Commercial Loans and Fun Blog

This is the 8th article in my series on commercial second mortgages.  So far we've discussed commercial second mortgages, mezzanine loans, and preferred equity.  Today we'll discuss equity, as it pertains to commercial real estate finance.

Equity has a dozen different meanings, depending on the context.  In finance, equity is difference between what an asset is worth and how much is owed against it.  Think about your own house.  It's worth $200,000, and you owe just $267,000 against it.  Therefore your equity is ... hey, wait a minute!  You're upside down.  Just having fun here.  :-)

In the context of a company, the owner's equity in a company is the difference between the assets owned by that company and what that company owes.  For example, let's suppose a linen cleaning company owns ten washers, four dryers and six delivery trucks - worth a total of $1 million.  The company owes $400,000 to the bank and various trade creditors.  Therefore, the owner's equity in the company is $600,000.

Now let's suppose our linen cleaning company is incorporated and the stock is publicly traded.  The owner's equity would therefore be evidenced by shares of stock.  If there were 600 outstanding shares of stock, each share of stock would be "worth" $1,000.  This is why the talking heads on Wall Street often use the term, equities.  Shares of common stock are often referred to as equities.

In commercial real estate finance, equity could mean the buyer's downpayment.  Equity could mean the developer's contribution to a construction project.  In the case of an existing commercial building, equity could mean the difference between what the building is worth and what the owner owes against it.

In commercial real estate finance, you will often hear the term, capital.  Capital is defined as wealth, in the form of money or other assets, owned by a person or organization or available or contributed for a particular purpose, such as starting a company or investing.

There are two main forms of capital - debt and equity.  The following point is huge:  The difference between debt and equity is that equity has no required interest payments.

Forgive me while I drive this important point home.  When you bought your house for $300,000, you put down $60,000 in cash (equity) and took out a new first mortgage loan for $240,000 (debt).  You have to make payments on your debt, but not your equity.

Your capital stack is the various layers of debt and equity that you used to raise the entire purchase price.  Here's an example of a capital stack.  You are buying that same house for $300,000.  Your take out a $240,000 first mortgage (debt), the seller carries back a $30,000 second mortgage (debt), and you put $30,000 down (equity).  Your capital stack consists of a first mortgage, a second mortgage, and your downpayment (equity).

Sometimes when those huge office towers in New York City get financed, the capital stack will look like this:  $60 million first mortgage, a $10 senior mezzanine loan, a $7 million junior mezzanine loan, a $10 million senior preferred equity investment, an $8 million junior preferred equity investment, and a $5 million downpayment (common equity).

Earlier we mentioned that equity could mean a developer's contribution to a development project.  Building income properties is a risky business.  There could be cost overruns.  The property could sit vacant for years.  Even when a tenant is finally found, the rent obtained might be 40% lower than projected.  The entire commercial property market could collapse in value by 45%, like it did during the Great Recession.

Clearly, if you are trying to construct a new commercial building, the bank is not going to lend you 100% of the total cost.  Even duing the best of times, the bank is going to want you to have enough skin in the game to make sure you stick around to to complete the building.  That skin in the game is your equity.

In commercial development, your equity will come from several sources.  Your first source will be the cash you spent for the land.  Then there is the cash you spent on the architectural plans, engineering work, and permits.  Then there is value-added equity, an increase in value of the land because you got the zoning changed or you purchased adjacent parcels from different owners and assembled them all into one larger, more developable parcel (assemblage).

Banks modernly will want the commercial developer's equity to total at least 30% of the cost of the entire project.

Banks are still stinging from the losses they took in commercial real estate during the Great Recession.  If an investor wants to buy a garden-variety, multi-tenant office building, he can no longer do so by putting down a mere 25% of the purchase price (his equity).  Nervous banks now often require the buyer to put a whopping 35% down.  Who has 35% to put down?  That's a lot of equity.

It's too bad that there isn't a place where you could go to get a little bit of extra equity.  Or is there?  Blackburne & Sons now provides equity for small commercial projects in California.
 

This is my sixth article on commercial second mortgages and structured finance.  First we said that commercial second mortgages are rare because most commercial second mortgage lenders were wiped out between 1989 and 1991.  Then we said that most bank loan documents prohibit second mortgages behind commercial first mortgages.

Then we described mezzanine loans and the expensive need (huge legal fees) for an intercreditor agreement.  Next we described the New-Money-to-Old-Money Ratio (needs to be larger than 1:3) and the danger of making a small second mortgage behind a much larger first mortgage.  In my last article we said that structured finance includes mezzanine loans, preferred equity, and equity.

Along this long journey I promised to eventually bring you to a warm, profitable place.

Today's topic is preferred equity.  

First let's define a preference.  A preference is a debtor's or investor's right to get paid back first.  Let's suppose you're the richest kid on the block.  Your parents give you a huge weekly allowance of $30.  I come up with the idea of setting up a lemonade and snack stand near the parking lot during Friday night high school football games.  For the card table, lemonade mix, sugar, red Solo cups, cookies, etc. we'll need $30.  You agree to put up the $30 ... BUT, you insist that you get the first $40 of sales receipts.  We agree to split anything over $40 equally.  In this example, that first $40 is a preference.  You negotiated the right to get paid back first.  Got it?

For ease of understanding, I want you to think of preferred equity as being very similar to a mezzanine loan.  A wealthy investor buys a huge office tower in Brooklyn in late-2008 for $12 million at the very bottom of the Great Recession.  He practically steals it at this distressed and deeply-discounted price.  He finances it with an $8 million, 10-year, new conduit loan that has an enormous prepayment penalty (defeasance).

During the next five years the New York City office market recovers.  Brooklyn, in particular, has been greatly gentrified.  Now this Brooklyn office tower is easily worth $22 million.  The investor wants to pull out some of his equity, but he doesn't want to pay a $1.3 million defeasance prepayment penalty.

Therefore he approaches a mezzanine lender for a $5 million mezzanine lender.  The mezz lender looks at the loan documents and breaks the news to him that his conduit first mortgage loan documents forbid not only a second mortgage, but also any mezzanine financing.

All is not lost, however, the mezz lender informs him.  For a 1.5% higher interest rate, the mezzanine lender will made a $5 million preferred equity investment in the property.  The "lender" (actually the mezz lender has become an "investor" at this point because preferred equity is not debt, but rather an agreement to share in the profits and losses) wants a preferred return of 12.5%.

I mentioned above that preferred equity is not technically a form of debt.  Instead, its an agreement to share in the profits and losses.  But there sure better be enough profits to yield the preferred equity investor his yield of 12.5%!  If the preferred equity investor does not get his preferred return, the new Operating Agreement of the "partnership" (actually its an LLC) says that the preferred equity investor can take over the management of the property!

"But George, I thought you said in an earlier article that most conduit and bank loan documents nowadays forbid any transfer of even an equitable interest in the LLC that owns property?"

More precisely most conduit and bank loan documents prohibit the transfer of a 50% or higher equitable interest in the LLC that owns the property.  Therefore, when a preferred equity investor makes a preferred equity investment in a commercial property, they are assigned only a 49% equitable interest in the LLC that owns it.  Fancy lawyer stuff.

Very wealthy investors can pull equity out of their very large commercial properties.  That's the good news.  The bad news is that the legal fees associated with preferred equity investments are so huge that very few preferred equity investments ever get made that are smaller than $5 million (maybe $3 million).  This is a game only played by the polo crowd in New York City, not mere mortals like you and me.

I promised to lead you to a warm, profitable place.  We are almost 85% of the way to our destination.

This is the fifth article in my series on commercial second mortgages, and it will be the hardest article in the series to understand.  Just try to get through it.

Rest assured that I am leading you to a warm, profitable place; but first you have to understand commercial second mortgages (done), mezzanine loans (done), structured finance (today's subject), preferred equity, and finally equity.  I promise that you will be well-rewarded for following along.

What is structured finance?  According to Wikipedia, structured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid laws using complex legal and corporate entities.  In commercial real estate finance, the risk to be avoided is any default risk, and the law to be avoided is any income taxes.  Are your eyes glossing over?  Perhaps an example will help.

Wall Street investment bankers are considered to be using structured finance when they securitize credit card debt, scratch-and-dent home loans, auto loans, and sub-prime commercial mortgages into mixed pools.  These pools are a real hodge-podge of assets.  The loans in this giant pool are held by a pass-through trust (a special kind of trust that doesn't have to pay income taxes).

The trust then issues bonds backed by the loans in the pool.  These bonds are called asset-backed securities (ABS) or collateralized debt obligations (CDO's).  Please don't give up on me.  All we are doing is making soup.  We have a great, big pool of water, and we are sprinkling in some car loans, some credit card loans, and some poorer-quality home loans and commercial loans.  We are calling the soup a C.D.O., and the bonds that will be issued by the pool are simply called asset-backed securities.

Different classes of bonds would have different levels of risk, called tranches.  The entire CDO would be rated by some rating agency, and each tranche would be assigned its own risk-rating and yield.  Investors could then choose the tranche that they wanted to invest in, according to how much risk they were willing to accept.  The more risk they accepted, the higher the yield they could earn.

By breaking a debt offering into tranches and giving investors the chance to choose their risk level, investment bankers discovered that they could get far more money for the pool of loans.  A single buyer of the entire pool of loans might only pay $250 million; but if the bonds were broken up into tranches and rated, the investment bankers might get a whopping $290 million for the same pool of loans.  (CDO pools are typically much smaller than CMBS pools.)

"Gee, George, these fancy structured finance securitizations you described above sound just like garden-variety mortgage-backed securities."  Fannie Mae and Freddie Mac have been securitizing residential mortgages for forty years.  Conduits have been securitizing commercial mortgage-backed securities (CMBS) for over a decade.  Tell me something I didn't know."

Asset-backed securities (ABS) are very similar to mortgage-backed securities, except that some of the loans in the pool are not mortgages.  Remember, we have lots of auto loans and credit card loans in the pool.

Hey, we're almost done for the day, and the following is possibly the most important point:

When investment bankers, commercial bankers, and mortgage originators use the term, structured finance, in the context of commercial real estate finance, they usually just mean the making of mezzanine loans, preferred equity investments, and equity investments.

"Geez, George, couldn't you have just said that in the first place?  My brain feels like its gonna explode!"  :-)

This article is the fourth in my series on commercial second mortgages.  In my first article I pointed out that commercial second mortgages are rare because most commercial second mortgage lenders got wiped out in the real estate depression of 1987 to 1991.

In my second article I pointed out that most bank commercial first mortgage loans have a due-on-the encumbrance clause, making it very risky for commercial lenders to make commercial second mortgages.  In my third article I pointed out even mezzanine loans were difficult because modernly most bank commercial loan documents contained an alienation clause, which forbids even mezzanine loans.

In this article we will talk about the relative size of the second mortgage compared to the first mortgage.  For the reasons I will outline here, it is imprudent for a commercial lender to make a second mortgage that is too much smaller than the underlying first mortgage. 

The New-Money-to-Old-Money Ratio holds that the ratio of the second mortgage to the first mortgage should never be smaller than 1:3.  In this ratio, the new second mortgage is the "new money", and the existing first mortgage is the "old money".

Why?  Suppose a second mortgage lender made a $200,000 commercial second mortgage behind a $1.5 million first mortgage.  Remember, if a borrower defaults on his first mortgage, the second mortgage holder has to keep the first mortgage current while he forecloses; otherwise, the second mortgage holder risks being wiped out by a foreclosure of the underlying first mortgage.

Now suppose the borrower defaults on both the first and second mortgages.  The second mortgage lender would have to keep the first mortgage current.  For this example, let's suppose the monthly payments on the underlying first mortgage were $15,000 per month.  If the foreclosure took 18 months*, the second mortgage holder would have to advance 18 monthly payments of $15,000 or a whopping $270,000 - just to protect a tiny $200,000 second mortgage.  Yikes!  In real life, most second mortgage lenders would just walk away.

So what would be a more reasonable second mortgage?  The New-Money-to-Old-Money Ratio suggests that the first mortgage should never be more than three times larger than the proposed first mortgage.  In our example, the first mortgage is $1.5 million.  Therefore the smallest second mortgage that would be economically justifiable would be $500,000.  Most lenders would advance $270,000 to protect $500,000.

*  Above I mentioned that the foreclosure might take 18 months.  Many states use mortgages, rather than deeds of trust.  In a mortgage foreclosure, the process has to take place in court.  Courts can often be backed up and extremely slow.  If the subject property is located in a trust deed state - like California or Arizona - the foreclosure process does not involve the courts and is usually much faster.

In addition, many times a second mortgage lender doesn't realize that the borrower has defaulted on the underlying first mortgage until the borrower is four to five months behind on the first mortgage.  The second mortgage holder would have to cure the first mortgage before he even starts his foreclosure, if he wants to keep the first mortgage lender's late charges, default interest, and legal fees to a minimum.  Yikes!

Lastly, if the property enjoys protective equity, a great many borrowers will file a Chapter 11 Bankruptcy to delay the foreclosure sale.  This means even more months of keeping the first mortgage current.

Later in the week we will talk about preferred equity and then later equity, a fairly sophisicated subject.

If you are enjoying this series of articles, how about giving your old buddy a "Like" above?  Thanks!

My private money commercial mortgage company, Blackburne & Sons, once had to foreclose on a commercial first mortgage loan on an office building in the State of New York.   Even though the borrower didn't fight us very much, because New York is a mortgage state, as opposed to a trust deed state, it still took us well over 18 months.  The process through the New York courts was very, very slow.

Now imagine if we had a made a $200,000 commercial second mortgage behind a $1.5 million first mortgage.  Remember, if a borrower defaults on his first mortgage, the second mortgage holder has to keep the first mortgage current while he forecloses; otherwise, the second mortgage holder risks being wiped out by a foreclosure of the underlying first mortgage.

It doesn't really matter how much equity the property enjoys.  The property in the above example could have been worth $4 million, and the second mortgage holder would still be wiped out 99% of the time.  Why?  In real life almost no one ever bids at commercial foreclosure sales.

The reason why is because the bidder has to show up at the foreclosure sale with enough cash to pay off the entire foreclosing first mortgage.  If the first mortgage was was originally $1.5 million, with accrued interest, late charges, penalties, legal fees, and foreclosure costs, the bidder would probably have to bring a cashier's check to the foreclosure sale of almost $2 million!  This just doesn't happen in real life.

Okay, so in our example, we made a $200,000 second mortgage behind a $1.5 million first mortgage.  We have to keep the first mortgage current, and let's suppose the monthly payments on the underlying first mortgage were $15,000 per month.  If the foreclosure took 18 months, the second mortgage holder would have to advance 18 payments of $15,000 or $270,000 - just to protect a tiny $200,000 second mortgage.  Yikes!

Clearly commercial second mortgages behind large first mortgages are darned risky.  Therefore smart financiers came up with the idea of mezzanine loans.

You will recall that a mezzanine loan is loan secured by the stock of the corporation that owns the property.  (More precisely, since most real estate investors use LLC's, rather than corporations, a mezzanine loan is a loan secured by the membership interests of the LLC that owns the property.  For ease of understanding throughout this article, however, I will continue to use stock and corporations, rather than membership interests and LLC's.)  If you own all of the stock of the corporation that owns the commercial property, you own the commercial property.

What's the big advantage of a mezzanine loan over a commercial second mortgage loan?  Stock is personal property, not real property.  A foreclosing lender does not have to go through the long mortgage foreclosure process.  Instead, he can simply advertise the foreclosure sale of the stock in a commercially reasonable way and then hold the sale in some attorney's office.  Since no courts are involved, a mezzanine loan foreclosure can happen in just 60 to 70 days!

So far, so good.  But there is a problem.  The alienation clauses of most standard commercial first mortgages prohibit the hypothecation (the pledging of an asset as security for a loan) of the stock of the corporation that owns the property and which borrowed the underlying mortgage loan.  Banks and conduits do this because they don't want some idiot-rookie taking over the management and control of a some multi-million-dollar commercial property.

So how then are mezzanine loans ever made?  The mezzanine lender signs an intercreditor agreement with the underlying first mortgage holder, whereby the first mortgage holder agrees not to disturb the mezzanine lender, if the mezzanine lender forecloses, as long as the mezzanine lender keeps the first mortgage current.

But good luck ever getting a bank to sign an intercreditor agreement.  The vast majority of the time, the bank will refuse to sign an intercreditor agreement; and if they ever do agree to sign one, it takes months of negotiations and thousands of dollars in legal fees.

Commercial second mortgage loans and mezzanine loans are therefore very, very rare.  Monday we will talk about the ratio of new money to old money and preferred equity.

Want to receive free commercial real estate finance training several times per week?  Remember, every chapter in every one of my expensive training courses started out first as a blog article.  Just find my ugly face in the upper-right-hand corner of this blog and fill in your email address below.

Yesterday I explained that the most important reason why commercial second mortgages are so rare these days is because all of the commercial second mortgage lenders got wiped out in the commercial real estate depression of 1987 to 1991.  Today I will explain a number of legal barriers facing commercial lenders wishing to make commercial second mortgages.

Most modern commercial mortgages contain a due-on-encumbrance clause.  This means that if the borrower places any junior financing on the property, the underlying first mortgage lender has the right to declare the borrower in default and to accelerate his loan; i.e., demand that the borrower immediately repay the loan in full.

It gets worse.  Most modern commercial mortgages also contain a provision whereby any alienation of title without the first mortgage lender's permission is grounds to accelerate the mortgage.  Alienation of title means the transfer of any legal or equitable ownership right in the property.  In this context the word "alienation" means "to make foreign" or "to send away".  When you alienate your wife's affection by yelling at her, you send her love for you to a foreign planet.

Okay, let's not forget where we are.  We are talking about the legal obstacles to making commercial second mortgages.  Placing a second mortgage on a commercial property constitutes a form of alienation of title.  You better get the lender's permission first because further encumbering the property is grounds for accelerating the bank's first mortgage.

"Mr. Borrower, this is Bob Smith, the loan officer at the bank.  I see that you recently placed a $200,000 second mortgage on your apartment building.  It is my duty to tell you, Mr. Borrower, that because you did not first get our permission, you are now in default on our $3.4 million first mortgage.  We are hereby accelerating it.  Would you please pay off our entire $3.4 million commercial loan by 5:00 p.m. tomorrow?  If you fail to do so, we will be forced to start seizing your assets (like all of the cash in your checking and savings account).  Have a pleasant day."

Have a pleasant day?

Tomorrow we'll talk about prohibitions against mezzanine loans, preferred equity, and springing personal guarantees.

Later in the week I will share with you the ratio known as the Old-Money-to-New-Money Ratio.  Today, however, I will explain why very few commercial lenders make commercial second mortgages.

Perhaps the the most important reason why so few commercial second mortgages are getting made is because virtually all of the largest commercial second mortgage lenders were wiped out in the commercial real estate recession of 1987 to 1991.

Prior to 1987, high-income-earners, like doctors, could shelter much of their employment income by using passsive losses (depreciation) from commercial real estate.  In late 1986, Congress completed a major tax overhaul that eliminated the advantages of passive losses from commercial real estate.

Suddenly commercial real estate lost much of its appeal, and commercial real estate values plummeted by a whopping 45%.  (Note to my sons:  That number - 45% - is an important historical number.  Commercial real estate tends to fall no more than 45%, even in the absolute worst of recessions / slumps.  The next time commercial real estate falls more than 38%, syndicate our investors and start buying back into the commercial real estate market.)

The commercial real estate recession (heck, it was a depression) lasted for five long years.  Wonderful, old commercial hard money lenders took painful losses in second mortgages.  In most cases the second mortgage holders were completely wiped out, as they ran out of money with which to keep the first mortgage current.  A great many commercial second mortgage companies - companies run by honest, competent men that had been in business for decades - simply went out of business.

The commercial second mortgage industry never recovered.  It's been well over 25 years since more than one commercial lender out of hundreds would consier a commercial second mortgage.  Commercial second mortgages are so rare today that its easier to think of them as if they no longer existed.

Tomorrow I will write about some serious legal problems facing commercial second mortgage lenders - things like the due-on-encumbrance clauses and prohibitions against alienating title in any way; e.g. mezzanine loans and preferred equity.

But for now you can simplify your understanding by remembering that the reason why commercial second mortgages are so rare is that all of the commercial second mortgage lenders got wiped out between 1987 and 1991.  The commercial second mortgage industry never recovered.

Our hard money commercial mortgage company, Blackburne & Sons, is working on a $2 million loan this week; and we have run into an interesting situation.  Our borrowers originally purchased a foreclosed apartment building from a bank, subject to an unpaid water bill.

As we proceeded further into the underwriting, we discovered that the unpaid water bill was a whopping $400,000 - plus it was a senior lien on the apartment building!

Obviously this water bill will have to be paid in full before we close our new loan; otherwise, the water company could foreclose on the building and wipe out our mortgage.  But at least the unpaid water bill was a recorded lien.  The water company was playing fair.

We once foreclosed on an apartment building near Kansas City, Missouri.  When we went to put the water bill in our name, we discovered to our horror that the water company was owed $70,000 by the prior owner.  Before the water company would turn the water back on, we, the innocent purchasers for value (foreclosure), had to pay the former owner's water bill!  The water company was a monopoly, and the city had passed a local ordinance authorizing the water company to withhold services until the buyer paid off the prior owner's bill.  Nothing was recorded on title.  

I'm not sure that such an obviously corrupt scam would survive a legal challenge; but the reality is that the city could withhold water services for years while the case made its way through the courts.

Is there a lesson to be learned here?  I dunno.  Perhaps its this, "There are all kinds of ways to lose money in commercial real estate."  Yikes.

This is an immensely important blog article for you.  If you can make the leap from just arranging commercial real estate loans (debt) to arranging both commercial real estate debt and real estate equity, you will have truly become a commercial real estate financier.

The first step to becoming a true financier is to understand the concept of equity.   The link above is an article that you should read first before going any further.  I please mean it.  Equity has about a dozen different definitions, depending on the situation.  Please read this article first before going any further.

Okay, now that we understand the concept of equity, let's talk about the cost of equity.

Equity is the first-loss piece.  It's kind of like that old joke:  What do a divorce and a tornado have in common?  Answer:  Somebody is going to lose a trailer.  If anyone is going to take a loss in a real estate deal, its going to be the holder or the contributor of the equity.

For example, let's suppose four yuppies pool their savings to buy a rental duplex in Council Bluffs, Iowa.  Between the four yuppies, they put 30% down on a $200,000 purchase price.  Crop prices suddenly fall, over-leveraged farmers across the country start losing their farms in foreclosure, and John Deere closes the nearby manufacturing plant.  Ten thousand workers are laid off in Council Bluffs, and rents plummet.

The yuppies can no longer find tenants for their rental duplex, they fall behind in their mortgage payments, and eventually the house sells at the foreclosure sale for $150,000.  After the $10,000 selling costs (foreclosure trustee, title policy, closing costs, etc.), the bank nets $140,000 - enough money to be repaid in full.

All is well, right?  Not if you contributed the equity!  The first people - and in this case, the only people - to lose money in this failed investment were the contributers of the equity.  They lost their entire $60,000 downpayment.  Equity is always the first-loss piece.

Remember, we're talking about the cost of equity.  Investing in equity is very, very risky, and in order to attract investors, the potential return has to be higher than what they can receive in competing real estate investments.

Well, banks are making commercial first mortgages at around 5.5%.  Their loans are pretty safe, typically just 65% LTV to good credit borrowers.  Hard money lenders are offering investments in commercial first and second mortgages at rates of between 10% and 14% (and they charge their borrowers 3 to 5 points as well).  Even hard money second mortgage investments are far safer than equity investments.

Therefore, you should not be surprised to learn that equity investors want to earn at least 16% to 20%.  In addition, the broker syndicating the investors is going to charge at least 6 to 10 points.  This isn't just what Blackburne & Sons is charging.  This is the market.  Equity is expensive.

Equity money is also very difficult to raise because of the risk.  Therefore, Blackburne & Sons can only raise equity for commercial real estate projects in amounts of between $150,000 and $600,000.  In other words, we play only in the minnow pond when it comes to equity.

Here are some sample scenarios:

1. The owner of a company has a balloon payment coming due on his industrial building.  He owes $2 million.  The property was once worth $3 million, but after the Great Recession it has fallen to just $1.9 million.  The bank has offered to accept a discounted pay-off (DPO) of just $1.35 million, but the largest new mortgage he can find is $1.1 million.  He is $250,000 short, and he doesn't have the dough to make up the difference.  Blackburne & Sons may be able to raise the $250,000 short-fall.
2. An experienced commercial real estate investor spots the deal of a lifetime - a partially leased office building in an affluent part of town that would cost $3 million to rebuild.  The seller has accepted a $2 million purchase offer, and the buyer has 25% ($500,000) to put down.  The buyer approaches every bank in town, but none of them (the big sissies) will lend more than $1.1 million because of the vacancies.  Blackburne & Sons may be able to raise the $400,000 short-fall for him.

We will pay referring brokers a finder's fee of 2 points on the net amount ($250,000 and $400,000 in the examples above) of the equity we raise.

Got a potential equity deal?  Please call or write Angela Vannucci, Vice President and the General Manager of our Equity Department, at 916-338-3232 or email her at angelav@blackburne.com.

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You can rely on C-Loans to keep you apprised on the latest developments and products in commercial real estate finance.  If you have not already subscribed to this blog, please do so by typing your email address into the field directly below my ugly face.

Advertising directly to the public for commercial loans simply does not work ... at all.  What does work is sending out a newsletter regularly to a small list of referral sources - folks who, because of their jobs, see lots of commercial loan requests coming across their desk every week.

Bankers and commercial real estate brokers are, by far, the best referral sources.   The next best referral sources of commercial loans, with the better ones listed first, include property managers, residential mortgage brokers (on a name and number referral basis ONLY), residential real estate brokers, other commercial lenders, attorneys, CPA's, and financial planners (life insurance agents).

So we all now know WHAT to do to attract more commercial financing requests; but too few of you commercial mortgage brokers are regularly sending out newsletters.  I think the problem is that you think you have to make your newsletters too long and fancy.

For twenty years I used snail mail to send out my newsletters.  I wrote these newsletters on the front and back side of a legal-sized sheet of copy paper.  I used no fancy fonts, and the newsletters contained no color.  They were simply black and white.  These newsletters worked just fine - better than fine, actually.

Today email is much faster and cheaper than snail mail.  If you get slow, you can write a commercial mortgage newsletter in an hour and blast it out immediately to your contacts.  It does not have to be fancy!  You should start with a plain-text email newsletter.  Just make sure that it is jammed full of fun stuff - jokes, interesting stories you've recently heard, movie reviews, book reviews, cool things that you have seen or heard recently, and stories about your family.

"But George, where am I going to get jokes for my commercial loan newsletter?"  Just steal mine from here.  You'll find hundreds of cute, clean jokes.

The lesson I want to drive home to you today is this:  Start sending out commercial mortgage newsletter every ten to 21 days, even if it is very short and very simple.  Stop making excuses, and get it done.  All you are really trying to do is keep your name and contact information in front of your referral sources.

I recently wrote a commercial real estate loan newsletter to my commercial mortgage brokers of which I was very proud.  Come take a peak at my recent newsletter.  Yours does not have to be anywhere near this fancy.  Remember, I have been writing newsletters for thirty years.

Just make SURE your commercial mortgage newsletters are jammed full of Rat Goodies.  Think of your newsletter as an hour-long TV show.  There are 48 minutes of the actual TV show - the cops chasing the bad guys - and every twelve minutes there is a BRIEF word from the sponsor.  Therefore, most of your commercial mortgage newsletter should be devoted to entertainment.  When you do mention your commercial real estate loan services, it should be done quickly and just in passing.

Be sure to review this five-slide lesson on Rat Goodies.