are cordovan.  I personally prefer wearing black leather because its easy to get the color of an acceptable cordovan wrong.  The closer to a dark wine color, the better.  The shoes below are a little too brown for my taste.

Your tie should be either blue, burgundy, gray, or gold when meeting bankers.  The gold color below is just about perfect.

Your tie should be either solid-colored, striped (just two or three colors), and or have a small regularly-repeating pattern.  The smaller the pattern, the richer the tie.  I like both the color and the small, regularly-repeating pattern on the below tie.

Paisley ties are also a surprisingly traditional and conservative form of acceptable tie for selling to bankers.  I guess all of the bankers of my generation secretly wanted to be hippies.  The hippies got all of the pretty girls.  :-)

A "rep tie" is a striped tie that "represents" the colors of the fancy university or prep school that you attended.  Never wear a striped tie / rep tie with a plaid suit or a pinstriped suit.  Rep ties are nice with solid-colored suits.

Let's talk about the three-button business suits that I see many young commercial loan brokers wearing.  My first thought when I see a young man at a commercial mortgage conference wearing a trendy, three-button suit is, "He's obviously just a low-level employee.  I only want to talk with his boss."

Remember the Golden Rule.  "Them that's got the gold make the rules."  The guys who have the gold are the guys of my generation (early sixties), and we wear dark blue or dark gray suits with just two buttons.  You want my gold?  Dress to please me, not your hot girlfriend.

"Gee, George, you were awfully dogmatic about what my uniform should look like."  Sorry, but commercial banking has a uniform.  Get used to it.

I used the term commercial banking above.  A commercial bank is just a garden-variety bank that takes deposits and makes loans, as opposed to an investment bank or a merchant bank.

An investment bank is a company that sells stock or membership interests in an LLC in order to raise equity dollars (as opposed to loan dollars).  Equity dollars are a form of risk capital.  The investors who contribute the equity dollars actually own all or part of the venture.  They are the guys who hit a home run if the investment is successful or get wiped out first if the investment goes south.

And if anyone ever tells you that he is a merchant banker, 99.9% of the time he is either a con man or a liar.  Merchant banks - in real life - are just fairly small offices owned by bank holding companies or life insurance company holding companies that use the profits of their bank or life insurance company to make investments in high-risk, high-reward ventures, like providing real estate developers with the equity dollars they need to build a large projects.

Our private money commercial mortgage company is hungry for commercial loans.

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So your loan client has a $2,000,000 commercial loan that just ballooned, but the largest refinance any bank has offered you is $1,750,000.  You're $250,000 short.  We'll cover your shortfall.

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Today we are going to teach you how to underwrite a $50 million commercial construction loan.  You will learn the six ratios that a bank underwriter will use to determine whether or not to approve your commercial construction loan request, and we are going to do this using understandable, layman's English.

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

After the commercial real estate meltdown of 2008 and during the Great Recession, commercial banks had a zero appetite for conventional commercial construction loans.  By conventional, I mean non-SBA, non-USDA, and non-EB-5 loans.  In plain English, conventional here means ordinary, garden-variety commercial construction loans.  In an earlier blog post I wrote that conventional commercial construction loan requests were as welcome during the Great Recession as a male stripper at a (hetereosexual) bachelor party.  Ha-ha!

For six long years, there was very little commercial construction in the U.S.  In the meantime, many vacant and neglected commercial buildings have had their water pipes burst during a cold winter, making them essentially now almost worthless.  Other vacant commercial buildings have been vandalized and stripped of their copper wiring.  The roofs of other vacant commercial buildings have leaked, leading to dangerous black mold.  A great many productive commercial buildings became unusable.  They disappeared from the country's stock of available commercial buildings.

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

Therefore the hottest new commercial loan product right now is a conventional commercial construction loan.  And where do you find hundreds of commercial banks hungry to make conventional commercial construction loans?  C-Loans.com.

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

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

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

The next ratio is the loan-to-value ratio.  The loan-to-value ratio on a commercial construction loan request is computed by taking the construction loan amount and dividing it by value of the commercial property, when it is completed and fully-leased.  The bank's appraiser will compute this value for you.  The loan-to-value ratio on a commercial construction loan request should not exceed today around 70% to 75%.

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

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

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

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

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

[Editor's note:  This article was updated August 25, 2016]

Do you need a commercial construction loan or any other type of commercial real estate loan?  If so, please click the maroon button below.

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

This article is important to you because someday you may really-really need a portfolio commercial lender willing to make a non-recourse commercial loan.

Finding a non-recourse commercial real estate loan is far more legally sophisticated than merely finding a commercial lender "foolish enough" to make a commercial loan to a borrower who wants to reserve the right to simply walk away from his obligation.  Sometimes there are important legal reasons why a commercial loan simply must be a non-recourse loan.  We'll discuss some of these important legal reasons further below.

First of all, however, what is a non-recourse commercial loan?  A non-recourse commercial real estate loan is a loan that is NOT personally guaranteed by the borrower.  If the real estate investment goes bad, the borrower can usually simply walk away from the property.

There are around seven to ten common exceptions, known as carve-outs, to this basic rule.  If the borrower commits certain Bad Boy Acts - fraud, intentional waste (taking a sledgehammer to the walls), toxic contamination, placing a second mortgage on the property without permission, failure to maintain fire insurance on the property, failure to pay the real estate taxes, misappropriation of a condemnation award or any fire insurance proceeds, or certain criminal acts by the borrower - then many non-recourse commercial loans becomes a full-recourse loans.  The borrower becomes personally liable.

However, absent the commission of some Bad Boy Act by the borrower, a commercial lender cannot come back after the borrower for a deficiency suffered as a result of making a non-recourse commercial real estate loan.  A deficiency is a loan loss left over after the property is sold in foreclosure.

Obviously commercial lenders are not crazy about the idea of making non-recourse commercial loans.  In fact, since the Great Recession the vast majority of all commercial banks making portfolio commercial loans today absolutely insist on a personal guarantee by the borrower.

A portfolio commercial loan is a commercial loan that the lender intends to keep in its own portfolio, as opposed to a commercial loan that the lender intends to later sell off in the secondary market.  CMBS lenders and ABS lenders (subprime commercial lenders who sell their scratch-and-dent commercial loans to Wall Street pools) are examples of commercial lenders who are not portfolio lenders.

Bottom line:  Since the vast majortiy of all commercial loans made today are made by commercial banks and credit unions, non-recourse commercial lenders are fairly rare.  If you happen to meet a commercial lender - like Blackburne & Sons - who is willing to make a non-recourse commercial loan, be sure to make a note of it.

Okay, so when is it legally necessary for a commercial loan to be non-recourse?

1. Let's suppose you own a commercial property in your IRA.  You may not legally personally guarantee your commercial loan from the bank without running afoul of the IRS.  Personally guaranteeing your IRA's commercial loan, in the opinion of the IRS, lowers the interest rate to your IRA and is a form of disallowed contribution. (Code Section 4975(c)(1)(B))
    
2. Commercial loans to Tenant-in-Common (TIC) investments must be non-recourse; otherwise the investments lose their tax-deferred qualification.
    
3. Certain irrevocable trusts have a trustee who is separate from the beneficiary, such as a family attorney serving as the trustee for the minor child of a deceased client.  If a balloon payment comes due on a commercial property owned by the irrevocable trust, the trustee certainly isn't going to be willing to guarantee some $800,000 new commercial loan.

I have been in the commercial loan business for over 34 years now, but I still learn more about commercial real estate finance ("CREF") almost every day.  This week I learned a new commercial loan term:

Burn-Off:

How can a small balance commercial construction lender like Blackburne & Sons make sure that its money is being properly spent on improving the property and that the owner-borrower is not over-spending the budget fixing unforeseen deficiencies that were discovered after the sheetrock came down?

Now I know all about construction control companies.  Using a construction control company does not solve my problem.  The problem is that there is seldom a detailed set of plans for the renovation work proposed.  To make matters worse, there is no contract with a general contractor to which my lending documents can refer.  Therefore the construction control company has nothing against which to gauge the project's progress.

For example, what exact work is to be performed in apartment number twenty-six?  What are the costs and the specifications of the materials to be used to renovate apartment number twenty-six?  Is there enough money remaining in the construction budget to renovate each apartment?

Yesterday I received an email advertisement from a commercial loan company offering senior stretch financing.  Huh?  I've been making commercial loans for 34 years now, and even I was thinking, "What on earth is senior stretch financing."

Fortunately, Michael Hoffenberg, Founder and Managing Principal of Trevian Capital, was kind enough to explain it to me:  "George, instead of the borrower obtaining both a garden-variety CMBS first mortgage and a separate mezzanine loan from a different lender, senior stretch financing is one loan priced similar to the blended rate of the first and the mezz."

Confused?  Let me translate this from commercial mortgage-ese into English.  As you know, a permanent loan is simply a commercial loan in a first mortgage position that has some amortization (usually based on a 25-year amortization) and a term of at least five years.  Because of the massive commercial loan losses suffered by most commercial lenders during the Great Recession, most permanent lenders today will not exceed 60% to 65% LTV.

Sixty-three percent loan-to-value financing is simply not enough leverage for most commercial real estate investors.  Therefore, the modern trend is for the investor to record a mezzanine loan from another lender simultaneously with his new permanent loan, thereby bringing the capital stack up to, say, 75% loan-to-value.  (I'll translate this into English for you too in just a minute.)

What is a mezzanine loan?  A mezzanine loan is not a real estate loan.  It's not a mortgage.  A mezzanine loan is a personal property loan secured by the stock* of the corporation* that owns the real estate.  If you own 100% of the stock of the corporation that owns a huge office tower in New York City, then you own the office tower.

By the way, personal property is defined as anything that is not real property - such as cars, boats, furniture, sewing machines ... or fifty shares of stock in IBM.

* To keep this article simple, I will be using words like "stock" and "corporation".  In real life, most large commercial properties are owned by a single-asset limited liability company ("LLC").  In an LLC, the ownership units are called membership interests, but its easier to just think of membership interests in an LLC as shares of stock in a corporation.

Okay, we said above that a mezzanine loan is simply a personal property loan secured by the "shares" of the "corporation" that owns the property.  Why not just make a garden-variety second mortgage?  Because it takes far too long to foreclose!  It once took Blackburne & Sons over 17 months to foreclose a mortgage in New York.  Yikes!

In stark contrast, you can execute (foreclose) on personal property in just a matter of weeks.  Think about your car - another form of personal property.  If you missed your car payments, would the bank wait 17 months to pop (repossess) your car?  Heck, no!  They'd catch you in less than six weeks, going to the bathroom at McDonalds, and drive away with your car before you got back.  In my youth I used to pop cars.  It was scary ... but very exhilarating.  You never know if you're going to get shot or cracked open by a baseball bat.

So using mezzanine financing, a junior lender can pop a $100 million office tower in less than two months.

Okay, before we finally reach senior stretch financing, let's look at how the Big Boys might finance the purchase of a $100 million office tower.  Some conduit lender might make a $63 million CMBS first mortgage at, say, 4.5%.  Then a separate finance company might make a $13 million mezzanine loan, bringing the total amount of outside financing - the capital stack - up to $75 million.  The buyer would then put $25 million down.  

The interest rate on the $13 million mezzanine loan might be 12.5%.  Twelve-and-a-half percent interest sounds horrible, until you think about the $63 million first mortgage that the buyer gets to enjoy at just 4.5%.  The borrower's weighted-average cost of funds is only around 5.95% - a historically very low rate.

Now we are finally ready to talk about senior stretch financing.  Some portfolio lender might look at this deal and say to himself, "Gee, the buyer is putting down $25 million.  He's not gonna just walk away from the property.  If I make just the first mortgage, I am only going to earn a lousy 4.5%.  But if I stretch my loan amount to the full $75 million, I'll bet I could get this borrower to pay me a whopping 5.95%.  It's a good deal.  I'm gonna stretch on my first mortgage and just eliminate the need for any mezzanine loan at all."

And that, folks, is senior stretch financing.  You can apply for senior stretch financing by simply using C-Loans.com and asking for a large first mortgage.

But folks, exotic loans like mezzanine loans and senior stretch loans are for the Big Boys.  Most mezzanine lenders have a minimum loan of $5 million, which means the underlying first mortgage is probably going to be at least $12 million.  Therefore, unless the property you are trying to finance has a purchase price of close to $20 million, structured finance is not going to help you.  Structured finance includes mezzanine loans, preferred equity, venture equity, and senior stretch financing.

Fortunately there is a solution.  Blackburne & Sons is the only small balance preferred equity provider in the entire country.  We will make preferred equity investments as small as $100,000 - which allows small investors to buy small commercial-investment properties.

How would you like a wonderful directory of over 2,000 hungry commercial real estate lenders?  You can get it here free!

Are you a commercial loan broker?  We give away a lot of free stuff here:

This article will teach commercial loan brokers where to go to find lots of commercial real estate loans.  It will also teach commercial real estate brokers (sales brokers) about some great new commercial real estate finance tools - really cool stuff - that will make it easier for them for them to sell or buy commercial real estate.

Recently I have been urging my commercial loan officers to agressively solicit commercial brokers (commercial real estate sales brokers) for commercial loans.  Commercial brokers are a great source of commercial loans.  Here's why:

Each active commercial broker probably knows at least 15 active commercial real estate investors.  When I say commercial real estate investors, I am talking about wealthy investors who own two or more commercial-investment properties.

You will recall that a commercial-investment property is a fairly standard kind of income property where the investor's profit comes from passive rental income, as opposed to operating a business.  Examples of commercial-investment propety include apartments, offfices, retail, industrial, and mobilehome parks.  Examples of business properties include restaurants, motels, bowling alleys, self storage, and assisted living facilities.

Okay, so suppose a commercial broker knows 20 investors, and each investor on average owns three commercial-investment properties.  Therefore that single commercial broker is connected to 60 commercial-investment properties.  

Now the thing about commercial properties is that every five to ten years the property has a balloon payment coming due.  Remember, the vast majority of all commercial loans have a term or either 5 years or 10 years.  Balloon payments keep commercial loan brokers in business.

Five years ago Broker Bill helped Investor John buy a rental office building.  They used a five-year commercial loan from the bank.  Now that commercial loan is ballooning, so Investor John calls Broker Bill and says, "Hey, Bill, would you please help me refinance my ballooning commercial loan?"

Now Broker Bill would prefer not to be bothered; but he wants Investor John's future business, so he says, "Sure."  Now Broker Bill is stuck.  He has volunteered to play commercial loan broker, and he's not even going to get paid for it.  Then your email arrives, offering Bill expert commercial loan brokerage assistance.  You're like the cavalry, which comes charging to the rescue in an old John Wayne western movie.  Broker Bill can turn Investor John's situation over to you and wash his hands of the affair.

Now, you commercial loan brokers, we're almost done.  Commercial brokers, your goodies are about to arrive.

Finally we come to the most important lesson of this training article.  The vast majority of all veteran commercial brokers own at least one commercial-investment property of their own!  Therefore, when you advertise to commercial brokers for commercial loans, not only do they have lots of clients who need commercial loans, but commercial brokers often need commercial loans themselves.

Okay, now here are the goodies for commercial brokers:

You have a web site, right?  How would you like to earn a $21,250 referral fee in your sleep?  C-Loans.com, our commercial mortgage portal (think of it as the LendingTree of commercial real estate finance), once paid Alan Dunn of Spydercube.com a $21,250 referral fee because he put a link to C-Loans.com on his website.  An investor saw his "Commercial Loans" link, clicked on it, came to C-Loans.com, applied for a commercial loan, and closed the deal.  I am not really sure if Alan was actually asleep when all of this ocurred, but he certainly could have been.  Makes for a great story.  :-)  Interested?  Please click below.

This next product is way cool.  Suppose you have an investor wishing to buy a non-owner-user commercial-investment property.  He wants to put down just 25%, but the bank refuses to go any higher than 60% LTV.  The bank won't even allow the seller to carry back a second mortgage!

Blackburne & Sons is the ONLY small balance preferred equity provider in the country.  We will contribute equity dollars - not loan dollars - and increase your buyer's downpayment from just 25% to the 40% required by the bank.

Let's suppose you have a listing on a strip center.  It's been four months, the seller needs cash, and your listing is about to expire.  He probably won't renew.  Why not get him a 6-month commercial bridge loan for just one point?  There is no prepayment penalty.  Relieved from his money pressure and grateful for your help, the investor renews your listing.

Do you have an investor-client in need of an "A" quality commercial loan?  Using C-Loans.com, you can submit your commercial loan to 750 different commercial lenders in just four minutes.  And C-Loans.com is free!

Wish you had a big list of hungry commercial lenders?  Get one for free here.

Our commercial hard money mortgage company, Blackburne & Sons, is making a really interesting commercial loan this month.  We are making a $1.6 million loan to the owner of two large apartment buildings so that the owner can take advantage of a discounted pay-off (DPO) being offered by the bank.

Now the really interesting thing about the deal is that the bank would not discount the four existing  commercial loans that it has with the borrower ... directly to the borrower.  They agreed to sell the four notes and mortgages to Blackburne & Sons at a discount, but not to the borrower.  Huh.  Kinda odd ... but whatever.  We get to make a nice loan fee on the deal.

So this complicated escrow will go as follows:  Blackburne & Sons, in escrow, will buy the four mortgages.  Then we will simultaneously sell these four mortgages to the borrower at a discount (they total around $2.3 million) using a brand new blanket loan of $1.6 million on both apartment buildings.

This deal is what is known as a brainer deal, as opposed to a no-brainer deal.  A no-brainer deal is a commercial loan that is so obviously good that the lender doesn't even have to think about it.  You should make a note that Blackburne & Sons is owned by a real estate attorney with 34 years experience in commercial mortgage finance.  If your commercial loan is fundamentally excellent, but the deal is just a little complicated (a brainer deal), we may be the perfect commercial lender for you.

Now we finally get to the point of today's article.  One of the four mortgages that we are buying in escrow is an open-ended mortgage.  An open-ended mortgage is a commercial loan with no fixed loan amount.  The bank might loan the borrower $600,000 to start with and then increase its loan amount to $2 million at a later date.  Junior lenders are put on notice, by the language in the mortgage, that the senior lender could increase its loan amount to $17 bazzillion without losing its seniority position.

Open-ended commercial mortgages are extremely rare.  I haven't seen one in almost two decades.  Open-ended mortgages are a lot like commercial lines of credit.  A line of credit is a form of debt where the borrower can borrow a certain amount of money, pay some or all of it back, and then, as the borrower needs it, borrow the money right back again, up to a certain loan amount.

The difference between a line of credit and an open-ended mortgage is that a line of credit has a fixed, maximum loan amount.  For example, the borrower might be authorized to draw down as much as $200,000 - but no more than that.  On an open-ended mortgage, the bank - at the bank's option - can increase its loan amount to $17 bazzillion, without recording a new mortgage and while maintaining its senior position.

But now let's talk about commercial lines of credit.  In home loan finance, home equity lines of credit are as common as dirt.  Surprisingly, in my 34 years in commercial real estate finance (CREF), I have never seen a bank offer commercial real estate lines of credit to the public.

Now a bank might offer a business line of credit, partially secured by a second mortgage on the borrower's owner-user commercial property, but banks almost never make such loans for anyone other than good bank customers.

A good bank customer is a company that keeps large deposits at the bank.  For example, Blackburne & Sons is a good bank customer because we service about $50 million in hard money commercial loans.  Our loan servicing trust account (not our money) contains, on average, well over $400,000.  The bank loves us because it doesn't have to pay a dime in interest for those trust  deposits.  Therefore, if we ever applied for a commercial line of credit, the bank might make us the loan, secured by our little office building in Indiana; however, it would almost never make such a loan to the public.

Bottom line:  If you are a commercial mortgage broker, you're never going to earn a big loan fee trying to broker a commercial real estate line of credit.  Unlike residential lenders, commercial lenders do NOT make commercial real estate equity lines of credit to strangers.

Finding a lender for a commercial loan secured only by land is pretty hard these days.  Many commercial lenders are still sitting on huge portfolios of land upon which they foreclosed during the Great Recession.

There is one kind of land, however, that is infinity financeable.

Actually there are two types of land upon which it is fairly easy to obtain a commercial loan.  The second type is farmland.  Farmland is a hot commodity right now.  Farmland in Indiana, for example, has tripled over the past seven years.  My own commercial loan company, Blackburne & Sons, loves to finance corn farmland.

But the subject of today's lesson is commercial out-parcels or pad sites (same thing).  An out-parcel is a small lot at the outer edge of a shopping center, usually reserved for later sale to a fast-food outlet or a chain restaurant; also called a pad site.

Usually there is a large shopping center on some busy commercial strip (thoroughfare).  Further back from the strip is the grocery store or the Wal-Mart, and well as some inline retail units.  Right on the actual strip, however, are several building pads that are ideal for a fast-food or a chain restaurant.  Please look carefully at the picture above.  The Advanced Auto Parts site and Burger King site are perfect examples of out-parcels.

Lenders love to make commercial loans on out-parcels or pad sites.  While the typical loan-to-value ratio for most land loans is in the range of 25% to 40%, many commercial lenders will happily make purchase money commercial loans of 55% to 65% loan-to-value on out-parcels.

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We're now down to the final 38 weeks of the World Cup.  This morning when France played Nigeria, it was the first time an American referee ever officiated a knockout round match. The French won it by a touchdown.  -- Jimmy Kimmel

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The thing to be careful about when underwriting a commercial loan on a shopping center is NOT to apply the same outrageous price paid per square foot by a fast food chain for an out-parcel to the value of the land underneath the entire shopping center!  No-no-no.  The success of a fast food restaurant is very dependent on street visibility and easy street access.  A fast food franchise owner might pay five times the price per square foot for the convenient out-parcel on the left compared to the difficult-to-reach out-parcel on the right.

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I used another fancy term above - inline retail.  Inline retail is another word for a store.  The term inline came about as malls were developed in the 60's because the stores were literally all in a line in the mall.

Inline tenants are smaller tenants than anchor tenants.  Inline tenants pay higher rental rates and sign shorter leases.  These stores benefit from the foot traffic that anchor tenants bring to a retail center, and inline tenants account for the majority of the scheduled rents at most retail centers.

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There was a huge blowout at the World Cup yesterday when Germany beat Brazil 7-1 in the semifinals.  It got so bad that the refs told Brazil, “You know what? Go ahead and use your hands.” -- Jimmy Fallon

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Be on the look-out for an old, dog-eared business card of a banker that you know who makes commercial loans.  You can trade the contents of that one business card for a free directory of 2,000 commercial real estate lenders.

Do you need commercial mortgage leads?  Most lead sellers ask a small fortune per lead ($20 to $50 apiece), and they often post the same lead again and again.  C-Loans.com sells commercial leads for just $1 to $9 apiece, plus 37.5 bps. if you close the deal.  We have one former lead buyer who has closed 40 loans for us!

After 34 years of marketing for commercial loans, I have learned a few things - like what utterly fails and what works like turning on a spigot.

I am about to really tick you off, but its for your own good.  If you don't invest a lousy $199 for my Practice Course, you are a flipping idiot.  This five-hour audio course contains 67 separate lessons on how to fix your commercial mortgage business.

Now if you're netting $120,000+ per year (not gross but net) from your commercial mortgage business, maybe you could argue that you don't need this course.  But the truth is that even you heavy-weights, you natural born salesmen, could learn a ton from a guy who has been in commercial real estate finance (CREF) for 34 years.

Now here's why you are a flipping idiot if you fail to buy this course - I guarantee that will double your net income as a commercial mortgage broker within 12 months - or I will refund 100% of your cost.  I have never guaranteed any other training product.

You've been reading my blog articles.  I hope you'll agree that my training is practical, do-able, down-to-earth kind of stuff.  I am promising to double your net income as a commercial mortgage broker within 12 months.  All for a lousy $199?  Guys, this is far more about making you a loyal supplier of loans to Blackburne & Sons and C-Loans.com than making a lousy $199.  If I turn your economic life around, in appreciation you will still be bringing business to my sons twenty years from now.  Don't be a flipping idiot.

The new Dodd-Frank Regulations have driven a ton of former residential loan agents into the commercial loan business.  I have never seen so many guys chasing commercial loan leads.  In a market flooded with commercial loan agents, the wise commercial mortgage broker will adjust his marketing strategy.  Commercial loan brokers need to market for commercial loans more directly, rather than just marketing to residential loan agents.

In the past, my own commercial hard money mortgage company, Blackburne & Sons, would advertise almost exclusively to mortgage brokers.  Historically only about 10% of mortgage brokers worked commercial mortgage leads, and we could be sure of a good volume of commercial loan referrals by offering a 20% referral fee.

Nowadays, however, most mortgage brokers can't afford to just refer out their commercial loan leads.  They need to work these commercial loan requests themselves.  When they do work the leads themselves, they don't necessarily bring these commercial loans to us.

In response, Blackburne & Sons is starting to bypass commercial loan brokers in favor advertising to other sources of commercial loans, which is a more direct approach to the end-borrower.

Enough work.  Time for a little fun:

As a general rule, you seldom want to advertise directly to commercial real estate investors for commercial loans.  The reason why is because refinancing a commercial loan is very expensive.  There is the $3,500 appraisal fee and then the $2,300 toxic report fee.  Then the closing attorneys need to be paid their thousands.  Since closing commercial loans is so expensive, most investors only refinance their commercial buildings when they are forced to.  In contrast, I have refinanced my home four times in the past six years.  In many cases, there was no cost to me.

The reason it makes little sense to market directly to commercial real estate investors is that the chances of your advertisement arriving at the exact time that an investor plans to refinance his commercial property is very, very low.  Six times over the past 34 years I have sent out more than 10,000 direct mail pieces to commercial real estate investors.  These costly snail mailings have never produced a closing.

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From a passenger ship, everyone can see a bearded man on a small island who is shouting and desperately waving his hands. "Who is it?" a passenger asks the captain.  "I've no idea. Every year when we pass, he goes nuts.”

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So how does a commercial loan broker find commercial loans to place, especially when the market is flooded with competion?  You will find commercial loan leads by soliciting referrals from workers who see commercial real estate transactions cross their desk on a weekly basis.  Let me give you some examples:

1. Commercial bankers (you solicit their turndowns)
2. Commercial real estate brokers
3. Property managers
4. Other lenders, like credit unions or hard money lenders
5. Residential mortgage brokers (on a name and number basis only)
6. Residential real estate agents
7. Real estate and bankruptcy attorneys
8. CPA's and accountants
9. Insurance agents and estate planners
10. Investors who own 3+ commercial-investment properties

In my opinion, purchase money commercial loans are much safer for a commercial lender than refinances.  The reason this is important to you is because soon wealthy real estate investors will be returning to the commercial-investment market, and you will be working on a ton of purchase money commercial loans.  This article, among other things, will help you sell the bank on making you - or your client - the required commercial loan.

Since the start of the Great Recession in 2008, the commercial real estate market has seen a huge decline in the number of commercial loans made for commercial-investment purposes.  A commercial-investment property is a business property that is owned for the primary purpose of generating net rental income.  Commercial-investment properties are usually purchased by wealthy investors wishing to receive a cash flow from their investment greater than what they can earn in CD's, bonds, or dividend-paying stocks.

It is easier to understand the concept of a commercial-investment property if you contrast it with an owner-user business property, like a bowling alley, a restaurant, or a hotel.  Commercial-investment properties, in comparison, are far more passive.  The investor earns his return from rental income, rather than from business income.  Examples of commercial-investment properties include multifamily, office, retail, industrial, and mobilehome parks.

The U.S. economy is rebounding strongly.  American companies cut a lot of waste during the Great Recession.  Sophisticated robots in American factories are replacing cheap Chinese workers (who have reached almost full-employment and who are not as cheap any more).  On-shoring (as opposed to off-shoring) is the new trend, as American companies realize that domestic manufacturing gives them better quality-control and faster response times.

Fracking and horizontal drilling here in the U.S. are generating many new high-paying American jobs, and these new wells have greatly reduced our reliance on foreign oil.  But there is another, even more important, benefit of fracking.  These wells are producing vast amounts of dirt-cheap natural gas.

Dirt-cheap natural gas give the U.S. a huge economic advantage in heavy manufacturing.  Millions of heavy manufacturing jobs will be migrating from Europe and Asia to the U.S. because of our dirt-cheap energy (Source:  Boston Consulting Group).  Housing is also recovering.

Bottom line:  The U.S. economy is recovering strongly, and commercial real estate will benefit.  Commercial real estate investors will soon be snapping up decent commercial buildings almost everywhere, and you will get to finance them.

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Married for 25 years, I took a look at my wife one day and said, "Honey, 25 years ago we had a cheap apartment, a cheap car, slept on a sofa bed and watched a 10 inch black and white TV, but I got to sleep every night with a hot 25-year-old blonde.

Now, we have a nice house, nice car, big bed, and plasma screen TV, but I'm sleeping with a 50-year-old woman. It seems to me that you are not holding up your side of things."

My wife is a very reasonable woman. She told me to go out and find a hot 25 year-old-blonde, and she would make sure that I would once again be living in a cheap apartment, driving a cheap car, sleeping on a sofa bed.

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No matter how sweet your purchase-money commercial loan, the bank is likely to push back over the idea of making a non-government-insured commercial loan, i.e., the loan is guaranteed by neither the SBA nor the USDA.  When the bank does push back, remind them that purchase money commercial loans are much safer than refinances because:

1. The fair market value of the collateral has been established in the open market.  The commercial lender does not have to rely on just the opinion of a fallible and/or potentially crooked appraiser.  The fair market value has been established by the arm's length negotiations between the seller and the buyer.
    
2. The buyer of the commercial property is putting down cold, hard cash.  Some commercial lenders call this down payment "skin in the game".  I call it "blood money", and it represents the buyer's blood on the porch that the lender will step over when he forecloses.
    
3. No matter how well a commercial lender underwrites, there is always the possibility that the borrower's business has suddenly taken a downward spiral.  Borrowers with financial trouble seldom rush out to put a large down payment on a commercial property.  Investors who go out and buy commercial-investment property are usually very sound and solvent financially.

One of the problems you will quickly discover trying to make commercial loans on commercial-investment property is that the bank will only want to finance 60% of the purchase price, and the bank will NOT allow a second mortgage.  This means that your buyer has to put a whopping 40% down. 

Blackburne & Sons has introduced a new preferred equity program where we will add our fresh equity dollars to your buyer's 25% downpayment to create the 40% downpayment required by the bank.

Unlike the bank, our hard money commercial mortgage company, Blackburne & Sons, WILL allow the seller to carry back a second mortgage behind one of our new first mortgages.

We will make a 75-0-25, a 70-10-20, a 70-15-15, or a 65-25-10, where the final number is the size of the buyer's downpayment.  "But George, the SBA will make a loan of 90% LTV."  Those are owner-user commercial loans, not commercial-investment properties.

I have a full-time employee who calls banks and credit unions all day long, where he invites them to join C-Loans.com.  Most of these banks are scarety-cats, and they decline.  I have assembled these banks into The Blackburne List, a huge list of 2,000 commercial lenders, organized by state, that I sell for $39.95.  If you are loathe to invest $39.95, its easy to get The Blackburne List for free.

"But, George, my borrrower has perfect credit and big tax returns.  He will never pay Blackburne & Sons' hard money rates."  Then submit your "A" quality commercial loan using C-Loans.com.  It takes only four minutes.  You can submit your commercial loan to 750 different commercial lenders, six lenders at a time.

 "But George, commercial mortgage portals don't really work."  Oh, yeah?  C-Loans just (6/7/14) closed an $18.5 million construction loan on a mixed-use project in Wisconsin.  The broker earned a $92,500 commission.  What would you do with a $92,500 commission?