Commercial Loans and Fun Blog

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?

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.