Commercial Loans and Fun Blog

Will the USDA Guarantee Commercial Loans Where There Are Some Residential Units on the Property?

USDA commercial loans are terrific deals, if a commercial property qualifies. Certainly motels, hotels, restaurants, office buildings, retail buildings, strip centers and industrial buildings qualify.

However, apartment buildings do NOT qualify. The purpose of a USDA commercial loan is to promote the growth of businesses and industries in rural areas. Mere rental housing is not considered a business or industry for the purposes of this program.

But what about a mixed use property, such as apartments over several storefronts? You'll find a great many mixed use buildings in the center of most older towns. Do these properties qualify for a USDA commercial loan?

I asked this question of a USDA commercial lender. Here is his response:

[There is no blanket rule. Each property would be looked at on a] case by case basis, depending on the amount of mixed use. Some state offices are more open to it than others. Generally, the residential component has to be small compared to the rest of the project. If the residential portion is more than 50% [of the total square footage or scheduled rents], it would not work.

Need a USDA commercial loan right now? Please call Tom Blackburne at 574-210-6686 or email him at tommy@blackburne.com.

So What Do B&I Lenders Typically Charge on a Rural Commercial Loan (Business & Industries Loan)?

Do you need a commercial loan on a motel or other commercial property located in a rural area? (Unfortunately apartments don't qualify for a B&I guarantee.) Are you ready to get started right now? Please call Tommy Blackburne at 574-210-6686 or email him at tommy@blackburne.com.

What do Business and Industries loans typically cost?

Rate: Prime + 2.75% to Prime + 3% floating, readjusted quarterly (as of 6/2/10 the prime rate was 3.25%, so we're talking about a floating rate loan between 6.0% and 6.25% today). If the deal is really strong and the property is NOT a special use property, it might be possible to get Prime + 2.50%.

Floor: 6.5% Higher if the deal is weak.  Please note that this makes the floor higher than the nominal rate (Prime + 2.75%), so the loan would start out at 6.5%. The margin over prime would therefore only become relevant if the prime rate increased, which many economists would argue is somewhat unlikely in the near term.

Ceiling: None.

Points: 1-2 to the lender plus 1-2 points for your mortgage broker.

Amortization: 25 years fully-amortized.

Prepayment penalty: Minimum of 5% for five years.  The lender might agree to a slightly lower rate if the borrower agrees to a 10% prepayment penalty for ten years that declines by 1% per year.

Assumability: The loan documents are usually silent on the subject, giving the lender the flexibility to allow an assumption for a strong buyer of the business or to deny the assumption. The original borrower usually remains secondarily liable.

Do you need a commercial loan on a motel or other commercial property located in a rural area? Unfortunately apartments don't qualify for a B&I guarantee.) Are you ready to get started right now? These USDA business and industries loans are a terrific deal. Please call Tom Blackburne at 574-210-6686 or email him at tommy@blackburne.com.

Does Your Commercial Property Qualify for a USDA B&I Loan?

Need a USDA B&I loan? In order for your commercial loan to qualify for a guarantee from the U.S. Department of Agriculture, it needs to be located in a rural community. Normally this means a town of less than 50,000 people.

However, a great many cities in suburbia have a population of less than 50,000 residents, but these suburban cities are far from small rural towns. They sit right next to population centers with hundreds of thousands of people. Therefore they are not the type of small, rural community that needs help getting commercial financing.

To see if a property is eligible for a USDA B&I loan go to the following website:

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=rbs

When the page comes up, click “I Accept”. It will take you to a map and you type in the address completely. You have to make sure that the address has street, city and zip code. This is essential. It will then bring up a map and tell you automatically if the property is eligible or ineligible.

Need a USDA business and industries loan (B&I loan)? Please call Tom Blackburne at 574-210-6686 or email him at tommy@blackburne.com.

You Can Use a USDA B&I Loan to Refinance a Ballooning Loan

You will recall from earlier articles that a USDA Business and Industries Loan (B&I Loan) is a terrific program if your commercial property is located in a town of less than 50,000 people. The B&I loan program is a government guarantee program similar to that of the SBA, and it is intended to help businesses in rural areas.

Can you use a B&I loan to refinance a balloon payment? The answer, surprisingly, is yes!

Do you need a commercial loan on an income property located in a small town? Please email a brief description to Tom Blackburne at tommy@blackburne.com or call him at 574-210-6686.

Construction Loans for Large Commercial Projects

Bond financing is the best way to finance the construction of large commercial projects today. Most commercial banks just are too scared right now to make large commercial construction loans.

In order to qualify for bond financing, the project must be commercial in nature. Bond financing cannot be used to build or finish residential subdivisions, residential condo projects, or multifamily projects. Mixed used projects - apartments over retail - may qualify if more than 20% of projected income is from non-residential sources, such a commercial rental income, laundry income, and vending income.

A bond attorney must eventually draft a very intensive set of trust documents, so bond financing is economically infeasible for construction projects of less than $4 million.

Bond financing is a little cheaper than a conventional commercial construction loan. The bonds are typically issued for 30 years at a fixed rate. If the project qualifies for tax-exempt status, the rate will probably be between 6.25% and 6.75% today. Commercial construction loans cash flow very well at only 6.50%.

A lot of developers are surprised to learn that they can now issue tax-exempt bonds. These bonds are not issued by any city, county or state. These bonds are actually issued by the developer. How is this possible?

A private developer can only issue tax-exempt bonds if he can secure a precious allotment of the right to issue tax-exempt bonds made available by the Federal economic stimulus bill of 2009. It's all about securing one of these precious allotments.

Developers are also pleasantly surprised to learn that no credit-enhancement is required. These bonds are welcomed by a hungry market of municipal bond buyers, even though the bonds are unrated. The reason why is because many savvy municipal bond investors no longer trust the good faith and credit of most states, counties and cities.

While the low interest rates on these bond deals are great, what's even greater is that finally developers can get their large commercial construction projects financed. If a developer is depending on a bank to make a large commercial construction loan today, it is very unlikely that his deal will ever get funded.

Bond refinancing cannot be used to refinance existing commercial projects. The proceeds must be used for new construction or extensive renovation.

Are you seeking bond financing for a large commercial construction project? Please call me, George Blackburne, at 574-360-2486 or email me at george@blackburne.com.

It's a Terrific Commercial Loan Program if Your Property is Located in a Small Town

The USDA Business and Industries Loan (B & I Loan) Program is a Federal loan guarantee program that is designed to encourage the commercial financing of rural businesses. The reason why the Federal government is involved is because it wants to create and save rural jobs and improve the economic and environmental climate of rural communities.

Are you ready to apply for a USDA B&I loan? Please call Tom Blackburne at 574-210-6686 or email him at tommy@blackburne.com.

Here's what makes a B&I loan different: The Business & Industry Loan program is lender-driven. The USDA guarantees the loan rather than lending directly. A commercial lender requests the B & I guarantee, and, if it is approved, the commercial lender makes and services the loan.

The benefits of the B & I Guaranteed Loans Program for businesses is that the borrower gets a higher loan amount. The reason why is because the guarantee strengthens the loan application, allowing the bank to feel comfortable with a smaller equity injection.

B&I loans also offer lower interest rates and longer repayment terms. This greatly assists businesses that may not qualify for conventional commercial real estate financing, which provides the rural business greater stability and leads to greater growth, expansion and rural employment.

Below is a list of the authorized uses of the loan funds. A borrower must be engaged in, or proposing to engage in, a business that will (1) Provide employment; (2) Improve the economic or environmental climate; (3) Promote the conservation, development, and use of water for aquaculture; or (4) Reduce reliance on nonrenewable energy resources by encouraging the development and construction of solar energy systems, and other renewable energy resources.

Authorized Loan Purposes:

(1) Business and industrial acquisitions, construction, conversion, expansion, repair, modernization or development costs.

(2) Purchase of equipment, machinery or supplies.

(3) Start-up costs and working capital.

(4) Processing and marketing facilities.

(5) Pollution control and abatement.

(6) Refinancing for viable projects, under certain conditions.

(7) Purchase of start-up cooperative stock for family sized farms where commodities are produced to be processed by the cooperative.

Bottom line, the USDA Building and Industry Loan (B&I Loan) program is a terrific program if the commercial property is located in a town of less than 50,000 residents. A great many small motels are financed using the B&I loan program.

Are you ready to apply for a USDA B&I loan? Please call Tom Blackburne at 574-210-6686 or email him at tommy@blackburne.com.

Stalking Horse Bids Arise in Connection with Bankruptcy Sales

Today I received an email announcing the bankruptcy court-ordered auction of a beautiful office tower in San Francisco. The flyer said the auction was subject to a $35 million stalking horse bid. What on earth is a stalking horse bid?

A stalking horse bid is an initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid.

This method allows the distressed company to avoid low bids on its assets. Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company's assets. In essence, the stalking horse sets the bar so that other bidders can't low-ball the purchase price.

Do you need a commercial loan to buy a commercial REO? Do you need to refinance your existing commercial mortgage? You can apply to 750 commercial real estate lenders in just four minutes using C-Loans.com. And C-Loans is free!  Click here to apply for a commercial mortgage loan.

I've Figured Out How to Make Commercial Borrowers Comfortable Enough to Sign Loan Broker Contracts

There is an old saying among horsemen, "If you haven't been thrown, you haven't ridden very much."

The same is true for commercial mortgage brokers. If you haven't been cheated out of a $20,000 loan brokerage commission, you haven't been brokering commercial mortgage loans for very long.

Obviously a commercial loan broker needs to get his principals to sign a mortgage broker fee agreement. The problem is that the borrowers are too scared to sign one. They think they are going to be forced to pay a fee that the commercial mortgage broker didn't earn.

This week I accidentally stumbled into a technique that helps to make the borrower feel comfortable enough to sign a loan broker fee agreement. Here is the technique:

Commercial borrowers will feel comfortable enough to sign a fee agreement ... if they are allowed to exclude five lenders from your non-circumvention clause.

Here's why it work: Borrowers will seldom come straight to a commercial mortgage broker. They will first submit their loans to a handful of banks. There is always the chance that one of these original banks will finally come through for the borrower, so the borrower is loathe to sign any agreement that seems to interfere with this possibility.

Now when I send my fee agreement to a borrower, I always tell the borrower, "Feel free to attach an addendum that excludes up to five lenders."

Are you a commercial mortgage broker who is having trouble collecting your fee? Order our 90-minute video training course, Fee Collection for Mortgage Brokers.

I Just Spoke at Crittenden's Commercial Financing Conference and Even the Top Commercial Loan Brokers Are Closing Nothing

I am writing tonight from the Hard Rock Casino in Las Vegas, where I spoke on the chaos in the private money commercial loan market at the Crittenden Commercial Financing Conference.Ouch! The news on the commercial mortgage financing front was grim.

The Royal Bank of Scotland recently went to market with a CMBS (commercial mortgage-backed securities) offering totaling around $600 million. The good news is that the offering was oversubscribed 2.76 times. The bad news? There were only six loans in the pool, meaning the average loan size was around $100 million. Such huge loans seldom fall into the laps of guys like you and me. Could smaller CMBS loans soon become available to us mere mortals? From the sounds of it ... no.

The only commercial mortgage deals that appear to be closing are Fannie Mae, Freddie Mac and HUD apartment loans. The delinquency rate on such loans is still tiny. Apartment owners at the conference reported that over the last year their occupancy rates have increased from 85% to well over 95%. Apparently it has become fashionable to rent.

The only apartment construction loans that are being made are being made under one of the HUD programs. The problem is that these loans took 9 months to process at the best of times, and now the backlog has grown to a year. To slow down the number of apartment construction loan applications, HUD recently increased its required debt service coverage ratio from 1.10 to a whopping 1.30. This forces the developer to contribute 15% to 20% of the total project cost. Nevertheless, HUD is still the only game in town.

I spoke at length to a number of the country's top commercial mortgage brokers, and they are dying. A number of them confessed that they had not closed a loan in 12 to 18 months! This is a tough time to be a commercial loan broker. Fortunately Blackburne & Sons is a private money lender, and we are still closing deals.

Need a commercial loan?  Please call me, George Blackburne, at 574-360-2486, or email me at george@blackburne.com.

Loans Used to Buy Foreclosed Homes in Bulk

An enterprising hard money broker in Southern California is issuing lines of credit to homebuilders, investors and speculators to buy foreclosed homes in bulk. As the lender described it:

"We have private money available to provide homebuilders/investors with collateralized lines of credit to purchase, renovate, and sell SFR’s purchased out of foreclosure. These homebuilders and investors are typically are well capitalized (very wealthy) and are looking for 1st TD debt at an advance rate of +/- 60% of cost in order to increase their volume and overall returns as a less expensive alternative to finding equity partners. Credit line applications in process range from $1 MM to $12 MM. Structures include: acceptance of replacement collateral at unit reconveyance, or short term loans which are re-written with new collateral at payoff. We are currently doing this business in both California and Arizona."

"How this works is that we have customers in the business of acquiring entry level single family homes at trustee sales throughout California. Following acquisition of these wholesale, in-fill purchases, the homes are renovated and listed for sale. In-house brokers within our borrower’s company than list those homes on the MLS and work with buyer brokers to sell them. Typical cash-on-cash returns in this operation are currently +/- 20%."

"Depending on deal structure, we lend between 60% - 80% of the purchase price of the homes purchased, and the borrower puts in all the renovation costs in cash. Total annualized cost for the credit line is between 15% - 22% all-in. The loans are usually, non-recourse depending on the advance rate.  The lines typically run in 6 month segments to one year. Origination points are paid when the line is used and houses are purchased. The line collateral is a 1st TD on all homes purchased within the line.

"The leverage is substantially accretive. Levered returns can increase to well above 100% as long as the product is turned (purchased/renovated/sold) within a 90-120 period and the money can go back to work purchasing new homes. Sale of the homes pay down the line 105% of the wholesale purchase price."

"There is a lot of action in this business currently. Particularly, in those states that have been hard hit and have tremendous foreclosure volume like CA, AZ, NV, FL. I have one borrower who has purchased over 350 homes in the last 9 months and moved over $85 MM of product. The profit in this borrower’s realm of operation, Southern California, is approximately +/- $40,000 per unit."

If you are a homebuilder or an investor and would like an introduction to this lender, please call me, George Blackburne III, at 574-360-2486 or email me at george@blackburne.com. I get bombarded with emails (but I love to hear from borrowers and brokers), so its easy for me to miss an email. I recommend that you use the title of this article, Commercial Lines of Credit from Hard Money Brokers, in your subject line.