Commercial Loans and Fun Blog

Sometimes the Best Time to Invest is When Blood is Running in the Streets

Commercial real estate has lost at least 40% of its value since 2006. Banks are reeling from their losses in commercial real estate loans. Of the 100 banks with the largest percentage of commercial loans in their portfolios, 42 of them have already been shut down by the FDIC. Many private investors in commercial first trust deeds made prior to 2007 have suffered painful losses. Now is not the time to be investing in commercial first trust deeds.

Or is it? Consider the following scenario: An office building legitimately appraised for $1 million in 2006. A bank made a $700,000 loan against it. In late 2007 the Great Recession started. Commercial real estate fell by 40%, dropping the value of the building to just $600,000. By early 2008, the tenant defaulted on his lease and moved out. The investor/owner tried to carry the mortgage payment on a vacant building out of his personal savings for several months, only to finally capitulate and default in late 2008. By mid-2009 the bank completed its foreclosure.

The bank finally sells the office building as an REO for $600,000 in early 2011. The buyer is an investor with a 700+ credit score. The buyer is prepared to put 40% cash down, and he is looking for a new commercial first trust deed of just $360,000. The buyer approaches his own bank, and several other banks in town, but no bank will write the loan. They are too nervous to finance commercial real estate right now because of all of the blood that is running in the streets. In addition, the property is vacant.

So the buyer goes to a hard money broker about a hard money loan of $360,000. Is this a reasonable loan? Would it be a wise first trust deed investment for some private investor?

A good argument can be made that now is a fine time to be investing in commercial first trust deeds. A loan of $360,000 is just 36% of the property's value in 2006. The buyer is putting 40% cash down. This means he has a lot of skin the game. He is not likely to just walk away from a $240,000 down payment. The buyer has excellent credit. Most important of all, the loan is based on an actual, arm's length purchase. We have finally found a price at which the property can clear the market; i.e., find an all-cash buyer.

It's terrifying to make new commercial real estate loans in the midst of a bloodbath; but sometimes the best time to invest is when blood is running in the streets. At no other time in the past 12 years could a trust deed investor regularly expect to be able to make a 12% commercial real estate loan to a wealthy investor with excellent credit on a standing commercial property at such a low loan-to-replacement cost ratio. Most other times some bank would have snatched up such a deal and offered the borrower a loan at less than 8% interest.

The deal described above is just a hypothetical deal. It's sole purpose is to stimulate your thinking and to open your mind to the idea that there may be some interesting commercial first trust deed investment opportunities out there right now.

This is not an offer to sell first mortgage investments. An offer is made only through an Offering Circular. Investing in first trust deeds and first mortgages involves substantial risk. Please be sure to carefully review the Risk Factors section of the Offering Circular before investing. A substantial and prolonged decline in real estate value is possible.

Please click here for more information on first mortgage investments.

These Are All Important Terms in the CMBS Industry

You will recall that the term, "CMBS", is short for commercial mortgage-backed securities. CMBS loans are large commercial real estate loans that are originated by banks and conduits according to very strict, published guidelines. CMBS loans are usually secured by loans on the four basic food groups - multifamily buildings, office buildings, retail buildings, and industrial buildings.

When about $1 billion of new CMBS loans can be assembled, the loans are assigned to a trust. The trust then issues bonds (securities), backed by the commercial loans in the trust. These bonds are then sold by investment bankers, like Goldman Sachs or Morgan Stanley, to investors - like insurance companies, pension plans, and wealthy trusts. The banks and conduits, which originated the CMBS loans, get their money back, and the whole process starts all over.

The CMBS industry competes against life insurance companies for the largest and nicest commercial real estate loans in America. If you pick out any nice skyscraper or huge shopping center in America, you can bet that the property is financed by either a life insurance company or a CMBS loan.

The life insurance companies almost always win. Think of it this way. Jennifer Aniston was a lovely lady, but when Angelina Jolie set her sights on Brad Pitt, well ... Angelina got the man she wanted. It's the same thing in commercial real estate finance. CMBS loans have terrific terms, but if MetLife wants the loan on a particular power center, well ... MetLife will get the loan. Fortunately for the CMBS industry, life companies only have a limited appetite. They simply don't have enough dough to make every large commercial real estate loan in the country.

But wait a minute. Suppose a 30-year-old office tower in New York City has a $300 million balloon payment coming due. What if none of the large life companies wants to do the deal?  Could the CMBS industry handle a $300 million loan? After all, the typical CMBS offering is only on the order of $1.3 billion. That means a single loan could represent almost 25% of the entire CMBS offering. Yikes! Then think about an act of terrorism. Suppose terrorists blew up the building. The investors in that pool of CMBS loans would take an immense loss - far too large to be tolerable.

This is how the investment bankers handle big loans. First they started by taking a $70 million loan and splitting it into a $50 million "A-piece" and a $20 million "B-piece". The A-piece would obviously get paid before the B-piece. Only the $50 million A-piece would be added to the $1.3 billion CMBS offering, making that one large loan only around 4% of the total offering.  The $20 million B-piece would be sold to a private buyer. This kind of structure was called an A/B Note.

The problem with the A/B Note structure, however, was two-fold. First, it only worked on loans up to around $100 million. After that, the A-piece was simply too large to put into a single CMBS offering. Secondly, the B-piece was often hard or expensive to sell.

Therefore the investment banks came up with the concept of pari passu notes. Pari passu is Latin for "on equal footing." Issuers of commercial mortgage-backed securities began to split large loans into a series of smaller notes, each note being equally entitled to a pro rata share of any payments received. For example, a $200 million loan might be split into 5 pari passu notes of $40 million each, with each note going into a different CMBS offering. This worked well until the number of new CMBS offerings slowed dramatically after 2008.

Most CMBS offerings today are fusion deals. A fusion deal is a CMBS offering with one very large pari passu note - perhaps as high as $120 million - and forty or so smaller deals of $5 million to $20 million.

Do you need a conduit loan? You can apply to scores of conduits with one simple mini-app using C-Loans.com.

Are you an accredited investor? If so, what are you doing with your IRA? Accredited investors are earning 11% to 13% in first trust deeds.

Read our blog on trust deed investing.

Are you a mortgage broker? Download our free Commercial Loan Placement Kit, that includes a list of 200 hungry commercial lenders, a Commercial Loan Placement Checklist, our wonderful whitepaper, How to Place a Commercial Loan When Banks Are Too Terrified to Lend, and our webinar on Structured Finance.

Are you a direct commercial borrower? Are you just browsing today? You should download our important, free whitepaper, How to Close a Commercial Loan During the Great Commercial Lending Drought.

Borrowers, wish you could get your hands on a free list of 200 commercial lenders?

You Should Try to Invest Only in Mortgages Secured By the Nicest 40% of Properties

Six years ago I was walking along Park Avenue in New York City with a wise, old veteran of the mortgage wars. He pointed to a nice apartment building and commented, "Did you know that Jackie Onassis, the former wife of John F. Kennedy, used to rent an apartment in that building?" "Rent?" I asked my buddy, "Did you just say rent? Jackie Onassis was once one of the richest women in the entire world, and she was just renting? She couldn't afford to buy a condo in the building?"

"George," my wise old mentor said to me, "the old-money family that owns that building along Park Avenue would never sell it. They don't need the cash, and there may be no better investment in the whole world. So, yes, if Jackie O wanted to live overlooking the Park, she had to rent, rather than buy, her apartment."

It was at that moment that I had an epiphany. No matter how bad the recession/slump gets, Jackie O was not going to default on her rent payments, nor would many other wealthy business owners.

I now call this concept, The Top 40% Rule. No matter how bad the next economic slump may get, the top 40% of all commercial properties will probably still stay rented - either to the original tenant or to a new tenant found during the slump. Someone will still have money, and those that have money will only want to rent one of the more attractive, modern, and/or best-located properties.

Japan's depression lasted for 20 years. Who knows how long the Great Recession will last? There may be a double-dip in the economy, and maybe even a third dip. After all, there were three sharp and distinct downward legs to the Great Depression.

The wise first trust deed investor will therefore look to only invest in mortgages secured by properties in the top 40% of desirability. There is, of course, no guarantee that any property will stay rented; but if you are forced to foreclose on a vacant building, at least then you will be able to compete for a good tenant.

This is not an offer to sell first mortgage investments. An offer is made only through an Offering Circular. Investing in first trust deeds and first mortgages involves substantial risk. Please be sure to carefully review the Risk Factors section of the Offering Circular before investing. A substantial and prolonged decline in real estate value is possible.

Please click here for more information on first mortgage investments.

Mezzanine Loans Are More Expensive Than Mortgage Debt But They Are Much Cheaper Than Equity

This is another blog article that was written in late 2005, long before the Great Recession. Since the financial crisis started, mezzanine financing has declined by 85%; but it has not disappeared. The pricing of mezzanine loans has surely changed since late 2005, but this article should give you a starting point.

There are two main types of mezzanine loans - mezzanine loans on standing property and mezzanine loans on construction projects. We shall use the terms standing mezz and construction mezz.

Let's suppose an investor bought an office building 8 years ago for $10 million, and the building is now worth $18 million. He originally obtained a $7.5 million permanent loan from a CMBS lender that is paid down to $7 million. Therefore he owes just $7 million on an $18 million property, and he wants to pull out some cash to buy another building.

CMBS lenders do not permit second mortgages, and their prepayment penalties are ghastly. Therefore the investor will need to get a mezzanine loan to pull out his equity. Today mezzanine lenders are very agressive, so he should be able to easily obtain a standing mezz loan of $7.4 million (80% LTV).

What would this loan cost him? He has two options. One option would be to get a floating rate, standing mezz loan. The other option would be a fixed rate loan.

A floating rate deal would probably cost him one-month LIBOR plus 400 to 500 basis points (bps). Lenders sometimes use the expression, "400 to 500 bips over". In structured finance, one-month LIBOR is so common that lenders don't even have to make reference to the name of the index. Today one-month LIBOR is around 4.4%, so the cost of his loan would be 8.4% to 9.4%.

The typical loan fee would be one point, plus maybe an exit fee of one point.

The term of the standing mezz loan would be coterminous with the first mortgage; i.e., they would mature on the same date. Since the original CMBS loan had a term of ten years, and since the CMBS loan was originated eight years ago, the standing mezz loan would have a term of two years.

Standing mezz loans typically have a term of one to three years, but extention options are often available. Some mezzanine lenders are even willing to go out five to ten years.

In our earlier example, the total debt stack on the office building was 80% loan-to-value. The debt stack includes all of the mortgages, mezzanine loans, and preferred equity investments directly or indirectly secured by the property. Did you know on some very large commercial projects that there will be a first mortgage piece, a senior mezz piece, a junior mezz piece, and a preferred equity piece? That pie is sliced and diced every which way from Sunday.

If a new buyer wanted to buy the office building and assume the $7 million first mortgage loan, he might want a mezzanine loan up to 90% of the purchase price. This way he would only have to put 10% down.

A mezzanine loan of 90% loan-to-value is more risky than one that is 80% LTV. Mezzanine lenders will often use the term loan-to-cost here because appraisals are mistrusted and the building is actually costing the buyer $18 million. A mezzanine loan of 90% LTC might cost 500 to 700 bips over. In this case the cost to the buyer would be 9.4% to 11.4%.

Fixed rate standing mezz deals are typically priced at 450 to 550 basis points over ten-year Treasuries. Ten year Treasuries today are around 4.5%, so fixed rate mezzanine loans up to 85% LTV might cost the borrower 9% to 10% interest. If a buyer needed 90% LTC financing, a fixed rate mezzanine loan might cost 550 to 750 bips over 10-year Treasuries, or 10% to 12% interest.

Construction mezz is typically priced on a floating rate basis with some sort of profit participation. The developer almost always needs at least 90% LTC financing. Therefore a typical deal might be priced at 600 to 700 bips over with a 10% to 25% participation. Since one-month LIBOR is 4.4%, the interest rate might be around 10.4% to 11.4%, plus the profit participation.

Sometimes mezzanine lenders may even go up to 93% to 95% of cost, but these loans are so risky that they are almost joint ventures. As a result, they are very costly. The developer will pay at least 11% to 13% interest plus up to 50% of the profits.

Equity investments from partners and merchant bankers usually cost in the range 18% to 30% annually; therefore in most cases mezzanine debt is much cheaper than equity.

You can apply to scores of mezzanine lenders on C-Loans.com.

Mezzanine Loans Are a Way to Achieve Extraordinary Leverage on Huge Commercial Projects

This blog article was first written in late 2005, long before the start of the Great Recession. Mezzanine lending has not completely disappeared, but the volume of new mezzanine loans has declined by 85% since then. Nevertheless, this blog article was worth saving, as I rearrange articles on my blog.

Mezzanine loans are similar to second mortgages, except a mezzanine loan is secured by the stock of the company that owns the property, as opposed to the real estate.

If the company (usually a LLC) fails to make the payments, the mezzanine lender can foreclose on the stock in a matter of a few weeks, as opposed to the 18 months it often takes to foreclose a mortgage in many states. If you own the company that owns the property, you control the property.

Our own hard money company once had to foreclose a mortgage in New York, and it took almost two years. Yikes! In contrast, a mezzanine loan is secured by the stock of a company, which is personal property and can be seized much faster.

Mezzanine loans are also fairly big. It is hard too find a mezzanine lender who will slug through all of the required paperwork for a loan of less than $2 million. It is occasionally possible to obtain mezzanine loans as small as $1 million.

In addition, mezzanine lenders typically want big projects. If the property you are trying to finance is not worth close to $10 million, you may have a hard time attracting the interest of any mezzanine lenders.

There are three typical uses for a mezzanine loan. Suppose the owner of a $10 million shopping center has a $5 million first mortgage from a conduit. The owner wants to pull out some equity, but he cannot simply refinance the shopping center because the first mortgage has either a lock-out clause or a huge defeasance prepayment penalty. In this instance, he could probably obtain a $2.5 million mezzanine loan to free up some cash.

Suppose an experienced office building investor wanted to buy a partially-vacant office building in a fine location. Once again, assume that the purchase price is $10 million (when the office building is still partially-vacant) and that the conduit first mortgage is $5 million.

This may surprise you, but the right mezzanine lender might be willing to lend a whopping $4 million! But isn't that 90% loan-to-value? Yes, but when the vacant space is rented - remember, our buyer is a pro - the property will increase to $12 million in value. Suddenly the mezzanine lender is back to 75% loan-to-value and his rationale is obvious. This kind of deal is called a value-added deal.

The third and final use of mezzanine loans is for new construction. Suppose a developer wanted to build a 400 room hotel across the street from Disneyland. Hotels today are out of favor, and a commercial construction lender might only be willing to make a loan of 60% loan-to-cost. If the total cost was $20 million, the developer would ordinarily have to come up with 40% of $20 million or $8 million. That's a lot of dough.

A $3 million mezzanine loan solves the developer's problem. The commercial construction lender would advance $12 million, the mezzanine lender would make a $3 million mezzanine loan, and the developer would "only" have to come up with $5 million.

There are about 150 mezzanine lenders active in the country today, and you can apply to most of them by just clicking here.

I read a fascinating statistic in a Bloomberg article this week.  Commercial real estate values soared 19% last year, the second largest annual increase in history.  Too bad the statistic is utter nonsense.

Bloomberg's statistics were based on closed sales of commercial real estate; but what about the 35% of all commercial properties that are sitting there with no tenant and no buyer?  These older commercial buildings definitely have not appreciated.

Take a drive around your town.  You'll see vacant commercial and industrial space everywhere.  I postulated in a recent blog post that most of these older commercial buildings may never a have tenant again.  They will be bulldozed before they are ever again leased. 

Here is what is really happening.  Commercial real estate is separating into two halves.  The top 40% of all commercial real estate that is modern and well-located enough to attract and keep tenants is appreciating.  With ten-year Treasuries yielding under 4.5%, investors are desperate for yield.  They are therefore bidding prime commercial real estate sharply up in value.

The bottom 35% of all commercial real estate is vacant, and it is not selling for any price.  Therefore the value of older, vacant commercial real estate has not been counted in Bloomberg's statistics.

This bottom tier of commercial real estate is not generating any income, and a good argument can be made that many older, vacant commercial buildings are less than worthless.  The owner has to pay real estate taxes.  The owner has to heat these buildings in the winter.  The owner has to maintain fire and liability insurance on the building. The owner has to maintain the aging roof and pay for a security system.  Many absentee managers have to pay for property management.

The truth is that if a relative died today and left me a large, vacant, older commercial building in a non-prime location, I would refuse the legacy.  I wouldn't want the large, old commercial property, even if its replacement cost was millions of dollars.  All it would ever do would be to cost me money.

Bottom line:  Commercial real estate is separating.  Prime commercial real estate is smoking hot.  Many older, vacant commercial properties are now worse less worthless.

Commercial REO's Must be Deeply Discounted to Finally Sell

Take the very same commercial property. If you sell it retail - the normal kind of sale to another investor - the commercial property may sell for $1 million. Ahhh, but if the lender unwisely let's word slip out to the real estate brokers in town that the property is a foreclosure, the commercial lender will be lucky to fetch $600,000 for the exact same property. Why? As soon as the investing world learns that the property is an REO, every potential buyer wants a 40% discount.

There is a price, however, at which every commercial property can be sold. It's the price where the commercial property finally clears the market. "Clearing the market" is a price so low that a buyer can finally be found.

Liquidation is a term that is very similar to clearing the market. Liquidation means taking an asset and reducing it to cash. For example, let's suppose a finance company repossesses a living room set sold on an installment sale (sold for 12 or 24 monthly payments). The finance company will then liquidate the used furniture; in other words, sell it, in order to pay off its unpaid debt.

Hard money commercial lenders are taking a terrible beating during the Great Recession because first commercial real estate fell by 40%. Then every potential buyer of the property wants an additional 40% discount off the already-discounted fair market value of the property because the property is an REO.

As the owner of a commercial hard money lender, Blackburne & Sons, I can tell you that it's maddening.

Are you a potential commercial borrower? You should download our important, free, whitepaper, How to Close a Commercial Loan During the Great Commercial Lending Drought.

Are you a mortgage broker? Download our free Commercial Loan Placement Kit that includes a list of 200 hungry commercial lenders, a Commercial Loan Placement Checklist, an important whitepaper entitled, How to Place a Commercial Loan When Banks Are Too Terrified to Lend, and our webinar on Structured Finance. This kit is free!

Are you commercial borrower? Wish you too could get a copy of this free list of 200 commercial lenders?

Are you an accredited investor? If so, what are you doing with your IRA? Accredited investors are earning 11% to 13% in first trust deed investments.

Do you need a commercial loan right now? You can submit your commercial loan to 750 different commercial lenders in just four minutes using CommercialMortgage.com. And this commercial mortgage portal is free!

Follow George Blackburne on Twitter.

Commercial Loan Underwriters Can Now See a Street View of Many Properties From Their Desk

As the owner of a hard money commercial lender, Blackburne & Sons, I have to try to underwrite commercial loans located all across the country. It's economically infeasible for me to fly to New York City from Sacramento to inspect a commercial property when the loan amount is only $400,000. Nevertheless, we have learned the hard way that if you don't "touch" every property that you finance, the consequences can often be disastrous.

Fortunately, Google Maps provides a partial solution. If you type in the property address into Google Maps and then click on the Satellite button in the upper-right-hand corner of the map, you can see an aerial view of the property. This allows you to see if the property is located in the Boonies or in a thriving commercial area. You can use the wheel on your mouse to zoom in on the property from the sky. You can send your investors or potential clients a link to the satellite image of the property by clicking on the Link button, directly above the upper-right-hand corner of the satellite image. Just cut and paste that link right into your presentation.

To see a street level picture of the subject property, look at the column to the left of the map. If the property is located in a major city, you will often see a street-level picture of the property. (By the way, never trust Google to point you to the exact building because the addresses are OFTEN wrong.) To see up and down the street, to get a feel for the neighborhood, click on the "More" hyperlink directly below the street-level picture of the property. Then click on the choice, "Street View".

You can also create a link to this street view of the property by clicking on the Link button, directly above the upper-right-hand corner of the street view image.  Here is such a link. (Please allow it 20 seconds to load.)

Be sure to take a moment to play with this. If you move your cursor around, you can enjoy a 360 degree view of the property and the neighborhood. These are wonderful tools. Reminder to myself: Be sure to use them!

Are you a potential commercial borrower? You should download our important, free, whitepaper, How to Close a Commercial Loan During the Great Commercial Lending Drought.

Are you a mortgage broker? Download our free Commercial Loan Placement Kit that includes a list of 200 hungry commercial lenders, a Commercial Loan Placement Checklist, an important whitepaper entitled, How to Place a Commercial Loan When Banks Are Too Terrified to Lend, and our webinar on Structured Finance. This kit is free!

Are you commercial borrower? Wish you too could get a copy of this free list of 200 commercial lenders?

Are you an accredited investor? If so, what are you doing with your IRA? Accredited investors are earning 11% to 13% in first trust deed investments.

Do you need a commercial loan right now? You can submit your commercial loan to 750 different commercial lenders in just four minutes using CommercialMortgage.com. And this commercial mortgage portal is free!

I often tell my students, "One of the best ways to close commercial loans is to read a summary of the deals that your commercial lender has recently closed.  This way you can discover your commercial lender's sweet spot - their favorite loan size, their favorite property type, and their favorite lending area."

The Pitreadie Digest is a commercial lending newsletter - written for investors, developers, and mortgage brokers - that covers about ten to twelve different commercial lenders in every issue.  This four-page newsletter comes out twice a month, and each issue includes all of the contact information for these 10 to 12 commercial lenders.

The newsletter describes the commercial loans that each lender has recently closed, their pricing, their likes, and their dislikes.  It also covers emerging industry trends, such as the reawakening of the CMBS industry or the explosion in the number of new hard money lenders.

For those of you who are developers or who work with developers, the service also covers equity providers.  For example, let's suppose you're a mortgage broker putting together a $10 million construction loan on a multifamily project in Washington, DC.  Your developer has a lot of experience, and he is contributing 20% of the cost of the project.  If the construction lender insists on more equity, using the Pitreadie Digest you might be able to find an equity provider to contribute more equity.

You Can Use Google to Give Your Lender an Aerial View of Your Commercial Loan

A mortgage broker submitted a hard money commercial loan to Blackburne & Sons today by email. It was a land loan request, and normally we would not even look at a land loan request; but the mortgage broker did a very clever thing. He included a Google map of the property.

Better yet, the map was a satellite view of the land. By moving the roller on my mouse, I was able to look closer and closer at the land. What I found was interesting. The land was right on a major thoroughfare.  Sewer, water, and power was already available to the site. Most of the surrounding land was already improved. All of the surrounding buildings were modern and attractive, and the area looked reasonably affluent. Now I don't know if we are going to make a land loan during the Great Recession, but its fair to say that because the broker provided a link to a satellite view of the property, this land loan might actually have a chance.

So how do you attach a zoom-able satellite map to your commercial loan packages?

1. Go to Google.com
2. At the top left of the page, click on "Maps"
3. Type in the property address
4. In the upper right-hand corner of the map, click on the square labeled, "Satellite"
5. Using the roller on your mouse, zoom in to the right height
6. In the upper-right-hand corner of the map, find a box labeled, "Map". Right above it you'll see the "Link" button. Click on it.
7. Cut and paste the link right into your email to your lender.
8. Voila!

Every commercial loan you now submit should include a link to a satellite view of the property.

Are you a mortgage broker? Download our Commercial Loan Placement Kit that includes a list of 200 commercial lenders, our Commercial Loan Placement Checklist, our wonderful whitepaper, How to Place a Commercial Loan When Banks Are Terrified, and a webinar on Structured Finance. Now you can finally learn understand mezzanine loans, preferred equity, and venture equity. This kit is free!

Mortgage brokers: Have you ever dreamed of becoming a hard money? Four hour video course, How to Find Your Own Private Mortgage Investors.

Are you an accredited investor? What are you doing with your IRA? Private investors are earning 11% to 13% in first mortgage investments.