Commercial Loans and Fun Blog

Just as I was finishing up my new training course on The Practice of Commercial Mortgage Brokerage - How to Fix Your Commercial Mortgage Business if You're Not Making Any Money (available 11/20/12), I received the following email from a sweet but obviously new commercial mortgage broker:

“Would any of your contacts fund a $50 million construction loan on a renewable energy project in Mexico?”

What a perfect teaching opportunity!  Let’s count together just how many important reasons why such a deal would never close.  The first three reasons are glaringly obvious.  The last two reasons are a bit more subtle:

1. The loan is much too large for a newbie commercial mortgage broker.  Remember, to qualify for a $50 million loan, the borrower would need a net worth of roughly $50 million.  Don’t forget that the borrower’s Net-Worth-to-Loan-Size Ratio is supposed to be at least 1.0.  Borrowers with a $50 million net worth don’t often apply to newbie commercial mortgage brokers.  Borrowers with a bona fide $50 million net worth typically have a dozen different bankers soliciting their business regularly.
   
   
2. Very few banks are making commercial construction loans right now.  Those few banks that are making commercial construction loans will seldom exceed 58% loan-to-cost.  This means that on a $50 million project, the developer would have to cover 42% of the total project cost, which equates to $21 million.  Not a whole lot of developers can contribute $21 million to any project these days.
   
   
3. The property is located in Mexico, making this an international loan.  International loans almost never close.  Why?  Because most countries levy a 30% tax on the interest income of foreign banks.
   
   
4. Daisy chains don’t close.  You’ll recall that a daisy chain is a deal that goes from broker to broker.   Blackburne & Sons is a small hard money shop, and our maximum loan is around $2 million.  There is no way we could fund a $50 million deal.  This means that we would have to broker out the deal ourselves, making this a broker-to-broker deal; i.e., a daisy chain.  Daisy chains don’t close!  (Unless each broker charges just a tiny fee – say, 15 to 25 basis points – and all of the brokers quickly get out of the final lender’s way.)
5. The collateral for the loan will be a highly-unusual property type, an alternative energy project.  Properties like ethanol plants are always far more difficult to finance than plain vanilla commercial properties, like shopping malls.  Trying to finance an unusual property type during the Great Recession is a pipedream.

Folks, this nice lady broker is not likely to feed her family with a commission earned on the closing of this deal. 

She needs to spend her time soliciting her referral contacts for do-able deals, like a $1.2 million refinance of a ballooning loan on an apartment building.

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With high-speed access to the internet, email, scanners with automatic document feeders, PDF software, and cloud computing –

the typical commercial mortgage broker does not need a single employee.

If you currently have a loan processor and several junior loan officers working for you, I strongly encourage you to let them go as soon as possible.

You certainly don’t need a loan processor.  You can simply do the loan processing yourself.  After all, your commercial lender will do most of the actual loan processing. 

Your job is to solicit deals, screen them, figure out the most suitable commercial lender for the deal, present the deal in an organized and understandable manner (usually as a PDF), and to fetch the loan documents.

You don’t need a loan processor to do any of these things.  In fact, it will usually take you far longer to explain the deal to your processor than to just do the packaging yourself.

You will solicit commercial loans yourself using email and fax newsletters.  You have to write these newsletters yourself.  When you’re done writing the newsletter, you simply email it off to ConstantContact (email newsletter service) or Westfax (fax service) for delivery.  There is little that a loan processor can do to help you here.

You’ll have to read the loan documents yourself, so there is little that a loan processor can do here to help you to underwrite any of your loans.

In the old days, hard copies of commercial loan packages were delivered by Fed Ex, the U.S. Postal Service, or in person.  A commercial mortgage broker desperately needed a loan processor back then to assemble the package and to make multiple copies of it.

Modernly, you will assemble your commercial loan package on your personal computer and then turn it into a PDF.  Delivery will be accomplished by email.  There is nothing for your loan processor to assemble, collate, and photocopy.

What about the really thick legal documents, like tax returns and lengthy LLC Operating Agreements?  They are usually too large to be sent by email.

The custom today is to simply scan these documents, turn them into a PDF; upload them to some cloud computing service, like Box.net or Dropbox.com; and then to send your lender a link by email with instructions on how to download the documents.

You do NOT need a loan processor to scan a tax return when your scanner has an automatic document feeder.  You can perform the whole function yourself in less time than it would take to explain the task to your processor.

Commercial mortgage brokers simply no longer need a loan processor.

“But George, won’t a loan processor make me more efficient?”

Here’s the problem:  Commercial mortgage brokers typically close their deals in clumps.  Life would be so much easier if a commercial mortgage broker could count on closing two to three deals every month.  It doesn’t happen that way in real life. 

The typical commercial mortgage broker will go at least 70 days between loan closings several times per year.  He may close 30+ loans per year, but he will go 70+ days between loan closings at least twice a year.  (Then he’ll close five or six deals in a two-week period.)

Paying out a salary to a loan processor after you have gone 70 days without a loan closing is a budget buster.

Don’t do it.  You do NOT need a loan processor.

“But George, won’t I get lonely?”

If you get lonely, move out of the house and rent a desk in some realtor’s office.  But don’t hire a loan processor!

I also think that you should NOT train junior loan officers to work alongside you in your office.   You will waste 50+ working hours training each loan officer - hours that would have been better spent making sales and working on your personal newsletter lists.

Then, just when your junior loan officer finally starts making you money - after disturbing you daily for 14 months - your junior loan officer will leave you to go to work for another commercial mortgage broker down the street.  He’ll become your competitor.

Don’t do it.  Don’t take time away from your personal selling.  Don’t train your future competition.  Do not hire and train junior loan officers.

Folks, if you want to make and keep a lot of money in the commercial mortgage business, fire all of your staff.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

The wise commercial mortgage broker will run his mortgage business out of his house.

Your borrowers certainly won’t mind.  In fact, they will probably think you’re pretty smart.  After all, just about every business owner in America was forced to make painful cuts to his staff and his overhead during the Great Recession.

You do NOT need a fancy office to impress your commercial mortgage borrowers.

If your commercial mortgage client needs to drop off some loan documents, just have him bring the documents by your house.  Don’t be embarrassed about it.

Now I don’t think I would invite some strange, deadbeat, home loan borrower to my house; but remember –

in commercial real estate finance almost all of your clients will be wealthy and classy.

So go ahead and introduce your multi-millionaire commercial borrower to your lovely wife.  Use this home visit to bond with your client, as he notices that your home is neat, clean, and tastefully decorated.  After the visit, he’ll almost feel like he’s part of your family.

Let me share a verbal proof story with you.  Before I made the move into hard money, I worked as a plain-vanilla commercial mortgage broker for seven years.  I started off by working out of my house, and I made very good money.

But then I opened an office that cost me several thousand dollars per month extra for rent, utilities, and janitorial expenses.  Slowly my finances began to deteriorate.  I no longer had a lot of extra cash in my business checking account.  My credit card balances grew. 

Eventually I realized that I would have to give up my office in order to lower my overhead.  I cut a deal with my landlord to escape early from my lease.  (I’m proud to say that I went back and repaid him every single penny that I owed him.)

Then I retreated back to working out of my house.  Almost immediately I started making very good money again. 

However, being the silly man that I was, I once again opened an office and took on an extra $2,000 per month (probably the equivalent of $3,500 today) in unnecessary expenses.

You will shocked – shocked, I tell you – to learn that the same thing happened again.  I quickly ran out of money, so I once again retreated to working out of my house.   Then – surprise, surprise – I started making very good money again.

“George, don’t you dare tell me that you were soooo stupid that you opened another office?  No one can be that stupid.”

Yup.  And once again I eventually had to retreat back to my house, where I proceeded to once again make very good money.  Is anyone seeing a pattern here?

Two years later I entered the hard money business and built up a large, automatic, monthly loan servicing income (almost like insurance residuals).  At that point, when I was bringing in $7,000+ per month in loan servicing fees, I once again moved out of the house and into an office for the final time.

Bottom line, folks, if you want to make and keep a lot of dough in the commercial mortgage brokerage business, you will either work out of the house or just rent a desk in some realty broker’s office for, say, $300 per month.

You do NOT need a fancy office.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

In our last lesson, I told you to always get a signed fee agreement from your commercial mortgage borrower.

However, if you demand that your borrower sign your fee agreement at the very start of the application process, it is very likely that you will scare him away into the arms of one of your commercial mortgage brokerage competitors.

So how do you get your commercial mortgage borrower to sign your fee agreement?

The secret is to make your commercial mortgage borrower fetch you a lot of documents and to do a lot of work.  Then, before you personally do a lot of work on the loan, you ask him to sign your fee agreement.  At that point the borrower will be tired and reluctant to start the exhaustive process all over again with a competing broker or lender.  He’ll sign your agreement.

For example, the processing of a commercial mortgage loan might go as follows.  Please be sure to note that I usually don’t ask for the borrower to sign a fee agreement until day ten, after he has gathered more than 50 pages of documents.

1. Day One:  Ask for a Rent Roll / Schedule of Leases and last year’s Actual Operating Expenses.  When they arrive, you should quickly scratch out a pro forma operating statement on a yellow legal pad and make sure the deal cash flows.  Call the borrower and give him the encouraging news that his loan looks good.
   
   
2. Day Two:  Ask for color pictures of the property.  When they arrive, glance at them quickly and then do some demographic research to make sure the property is not located in some ghetto.  Assuming the area is okay, call the borrower with the encouraging news that his loan looks good.
   
   
3. Day Three:  Ask for an old financial statement and two years’ tax returns.  Glance at the them quickly to make sure the borrower is making a little dough and that his net worth is at least as large as the loan amount.  Call the borrower and give him the encouraging news that his loan looks good.
   
   
4. Day Four:  Ask for copies of all of the Leases.
   
   
5. Day Seven:  Ask for a financial statement and two years’ tax returns on the LLC that holds title to the property.
   
   
6. Day Ten:  Before you do any serious work on the file, tell your borrower that you are ready to submit his loan to your investor, but first you need him to first sign your “application.”  When the application arrives, he discovers for the first time that you are actually asking him to sign your simple fee agreement.  At that point in time, he certainly doesn’t want to start all over.  In most cases, the borrower will sign.   If he won’t sign, move on to your next deal.  Please note that you personally have done very little work, other than to label a file folder, fill it with his documents, and scratch out a pro forma operating statement.   It’s the borrower who has done all of the work.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

An important and painful lesson learned by just about every new commercial mortgage broker is to always require a signed fee agreement from the borrower.

You’re going to learn this painful lesson eventually.  The only real question is whether you learn this lesson after losing just five big commissions ($20,000+) or you have to lose fifteen big commissions before you learn this lesson.  Either way, you will learn this lesson:

Always get a signed fee agreement with the borrower.

You probably think that the purpose of the fee agreement is to protect you against the borrower refusing to pay your commission at the closing.  This happens occasionally but not very often.  By the time most commercial mortgage loans get ready to close, most borrowers are exhausted, impatient, and eager to close the deal.  The borrower doesn’t want to risk starting the four-month application process all over again by appearing dishonorable in front of the lender.

The real reason you need a fee agreement is to protect yourself against (1) borrower fraud and (2) unjustified borrower cancellations. 

Commercial mortgage borrowers lie all of the time.  They lie about having the target property in contract.  They lie about having the cash to make the down payment.   They lie about the purchase price.  On refinances, they tell tall tales about the value of their commercial property.  They withhold material information about their past credit problems.  They lie-lie-lie.  If you have a fee agreement with them (a contract to arrange a commercial loan), you can sue them for lying to you.

You will also quickly learn that commercial mortgage borrowers have no appreciation for the value of your time.  They will work you for hours and hours … and then cancel on you for no legally sufficient reason.  Their attitude is, “Everybody knows that you don’t owe your mortgage broker a fee unless the deal closes.”

Excuse me, but these are not owner-occupied, one-to-four family loans with a personal, family, or household purpose.  Commercial loans are not subject to Reg Z.  There is no legal Right of Rescission.  If you cancel a commercial mortgage loan, in many cases you will still owe your commercial mortgage broker his fee.

I got screwed out of my commission so many times as a commercial mortgage broker that I went to law school and became an attorney.  Imagine going to law school with two children in diapers.  I never missed a day of class.  I briefed every case.  I graduated with honors.  I did all of this because I was tired of getting screwed out of my commission.

I never practiced law in the traditional sense, but over the next six years I proceeded to sue 30+ commercial mortgage borrowers who cheated my company and me.  I won almost every case.  These were not innocent consumers of whom I took advantage.  These guys were filthy rich investors who thought they could get away with cheating a poor mortgage broker.  Thirty times the court (more precisely the arbitrator) agreed that they had in fact cheated us.

I teach a separate Commercial Mortgage Broker Fee Collection course for just $199 that comes with a sample fee agreement.  I strongly encourage you to take this course.  It may prove to be the turning point in your career as a commercial mortgage broker.

Until then, here are some pointers:

1. Always make sure that your fee agreement provides for arbitration under the Rules of the American Arbitration Association.
   
   
2. Make sure your agreement provides that any hearing will be held in your own hometown, not in some state 1,000 miles away.
   
   
3. Make sure your contract forbids the award of attorney’s fees.
   
   
4. Make sure your contract has a non-circumvention clause.
   
   
5. Your agreement does not have to be an exclusive agreement.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

If you want to succeed as a commercial mortgage broker, you need two things:

1. A large number of referral sources who are in a position to refer you a lot of commercial mortgage leads.
   
   
2. A large number of wealthy clients who regularly need commercial real estate loans themselves and/or who have lots of friends who need commercial real estate loans.

Today we are going to focus on item two in the list above.

The good news – and this is really good news – is that its easy for a commercial mortgage broker to meet high-net-worth investors.   Why?

The vast majority of your borrowers will be wealthy investors.  After all, poor folks don’t own multi-million dollar commercial properties.  Wealthy investors do!  It’s like being a Rolls Royce salesman.  The people walking the car lot are unlikely to be janitors.

Therefore almost every time you are speaking with a commercial mortgage borrower, you are speaking with a wealthy investor.  In fact, I have often said,

There is no easier way to meet high-net-worth investors than to be a commercial mortgage broker.

[Side note:  I own a $50 million hard money shop, and every single one of my early trust deed investors was a former borrower.  Do you see the benefit of staying in touch with your wealthy former borrowers?]

Once you have worked on a commercial real estate loan for a wealthy investor, regardless of whether or not the deal actually closed, you have established legitimacy with him. 

You are no longer some stranger that he met calling out of the Yellow Pages or over the internet.  You are a real life person who treated him honestly and worked hard for him.  If the deal didn’t close, the investor may even feel a little obligated to you because you worked so hard for him and didn’t get paid.

You must be tenacious about staying in touch with the wealthy investors that you meet in the legitimate course of business.

Not only will these wealthy investors need commercial loans in the future, but so will their buddies at the country club.

So what’s the best way to stay in touch with your list of wealthy investor clients?  I recommend a fun email newsletter like this one.

If you want to be rich, you will add three to five new wealthy investors to your email list daily.

“Three to five per day?  George, I don’t meet three to five wealthy investors daily!”

Yes, you do.  How many commercial loan shoppers do you talk to daily?  Eight to ten?  If so, at least three to five of them will be bona fide income property investors, people with whom you want to stay in touch.  

Remember, all you have to do is to quote a commercial loan to an investor to establish the beginning of a relationship.  Even if he never sends you his commercial loan package, you should add him to your contact list.

You know what drives me absolutely nuts?  Newbie commercial mortgage brokers working on international loans, loans on gold mines, or other goofy, never-going-to-close deals, rather than building their email list of wealthy investors (with whom they have a little bit of a relationship) and their email list of referral sources.  Dumb-dumb-dumb.

You can make all kinds of money from your wealthy investor clients:

1. You can arrange commercial loans for them.
   
   
2. You can pay them referral fees for referring their friends.
   
   
3. You can sell them mortgage investments.  Remember, I own a $50 million hard money shop, and all of my early mortgage investors were former borrowers.
   
   
4. You can syndicate your wealthy investors to buy foreclosures or other opportunistic real estate investments.

So pay attention!  You are already meeting three to five wealthy investors every day.  Capture their address, phone number, and email address and then add them to your email list.  Then hit them with a fun newsletter at least every three weeks.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

Right behind my right ear is this goiter that swells up, pulsates, and glows a florescent internet green whenever I run across a commercial loan that smells like a big commission.  I call that goiter my "greed gland", and boy does that sucker pulsate (thump-thump, thump-thump) whenever I stumble across a hot commercial mortgage lead.

It's sort of like that old joke, "What do a hurricane, a tornado, and a redneck divorce all have in common? Someone's fixin to lose a house trailer."  Well, when certain stars align, some lucky commercial mortgage broker is fixin' to earn a big commission.  But here's the $20,000 question, "What do the stars look like when a commercial loan is almost certain to close?"

It's easy to spot the hopeless deals:

1. Commercial construction loans
2. International commercial loans
3. Letter of credit commercial loans
4. Most large commercial loans
5. Loans on casinos and mines
6. Land loans

Here are some of the deals that make my greed gland glow:

1. Loans with balloon payments.
2. Deals where the bank has offered a discounted pay-off.
3. Since the start of the Great Recession, low-LTV commercial mortgage loans to business owners to help cover their losses.
4. When an heir inherits a free-and-clear commercial property, he usually has it mortgaged to the hilt within five nano-seconds.

I used to teach my students that, "Commercial property owners who pay off their mortgages almost never mortgage their commercial properties again.  Corrolary:  When an heir inherits a free-and-clear commercial property, he usually mortgages it to the hilt within five nano-seconds."  Yeah-yeah, I said the same thing in the list above, but this is so important that it was worth mentioning again.

Since the Great Recession, we have refinanced a number the commercial properties where the business owners had previously paid off their mortgages.  Clearly the rule is not perfect.  The Great Recession was just so bad that they just plain needed the money.

The wise commercial mortgage broker will therefore not waste his time working leads from the first list, but rather he will relentlessly pursue the leads from the second list.  And if he has worked all of the hot leads, he will devote his time to marketing for more referral sources.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please-please-please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

On December 21, 2024, old man Blackburne was fatally struck by a car while crossing the street with his beloved family.  Fortunately, only the old man was hit.  George didn’t die instantly.  He died of internal bleeding about four minutes after the collision.

Arguably it was a blessing.  As his wife of 42 years held his hand, he had time to remind her of his undying love.  To his three children, he told them each that they had made him very proud.  And as the light started to dim in his eyes, he passed on one final lesson to his sons:

“And please always remember, sons, the most important lesson in all of commercial mortgage finance.  It’s a critical lesson that I wish I had understood much earlier in my career.  Commercial lenders close loans for their friends.”

That’s it?  Those were George’s final words?  What could possibly be so important about those simple seven words?

By the way, its just 2012 right now, so I still have another twelve years before I get hit by that car.  I just needed a way to dramatize this lesson so that you would remember it.

We start from the basic proposition that every commercial real estate loan ever made had at least a few black hairs.  Maybe the property had some vacancies.  Maybe the borrower’s net worth was not larger than the loan amount.  Maybe the property was a little older.  There are a thousand potential flaws to a commercial real estate loan, and every deal has at least a few of them.

Will the commercial lender fixate on the one or two negatives on your deal or will he recognize the two-dozen other pluses?  The answer lies with your loan officer and with Loan Committee.  Do they like you?  If so, your deal has a chance.

Commercial lending is also an advocacy process.  Loan Committee’s job is to say, “No” to every deal.  Their job is to point out the flaws in your commercial loan package.  Your loan officer is like the public defender in a criminal trial.  His job is to convince Loan Committee that your commercial loan request should be approved.  It’s his job to point out all of the strengths on the deal and to refuse to take “No” as an answer.

So will your loan officer fight hard for you in Loan Committee?  Well… does he like you?

But how do you make the loan officer at the bank like you?

1. If you are personable and the lender is local, try to deliver your commercial loan package in person.  Sit down and get to know your commercial loan officer.  Chat him up.  Schmooze him.
   
   
2. Make a big fuss over the receptionist or the commercial loan department secretary.   Bring her flowers or candy.  Joke or flirt with her over the phone.  Compliment her in an interesting way.  “Hey Julie, I really like your new necklace.”   You want her saying, “Mr. Wilson, that nice Mr. Blackburne is on the phone,” rather than, “Hey, boss, that jerk Blackburne is holding for you.”  (I was soooo arrogant in my early years as a commercial mortgage broker, and I was often rude to the receptionist.  Dumb-dumb-dumb.)
   
   
3. Make sure your commercial loan package is nicely organized and understandable before you submit it.  Lenders appreciate a well-organized package.
   
   
4. Take your loan officer out to lunch.  Everybody loves a free lunch.
   
   
5. Take your loan officer out for drinks after work.
   
   
6. Play golf with your loan officer.  Golf is a great way to develop a relationship with a lender.  (BTW, it is now October of 2016, and I am updating this article.  I just came back from the 2016 Western States CREF Conference, where I arrived a day early to play in the golf tournament.  I made two wonderful contacts at the golf outing, both of whom only make the HUGE loans.)
   
   
7. If your loan officer is local, invite him to a ball game or a barbeque at your house.  Even if he has to decline, he will appreciate the invitation.
   
   
8. If your loan officer is located far away, arrange in advance to meet him at a commercial real estate finance trade show.  Meet for drinks or golf there.  (The Big Boys - the really big lenders like Key Bank or Holiday Fenoglio and Fowler - rent small meeting rooms or cabanas around the pool at big conferences to hold private meetings all day long with their best brokers.)
   
   
9. The great Dale Carnegie, author of Making Friends and Influencing People, tells the story about how he learned that the 12-year-old son of an important sales prospect collected foreign stamps.  When Dale Carnegie received an envelope from Africa with an unusual stamp a few weeks later, he rushed it over to his sales prospect.  The man was immensely grateful, and Mr. Carnegie eventually made that sale.  My point here is to look for ways to show kindness and thoughtfulness to your bank loan officers.  If you want to have friends, be a friend.
   
   
10. Invest a little money in your schmoozing of bankers.  Commercial real estate loan officers may move from Bank of America to Wells Fargo Bank, but they seldom leave commercial real estate lending completely.  Your investment in most cases will pay off handsomely.

As a mortgage broker, a good argument can be made that the most significant contribution that you add to a deal is your relationship with your best lenders.

If you learn nothing else from this course, at least tattoo the following words to your forehead:  Commercial lenders close loans for their friends.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)

My sons were reading a newsletter issued by a commercial mortgage banking firm that is a correspondent for a number of life companies.  Confused, they asked me what the following sentence meant:

"Although non-recourse options are more the exception than the rule, they are quoting low LIBOR +250 terms on an interest only basis down to a break-even going-in coverage."

Back in the old days (the 1970's and earlier) it took a computer the size of a small bedroom about 7 minutes to figure out the monthly payments on a fully-amortized loan.  Obviously loan officers could not carry around a 2-ton computer.  They therefore used "loan constants".

You will recall that a "loan constant" is the monthly payment on an imaginary loan of $1,000 at a particular interest rate and amortization.  For example, the monthly payment on a loan of $1,000 at 4.5% interest and fully-amortized over 25 years is $5.56/month.  In other words, if you borrow $1,000 at 4.5% interest and pay back $5.56 every month for 25 years the loan will be paid in full.

The office manager at the mortgage company would announce to all of its loan officers that Freddie Mac had just raised its interest rate from 4.375% to 4.5%.  The new loan constant was therefore $5.56.  If a borrower was borrowing $200,000 rather than just $1,000; the loan officer would simply multiply $5.56 (the monthly payment on a $1,000 loan) by 200 to get the monthly payment on a $200,000 loan at 4.5% interest and fully-amortized over 25 years.

Modernly, when commercial loan officers talk about "loan constants", they are doing so to tell the reader what interest rate and amortization they used when they computed their debt service coverage ratio.  For example, a loan officer might say, "The debt service coverage ratio is 1.42 based on a 4.5%, 25-year constant."  The constant matters a lot.  That same property might only have a 1.02 debt service coverage ratio using a 6.75%, 20-year constant.  A debt service coverage ratio of just 1.02 is not good enough for most commercial lenders.

What if the proposed commercial loan is an interest-only loan?  The monthly interest-only payment on a loan of $1,000 at 4.5% is $3.75 per month.  So if a loan officer is talking with his boss about an interest-only bridge loan, he might say, "Boss, the debt service coverage ratio on this deal is 1.57 based on a 4.5% interest-only constant."  

So the sentence, "Although non-recourse options are more the exception than the rule, they are quoting low LIBOR +250 terms on an interest only basis down to a break-even going-in coverage," means in English that this commercial lender is making commercial loans at one-month LIBOR (just 0.25% today) plus 2.50%, which works out to a 2.75% interest rate, with the rate being readjusted monthly.  The loan has interest-only payments, and the lender is only requiring a 1.0 debt service coverage ratio (break-even cash flow) based on a 2.75% interest-only constant.  The borrower would also probably have to personally guarantee the loan.

Phew!  There were a lot of moving parts in that one little sentence.

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Many times in my career I have a closed a commercial real estate loan with the very same bank that had previously turned it down.  In fact, this happens all of the time.

We start from the basic reality that all commercial real estate loans have at least one black hair.   There is no such thing as a perfect commercial real estate loan.

Now whenever you call a banker, you’re supposed to ask him the following key question first:  “Bob, I have a commercial loan I’d like to run by you.  Did I catch you at a good time?  If not, I can easily call you back later.”

Let’s suppose you’re a dummy and you failed to ask Bob of ABC Bank that crucial question.  The banker was in fact extremely busy.  He was in no mood to listen to your description of a new commercial loan.  Irritated, he listened very impatiently until he heard about the very first black hair on your deal (remember, all commercial real estate loans have black hairs).  Then he immediately turned your commercial loan down.

Okay, now what?  Do you give up on ABC Bank?  Absolutely not!  Simply call a different commercial loan officer at ABC Bank, ideally one in a different branch.  And this time, don’t be a dummy.  Ask him first if this is a good time to discuss a commercial loan.

If you found this article to be instructive, I strongly encourage you to subscribe to our blog via email.  To get a copy of each new training blog article as it comes out, without having to remember to come back, please fill in your email address in the space provided on the right.

Lastly, if you're a buddy or a former student of mine, would you please do me the great kindness of hitting the Like button, the Google+1 button, and the Linked-In Share button above.  Thanks so much.  :-)