Commercial Loans and Fun Blog

If You're Trying to Sell a $5+ Million Commercial Property, Consider Real Capital Markets

If you are trying to sell or lease a large commercial property, consider the following: Real Capital Markets assists in the sale of a whopping 30% of all commercial properties worth over $10 million! This includes all property types, including multifamily, office, retail, industrial, and hospitality.

"Is Real Capital Markets a real estate broker?"

No. In fact, it is the listing commercial real estate broker who usually recommends to his client that he hire Real Capital Markets to assist with the sale.

"So what exactly does Real Capital Markets ("RCM") do?"

The two big services that RCM performs are marketing and supplying a document storage/display room to share the financial info with prospective buyers (more on this in a bit).

First of all, in order to sell a large investment property, you need to find a buyer. And just like a fisherman needs bait, the seller and the listing broker needs a very attractive Executive Summary (aka: teaser) to dangle in front of potential buyers. RCM prepares this teaser for the seller. I've seen a few of these teasers prepared by RCM, and they are gorgeous.

A stunning looking Executive Summary is great and all, but its not a lot of help if no one ever sees it. Therefore the next marketing service that RCM provides is a huge email list (2,000 to 4,000) of potential buyers, including opportunity funds, fund advisors, REIT's, trusts, developers, money managers, real estate operating companies and wealthy principals.

You can't send out all of the financial data at once to these prospective buyers because some of these data files are as large as 4 gigabytes. RCM therefore sends out the teaser by email, together with an encrypted link to a "virtual war room" containing the data. The encryption is 120-key ADS, the same level of encryption used by the National Security Agency. The prospective buyer first signs a confidentiality agreement before enjoying access to the property's financial data.

From the point of view of the listing broker, the email marketing system used by RCM is awesome.  A broker can view in real time just which prospective buyers nibble on the data, allowing the broker to make targeted follow-up calls.

The second major service provided by RCM is the virtual war room, where the listing broker stores the 30 to 50 data files on the property's financial condition. There are rent rolls, operating expense histories, leases, property photo's, Argus runs, and scores of other important but private documents. The listing broker, using the RCM service, can allow one potential buyer to have only a limited access to documents and another potential buyer to have full access to all of the documents. Access for each buyer can be set to low, medium or high, and of course the broker can see who is downloading which documents.

RCM is no longer just used in connection with the sale of commercial real estate. Increasingly banks are using RCM to assist in the sale of large mortgage notes on commercial properties. REIT's and large real estate operating companies are also using RCM to store all of their financial documents on all of the properties in their portfolio's. This way the data is easily available to branch offices, shareholders, equity partners, JV partners, staff and outside attorneys, investors and shareholders.

It's no wonder that that the services of Real Capital Markets is used in connection with the sale of 30% of all commercial properties worth $10 million or more.

But what does this service cost? Surpisingly, very little. The cost is typically only $2,500 to $4,500, depending on the level of service provided by RCM. Please be sure to tell Real Capital Markets that you found out about them from C-Loans because you get a 5% discount.

You can reach Real Capital Markets by calling Jay Knowles, Real Capital Markets, 760-602-5080 x 232.

Do you need a commercial real estate loan? You can apply to 750 different commercial lenders in just four minutes using C-Loans.com. And C-Loans is free!

Only SBA Lenders and Hard Money Lenders Make Them

In the early 1990's commercial real estate nationwide suffered through a depression. Commercial real estate values fell by 45%.

Prior to the early 1990's there were lots of commercial lenders who would make second mortgages and second trust deeds on commercial real estate. The commercial real estate depression on 1991 wiped almost all of them out. Since then very few commercial lenders have been willing to take the risk of making a second mortgage.

Certainly very few banks will make commercial second mortgages these days ... unless the loan is guaranteed by the SBA. If your company occupies more than 50% of your commercial property, you should definitely apply to C-Loans for an SBA second mortgage.

The SBA, however, will not guarantee commercial loans made on residential investment real estate, like apartment buildings and mixed used properties (for example, apartments over storefronts).

The only other type of lenders that might consider a commercial second mortgage or a commercial second deed of trust is a hard money lender. Hard money lenders will typically charge between 13% and 15% and five to eight points for a three to five year interest-only second mortgage. Like the old joke says, their apples may be expensive, but at least they have apples.

There is a very important ratio that applies to commercial second mortgages. It's the Old-Money-to- New-Money Ratio. In this ratio, the old money is the existing first mortgage. The new money is the gross amount of the new second mortgage. The ratio of old money to new money must never be greater than 3:1.

The reason why is that the second mortgage has to keep the first mortgage current as it forecloses; otherwise the foreclosure of the first mortgage will wipe out the second mortgage (very few buyers in real life ever bid at commercial foreclosure sales). If the second mortgage is too small in comparison to the first mortgage, then the second mortgage lender will have to keep far too much money sitting around uninvested and ready to carry the first mortgage for 18 months to complete the foreclosure and possible Chapter 11 bankruptcy of the borrower.

For example, if a lender foolishly makes a $100,000 second mortgage behind a $1 million first mortgage, the second mortgage lender may have to advance $180,000 (18 months of $10,000 per month payments on the first mortgage) in order to protect a measley $100,000. The ratio of old money to new money should never exceed 3:1.

You can apply to scores of commercial second mortgage seconds in just four minutes using C-Loans. And C-Loans is free.

Credit Unions Are Becoming an Important Source of Commercial Real Estate Loans

The commercial mortgage-backed securities industry virtually disappeared in late 2007 and 2008.  Commercial banks have fortunately stepped up to make a fair volume of commercial real estate loans; but unfortunately they are not approving a huge volume of commercial deals.

As a result, credit unions are beginning to emerge as non-trivial players in the smaller commercial real estate loan market.

Credit unions have several advantages when it comes to commercial real estate loans. First of all, credit unions were not involved in the meltdown of the sub-prime residential mortgage-backed securities market. Therefore they are, as a group, financially healthier than many of the larger banks.

Secondly, credit unions are portfolio lenders. As a result, they can make fixed rate commercial loans with prepayment penalties far less onerous than the defeasance prepayment penalties required by life companies, CMBS lenders and many commercial banks.

But doesn't the borrower have to be a member of the credit union in order to borrow? Yes, but in 1998 the Federal government relaxed the rules for credit union membership. Prior to 1998 only the largest companies had credit unions. In 1998 the Federal government changed the law to allow credit unions to accept members from outside their core group, as long as those people come from companies or groups with fewer than 3,000 people. Credit unions can also apply for exemptions to accept even larger groups.

The banks howled in protest. Credit unions are exempt from Federal taxation, and the rapid growth in credit union membership cut into their deposit-taking and loan markets. In 1999, however, a Federal appeals court rejected the legal challenge filed by the banks. Credit union membership has grown sharply since 1999.

As a practical matter, therefore, a great many borrowers now fall within some small group that would allow them to join a nearby credit union. Commercial loan borrowers and commercial mortgage brokers should therefore consider local credit unions when trying to place a commercial loan.

Right now credit unions are small players in the commercial real estate loan market. Fewer than 4% of all commercial real estate loans originated in the past twelve months were originated by credit unions. However, ten years ago this figure was less than 1%, and in three years it would not be surprising to see this figure grow to 7% or 8%. Credit unions are indeed becoming an important source of commercial real estate loans.

You can apply for a commercial real estate loan to scores of credit unions, as well as hundreds of banks, using C-Loans.com, the free commercial mortgage lender databank.

Includes George's Famous Pooh-Pooh Soup Story

You're a commercial mortgage broker. You've just quoted a commercial real estate loan to a borrower over the phone. The borrower appears interested, and you want to convince the borrower to send his commercial real estate loan application to you, as opposed to a competing mortgage broker or bank.

The key thing to remember is the Theory of Momentum. A body at rest tends to stay at rest. A body in motion tends to stay in motion.  A potential commercial real estate borrower is therefore going to want to keep sitting on his hands.

To convince a potential commercial borrower to send his loan package to you, never ask for too many documents at one time.

If you ask for a huge checklist of documents, the borrower will surely procrastinate, during which time he'll speak with a competing commercial lender or mortgage broker, and you'll lose the deal. Instead, ask for just two or three documents at a time. Gather the six-inch-thick stack of required documents slowly over a period of weeks.

"But George, it will take months to close a commercial loan at that pace."

We've all heard the story about the young bull and the old bull standing at the top on the hill and looking down over a herd of beautiful heifers. The young bull turns to the old bull and says, "Hey, Pops, let's run down and kiss one of those cows." The wise old bull replies, "Son, let's walk down and kiss them all."

The point of the story is that if you rush things, your success rate is often much lower. If you ask for a huge checklist of documents, you'll only close one deal in fifty. If you gather the required documents in small, easy waves, you might be able to convince all fifty borrowers to send you a package.

But you have to give the borrower reassurance that his commercial loan application is looking good ... and this leads us to my famous Pooh-Pooh Soup Story:

Have you ever noticed that whenever you order anything to eat at an expensive French restaurant that the snooty waiter always says, "Ah, good choice. The duck a la orange is delicious!" And when you order dessert, "Wonderful choice, sir. The Crepes Suzette are
delicious!"

I've therefore often wondered that if I ever asked for Pooh-Pooh Soup (you guessed it, a log floating is broth ..... eeuuuuu!) whether the French waiter would say, "Ah, the Pooh-Pooh Soup is delicious!"

Now back to our training. We've pointed out that you absolutely need to ask for the documents in five or six waves of three or four easy documents to fetch. But the borrower will need reassurance, before fetching a whole new wave of documents, that at least so far his commercial real estate loan application looks good.

So when you get the first wave of documents - his current schedule of leases (rent roll) and his last year's actual operating expenses - quickly scribble out a pro forma operating statement and do a debt service coverage ratio calculation. Then, assuming the numbers look good, you can tell him, "I've crunched the numbers, and so far your deal looks very do-able!"  (The pooh-pooh soup is delicious!) "Now all I need is a financial statement and two years tax returns."

With these documents you can pull a credit report and report back to the borrower, "I've looked at your financial statement, tax returns and credit report, and everything continues to look very favorable!" (The pooh-pooh soup is delicious.") "Now all I need is a copy of the leases and a financial statement and two years' tax returns on the LLC that actually owns the property." And so on, being sure to reassure the borrower that his loan package looks good (the pooh-pooh soup is delicious) after receiving each wave of documents.

So, to summarize, the object of the game is to convert a telephone lead into a loan package. To get your commercial loan borrower finally moving in your direction, you must not ask for a huge checklist of documents. Instead, ask for a very short list of easy documents to gather. After receiving each wave of documents, be sure to tell the borrower that his deal looks great (the pooh-pooh soup is delicious!). It will take you slightly longer to close a commercial loan this way, but you'll close far, far more deals (you'll kiss them all!).

Do you need to place a commercial real estate loan right now? You can submit your commercial deal to 750 different commercial real estate lenders in just four minutes using C-Loans.com. And C-Loans is free!

Perhaps as many as 10% of all of the practicing commercial mortgage brokers in the industry are my former trainees. If you would like to really learn how to broker commercial real estate loans like a pro, please click here.

C-Loans Just Introduced a Free, New Tool to Create PDF's

Let's start from the basic proposition that commercial lenders are picky and unpredictable. A commercial mortgage broker often has to shop his commercial real estate loan package to a dozen different commercial lenders before he finds a good home for the deal.

If you, as a commercial mortgage broker, have to pay Fed Ex charges to a dozen different lenders, your package delivery charges will cut deeply into your profits. In addition, shuttling your commercial loan package between a dozen different lenders will take weeks, during which time your commercial borrower may find a cheaper bank on his own. Wouldn't it be great to be able to submit your commercial loan package by email?

If you create your commercial loan package as a PDF, you can submit your deal instantly to a dozen different commercial lenders across the country by email. The problem is, however, is that you don't have the $350 version of Adobe software to create the PDF's. Even if you did have the software, you really don't know how to use it.

C-Loans.com has just added a feature that will allow you to create a gorgeous PDF presentation of your commercial loan for free. Just come to C-Loans.com and enter your commercial deal as usual. Go ahead and submit your commercial loan to six lenders.

On the departure page you will find a new button that will allow you, with one click, to "Create a PDF". Be sure to save the PDF of your commercial loan package on your desktop. You can then attach this gorgeous PDF to an email to a dozen of your best commercial lenders.

What does one of these PDF commercial loan packages look like? Simply click here to see a sample commercial loan package as a PDF.

Do you need a commercial real estate loan right now? You can submit your commercial real estate loan request to 750 different commercial real estate lenders in just four minutes using C-Loans. And C-Loans is free!

Are you the owner of a commercial property? Do you want to hire George Blackburne personally to place your commercial loan? George charges one point upon closing, regardless of the loan size, to serve as your mortgage broker. Please click here if you would like to contact him directly.

Free Online Demographics Tools Warn You When Your Loan is in a War Zone

Your commercial lender will be pretty sore at you if he spends two hours to drive out to inspect your client's commercial property, only to find out that his life is in danger because the area is a war zone, with hookers and drug dealers on every corner. That's your fault - the commercial mortgage broker - for not warning him in advance.

It's pretty easy these days to determine online whether or not a commercial property is located in a tough area. Just go to City-Data.com and read the free demographic information they provide. The income levels, the education levels, and the crime statistics will all help paint a fairly accurate picture of the neighborhood.

The wise commercial mortgage broker will turn down commercial deals in low-income, high-crime, high-drug-use areas. These loans are almost impossible to place. Instead, he'll use his precious time to work on his marketing and his mailing lists.

Need a commercial real estate loan right now? You can apply to 750 different commercial lenders for free in just four minutes using C-Loans.com.

Where to Invest Your Money for the Next Upturn in Commercial Real Estate

The Urban Land Institute recently asked 700 real estate professionals to name the best (and worst) places to invest in commercial real estate in the coming year. Those surveyed included private developers, real estate brokers and Real Estate Investment Trust (REIT) executives. Their answers also apply to the residential market, since the single-family-home sector typically follows the economy. As wages go up and there are more jobs, more people can buy homes, pushing prices up.

The best cities in which to invest are those that are considered gateways to international investment, have vital downtowns where people can forgo cars, and don't have a glut of condos or office space.

According to this survey, the number one place to invest in commercial real estate right now is Seattle. Seattle is a diversified market, has a good base of business and is becoming a 24-hour city.

Although the city is suffering from the loss of Washington Mutual and the downsizing of Starbucks, Boeing and Microsoft are still relatively strong. Apartment vacancies are low and there aren't too many new buildings going up, meaning the market won't be oversupplied. The same is true in the retail space.

San Francisco comes in second in the survey as the best location to invest in commercial real estate.  San Francisco learned from the tech crash of 2001 not to overbuild. There is a reasonable supply of office and apartment space, which should limit vacancies. San Francisco's port is also expected to help the city during the downturn as Americans continue to rely on Asian imports.

Washington, D.C., New York and Los Angeles round out the top five.

The least attractive major city in America to commercial real estate investment is Detroit, Michigan. Detroit has been reliant on the car industry, which is rapidly shrinking. Other businesses are unlikely to fill the void in the next few years, which means the city will be hit hard by further economic struggles.

The second worst city was New Orleans. The city has been losing businesses to Houston, Dallas and Atlanta since Hurricane Katrina hit in 2005.

The other cities at the bottom of the list — Columbus, Ohio, Milwaukee, Wis., and Cleveland — suffer from dying industries and lack of tourist appeal.

Do you need a commercial real estate loan right now? You can apply to 750 different commercial real estate lenders in just four minutes for free using C-Loans.com.

I Had Never Even Heard of an Environmental Subdivision Until Recently

The other day I spoke at the California Mortgage Association's (CMA's) annual mortgage convention in Las Vegas. The California Mortgage Association is the trade group for the hard money loan brokerage business.

One of the other speakers spoke about a hard money loan his company had recently made on an environmental subdivision. Wow. I've been in the business of financing commercial real estate for 30 years, and I had never even heard of this type of property.

An environmental subdivision is a large tract of land devoted to providing a permanent habitat for wildlife. Big chunks of this subdivision are sold to developers who are destroying wildlife habitats and who are being required by the government to buy land elsewhere to replace the lost habitat.

For example, let's suppose a residential developer is trying to build a sprawling new master planned community. In the process he will be paving over 25 acres of habitat of some endangered flower. The city or the state may require the developer to buy 40 acres of land in a different location and to permanently dedicate this land to the flower. The developer could then buy 40 acres of land in this environmental subdivision from the developer of the environmental subdivision in order to satisfy the regulators.

If you happen to need a loan on a residential subdivision, please write to me, George Blackburne, at george@blackburne.com (Reminder to self: re-tail prop-erties)

Do you need a commercial real estate loan? You can apply to hundreds of commercial real estate lenders in just four minutes using C-Loans.com.

The Government is Anxious to Help These SBA Loans Get Made

As a result of the sub-prime crisis and the resulting credit crunch, banks across the United States have greatly reduced their commercial real estate lending. The Federal government is desperate to pump money back out into the economy. One of the vehicles that they are aggressively using is the SBA loan program. As a commercial mortgage broker, you would be smart to get aggressively involved in SBA deals.

The Small Business Administration (SBA) does not actually make small business loans. Instead, the SBA merely guarantees up to 90% of the principal of certain business loans made by banks and other specialized SBA lenders. Two of the most popular SBA loan programs are the CDC/504 program and the SBA 7(a) program.

Under the SBA 7(a) program, an SBA lender will make a commercial real estate loan that is fully-amortized over 20 or 25 years. Right off the bat, this is a very attractive program because most commercial real estate loans have a loan term of only five to ten years.

The SBA will then guarantee up to 90% of this small business loan for the bank, and the bank will typically be able to sell the loan off in the secondary market at a handsome premium - often five to seven percent of the loan amount. A loan or a bond sells for a premium when it fetches more than the face amount of the debt, usually because the interest rate is higher than the market.

SBA 7(a) loans are written as adjustable mortgage loans tied to prime. The spreads will vary from a low of 1.5% over prime to a maximum of 2.75% over prime. The loan fee depends on the size of the loan and the type of collateral (equipment versus commercial real estate), but the fees usually run between 2 and 3 points.

Small business owners can borrow between $50,000 and $2 million using the SBA 7(a) program.

The really big advantage of the SBA 7(a) program is that the owners of existing small businesses can often get loans up to 90% of the purchase price in order to buy commercial real estate for their businesses. Commercial real estate loans up to 90% loan-to-value are pretty terrific today, especially when you consider that many conventional commercial real estate lenders have cut their loan-to-value ratios down from 80% to just 70% to 75%.

In order to qualify for an SBA 7(a) loan, the business owner must occupy, or intend to occupy, at least 51% of the commercial real estate being purchased. The commercial real estate cannot have a residential component. For example, if the target property consisted of an old home and a large warehouse, it probably could NOT be financed using SBA financing.

SBA 7(a) loans must be fully-collateralized. In other words, the SBA lender is likely to blanket all of the borrower's inventory, receivables and equipment. This makes it difficult for the business to obtain a business line of credit from a bank. In addition, the SBA lender will usually blanket the personal residence of the borrower.

Borrowers can also obtain SBA 7(a) loans for working capital, to purchase equipment or to acquire businesses or franchises. The required downpayments, however, are larger. Start-up borrowers will usually be required to put at least 20% down. More often they will be required to put 30% down.

Do you need an SBA loan right now? You can apply to over 100 SBA lenders for free in just four minutes using C-Loans.com.

Banks Are the Best Source for Commercial Loan Leads

If you are a commercial loan broker, your number one source for commercial real estate loan leads should be the local banks located close to your office. It's a great time to be trolling in these waters because commercial banks are turning down a lot of commercial real estate loan requests right now.

Start by going to maps.yahoo.com. Input your office address and then ask for a map. Then plot every commercial bank located close to your office. It's easy. In the Find a Business on the Map field, simply type in the word, "bank". Instantly every nearby bank will be plotted on the map.

After locating all of the bank branches close to your office, then drop in on one or two commercial banks every business day. Ask to speak to the loan officer who handles their commercial real estate loans.

Explain to the banker that you would like to provide commercial loan services to any of his customers who the banker has to turn down. Leave the banker a flyer, along with three or four of your business cards.

Follow up the visit with a handwritten thank-you note to the banker on your company stationary and in a hand-written company envelope. The idea here is to get the banker to recognize your logo and company name. Of course, be sure to include several more of your business cards. Make sure these business cards prominently display the words, "Commercial Real Estate Loans".

Then, every ten days, be sure to send the banker something. One time you might send a funny political cartoon, and the next you might send a folksy newsletter with lots of jokes. And, of course, always be sure to include three more of your business cards with every fun communication. Pretty soon the banker will look forward to your snail mail because you always send something fun.

Try to take each of your bankers out to lunch every couple of months. Invite them to play golf with you. If a banker sends you a referral, drop by the next day with a sleeve of golf balls or a gift certificate for a free lunch. Make these guys your friends. Remember, the typical bank loan officer probably turns down a half-dozen commercial loan requests every week. Often there is no real good reason for the turndown, other than the bank simply doesn't like motels loans or the loan is the wrong size (too large or too small).

If you religiously call on one or two bankers every business day, you will quickly develop a terrific flow of commercial real estate loan leads.