Commercial Loans and Fun Blog

Learned a Few New Commercial Finance Terms This Week

Even though I have been working in commercial real estate finance for over 30 years, I still learn new terms and concepts all of the time. Here are a few new ones:

NPN - The acronym, "NPN", stands for for Non-Performing Notes.

DPO - The acronym, "DPO", stands for discounted pay-off. In recent weeks I have personally learned of a bank selling a $17 million performing loan for just $7.5 million. On another deal a group of banks are willing to sell $37 million of debt for just $8 million.

I love working on DPO deals (discounted pay off deals). Do you have a bank willing to accept a big haircut to get rid of a note? Please call me directly, George Blackburne III (the old man) on my cell at 574-360-2486 or email a deal to me to george@blackburne.com. In the subject line, please type the words, "DPO Deal."

White Box Finish - This implies a finished unit that is missing only those items that the prospective owner or prospective tenant will choose, such as the type of counter-top, the carpeting, the color of cabinets, and for office or retail space, the location of the bathrooms and interior walls.

A Mezzanine Loan is Personal Property, Not Real Property

This is really juicy gossip. A mezzanine lender is foreclosing on a $100 million mezzanine loan that is secured by the largest apartment complex in New York City.

You will recall that a mezzanine loan is not a real estate loan. Instead, a mezzanine loan is loan that is secured by the membership interests (think shares) of a LLC (think corporation) that owns a huge real estate project. If you own all of the company and the company owns all of the property, then you own all of the property.

Why would a lender make a mezzanine loan rather than just a normal mortgage loan? The answer is speed. It can take up to 18 months to foreclose a mortgage in New York. A lender can foreclose on the membership interests of a limited liability company in just 30 days because membership interests in an LLC are just chattel (personal property), not real estate.

The law merely requires that the lender seize the membership interests without breaching the peace and that it conduct the sale in a commercially reasonable manner; i.e., in a manner in which such property is usually sold.

Today I received the fascinating email below that details an upcoming UCC (personal property) foreclosure sale. This is GOOD STUFF.

Dear George,

I am writing to inform you of the upcoming opportunity to bid at public auction on the "Peter Cooper Village/Stuyvesant Town" Mezzanine Loans 1, 2 and 3 (with a face amount of $100 million each), which are indirectly secured by the Peter Cooper Village/Stuyvesant Town property located in Manhattan, New York. The public auction will be adjourned from August 25, 2010 until September 8, 2010 at 11:00 AM (for Mezzanine 3), 12PM (for Mezzanine 2) and 1PM (for Mezzanine 1) at the offices of Brown Rudnick LLP, located at Seven Times Square, 47th Floor, New York, NY 10036.

Peter Cooper Village/Stuyvesant Town, well known as a “City within a City”, was built for MetLife in 1947 and is considered Manhattan’s largest apartment complex. The complex is comprised of 56 buildings, situated on 80 acres and includes 11,227 residential apartments. In addition to the residential component, the complex contains approximately 100,000 square feet of retail space, approximately 20,000 square feet of professional office space, and 6 parking garages with 2,260 licensed spaces totaling approximately 400,000 square feet.

For additional information regarding the public UCC foreclosure sale, please execute the attached Confidentiality and Investment Agreement. Upon the execution and return of the Confidentiality and Investment Agreement in such form, you will be given a USER ID and Password to access the CONFIDENTIAL website located at ...

Thanks,

Joe Schmoe
Lender

Borrowers and Mortgage Brokers Can Now Deliver Commercial Loan Packages For Free Using Box.net

Do you need a commercial mortgage loan right now? Using C-Loans.com, you can submit your commercial loan application to 750 different commercial lenders in just four minutes, and C-Loans.com is free!

Years ago, if a commercial mortgage borrower or a commercial loan broker wanted to deliver a commercial loan package to a commercial lender, he would have to ship by snail mail a package of financial documents nearly one foot thick. After all, commercial lenders insist on collecting a financial statement and two years' tax returns on each borrower, a financial statement and two years' tax returns on each business owned by each borrower, a financial statement and two years' tax returns on the LLC or partnership that actually owns the property, and a copy of every single lease. That's a whole lot of documents!

With the rise of email, these loan documents are now usually delivered by email in the form of 10 to 15 different PDF's. However, most bankers have a limit on the size of any email attachment of 10MB. This means that in order for a commercial mortgage borrower or a commercial loan broker to deliver a complete loan package, they have to break the package up into six or seven smaller, separate emails. This is quite a messy inconvenience.

Now there is a far more efficient way to deliver commercial loan packages. Box.net is a free data storage software program available online where you safely store the financial information of the borrower. Simply scan each document - think of a tax return - and save it as a separate PDF. Then you upload the 10 to 15 PDF's, each containing a financial document like a lease - to a folder on Box.net. Finally, you simply send the lender a link to the folder on Box.net where he can find and view/download each of the PDF's.

It is much safer to password protect the link to this folder on Box.net, and using Box.net, this is easy to do.  You can then simply call the lender and give him the password over the phone.

It takes just five minutes to create your own free account on Box.net. They give you a certain amount of storage for free in hopes that you will so love the system that you will buy additional space from them.

Do you need a commercial mortgage loan right now? Using C-Loans.com, you can submit your commercial loan application to 750 different commercial lenders in just four minutes, and C-Loans.com is free!

Understanding the Interest Reserve and How to Compute It

Need a commercial construction loan right now? If the loan is larger than $4 million and the collateral is commercial and not residential (sorry, no homes, condo's or apartments), please write to me, George Blackburne, at george@blackburne.com or call me directly on my cell at 574-360-2486.  We have a terrific bond financing program.

When a developer secures a $2 million commercial construction loan from a bank to build a project, did you know that he starts to make monthly payments the very first month?

"Gee, George, that sounds awful. How can that poor developer afford to make the monthly payments on a $2 million loan when the property isn't built yet and generating rent? Those payments have to be in the range of $14,000 per month!"

It's not as bad as it seems. First of all, commercial construction loans are disbursed in small progress payments. During the early months of the loan, the outstanding balance might only be a few hundred thousand dollars. Secondly, the monthly payments owed to the bank on a commercial construction loan are just interest-only payments based on the outstanding balance. The interest-only monthly payments on an outstanding balance of just $200,000 aren't too bad.

Lastly, the construction loan budget contains an interest reserve to cover the construction period interest. In other words, the monthly loan payments on a commercial construction loan come right out of a little savings account built right into the construction loan budget.

"That sounds much better. But how does the bank know how large of an interest reserve the developer will need?"

One way to compute the interest reserve is for the developer and the bank to build a spreadsheet that lays out when all of the construction loan proceeds are expected to be disbursed. Then, using the spreadsheet, the bank can compute the exact amount of interest that will be needed in the interest reserve.

On smaller commercial construction loans, the bank will use a rule of thumb. Suppose a $2 million commercial construction loan has an estimated term of 1.5 years. During the early months of the loan, only a few thousand dollars will be disbursed. At the latter end of the term, almost all $2 million of the commercial construction loan will be disbursed.

Bankers will therefore assume that on average about half the loan will be disbursed over the 18 months. In this example, half of $2 million commercial construction loan is $1 million.

Therefore, to compute the required interest reserve, the banker will multiply $1 million (the average outstanding loan balance) times 7% per year (the annual interest rate) times 1.5 years (the anticipated term of the commercial construction loan), which equals $105,000.

"Gee, George, that seems simple enough. But what happens if the property takes longer to build or longer to lease than the developer expects?"

The developer is toast. He will have to start making the interest-only payments out of his personal pocket, and if he can't, the bank may decide to foreclose on him immediately. Hey, there's a reason why developers make the big bucks. They take some serious risks.

Need a commercial construction loan right now? If the loan is larger than $4 million and the collateral is commercial and not residential (sorry, no homes, condo's or apartments), please write to me, George Blackburne, at george@blackburne.com or call me directly on my cell at 574-360-2486. We have a terrific bond financing program.

If One Commercial Loan Officer Turns You Down, Just Call Another One at the Very Same Bank

Need to place a commercial mortgage loan right now? You can submit your commercial loan in 750 different commercial lenders in just four minutes using C-Loans.com. And C-Loans.com is free!

Placing a commercial mortgage loan with a bank is more of an art than a science. Below you will find some placement tips that may help you to close your commercial loan:

1. Before you send a commercial loan package to a lender, it is customary to call the commercial loan officer first to run the deal by him.
2. Hugely important tip: Whenever you call a loan officer to run a deal by him, make sure you first ask him, "Hey, John, this is George Blackburne at C-Loans, and I'd like to run a deal by you. Did I catch you at a bad time? I'll be happy to call back later if you're swamped right now." Brokers and borrowers who fail to do this will find that the loan officer will only listen long enough to find the first excuse to turn the deal down - just because he's harried at the moment and doesn't want to be bothered.
3. When you do send a package, don't send some great, big, thick package that will take the loan officer five hours to review. Instead, just send a two or three page Executive Loan Summary. Most commercial mortgage loan documents are now delivered by email, instead of by snail mail or Federal Express.
4. Make sure your Executive Loan Summary includes at least one photograph of the property.
5. When a commercial loan officer receives a PDF by email, in the back of his mind he is worried that the PDF might contain 400 pages of documentation. As a result, he will tend to put off reviewing it.
6. I therefore like to include in the body of the short email words like the following: "John, attached is a short Executive Loan Summary on the deal we discussed the other day. It's just three pages long, and there's a nice color photograph of the property. It's really nice!"
7. It is customary in commercial mortgage finance to call the lender a few hours later and say, "Hey, John, this is George over at C-Loans. I am just calling to make sure you received the Executive Loan Summary on that deal we discussed the other day. I know you haven't had time to review it yet. I just need to verify that you received it."
8. Now in reality, what you're really doing when you make the above call is to gently kick the commercial loan officer in the booty to read the package. He's not lazy. He's just a veteran who knows that many commercial mortgage brokers will ship out a loan package to 30 different lenders. It's called shotgunning.  Your kick-in-the booty call is a welcome message to the commercial loan officer that this deal is alive and waiting just for him, if he likes it.
9. Every commercial mortgage deal ever originated has a few black hairs (flaws). There is no such thing as a perfect commercial mortgage deal. Therefore, if you are going to close a commercial mortgage loan, you need to find a commercial loan officer who both likes you and is willing to fight for your loan in Loan Committee.
10. If the first commercial loan officer that you call at Bank of America, for example, just brushes you off (turns you down without seriously considering the deal, just to get rid of you), don't give up! Just call a different commercial loan officer at Bank of America and try to sell him on the deal. Over the years I have closed numerous commercial loans this way.
11. Not all commercial mortgage loan officers are the same. Some will fight hard in Loan Committee to sell your deal, and others are as wimpy in Loan Committee as a spaghetti noodle. Based on a lifetime of experience in commercial real estate finance, here is my pecking order of commercial loan officers, from best to worst: Asian women (absolutely the best!), women on commission, men on commission, men on salary, and women on salary (very often too scared of losing their jobs to fight for you).
12. If your deal gets turned over to commercial loan officer that you can tell is an absolute wimp, pull the deal! Don't let the wimp work on it. The wimp will simply look for the first black hair and then turn you down. And since every commercial mortgage deal has a black hair, all you are doing is fouling the water at that bank. Why not pull the package back and resubmit it to a different loan officer ten days later?
13. My final tip is to learn to use Box.net (free data storage) to send your loan packages. This way the banker can just pull down the supporting loan documents (tax returns, financial statements, etc.) as he needs them.

Need to place a commercial mortgage loan right now? You can submit your commercial loan in 750 different commercial lenders in just four minutes using C-Loans.com. And C-Loans.com is free!

Commercial Mortgages Are Being Paid Down or Written Off

The size of the commercial mortgage market in the United States continued shrinking in the first quarter, to $3.31 trillion from $3.34 trillion at the end of last year, according to the Mortgage Bankers Association's analysis of Federal Reserve Board flow-of-funds data. The universe of mortgages has now shrunk for five consecutive quarters and is now roughly the same size it was at the end of 2007.

Every major investor group, except the housing-finance agencies, private pensions, savings institutions and government entities, saw a reduction in the size of their mortgage portfolios. Commercial banking organizations saw an $18.9 billion, or 1.3 percent reduction in the size of their holdings, to $1.49 trillion. They are still the biggest holders of loans, accounting for 44.9 percent of the entire universe, down from 45.1 percent at the end of the fourth quarter.

CMBS and other securitization vehicles saw their portfolio of mortgages shrink by 1.6 percent over the last quarter to $679 billion. That accounts for 20.5 percent of the universe, down from 20.6 percent in the fourth quarter.

Life-insurance companies, which lately have become hungry to write loans but have faced tepid demand, saw their holdings fall by $4.4 billion, or 1.4 percent, to $301.9 billion. They now hold 9.1 percent of the total universe, down slightly from 9.2 percent at the end of last year.

The housing-finance agencies, meanwhile, saw their portfolios grow by $5.8 billion, or 1.9 percent, to $309 billion. That represents 9.3 percent of the commercial mortgage universe, up from 9.1 percent in the fourth quarter. If you look at only multifamily loans, the agencies - Fannie Mae, Freddie Mac and agency-backed mortgage pools - hold 36.3 percent of the $852.1 billion universe. That universe is up from $849 billion in the fourth quarter - testament that the agencies continue to actively write loans.

"Low levels of commercial mortgage borrowing mean that property investors are paying off and paying down more in mortgages than they are taking out," explained Jamie Woodwell, vice president of commercial real estate research at the MBA.  (Commercial Real Estate Direct)

New Loan Poolers Will Help Jump Start Secondary Market for 504 Loans

The U.S. Small Business Administration (SBA) announced the first nine loan pool originators authorized by the agency to assemble and sell pools of 504 program first mortgage loans, a major step to jump starting a secondary market that should make fixed-asset financing more widely available for small businesses. The new program was approved under the American Recovery and Reinvestment Act.

Prior to the recent disruption in the credit market, a private secondary market for these loans existed, but it has not revived as the economy has started to rebound. The SBA expects this new program to breathe life into that secondary market and improve access to credit for small businesses by providing a resource that can help boost liquidity to small business lenders.

"With the resources provided in the Recovery Act, we have engineered a turnaround in its SBA lending, putting nearly $30 billion in the hands of small businesses across the country," said SBA Administrator Karen Mills. "This added support to re-launch the 504 first mortgage secondary market builds on that success and will help leverage even more capital for small businesses to support their growth and create new jobs."

Under the program, the SBA will provide a government guarantee on pools of portions of eligible 504 first mortgage loans assembled by approved pool originators to be sold to third-party investors. Lenders will retain at least 15% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%.

Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering up to 50% of the project cost, a second mortgage secured with a junior lien from a Certified Development Company (backed by a 100% SBA-guaranteed debenture) covering up to 40% of the cost, and a contribution of at least 10% equity from the small business borrower.

Under the new program, portions of the senior liens are pooled by pool originators and sold to investors in the secondary market. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after February 17, 2009. The program will be in place until February 16, 2011 or until $3 billion in new pools are created, whichever occurs first.

The pool originators approved so far are

• Bank of America, N. A. of New York, New York;
• Cantor Fitzgerald & Co. of New York, New York;
• Citizens Bank of Elizabethton, Tennessee;
• Coastal Securities, Inc. of Houston, Texas;
• Community South Bank of Knoxville, Tennessee;
• Fidelity Bank of Covington, Georgia;
• Meadows Bank of Las Vegas, Nevada;
• Morgan Stanley Bank, N.A. of Salt Lake City, Utah; and
• Voyager Bank of Eden Prairie, Minnesota.

Need an SBA loan right now?  Please call George Blackburne III at 574-360-2486 or email him at george@blackburne.com.

Most Commercial Mortgage Loans are Recourse Loans These Days

Normally when you borrow money, you have to pay it back; but this is not true of a non-recourse loan. If a non-recourse commercial real estate loan goes bad, the commercial lender cannot go after the borrower personally. The lender's sole recourse is to attach the rents and then foreclose on the property.

A recourse loan is just the opposite. Suppose a commercial real estate lender makes a $10 million commercial loan, and the loan goes bad. The commercial lender forecloses, but it still loses $2 million when the property goes to a Sheriff's Sale. If the loan is a recourse loan, the commercial lender that just took a $2 million haircut can attach the assets of the borrower. It can attach the debtor's wages, foreclose its lien on the debtor's house, and foreclose on other properties owned by the debtor. It can seize the debtor's expensive cars, his boat, and his valuable stamp collection. The debtor promised to pay, so he has to pay.

Is a recourse loan the same thing as a personal guaranty? They are close, but they are not exactly the same thing. If a loan is a recourse loan, the commercial lender can go after the debtor for any deficiency judgment. However, the debtor might be a corporation or a limited liability company. In this case, the commercial lender can go after the assets of the corporation or the LLC that used to own the commercial property, but it cannot go after the assets of the investors in the corporation or the LLC.

However, if the commercial lender also obtained a personal guaranty from each of the major investors in the corporation or the LLC, then the commercial lender could indeed go after the wages, the home, the other real estate, and the expensive toys of the personal guarantors.

Before the Great Recession, conduits originated about half of all commercial real estate loans. These conduit loans were non-recourse. Unfortunately, the commercial mortgage-backed securities (CMBS) market collapsed under the weight of the sub-prime crisis, and all conduit lending ceased. As of today, conduit lending has not restarted. As a result, few remaining commercial lenders will make non-recourse loans.

Life companies will make non-recourse loans, but they simply don't make many loans, and the loans they do make are very, very conservative. Few life companies will make commercial mortgage loans today much higher than 55% loan-to-value, and their minimum loan is often $5 million.

Most commercial real estate loans made today by banks are recourse loans. Personal guaranties are also required on most commercial loans from banks.  However, if the loan is large and the collateral is very, very desirable, banks will sometimes make non-recourse loans.

Few hard money lenders will make non-recourse loans, but Blackburne & Sons will make a non-recourse loan for a slightly larger fee, if the loan is highly desirable. Need a commercial loan that is non-recourse? Please call George Blackburne, III (the old man) at 574-360-2486 or email him at george@blackburne.com.

Only Three Kinds of Commercial Lenders Are Left

Do you need to find some commercial lenders right now? You can submit your commercial mortgage mini-app to 750 different commercial lenders in just four minutes using C-Loans.com. And C-Loans is free!

Before the Great Recession, there were eight different kinds of commercial lenders - life companies, conduits, commercial banks, savings and loan associations (S&L's), mortgage REIT's, finance companies, thrift & loan associations, and hard money lenders. Today all but three of these classes of commercial lenders are kaput.

1. Life companies - The life companies were always the most conservative of the commercial lenders. They seldom made loans higher than 55% to 60% loan-to-value. As a result of their great caution, this class of commercial lenders is still standing. Life companies make about 10% of all commercial loans, but their loans are much larger ($5 million minimum) and much more conservative than the rest of the commercial lenders.
2. Conduits - Off all commercial lenders, the conduits were the most active. A conduit was a mortgage company that originated and inventoried fixed rate commercial loans for eventual sale to the commercial mortgage-backed securities market. At their zenith, they were originating over 50% of all commercial mortgage loans. Unfortunately in 2008 the secondary market for CMBS loans evaporated. Poof. It disappeared completely. No conduit loans are being originated today at all. This class of commercial lenders has disappeared off the face of the earth.
3. Commercial banks - The largest surviving class of commercial lenders are the commercial banks.  Banks will still make commercial loans, but at much lower loan-to-value ratio's and only to very strong borrowers.
4. Savings and loan associations (S&L's) - S&L's were once very active commercial lenders. Today very few S&L's even survive, and those that did survive are not active commercial lenders.
5. Mortgage REIT's - Even before the Great Recession, mortgage REIT's were not huge commercial lenders. I can think of only two surviving mortgage REIT's, and neither makes more than a handful of commercial loans annually. Essentially mortgage REIT's no longer exist as a class of commercial lenders.
6. Finance companies - Finance companies borrowed their money from the bank at prime plus 1% an relent that money on riskier, complicated loans at prime plus 7%. Virtually all of the finance companies making commercial loans are now bankrupt.
7. Thrift & Loans Associations - Not to be confused with S&L's, thrift and loan associations were a special kind of bank in California whose deposits were NOT insured by the FDIC. In the early 2000's, most of these commercial lenders failed. The rest converted to federally chartered savings banks.
8. Hard money lenders - Private lenders will always make commercial loans. It's just that when private investors get scared, the rates goes up. A great many mortgage funds are being wound down, but hard money lenders are still exist as a class of commercial lenders.

Do you need to find some commercial lenders right now? You can submit your commercial mortgage mini-app to 750 different commercial lenders in just four minutes using C-Loans.com. And C-Loans is free!

If you have a credit tenant and the lease is triple net, CTL Financing terms are much, much better than conventional commercial loan terms.

If you are an investor with a prime property leased on a triple net basis to a credit tenant, you can still get terrific commercial financing. (If you need CTL or any other commercial financing right now, please write to me, George Blackburne III - the old man - at george@blackburne.com.)

A credit tenant lease is a method of financing real estate. The landlord borrows money to finance the property and pledges as security the rents to be received from the tenant. Usually, the financing is structured as nonrecourse debt, and the lease is structured as a triple net lease.  Credit tenant leases may be created either in sale/leaseback transactions or new purchase transactions.

A credit tenant is typically a national company that is rated BBB or higher by Standard & Poors. Examples of national credit tenants include Walgreens, CVS Pharmacies, Petco, Auto Zone, Bed Bath & Beyond, Advance Auto Parts, Lenscrafters, FedEx Kinko's, etc.

Credit Tenant Lease Financing (CTL) is available to borrowers for acquisitions, refinances or the construction of a variety of property types that are tenanted by Investment-Grade rated tenants on long-term Bond, NNN, or ground leases. Acceptable property types include Single Tenant Retail, Corporate Office, Industrial (warehouse distribution) and US Government leased properties.

Loans range in size from $3 million up to $300 million or more on single properties or large multi-property portfolios. Minimum debt service coverage ratios range from 1.0x to 1.05x. Surprisingly, there are no traditional restrictions on the LTV; however, the loan-to-value ratio must not exceed 100%.

These CTL loans are made on a fixed rate basis at a market spread over matching United States Treasuries (UST's). The loan term will often, but not always, match the term of the underlying lease (coterminous).  What this means is that if there are 18 years left on your credit tenant lease, lenders will sometimes - but not always - amortize their loans over 18 years.  

"But George, won't the short term of the loan making the monthly payments much too large?"  You would think so, but the interest rate on CTL loans are soooo low that most deals cash flow comfortably. 

If you need CTL or any other commercial financing right now, please write to me, George Blackburne III - the old man - at george@blackburne.com  I get 1,300 emails per day (really), and I don't want to miss your email.  Would you please make the Subject Line read, "CTL Financing"?  Thanks!