Commercial Loans and Fun Blog

Most borrowers, when exercising a lease-option on a commercial property, will use an SBA loan.  There are times, however, when an SBA loan won't work, and a private money commercial loan from Blackburne & Sons can help.  Today we cover those situations, but first, some background:

A lease-option-to-buy is an agreement between a landlord and his tenant, whereby the tenant agrees to lease the real estate, but only if the tenant is also granted the right to buy the property for a certain price during the term of the lease.  In the typical lease-option agreement, the tenant pays a monthly rent that is more than than fair market rent of the property.  The amount in excess of fair market rent is credited towards the buyer's eventual downpayment.  If the tenant decides not to exercise his option-to-buy, the landlord keeps the excess rent as his option fee.

When a commercial tenant chooses to exercise his option to buy, he will need a commercial loan.  Most of the time commercial borrowers, with a lease-option-to-buy, are eligible for an SBA loan because the property is owner-used.  By the way, the expression, owner-used, is actually more precise than owner-occupied because a commercial tenant does not actually live in the property.

By the way, did you know that all SBA lenders are not the same?  Even though the SBA guarantees 70% to 90% of an SBA loan, the bank originating the SBA loan still has to retain the risk of loss on the remaining 10% to 30% of the loan.  Therefore, because commercial lending is subjective (determined by the judgement, experience, economic optimism, and prejudices of Loan Committee), one SBA lender might turn you down, while another SBA lender might approve the exact same loan.  The first bank just might not be willing to take the risk of loss on the 10% to 30% portion that the bank has to retain.

Therefore just because one SBA lender turns you down doesn't automatically mean that you do not qualify for an SBA loan.  It could very well be that the SBA lender who turned you down was pessimistic about the widgets industry (your industry) or recently took a loss in your area of the city.  Another SBA lender might be wildly optimistic about the widgets industry or may enjoy three other performing loans in your neightborhood.

If you are exercising a lease-option, be sure to submit your commercial loan application to several different SBA lenders.  You can submit your commercial loan to over 200 different SBA lenders in just four minutes by using C-Loans.com.

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"A slipping gear could let your M203 grenade launcher fire when you least expect it. That would make you quite unpopular in what's left of your unit." -- Army's magazine of preventative maintenance 

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Okay, so when would it make sense to use a private money lender, like Blackburne & Sons, rather than an SBA lender?

1. Maybe the buyer's credit is spotty because he went through a divorce.
2. Maybe the buyer's company really got beat up financially during the Great Recession.
3. Maybe the seller has offered to carry back a second mortgage.  SBA lenders won't allow a second mortgage.
4. Maybe the buyer's downpayment is a little light.  By taking additional collateral (or not), Blackburne & Sons can often make the deal work.
5. We see the following situation a lot:  The tenant pours $125,000 into upgrading the property, but when it comes time to buy the property, he lacks the 10% downpayment in cash needed to satisfy the SBA.  The smart private money lender will still make this deal.  The purpose of a downpayment is to make sure than the buyer has some skin in the game.  In this situation, the buyer has clearly made a serious economic commitment to the property.
6. Commercial real estate fell by 45% during the Great Recession.  Suppose a lease-optionee (the tenant) executed his lease-option during the nadir (lowest point) of the Great Recession.  Since then commercial real estate has recovered significantly (but far from all of the way).  An SBA lender is not going to give the lease-optionee any credit whatsoever for that appreciation, while Blackburne & Sons will strongly consider it.

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"If you see a bomb technician running, try to keep up with him." -- USAF Ammo Troop

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Blackburne & Sons is extremely bullish on commercial real estate right now.  The Great Recession is over, and in my opinion the United States is facing the largest and most wonderful economic expansion in its 230-year history.  I genuinely believe the future is so bright, we gotta wear shades.

A lot of good things happen when banks are willing to make loans to businesses.  To a very large extent, the Great Recession was so cataclysmic because banks stopped making new business loans.  See my 2006 book, The Reverse Multiplier Effect. 

That's why I felt like dancing when I read the following:  Bank loans and private-sector credit grew "very slowly" until January, he explains. "Since then the Fed's weekly data show that bank loans to private businesses have accelerated sharply and are on track to grow by $700 billion in 2014 after only growing $140 billion in 2013."  Folks, this is immensely bullish news for the economy.

It also helps to explains why Blackburne & Sons is so bullish on commercial real estate and is currently willing to consider new commercial loans that we would never have considered during the Great Recession.

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"When the pin is pulled, Mr. Grenade is not our friend."  -- U.S. Marine Corps

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If you need a private money commercial loan, please be sure to submit your deal to Blackburne & Sons.

If you need an SBA loan, you can submit your commercial loan mini-app to over 200 different SBA lenders using C-Loans.

We have an employee whose full-time job is to call commercial lenders and to invite them to join C-Loans.com.  Those that decline are added to The Blackburne List.  You can either buy The Blackburne List for $39.95 or trade us one banker and get the entire list for free.

I have often said, "There is no better way to meet high-net-worth investors than to be a commercial mortgage broker."

Even if you are a commercial real estate broker (aka "commercial broker"), you should open a commercial mortgage company and broker some commercial loans on the side, when sales are slow - just for the opportunity to meet wealthy investment property investors.  In my role as a commercial mortgage lender, today I met the investment manager of a family office.  Folks, this is a huge deal!  This could potentially be a very important contact.

A family office is usually a small company of three or four employees that manages the investments and the business affairs of a single, extremely wealthy family.  Usually we're talking about investment portfolios in excess of $30 million, and some family offices manage investment portfolios as large as $500 million or more.

A family office does far more than merely manage the family's investment portfolio.  A family office will also provide for tax compliance work, access to private banking and private trust services, document management and recordkeeping services, expense management, bill paying, bookkeeping services, family member financial education, family support services, and family governance.

Whether you are a commercial broker or a commercial mortgage banker, you need to develop a fun newsletter with which you can stay in touch with your clients.  At Blackburne & Sons, we use iContact.com as our newsletter service.  I think it costs less than $60 per month to send out 4,000 email newsletters every business day.

I will try to stay in contact with this family office investment manager by sending him lots of folksy, fun, down-to-earth, opposite-of-professional newsletters.  In every newsletter I will include lots of jokes, funny pics, and cool videos.  I will also try to reach him with a newsletter every three weeks for decades.

I call these the fun treats in my newsletters "Rat Goodies".  Back in the 1960's a famous psychologist, B.F. Skinner, conditioned rats to press a lever to get a rat goody.  If we can condition rats to press a lever to get a rat goody, we should be able to encourage our friends, clients, and pen pals to look forward to our newsletters (and blog articles) because they always include fun treats.

"Gee, George, are you trying to condition me?"  Yes, I am, but its for a noble purpose - so we can make money together and have fun doing it.

Last year I started selling The Blackburne List, a list of 2,000 commercial real estate lenders who said, "No," when we asked them to join C-Loans.com.  We would sell maybe two or three copies of the list every week at $39.95.

Then we added the opportunity to get The Blackburne List for free, merely for trading us the name and the contact information of one banker making commercial loans.  It's a helluva deal for the guy making the trade - 2,000+ bankers for just one.  Not surprisingly we're making one to two such trades per day.

But the thing that is blowing my mind is that outright sales of The Blackburne List have tripled.  For some reason many guys would prefer to pay the $39.95 rather than give up the name of one of their bankers.  Go figure.  We're happy either way.

We're still dancing in the aisles here at C-Loans over our closing this week of an $18.5 million construction loan on a mixed-use project in Wisconsin.  If you had brokered that deal and charged the borrower 50 basis points, your commission would have been a whopping $92,500.  What would you do with $92,500?

By the way, a basis point, often abbreviated "bps." and pronounced bips, is just 1/100th of a point.  Therefore 50 basis points is 50/100ths of a point ... or one-half point.

C-Loans.com has closed over 1,000 different commercial real estate loans totaling over $1 billion.  "Yeah, yeah, George, I 've heard you say that a dozen times."

But here's the thing that you need to understand:  The Suggested Lender List for every commercial loan search is different.  Different lenders make different size and types of commercial loans.  Just because you have a disappointing response to one commercial loan - say, a $275,000 loan on a bar in the ghetto to a guy with poor credit - doesn't mean that you won't meet tons of dreamy lenders on a different deal - say, a $3 million loan on an apartment building in Austin, Texas.

Here's your final treat for the day:

Stop the presses!  Jeff Smith of StarFury Capital Management just asked me, "Ok, George, that sounds great.  Now how can we mere mortals meet the high execs of family offices?"

The answer is to broker commercial loans!  The larger the loans that you broker, the wealthier your borrowers will be.  Remember the Net-Worth-To-Loan-Size Ratio says that the borrower's net worth should be at least as large as the loan size requested (1.0 ratio).  If you work only on $10 million loans, you should meet plenty of guys with a net worth of $10+ million.

And when you "meet" a wealthy investor - even if its only over the phone and even if you only quote him a loan - keep marketing to him for years.  That's how I built my $50 million hard money shop.  Every time I met a high-net-worth commercial borrower, for the four years leading up to when I started selling trust deed investments, I saved his contact information and kept my name in front of him with my newsletters.

This investor was special.  I had met him in the legitimate course of business.  With him, I had legitimacy.  I earn 2% per year for loan servicing.  Do the math on $50 million in servicing.

Grasp this concept:  Every one of my early trust deed investors was a former borrower!  It's a strange notion, but an investor is an investor.  The same guy who invests in large apartment buildings, and hence needs a big apartment loan, is also the guy who buys stocks and trust deeds.  An investor is an investor.

Mick Carlson, General Manager of C-Loans, Inc., is pleased to announce that C-Loans has just closed an $18.5 million commercial construction loan on a mixed use project in Monona, Wisconsin.  Who says no one is making commercial construction loans these days?

Mixed-use is not the same as mixed-commercial.  A mixed-use property combines residential income units (usually apartments) with commercial space (usually, but not always, retail).  

There was an issue with mixed-use properties that scared away many lenders in the 1970's - noise.  In the 1970's there were a number of court cases that penalized lenders which had foreclosed on mixed-use properties.  The residential tenants sued the lenders for a breach of their right of quiet enjoyment to their apartments.

Apparently the prior owners of these mixed-use properties had rented the ground floor commercial units to noisy bars or loud disco's.  The poor residential tenants couldn't sleep at night, but they didn't want to move out because of the cost of moving or because they had rent-controlled apartments with below-market rents.  The foreclosing lenders had to either buy out the successful disco with a ten-year lease or buy out the residential tenants.  For several decades afterwards, mixed-use properties were shunned by most lenders.

In contrast, a mixed-commercial property is one that mixes two different classes of commercial property, like offices over ground-floor retail or retail in front of self-storage units.

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A lady tells the story:  Waiting for our aerobics class to begin, several of us were standing around in our leotards chatting about fitness and diets. One woman said that her brother-in-law had quit smoking, gone on a diet, and lost weight - all at the same time. 

Thinking to myself that no human being could possibly do this without acquiring at least one other undesirable habit for compensation, I jokingly asked her, "What did he start doing instead of these things?" 

After a slight pause, she smiled and said, "Well, my sister is pregnant now."

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This huge $18.5 million closing is an important milestone for C-Loans.  Even though we have closed over 1,000 different commercial real estate loans totaling over $1 billion, many of the large-loan lenders refused to believe that it was possible to close large commercial loans over the internet.  On top of a $17 million closing, this new $18.5 million closing finally puts this prejudice to bed.

Commercial construction lending is poised to come roaring back, as new commercial construction was almost non-existent during the Great Recession.  C-Loans, Inc. is so bullish on commercial construction lending that we just went out and paid a small fortune for the domain, CommercialConstructionLoans.com. 

Ultimately all of our loan requests get funneled into C-Loans.com.  If you need a large commercial construction loan - or any type of commercial real estate loan - please enter it into C-Loans.com.  Remember, it takes only four minutes, and C-Loans.com is free!

Somewhere in your pencil drawer is the business card of a banker who makes commercial loans.  It's probably stained and dog-eared, and you probably haven't even looked at in months.  You can trade the contents of this stinky 'ole business card for a free, written directory of 2,000+ commercial real estate lenders.

Sooner or later you will be trying to get a commercial loan so that either you, or your investor client, can buy a commercial-investment property (as opposed to an owner-user property).  You will be very frustrated to learn that your bank will not lend up to 75% loan-to-value.  The bank will want you to put down a whopping 40% of the purchase price.  Blackburne & Son's will invest preferred equity in your project to make your down payment large enough.

A commercial loan, if secured by deed of trust, can be foreclosed much faster and much more cheaply than a commercial loan secured by a mortgage.  California, like most of the states in the West, is a deed of trust state. This is why the trust deed investment business (hard money mortgage business) is so large in California.

So what is the difference between a mortgage and a deed of trust?  A mortgage has two parties - the mortgagor and the mortgagee.  The mortgagor is the party who gives away a mortgage to his property.  In other words, the mortgagor is the borrower.  By the way, any time you see a legal word ending in "or", that is the party giving away something.

The lender is the mortgagee.  He is the party receiving the mortgage as security for his loan.  Any time you see a legal word ending in "ee", that is the party receeeeiving something.  In this case the mortgageeeeeee is receeeeeiving a mortgage as security for his loan.  If the mortgag-OR (borrower) doesn't make his payments, the mortgag-EE can foreclose the mortgage.

In order to foreclose a mortgage, the mortgagee (lender) must use the courts.  In most states, the courts are backed up for months and months.  This can be a very slow process.  It once took Blackburne & Sons over 17 months to foreclose a mortgage in the state of New York.

Many of the states East of the Mississippi are mortgage states; i.e., a commercial lender has to foreclose his commercial mortgage loan using the very slow courts.  If only there was a way to bypass the slow-pokey court system ...

A deed of trust is a three-party document (trustor, trustee, beneficiary), rather than a two-party document (mortgagor, mortgagee).  A deed of trust bypasses the need to use the courts to foreclose a commercial loan.  Therefore it is much faster to foreclose a deed of trust than a mortgage.

What's the difference between trust deed and a deed of trust?  Nothing.  They're identical.

Here's the way a deed of trust works.  The trustor (borrower) gives away bare legal title to the property to the trustee.  The trustee is a neutral, private intermediary, trusted by both sides of the contract, who holds the bare legal title to the property for the benefit of the beneficiary (lender).

Think of the trustee like a stakeholder.  Suppose my son, Tom, and I wanted to bet $50 over who was going to win the NBA championship.  Let's suppose that neither of us trusted the other.  We could give the money to Mickey, a mutual friend, to hold until the NBA Championship was over.  We would each give Mickey instructions, "Here is $50 from each of us.  Please give the winner the entire $100."  (And then I would fire Mickey when he fails to give me the $100, even though I lost.  No wonder my son doesn't trust me!)

Please note that the trustee is NOT some court, although he is often either an attorney or a title company.  He's just a private guy or a private company, not some slow-pokey governmental official.

The trustee holds bare legal title for the benefit of the beneficiary (lender) until the debt is repaid.  If the borrower fails to make his payments, the beneficiary notifies the trustee, who then schedules a PRIVATE foreclosure sale (Trustee's Sale) about four months later.  I screamed the word "private" because there is no slow-pokey court or government official involved.  Without any involvement of the courts, the trustee can conduct a trustee's sale, and, if no one bids at the sale, issue a Trustee's Deed in favor of the beneficiary.

Several times I used the expression, "bare legal title".  Bare legal title is just the right to hold title to the property until a deed of trust or mortgage loan is paid.  It's called "bare" legal title because the trustee does not own any of the other rights of ownership - like the right to occupy the property, the right to exclude others, the right of quiet enjoyment (stop bugging me on my property!!!), and the right to collect rents.

The year was 2010.  Real estate had collapsed due to the Great Recession.  Commercial real estate had fallen by 45%.  Residential real estate had fallen almost as far.  Professor Robert Shiller of Yale was warning of further declines in real estate, as the tens of thousands of foreclosures-in-process (the homes in the so-called shadow inventory) were released onto the market.  And then ...

Nothin'.  The washout never happened.  Enormous opportunity funds, like Blackstone, had figured out that they could buy these foreclosures for all cash and rent them out for a 7% to 9% cash-on-cash return.  That was a huge return, considering that Treasuries were paying only 2%.

Stories began to circulate of hedge fund executives driving by hundreds of foreclosed homes in a single week ... and then making aggressive offers on them all.  Suddenly young couples could no longer find entry level houses to buy.  Home values stopped declining, stabilized, and then started to march back upwards.

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A little old man shuffled slowly into the "Orange Dipper", an ice cream parlor in Naples, Florida, and pulled himself slowly, painfully, up onto a stool.  After catching his breath, he ordered a banana split.  The waitress asked kindly, "Crushed nuts?"  "No," he replied, "hemorrhoids."

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When commercial real estate plunged by 45% during the Great Recession, most commercial lenders got crushed.  They took enormous losses.  As a result, for the past five years, the only types of commercial real estate loans sought by the banks were either SBA loans and USDA loans, which were mostly guaranteed by the government.  The key issue to grasp here is that most of the properties receiving commercial loans for the past five years were owner-user buildings.  This is about to change.

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A daddy teased his little daughter by suggesting she liked a certain boy in her kindergarten class.  The little girl was quite indignant. "No, daddy, I don't like him!" she stated. "He's only interested in one thing."  Shocked, the daddy cautiously asked what that one thing might be.  "Power Rangers, of course," said the toddler.

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Commercial real estate rents are about to start increasing.  The U.S. economy is building up tremendous strength due our plummeting reliance on imported oil, the thousands of new jobs being created in the oil fields, dirt cheap natural gas to power our power plants, our enormous cost advantage in heavy manufacturing (in heavy manufacturing energy is by far the largest line item expense), an improving housing market, the use of robots to replace cheap labor in Asia, and the growing trend of on-shoring, which allows a manufacturer greater quality control and flexibility.

Folks, I was right about the Great Recession, and I am right about this.  Our economy is already the King Kong of the world, and we will continue to pull even further ahead.  The next few decades will be the Golden Age for the United States.  Here in the Midwest, where I personally live, the wealthiest men in town are all in manufacturing.  At my country club, every manufacturer is telling me the same thing - business is booming!

With commercial real estate falling by 45%, there has been very little new commercial real estate construction for six years.  In the meantime, a certain number of older buildings have become economically obsolete and have been either demolished or abandoned.  Now overlay an expanding economy, and you can see how competition to rent existing commercial buildings will almost certainly lead to higher commercial rents this year.

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A pirate walks into a bar wearing a paper towel on his head.  He sits down at the bar and orders some dirty rum.  The bartender asks, "Why are you wearing a paper towel?"  "Arrr..." says the pirate. "I've got a bounty on me head!”

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Do you know what you haven't seen for six years?  Investors buying commercial buildings for income.  This is the point of today's article.  This year will mark the return of income property investors and the commercial-investment loan.  Wealthy investors will be snatching up good rental properties, like multi-tenant office buildings, strip centers, and industrial buildings.

"Gee, George, how can you be so sure?"  With rents increasing, investors will be able to buy good rental buildings at attractive 6% to 7% cap rates, with the excellent prospect of earning 8% to 10% as the economy heats up and the demand for commercial space increases.

What does this mean for you?  More and more of the commercial loans that you'll be seeking this year will be for commercial-investment properties, as opposed to owner-user properties.  The bank may not give you a 75% LTV loan, even if your proposed commercial loan cash flows beautifully.  Banks are still nervous.

If you ever find yourself frustrated because the bank won't make you a large enough commercial loan, please remember our preferred equtiy.  We'll add our equity to your downpayment to create a downpayment large enough to satify the bank.

About 40 commercial mortgage bankers and investors have now swapped one of their bankers for our free directory of 2,000 commercial real estate lenders.

The more expensive the commercial loan quote, the less likely it is to be either BS or some advance fee scheme.  Put another way, the higher the rate and points a lender quotes you, the more likely the commercial loan quote is to be real.

For example, a buddy of mine recently sent me an email saying that he had just funded a $1 million hard money land loan using a single, wealthy investor.  Apparently this investor used to be in the land banking business, and he only invests in land loans.  Here's the comment in his email that convinced me that this investor of his was real:  "This is expensive money - make no mistake about that.  The minimum IRR for him alone is 16-18% annually, before we get paid."

In contrast, an advance fee scammer would quote 5.5% and 2 points.  On a land loan?  Whenever you hear an unusually attractive quote like that, ask yourself, "Who is quoting 5.625% and forced this so-called lender (advance fee scammer?) to drop his rate to 5.5%?"

Lenders only drop their interest rate and points in response to competition.  If a "lender" has no apparent competition, and his rates are deliciously low, be on your guard.  He's out to con a big application fee out of you.  The interest rates here at Blackburne & Sons started out at 5,000% per day (hey, I'm a proud capitalist), until we were forced by competitors to drop our rates.  Now we're quoting just 8.9% to 11.9% annually.  Darned competitors!  :-)

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You know it's time to diet when you dance, and it makes the band skip.

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The new hot commercial lending product out there is a blanket commercial loan against a portfolio of 5 or more rental houses.  More and more lenders are entering this market.  Blackburne & Sons is doing a $1.25 million blanket loan on about 35 homes this month.

I have owned my own hard money commercial mortgage company now almost 34 years.  During those years we have survived three horrible real estate recessions.  The guys that bought commercial real estate at the very bottom of the market made a fortune.  If only I knew when the bottom was the bottom.  I would have loaded up on commercial real estate.

Hey, wait a minute!  I actually DO know.  In all three real estate crashes over the past 34 years, commercial real estate fell by almost exactly 45%.  All three times a 45% decline was the nadir (bottom point) of the collapse.

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You know its time to diet when you are diagnosed with the flesh eating virus, and the doctor gives you 22 more years to live.

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"Gee, George, if commercial real estate fell by almost exactly 45% during the Great Recession, you ought to be loading up on commercial real estate!"

We are!  That's why Blackburne & Sons has just come out with its new preferred equity program.  We add our equity on to your buyer's 25% downpayment to create a cash downpayment large enough to satisfy the bank.  You really-really need to understand this concept of preferred equity.  It will save so many of your commercial real estate loans and property sales.  Preferred equity is NOT a loan.  It's equity!

About two dozen mortgage brokers out there have had the common sense to trade one banker making for commercial loans for the 2,000+ bankers making commercial loans on The Blackburne List.  "Gee, one for two thousand ... is that a good deal?"  You better jump all over this offer before it goes away.  Or you can buy The Blackburne List for $39.95.

While we are on the subject of real estate crashes, did you ever wonder how commercial real estate appraisers find market comparables when nothing is selling?  That is when commercial real estate lenders stop talking about fair market value, and all they want to talk about is cost.  What did you pay for the building originally?  Don't tell me what it once appraised for.  What did you actually pay for it?  Cost-cost-cost.  Marcia-Marcia-Marcia.  All commercial lenders want to talk about during real estate crashes is cost.

This brings up the concept of clearing the market.  For almost all goods (including stocks in a financial panic), there is some price at which an all-cash buyer can be found.  The process is also called liquidation.  The price just has to drop - drop - drop until the asset finally clears the market.  I was reminded today of a Warren Buffet quote:

Be fearful when others are greedy, and be greedy when others are fearful.

If a restaurateur owns a successful restaurant, it is often surprisingly easy for him to obtain a new commercial loan from his own, local commercial bank.  Bankers go out for lunch a lot, and they spend much of their time schmoozing with the wealthy elite of the community.  They know from mere observation which restaurants in town are packed and which ones are almost deserted.

Therefore, if a restaurateur has a thriving restaurant and a good financial statement, and if he maintains healthy cash balances on deposit with his bank, his banker will usually fall all over himself in an effort to supply any needed commercial loan.

But what about less-successful restaurants or restaurants wth unimpressive financial statements.  Can these borrowers still obtain a commercial loan?  It depends.

We all know from experience that restaurants suffer from a very high failure rate.  The common belief, however, that 90% of all restaurants fail in their first year is just a myth.  According to a 2005 research study by the Cornell Hotel and Restaurant Administration Quarterly, about 25% of restaurants fail in their first year.  Another 20% fail in the second year, and another 15% fail by the third year.  Therefore 60% of all new restaurants fail within the first three years.  Clearly restaurants are a very risky asset class upon which to make commercial loans.

But the Chinese character for crisis is the symbol for danger next to the symbol for opportunity.  For commercial loan brokers, there is money to be made helping restaurateurs find a commercial loan.

When might a restaurant commercial loan be do-able?  We start from the basic proposition that if the restaurant owner's business is thriving, if he has a good financial statement, and if he maintains substantial cash on deposit with the bank, he doesn't need the help of a commercial loan broker.  His own bank will do the deal.

Therefore, if you are looking at a commercial loan package on a restaurant, you can pretty much bet that the deal will be flawed.  The restaurant will either be losing money on paper, the restaurateur will have sloppy or poor credit, and/or he will not have a lot of liquidity.

Here are some times when a commercial loan on his restaurant might still be do-able:

1. If the borrower has pristine credit and substantial cash deposits, but his income statement and tax returns show him making very little money, many private money commercial lenders, like Blackburne & Sons, will still make him a commercial loan.  The restaurant business is a cash business, and few veteran commercial loan underwriters would be terribly shocked to learn that every single cash sale is not making it into his bank account and/or on to his income statement.  He is also probably running a lot of household expenses through his business.  The guy clearly is making money.  He is just cheating on his tax returns.
    
2. This reminds me of the old joke: The owner of a small deli was being questioned by an IRS agent about his tax return. He had reported a net profit of $80,000 for the year. "Why don't you people leave me alone?" the deli owner said. "I work like a dog. Everyone in my family helps out. The place is only closed three days a year. And you want to know how I made $80,000?" "It's not your income that bothers us," the agent said. "It's these deductions. You listed six trips to Bermuda for you and your wife." "Oh, that," the owner said smiling. "I forgot to tell you - we also deliver.”
    
3. If the restaurant business has been in business for ten years or more, under the same owner, a commercial loan underwriter will probably be more inclined to approve the deal, even if the business is losing money on paper.  It's those dangerous first three years when the failure rate is so high - 60%.
    
4. Can the building be used for anything else?  A Denny's-style restaurant building, with a corner location and a large parking lot, probably is best used as a restaurant.  In contrast, what if the propety is a garden-variety row commercial building.  A row commercial building is simply a big box in a downtown area, where the neighboring buildings touch it on the left and right sides.  It's basically like a townhouse, but its commercial space.  Today it might be occupied by a restaurant, but in the past it was an office supply store, and before that it was a dress store.  The key thing here is that the space is generic.  A private money commercial lender could lend aggressively on such a commercial building because the property has multiple uses.
    
5.  Be wary of restaurant buildings whese several prior restaurants have already failed.  Sometimes the location just sucks.  Maybe the building is on a busy one-way street.  Maybe there is a road divider (median), and there is no suicide lane for easy access to the restaurant building.  Maybe its almost impossible to find a  parking space.  Some restaurant buildings are so poorly located that any restaurant that tries to open there is doomed to failure.

 

This article has some real gems for both commercial brokers (commercial realtors) and commercial loan brokers, so please read on.  Both kinds of professionals need to finish this article.

Historically, my hard money commercial loan company, Blackburne & Sons, has relied on commercial loan brokers to bring it most of its deals.  The advantage of advertising to mortgage brokers is marketing leverage. Commercial loan brokers, this section on marketing leverage is your gem.

Let me explain what I mean by marketing leverage.  Let’s assume that the average mortgage broker spends $400 per month advertising for real estate loans.  The mortgage broker might use a classified ad in the newspaper or an advertisement in the local PennySaver.  He might buy AdWords on Google.  He might call on realtors.  He might market for leads using direct mail.  Marketing for real estate loans using direct mail (snail mail) is very expensive and is essentially a complete bust if you are seeking commercial loans.  It does work, however, for home loans.  My point is that the typical mortgage broker spends at least $400 per month marketing for real estate loans.

If you can reach a mortgage broker, every ten days to two weeks, using a fun, entertaining, wacky, and intentionally unprofessional newsletter for, say, $1 per month - and if the mortgage broker himself is spending $400 per month marketing for real estate loans - you will have reached a huge market for your lousy $1 expenditure.  You will be able to compete for any deal that your mortgage broker finds that fits your niche.  You have leveraged that one marketing dollar by 400 times (his $400 expenditure).  I love marketing leverage.

But the commercial loan market is changing - evolving - become more efficient.  In the past, very few hard money lenders, like Blackburne & Sons, made commercial loans.  Since the real estate crash caused by the Great Recession, Federal regulators have made it extremely difficult for hard money lenders to make loans on owner-occupied homes.  Many hard money lenders therefore have fled residential lending, and they are now making commercial loans.

Hard money commercial loan companies, like ours, now have far more competition.  Mortgage brokers therefore have lots of choices, and one hard money commercial mortgage loan is often priced much like another.  Blackburne & Sons can no longer rely on being the only company willing to make a commercial loan.

In the year 390 B.C. - two-hundred-ninety years before the birth of Julius Ceasar - Rome was just a small city-state.  We are not talking about the Roman Empire now.  The Golden Age of Rome would not happen for another 350 years.  We are talking about Rome when it could barely sprout whiskers.  

The Gauls (barbarians from modern-day France) had invaded Italy, and they were marching on Rome.  A formidable Roman Army marched out to meet them ... and the Romans got their butts kicked (Battle of Allia).  A handful of Roman survivors streamed back into the city, bringing the ill-tidings.  The population of Rome, already fearing the worst, was packed and ready to go.  Almost the entire population fled south, taking with them their valuables.

The Gauls poured in, raping and killing anyone they found still in the City.  A handful of survivors took refuge at the top of the Capitoline Hill of Rome, where they built barricades of wood, stone, carts, and anything else they could find.  For days the Gauls stormed that hill, only to be driven back, with heavy casualties, by the handful of survivors.

Then the Gauls settled in a for siege, where days passed without further fighting.  The Roman survivors were lulled into complacency.  In middle of the night the barbarians crept up a narrow, hidden path to the top of the hill, where they silently dispatched the guards.

SUDDENLY a gaggle of geese was disturbed, and they began to HONK and HONK loudly.  Awakened from their slumber, Roman soldiers, old men, and young boys rushed to the imperiled battlements.  Desperately fighting for their wives, mothers, and children, the valiant defenders drove the Gauls off the walls and back down the hill.

Several weeks later a Roman relief army broke the siege, and the near-starving Roman inhabitants were saved.  For the next 800 years, geese were considered sacred in Rome.  If you look carefully at the illustration, you'll see the sacred geese squawking up a storm.

"Wow, George, that was an exciting story, but what does it have to do with commercial real estate finance?"

For the reasons described here today, real estate on hills almost always sells at a large premium compared to real estate in the flatlands.  The good views available from real estate on a hill are an equally important reason, but there is always the thought in the minds of the wealthy, "The barbarians are coming.  Barricade the road!"

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Continue to be on the look-out for that old business card of that banker you picked up eight months ago.  You can trade it for a Directory of 2,000 Commercial Real Estate Lenders.

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Are you working on a purchase money commercial loan?  Are you frustrated because the bank will only lend your buyer 58% of the purchase price?  Remember, Blackburne & Sons will add its equity dollars (called preferred equity) to your buyer's 25% down payment to make your down payment large enough to satisfy the bank.

One of our commercial loan officers said to me this week, "George, this commercial loan cash flows really-really well."  To which I replied, "I would much rather make a commercial loan that didn't cash flow worth a darn."  Why of EARTH would I say such a thing?

Poor folks with lousy credit pay far more for a 2-bedroom, 1 bath apartment than renters of nicer units with good credit.  The reason why is that in order for landlords to be willing to rent to folks with poor credit, they need to make a large premium in order to make up for the flakes who skip out in the middle of the night and the lowlifes who trash their property.

Its much the same way for rent-to-own funiture and appliance stores.  Used car dealerships, which sell most of their cars to buyers with poor credit, do the same thing.  They charge a huge premium for their cars.

Therefore any time you see a multifamily or commercial property that cash flows unusually well, be alert to the possibility that the property may be in a rough area and/or may have low-class, dangerous tenants.

Another way to look at the same issue is to look at the cap rate.  Remember, a cap rate is just the return on your money that you would enjoy if you bought a commercial property for all cash.

For example, if you paid $1 million for a property that generated $80,000 in net operating income, you purchased the property at an 8% cap rate ($80,000 NOI / $1,000,000 purchase price times 100%).

What would you say if I told you that in order to collect your 8% return, you would have to drive through the ghetto every month to collect your rent?  Would you still pay $1 million for the property, when you would literally be risking your life every time you drove to see your own property?  If you got a flat tire, you might never see your sweet wife and kids again.  I can see the headline now, "Landlord Beaten to Death With Lead Pipe.  Local Toughs Suspected."

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Here's an interesting offer.  You can either buy The Blackburne List of 2,000 Commercial Real Estate Lenders for $39.95 or trade us the contents of a single, dog-eared, and dusty business card sloshing around in your pencil drawer.

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Okay, so clearly you wouldn't pay $1 million for just $80,000 coming out of the ghetto.  How about $900,000?  Naw.  How about $750,000?  Tempting ... but no.  How about $600,000?  Well, every person has his price.  You could hire an armed guard to accompany you every month when you went to inspect the property and collect your rent.

Okay, so if you buy the property for just $600,000 - what is your cap rate?  C' mon, guys, this is just 7th grade math.  Chug a Red Bull and stay awake here.

Cap Rate = (Net Operating Income / Purchase Price) x 100%

Cap Rate = $80,000 NOI / $600,000 Purchase Price - all times 100%

Cap Rate = .133 times 100%

Cap Rate = 13.3%

The good news for you is that your new commercial loan from the bank is going to cash flow very well.  If the bank is financing 70% of the purchase price ($600,000 times 70% LTV = $420,000), and the bank is offering 5.5% commercial loan, with a 20-year amortization and a 5 year term, your debt service coverage ratio would be a whopping 2.31.  Wow.  This commercial loan has to be really-really safe, right?

Well ... until the tenant moves out, the two pit bull terriers are no longer manning the barbed-wire fence, local druggies quickly strip the building of all of its copper wire, and then the local gangsters vandalize the building, just for fun.

Okay, now let's compare this industrial building in the ghetto to a nice apartment building within walking distance of Chinatown.  That same $80,000 in Net Operating Income, because the property is in a such a wonderful location, might sell for $2,286,000 (a 3.5% cap rate).  The building would only carry a $858,000 new loan, if the commercial lender insisted on a 1.25 debt service coverage ratio.  Holy smack, the property will only carry a new commercial loan of 37.5% LTV because the property is selling at such a low cap rate.

But let's forget about cash flow for the moment and assume that the lender made new commercial loans of 60% LTV, based on the purchase price, on both properties.  Then let's assume that the borrowers defaulted and the lender has to foreclose both commercial loans.

After the foreclosure auction, which property do you think would be in better condition, the property in the ghetto or the property in the far nicer neighborhood with better quality tenants?

This brings me to the point of this article.  Any time a commercial property cash flows extraordinarily well, be on guard.  Perhaps the property is being valued at a very high cap rate because it is located in a very dangerous and very yucky area.