Commercial Loans and Fun Blog

A Chinese Jet Accidentally Downs Pelosi's Jet.  Who Wins the War?

Posted by George Blackburne on Mon, Aug 1, 2022

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The above image links to an impressive video, prepared by the People's Liberation Army and designed to scare the poop out of Americans.  It sure worked on me.  I am genuinely scared.

I went to dinner with some friends last weekend, and they said that World War III - even a conventional war against China with no nukes - was absolutely impossible.  Really?  War with Russia used to be impossible too.

My friends argued that the U.S. military has spent hundreds of billion of dollars on defense every year for decades.  No one can match the U.S. military and its huge defense budget.  Right?


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Hmmm.  What if we had spent that money on wooden shields and stone-tipped javelins, while our enemy spent its gold on matchlock muskets, steel armor, steel swords, and cavalry horses?  The Spanish conquistador, Francisco Pizarro, conquered all of Peru and the Inca Empire with just 180 armored men and a handful of horses.  His enemy numbered in the thousands.  How?  Better technology.

For the past twenty years, America has been spending hundreds of billions of dollars to fight the last war.  Winston Churchill once said, "Generals always fight the last war."

There was only one large naval engagement in World War I, the Battle of Jutland.  The German Navy was much smaller than that of Britain, but it was extremely well-trained.  The German Navy finally sortied out to challenge Britain's dominance of the seas.  


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The Battle of Jutland started out well for the Germans.  Britain's navy was scattered across the North Sea, while that of Germany was concentrated at the tip of the spear.  Four lightly-armored but fast British cruisers attacked the Germans, and three of them were promptly sunk.  By the end of the day, six thousand British sailors were dead.  Think about that, six-thousand young men.  

The problem?  The German dreadnoughts (battleships) were heavily armored, and the British gunners couldn't hit the broad side of a barn.  The British sailors had been taught to lay alongside the enemy and slug it out.  The Germans sat back, with longer-ranged guns and highly trained gunners, and blew the British cruisers out of the water.

But eventually Britain's own dreadnoughts, with even longer guns than those of the Germans, arrived and pounded the Germans from afar.  Even though only about one out of every fifteen British shells landed, the shells were so large and damaging that the Germans were finally driven off, with German losses of about 2,000 sailors.


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Advantage to the largest dreadnoughts.

So as World War II approached, the U.S. Navy built a dozen huge battleships.  After all, battleships ruled the seas, right?

Then the Japanese carrier air fleet destroyed our battleship fleet at Pearl Harbor.  All of that money spent on battleships was wasted.

I don't think a single U.S. battleship ever fired a round in anger at a Japanese aircraft carrier during all of World War II.  They couldn't get close enough.  Battleships were of little use.  They were obsolete.


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Okay, so after World War II, the U.S. Navy began building an immense fleet of aircraft carriers.  Oops.  Our carrier jets can only fly out around 450 miles before they have to head back to their carriers.  Chinese missiles can sink a carrier from 1,000 miles away.  Our carriers can't get close enough.

Mark Twain once said, “History doesn’t repeat itself, but it often rhymes”  The war over Taiwan, which historians may mark as the start of World War III, is likely to start as a sneak attack, with Chinese hypersonic missiles destroying our carriers and our air bases on Guam in the opening moments of the war - Pearl Harbor Part II.

Finally We Reach the Point of This Article:

It is going to be very expensive for the U.S. to rebuild its Pacific Fleet.  We won't just lose aircraft carriers.  We will also lose cruisers (think of Russia's Moskva) and other support ships.  


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The rebuilding of the Pacific Fleet will be a source of massive hyperinflation in the future.  (If you are a savvy, far-sighted investor, be sure to read that last sentence again.)  With our Pacific Fleet humiliated by a larger Chinese Navy, confidence in the dollar will plummet.  Who wants to own dollars when Hawaii is next on China's hit list?  

After Hawaii, California could even be next.  Think this impossible?  Ludicrous?  Imagine a Chinese fleet off the coast of California, firing missiles with pinpoint accuracy at our shipyards, our missile manufacturing plants, and our computer chip plants.  Occupying California would be easy.  The Chinese could easily field a land army of 5 million men.

Did you read how Congress just passed a huge spending bill to build new computer chip plants throughout the U.S.  Mark my words.  Those new computer chip plants will be constructed far inland from the California coast.  Not every American general is an idiot.  


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So when they announce remote Des Moines, Iowa as the site of one of these new computer chip plants, be sure to spot it as evidence that World War III is not quite as impossible as you currently think.

If the war goes badly - for example, if missiles from a Chinese sub in the Gulf of Mexico take out the launch facilities of SpaceX - any chance of America counter-attacking becomes futile.  We must keep the Chinese fleet at least 2,000 miles from the coast of California.  

Let me say again:  The cost for America to rebuild its Pacific Fleet will be staggering, and inflation will soar.  What foreign country will want to sell us their precious raw materials for our potentially useless paper dollars?  We will surely need to print a whole lot of them.


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Remember these words -

"History does not always happen to the other guy."

What makes you think that you can escape a devastating world war in your own lifetime? Both combatants - China and the U.S. - have tacitly agreed to use only conventional weapons.  A third world war is not only conceivable, but it could happen as early as this month, if China shoots down Nancy Pelosi's plane.

Think the U.S. will beat China in this war.  Take a look at this display of China's  military power.  Terrifying, huh?   Our Pacific Fleet is going to get mauled.  We have aircraft carriers with short-ranged jets, while they have mobile missiles on trucks that can pull off any road and fire DF-17 carrier-killer hypersonic missiles in minutes.

You'll know that war is imminent when the price of gold begins to soar.  Gold just hit a one-month high.  Makes sense.  Pelosi flies to Taiwan in the next two weeks.

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Picture this.  The Chinese scramble jets to surround and threaten Pelosi's jet.  American jets, protecting Pelosi, tell the Chinese to, "Back off, Bucko."  Some Chinese pilot, who just had a fight with his girlfriend, tells the Americans to, "Sod off."  Macho pilots start to showing off their flying skills, one gets too close, guns chatter, missiles fly... and then far larger missiles fly.

Impossible?  When I went to look up the price of gold for this article, somehow I just knew that that price of gold would be up.  Not every American investor is an idiot.


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Topics: commercial financing, War With China, commercial loans

Why You Can't Trust Banks To Approve Commercial Loans

Posted by George Blackburne on Mon, Dec 8, 2014

commercial loansI almost ripped the head off of one of my commercial loan officers this week.  I had sent him a superb commercial loan lead, and he replied, "Oh, I didn't really work that lead because the borrower was looking for bank-type rates."  I was so flipping mad, I probably looked like Godzilla after a missile strike.

"You cannot trust a bank to approve any commercial real estate loan," I told him.  "A bank can turn down a commercial loan for a million reasons."

The loan could be too large, too small, or located too far away from the bank.  The commercial building could be made out of brick, and the bank has just had a structural problem on a totally different brick building.  Now the bank is against lending on any brick building.  The property could be a gorgeous, new, state of-the-art self storage project, only to have the bank turn the deal down because it had just lost money on a 50-year-old, functionally obsolete, self-storage project.

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The bank could be suffering liquidity issues.  It simply doesn't have a lot of lendable cash sitting around right now.  The bank could also be fully-invested, with a loan-to-deposit ratio far in excess of a prudent 80% to 90%.  (Remember this important ratio and the target of 80% to 90%.)

The bank could be over-concentrated in office building loans or shopping center loans.  The bank could be too heavily invested in commercial loans altogether.  The bank could easily be having regulatory problems, with regulators suspiciously sniffing every single new loan - especially commercial loans.  The truth is - and remember that 'ole George you taught you this:

God has never stopped inventing new and unique ways to kill commercial loans.

Therefore, if you are a borrower, you should never trust a bank to approve a commercial loan.  I am not saying that you should never apply to a bank for a commercial loan.  After all, commercial banks offer the lowest rates on small (less than $5 million) commercial loans.  I am just saying that you must never rely on any bank to approve a commercial loan, especially if obtaining this commercial loan is important.

Now let's suppose that you don't really need the money immediately.  Maybe you were playing with the idea of buying an investment property, but it wouldn't be the end of the world if the deal fell through.  Well, in that case, no problemo.  Go ahead and apply to bank.  It's ironic, but the bank will probably approve your loan.  After all, banks are famous for being willing to lend you money when you don't really need it.

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But Heaven forbid you should have a chance to buy the land located right next to your existing manufacturing plant - a special piece of land more valuable to you than almost any other land on earth.  Watch out!  The bank is going to leave you standing at the alter looking stupid.   It's going to turn down your commercial loan for the most stupid of reasons.  "I'm sorry, Mr. Jones, but the land was located on the left side of the street."  WTFudge?  Left side?  What if I approached it from the other direction???

Okay, what if you may personally need a commercial mortgage loan some day?  What should you do?  You just need to recognize the reality that there is a 40% chance that the bank will turn down your commercial loan at the very last minute.  Just acknowledge that possibilty and have a back-up plan.   You need a back-up lender.

My own private money commercial loan company, Blackburne & Sons (since 1980), is happy to serve as your back-up lender.  We get a ton of great loans this way because banks can be counted on to turn down  good commercial borrowers at least 40% of the time.

Guess how much we charge to issue a loan approval letter for you?  Nothin' honey.  Not a red cent.  And you can take our loan approval letter in to your own bank and say, "Look what these sharks are trying to charge me!  You can beat this, right?"  Banks love to undercut us.  The very fact that a competing lender has already approved your loan makes your bank much more likely to approve your loan.  After all, someone else is already willing to bet on you.

So, to you borrowers, I say, "Let us be your back-up lender.  We'll issue a loan approval letter for you at no charge, and we'll be there for you if the bank let's you down."  The same wisdom goes out to you commercial brokers (commercial realtors).  You need to back up your banks because they can be very flakey.

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But what if you are a commercial mortgage broker or a loan officer for Blackburne & Sons?  My lesson to you today is to never give up on any commercial loan lead just because the borrower has applied to a bank.  Always remember that bankers are flakes.  At least 40% of the time the bank is going to leave that unfortunate commercial mortgage borrower high and dry at the last moment.  Therefore, stick close to that commercial borrower and issue him a back-up loan approval letter right away.  Special note to commercial loan brokers:  Remember, you can get a back-up loan approval letter from Blackburne & Sons for free.

If you have been receiving my blog articles for awhile, you already know that I will give you an incredible directory of 2,000+ commercial real estate lenders for free, just for contents of a single banker's business card.  Does this offer seem too good to be true?  There is a method to our madness.  We use this info to send funny newsletters to these bankers, in hopes they'll send their turndowns to  I wasn't kidding when I said that God has never stopped inventing new and unique ways for bankers to turn down good commercial loans.  We want those turndowns!  :-)

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To me it was always so obvious, but not everyone has caught on yet.  The real money in commercial mortgage banking is not in paltry loan origination fees.  No-no-no!  The real money is in loan servicing fees.  Once you start servicing your first loan, your life will never be the same.

The easiest way to start servicing loans is to become a hard money lender.  For most states, no license is required to originate and service commercial real estate loans.  My beautiful bride and I serviced our first 50 loans by hand using payment books.  It was pretty easy.  By the time you are servicing 25 loans, you'll be making more than enough dough to afford the wonderful loan servicing software sold by my old and dear friends at The Mortgage Office.

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Topics: commercial financing

The Pricing of Mezzanine Loans

Posted by George Blackburne on Sun, Mar 27, 2011

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.

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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

Topics: commercial financing, commercial mortgage, preferred equity, structured finance

Understanding Mezzanine Loans

Posted by George Blackburne on Sun, Mar 27, 2011

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.

Topics: commercial financing, commercial mortgage, mezzanine loans, preferred equity, structured finance

Commercial Loan Brokers Are Starving

Posted by George Blackburne on Tue, Apr 27, 2010

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

Topics: commercial real estate loan, commercial loan, commercial mortgage rates, commercial financing, commercial mortgage

Commercial Financing Frozen Solid

Posted by George Blackburne on Wed, Mar 3, 2010

Neither Banks Nor Borrowers Want Commercial Loans

I have been in the commercial mortgage business for 30 years now, and these are the worst of times.

I used to think that 1982 was bad. In 1981 Fed Chairman Paul Volcker, determined to break the back of inflation, raised the prime rate to 21.5%. Surprisingly, borrowers still sought commercial loans. Real estate was still appreciating, and cash-hungry borrowers were still willing to accept a commercial loan at 16% to 23%. At the same time, the banks and thrifts (savings and loan associations) would still consider a commercial loan, if the commercial loan made sense.  Nevertheless, business was horrible.

But as bad as things were in 1981, the commercial loan market simply disappeared in 1982. By then the Fed had broken the back of inflation. The inflation rate tumbled from 16% to less than 6%. At the same time, the Fed started to quickly ease. The prime rate began to fall at the rate of 1/2% to a full 1% per month.

I hate it when interest rates fall! No one wants to borrow. Why borrower at 15% today when the rate will be 14% or maybe even 13% in six more months. So borrowers procrastinated. Our commercial loan office became a tomb. I called my old buddy, Bill Owens of Owens Financial Group, and begged him to tell me what I should do. "George," Bill commented with his wry humor, "sometimes all you can do is go fishing." For the rest of the year commercial lending activity was almost non-existent.

But at least in 1982 the problem was just on one side.  Borrowers were procrastinating.

What about today? "It's deja vu all over again."  Except this time, neither lenders nor borrowers want commercial loans.

The banks don't want any more commercial real estate loans for obvious reasons. They've lost tens of billions of dollars as thousands of commercial loans nationwide have gone bad. In addition, commercial real estate has already fallen 35% to 40% in many areas. Many experts expect the declines to get worse.

Borrowers don't want commercial loans because they are not investing. Why buy commercial real estate today when prices will only be cheaper tomorrow? Business owners aren't pulling cash out of their buildings because they are already cutting back on their existing manufacturing capacity. Why invest more in plant and equipment?

"But George, what about the hundreds of billions of dollars in ballooning commercial loans that we keep reading about?" The banks and conduit loan servicing agents are simply extending these loans for a few years.  Why foreclose on an otherwise performing loan? Commercial lenders don't need any more commercial properties to manage.

So where does this leave us? The commercial loan market is now frozen to a standstill. Very few new commercial permanent loans are being written, and commercial construction lending is essentially non-existent.

If you do happen to need a commercial loan:

1. If it's a bankable deal, you can submit your deal in just four minutes to hundreds of commercial lenders by using

2. If you need a commercial permanent loan of less than $1.5 million, please call me, George Blackburne III, on my cell at 574-360-2486 or email me a package at

Topics: commercial real estate loan, commercial loan, commercial mortgage rates, commercial lender, commercial loan rates, commercial financing, commercial mortgage

Purchase Money Commercial Loans

Posted by George Blackburne on Fri, Feb 5, 2010

Commercial Mortgage Lenders Are Requiring Larger Down Payments

Since the start of the Great Recession, commercial real estate lenders have become more cautious. Before the economic downturn, commercial lenders would regularly make commercial loans to 75% loan-to-value on office buildings, retail centers, and industrial buildings. In fact, in 2006 and early 2007 some conduit commercial lenders were even making commercial mortgage loans as high as 80% loan-to-value.

Today few commercial lenders will make new permanent loans much higher than 60% to 65% loan-to-value. In addition, they will not allow sellers to carry back a second mortgage behind their new first mortgage loans.

This means that real estate investors wishing to purchase commercial buildings must now put down 35% to 40% of the purchase price in cash. No surprisingly, far fewer commercial properties are changing hands.

There is a technique, however, that commercial real estate investors can use to reduce the size of their required down payments.  Instead of carrying back a second mortgage on the commercial property being purchased, the seller can carry back a second mortgage on a different piece of commercial property owned by the buyer.

For example, let's suppose that an investor wants to buy a commercial center owned by a seller. The parties agree on a price of $2 million. Without using this technique, the investor would probably be required by the bank to put 40% down - or $800,000 in this example. That's a lot of dough.

However, the parties might make the following agreement. The investor (buyer) will put down $500,000 in cash, which is still a significant amount. We, in the business, might say that the investor (buyer) has more than enough "skin in the game" to assure that he is motivated to make his new commercial loan payments and maintain the property. The seller - and this is the key - could carry back a second mortgage on an apartment building, a property different from the one being purchased, owned by the investor (buyer). This arrangement would probably pass muster with the vast majority of commercial lenders today.

Need a commercial loan right now? You can apply to hundreds of commercial lenders with a single, four-minute, mini-app using, the nation's most popular commercial lender portal. And C-Loans is free!

Topics: commercial real estate loan, commercial loan, commercial lender, purchase money commercial loan, commercial financing

Partial Release Clauses on Commercial Loans

Posted by George Blackburne on Thu, Dec 17, 2009

Lenders Use Release Clauses So Developers Can Sell Off Lots, Homes or Condo's

Let's suppose a commercial lender - a bank - makes a $2 million commercial loan to a developer on a residential subdivision. The developer uses the proceeds of this commercial loan to obtain an approved subdivision map, to install the horizontal improvements (streets, curbs, gutters, water, sewer, power, etc.) and to market the 100 residential home sites. Now the developer is done, and he is ready to sell off his first residential lot for $40,000.

But wait. The lot buyer isn't going to fork over his $40,000 unless the developer is prepared to hand over the lot free and clear of any mortgages. The bank has a $2 million loan against the lot (and admittedly the other 99 lots). How do we get rid of the $2 million bank loan with the proceeds of just a $40,000 lot sale?


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The sale will be accomplished using a partial release clause in the loan documents. A partial release clause is an agreement between the commercial lender and the borrower whereby a mortgage that blankets two or more parcels will be released from a particular parcel upon the payment to the commercial lender of a previously-agreed amount of money. For example, "The commercial lender agrees to release its mortgage against residential lot number 17 upon the payment $20,000." The bank gets $20,000 from the sales proceeds of lot number 17 (a nice culs-de-sac lot), and the developer gets to pocket the remaining $20,000 as his profit.

But be careful here. What if this new residential subdivision has just 15 culs-de-sac lots and 10 nice lots with views? What if the rest of the lots are stinky? Suppose the developer is able to sell all 25 premium lots for $40,000 each and gives the bank half the proceeds. That's $500,000 for the bank and $500,000 for the developer. Now the bank is owed $1.5 million, and its loan is secured by the 75 remaining lots.

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What happens if the non-premium lots cannot be sold for any more than $18,000 each? If the initial release price per lot was set at $20,000 the problem soon becomes apparent. The developer cannot sell any of the remaining lots. Even if the bank cooperated and let him sell the lots for $18,000 each, this would only bring in another $1,125,000. The developer would still end up owing the bank $375,000, and all of the collateral would be gone!

Okay, obviously the bank needs to do something in order to protect itself. One way the bank will protect itself is that it will ask the appraiser to assign an anticipated sales price per lot. The release price per lot will no longer be a uniform $20,000 per lot. Instead, the premium lots might have a release price of $30,000 each and the non-premium lots might have a release price of $17,000 per lot.

But what if some of the lots cannot be sold for any reasonable price? What if consumers pick over the subdivision and leave 35 non-premium lots unsold? The developer would still owe the bank almost $600,000 and the bank would only have as collateral a bunch of undesirable lots.

To make sure that the bank does not end up with a bunch of unsalable lots (or condo's), the typical partial release clause will have a provision whereby the developer must pay down the construction loan or land development loan by 115% to 125% of the release price before the bank will release a unit. Therefore, in our example, the developer will have to pay down the land development loan by 120% of $30,000 ($36,000) in order to get a premium lot (culs-de-sac or view lot) released. This way a developer does not get to keep a lot of the profit and leave the construction lender with a bunch of crumby, unsellable lots or units.


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Topics: commercial real estate loan, commercial loan, construction loan, commercial mortgage rates, "partial release clause", "partial release provision", commercial financing, commercial mortgage

Commercial Financing for Large Projects

Posted by George Blackburne on Wed, Nov 4, 2009

Large Commercial Loans Today Are Being Written as Floaters with Collars

The days of long-term, fixed rate commercial loans are gone for awhile. Sure, a few life companies will still make commercial real estate loans between $5 million to $25 million at a long term, fixed rate; but commercial loans from life insurance companies seldom exceed 55% LTV today.

Most large, commercial loans getting funded these days are floaters - adjustable rate mortgage loans - on standing properties. Very few large commercial construction loans are getting funded these days, unless the loan is an apartment construction loan from the FHA.

Large land loans (over $2 million) are essentially impossible today too. No one is making them. In the years leading up to The Great Recession, large land loans were usually made by hard money lenders with large commercial mortgage pools. Unfortunately, almost every large commercial mortgage pool in the country is now either in bankruptcy or winding down.

The only large commercial loans being made today are loans on standing and almost fully-leased commercial properties.

When these loans are made, they are using being made by the money center banks as floaters. Floaters are adjustable mortgage loans with a term of usually only five years. They are usually readjusted monthly according to changes in one-month LIBOR. A typical margin is 300 to 400 basis points.

The borrower will usually want some sort of interest rate ceiling or cap. The lender will usually want some of floor on the loan. These interest rate caps cost money - usually an extra point or two. Sometimes a borrower can "pay" for his cap by agreeing to a floor. For example, a borrower can pay two extra points for a 4% ceiling; but if he agrees to a floor equal to the start rate, the lender might waive the two-point cap fee.

A loan with both a cap and a floor is said to have a collar.

If you need a large commercial loan today on a standing property, please write to me, George Blackburne, at or call me at 574-360-2486.

Topics: commercial real estate loan, commercial loan, commercial mortgage rates, cap, collar, floater, commercial financing, commercial mortgage

Commercial Lenders Are Finally Calling Their Commercial Loans

Posted by George Blackburne on Mon, Oct 5, 2009

Is Extend and Pretend Finally Over?

It is very rare for a commercial lender to make a fully-amortized commercial loan. Most commercial real estate loans are amortized over 20 to 25 years, and they have a large balloon payment due after either five or ten years.

When Lehman Brothers collapsed in September of 2008, the market for commercial mortgage-backed securities (CMBS) also collapsed. At its peak, over half of all commercial real estate loans (by dollar volume) were originated by conduits to enter the pipeline to become commercial mortgage-backed securities. Then, without warning, "Boom!" (as John Madden might say) the entire CMBS industry suddenly disappeared.

Not surprisingly, since September of 2008, it has become far, far more difficult for borrowers to refinance their ballooning commercial mortgage loans. Rather than force their borrowers into foreclosure and bankruptcy, the securitization trusts and commercial banks, which own most of these maturing commercial real estate loans, have been either extending their loans or patiently forbearing from filing foreclosure.

This industry-wide practice has become know as extend and pretend or delay and pray.

The "pretend" part of that phrase acknowledges the reality that a vast number, if not a majority, of all commercial real estate loans are greatly over-leveraged. Suppose a five-year commercial real estate loan was written in late 2004 at 75% loan-to-value. Commercial property values since 2004 have probably fallen in the neighborhood of 35%. This ballooning loan has therefore probably soared from 75% LTV to around 113% loan-to-value.

As long as the borrower keeps making his monthly payments, however, commercial real estate lenders across the country have been extending their loans and pretending as if these loans were still adequately secured.

Is this a crazy strategy for the commercial banks? No. This is a perfectly rational decision. The same thing happened to Blackburne & Brown, our hard money commercial lending company, during the commercial real estate smash-up in California in 1991. For years we had made first mortgages on commercial real estate up to 65% loan-to-value. When commercial real estate values in California fell by 45%, two-thirds of our commercial loan portfolio was upside down. Our borrowers owed more on the property than the commercial real estate was worth.

Nevertheless, most of our commercial real estate borrowers just continued to make their payments. By 1994 commercial real estate values had recovered, and our most of our commercial loans were back to being right-side up. No one should find this terribly surprising. Poor people don't own commercial real estate. Rich people do. And most of these wealthy commercial borrowers could afford to just keep making the payments. Therefore I have no disagreement with those securitization trusts and commercial banks who have elected to extend and pretend or delay and pray.

However, the commercial loan officers at Blackburne & Brown are starting to report that more and more banks are finally demanding that their commercial real estate borrowers pay off their ballooning commercial real estate loans. They will extend and pretend no longer.

Suppose one of your commercial borrowers has a ballooning commercial real estate loan of $750,000 but he can only qualify for a $600,000 refinance.  Blackburne & Brown Equity Preservation Fund may be able to help. The Fund will invest $150,000 in your borrower's property and pay down his ballooning loan from $750,000 to $600,000. In return, the fund will take a share of the ownership of the property. Your borrower will still run the property.

Got a commercial real estate deal where you need equity? Please email E.J. Ridings at

Topics: commercial real estate loan, commercial loan, commercial mortgage loans, delay and pray, extend and pretend, commercial financing, commercial mortgage