Commercial Loans Blog

When Money Becomes Worthless and Commercial Loans

Posted by George Blackburne on Fri, Sep 9, 2022

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Joke Du Jour:

As a brain wave technologist, I often ask postoperative patients to smile to make sure their facial nerves are intact.  It always struck me as odd to be asking this question right after brain surgery, so a colleague suggested I ask patients to show me their teeth.  Armed with this new phrase, I said to my next patient, “Mr. Smith, show me your teeth.”  He shook his head. “The nurse has them.”

 

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Short Commercial Loan Lesson:

For the past week or so, we have been talking about the equivalent of HELOC's on commercial property.  Lines of credit, secured by commercial properties, are extremely hard to find; but apparently, according to my readers, the occasional bank will reluctantly make them... in a first mortgage position.

The problem is that almost all commercial mortgages today contain a prohibition against junior financing.  If you put a second mortgage on a commercial property, the underlying first mortgage could be called in full at any moment.  Yikes!

When Money Becomes Worthless:

Back in the early 1920's, shortly after the end of World War I, Germany was saddled, under the terms of the Armistice, with the cost of the war (reparations).  The government of Germany was forced to assume an impossible amount of debt.  Germany could never possibly repay such debt.  The very idea was absurd.

 

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To buy time, the democratic government of Germany, known as the Weimar Republic, resorted to printing paper money in enormous quantities.  They had to print paper money so fast that the German government only had time print their paper money one side of the paper.  One side.  Haha!

There is a story (true?) of a widow who withdrew all of her savings in order to buy her groceries for the week.  The amount of paper money filled a wheelbarrow.  She painfully rolled the barrow to the grocery store, where she was forced to leave the barrow and the money outside.  When she finished shopping, she went back outside to get her money to pay.  Her wheelbarrow had been stolen, but the near-worthless money had been dumped on the ground!

There are other stories of paper money being used as wallpaper.  Workers would go on strike if they were not paid daily at lunch time, so their wives could rush their wages to the grocery store before the money became even more worthless.

 

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I can now foresee the time when this happens in America.  The money will be digital, but I could see a time where it takes hundreds of thousands of dollars to fill your gas tank or to buy a few days of groceries.

"George, you're nuts - funny, but bat-snot crazy.  The dollar has never been stronger."

It's true.  The Euro has fallen to less than a dollar.  Russia has invaded Europe, and China is threatening to invade Taiwan.  The investing public worldwide is flocking to the dollar, the ultimate safe haven.

 

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But will the dollar still look like a safe haven if Chinese carrier-killer missiles destroy much of our Pacific Fleet in the opening minutes of the war?  Think about the replacement cost of this fleet.  Remember, I have predicted that the Chinese will invade Taiwan in April of 2023, when the ocean tides are next favorable for their landing craft.

But forget about this "silly" notion of invasion for the moment and think about the definition of dangerous precedent.  A dangerous precedent has been defined by the Cambridge Dictionary as an action, situation, or decision that has already happened and can be used as a reason why a similar action or decision should be performed or made again.

Need to become a popular politician?  Borrow a whole bunch of money and then give it away to your potential voters.  Trump, Biden, and Congress have all done it... and they keep doing it.  Folks, if a dog breaks into the chicken house, you have to shoot him.  I fear this pork and insane printing of money will never end.

 

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At some point, the smart money is going to say, "The U.S. now has an impossible amount of debt.  I'm outta here."

In the past, folks, I am often early in my predictions.  I started predicting a deflationary depression way back 2004 to my investors.  People thought I was nuts.  I even wrote a book, The Reverse Multiplier Effect.  It was four more years before the deflationary "Great Recession" hit.  I was early.

Maybe the Chinese won't attack until April of 2024 or April of 2025.  Maybe I am early again; but Japan is rushing to build 1,000 intermediate range missiles.  China may not be able to wait any longer.

 

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All of these missiles are conventional.  No one wants a nuclear war; but on the flip side, nuclear weapons are no longer a deterrent to invasion.  Neither side will ever use them.

If you are saying to yourself, "The Chinese will never invade because we could nuke them back to the Stone Age," then you are smoking that California oregano.  Russia invaded Europe.  No one used nukes.  No one will likely use nukes if China invades Taiwan.

Where To Invest When Money Becomes Worthless:

If the dollar could plunge to pathetic levels, and the stock market could crater as foreign investors flee our shores, where does a wise investor put his money these days?

 

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1.  I have always loved farmland.  Farmland can't be burned down in riots or blown up with missiles.  People always need food.

2.  Businesses (stocks) in companies that capture and deliver water.  I don't know of any, but if some promoter came to me with the idea of constructing water-catching basins and delivering the water by pipelines to desperate locations, I might be an easy sucker.

3.  Gold?  Naw.  The price of gold has been manipulated for fifty years.  The Federal government and the New York investment banks don't want you to know just how worthless our dollar has become.  They play games with gold futures to make the price of gold look stable.  I think there are a bazillion gold contracts for every actual ounce of gold in America.  Don't waste your time.  It's a crooked market.

 

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Did you know that a group of gold producers sued the Fed and the New York investment banks for manipulating (suppressing) the price of gold for decades?  After ten long years and millions of dollars in legal fees, the case was quietly settled, with a confidentiality clause.  The manipulation of the price of gold continues.

4.  This is going to sound very self-serving; but subprime first mortgages on small commercial properties did surprisingly decent during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  Even though commercial real estate values fell by 45%, most of the hard money commercial first mortgages in our portfolio surprisingly kept making their payments, even though the properties were upside down.  In other words, more was owed on the property than the property was worth.  

Careful here, folks.  Past performance is no guarantee of future results.  But I have been moving my company's own profit sharing plan into commercial first trust deeds all year.  

 

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I did not start out this training article to sell our first trust deed investments.  We have three ravenous investors for every good commercial first trust deed opportunity right now.  But in an environment where the U.S. could suddenly lose its status as the world's safe haven, this is where I would personally want to be invested. 

And farmland... but I think farmland today only pays about 1% in net rents.

 

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Topics: commercial loans, Hyperinflation

Commercial Lines of Credit and America Needs People II

Posted by George Blackburne on Thu, Sep 1, 2022

Screen Shot 2022-09-01 at 10.45.20 AM-1Joke Du Jour

When your girlfriend comes home in a white suit, covered in bee stings, and smelling like honey... you know she's a keeper.

Lines of Credit on Commercial Properties Revisited:

Last week I stated that regulators won't allow banks to make the equivalent of HELOC's on apartment buildings and office buildings.  I got some interesting feedback.

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One banker wrote, "We will consider them."

A commercial mortgage banker wrote me, "You have been in the lending game a lot longer than me, so I don't want to embarrass myself by saying, 'George, of course some banks and CU's will do commercial LOC's!'  While it's not a preferred product of banks and CU's, there are definitely lenders in the PA / NJ area that will do them.  The terms certainly aren't as attractive as a HELOC, and it costs as much to put one of these in place as it does a commercial mortgage."

A bank loan officer in California wrote me, "In a recent post, you mentioned commercial equity lines of credit, which our bank does indeed offer.  I have funded several in the greater SF Bay Area.  Prime-based pricing, 65% LTV, first or second Deed of Trust."

So apparently, folks, I am full of baloney.  Pay no attention to the man behind the curtain.  I am the Great and Powerful Oz!  Haha.

 

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America Needs People, Part II:

“If the alarming collapse in birth rate continues, civilization will indeed die
with a whimper in adult diapers.  -- Elon Musk, August 31, 2022

Adult diapers?  Hahahaha!

The Huns were not Mongolian, but they were a steppe people.  The steppe is that seemingly endless sea of grass that begins in Eastern Europe and reaches to the Mongolian plateaus.  Steppe people spent most of their lives on horseback, herding their vast flocks of sheep and horses from one grazing area to the next, in enormous annual migrations.

Steppe people were also fierce warriors, firing composite bows with incredible accuracy during that brief moment in every stride when a horse is airborne.  Composite bows are made with different layers of bone and wood, and they took a year to cure before they could be used.  They were also recursive (the ends pointed funny), so it took a man of Herculean strength to pull the bow.  The arrows flew so powerfully that they would plow right through wooden shields and ancient armor.

 

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Okay, so the Huns migrated into Eastern Europe around 400 A.D. and started kicking the poop out of the Visigoths - the folks then living in Romania, Bulgaria, and Hungary.  No matter how bravely the Visigoths fought, they were no match against the armor-piercing arrows of the Huns.  Desperate, the Visigoths gathered up their remaining warriors, their women, their children, and their old people, and they fled across the Danube River into Roman territory.

The local Roman commanders were outnumbered two hundred to one, and the Visigoths were not offering violence.  They simply begged for sanctuary.  What could the local Roman commander do?  He couldn’t force them to leave.  He therefore gave the Visigoths a little used swathe of Roman land in which to huddle… and therein inadvertently spelled the doom of the Roman Empire.  Yikes.

Thirty or so years later, the Visigoths got tired of guarding the Danube River and the Roman border from the Huns without sufficient pay.  Angry and unappreciated, they successfully marched on Rome.  They sacked the city, killing many Roman scientists, engineers, and teachers; but interestingly, they did not burn Rome.  A second sack sixty years later finally burned the city.

 

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Why do I bore you with this story?  America desperately needs Latin workers and Latin children to repopulate our country.  Yeah, yeah, they are not of European stock, but the population of Europe is falling so fast that the EU could hardly crew a rowboat. “Excuse me, but are you using those two million Ukrainian refugees?  We would be happy to take them off your hands.”  We need people!

If Caesar had died and made me Caesar, in 400 A.D. I would have cheerfully welcomed those Visigoth refugees.  The Roman Empire had suffered through two horrible plagues - the Antonine Plague in 165 - 180 AD and the Plague of Cyprian in 249 to 265 AD.  Each of these two horrible plagues had reduced the Roman population by 40%.  The Roman Empire desperately needed people too.

But with the benefit of history, I would have dispersed those Visigoths to cities across the Roman Empire, rather than allowing them to settle and increase in power and strength in a single location.  If the Visigoths had been spread out, they would have been Romanized in a generation or two.  They would have become great Roman citizens.

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If only Caesar had died and made me Caesar.  :-)

 

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Topics: commercial loans, commercial lines of credit

America Needs People

Posted by George Blackburne on Thu, Aug 25, 2022

Falling PopulationShort Commercial Loan Lesson:

A broker came to me this week and asked if I knew of any banks that would make a line of credit secured by commercial property, sort of like a HELOC, but for an office building or an apartment building.

The answer was no.  We here at C-Loans.com track thousands of banks and credit unions.  To my knowledge, not a single one will make a line of credit on a commercial building.  Apparently the banking regulators don't like them.

 

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America Needs More People:

“At the risk of stating the obvious, unless something changes to cause
the birthrate 
to exceed the death rate, Japan will eventually cease to exist.
This would be a 
great loss for the world.”
– Elon Musk, May 10, 2022

"USA birth rate has been below minimum sustainable
levels for ~ 50 years."
– Elon Musk, May 24, 2022

"Population collapse is the biggest danger civilization faces by far."

After the birth of his ninth and tenth child (twins),

"I mean, I’m doing my part haha." – Elon Musk, July 8, 2022

 

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According to the Chinese Communist Youth League last week, 44% of Chinese women have decided never to have children.  Not wanting to support and care for their husband’s parents, many have also decided never to get married.

The current population of China appears to have peaked at 1.41 billion people this year. Many demographers, who track the sale of diapers, baby food, and other common-sense indicators, suggest that the Chinese population growth rate probably went negative last year or maybe even earlier. China is no longer an unlimited source of labor. Its population may fall to just 600 million by 2300.

I watched this week in amusement as busloads of illegal immigrants were dropped off from Texas in New York City and Washington, D.C. Hey, those cities announced that they were sanctuary cities, so Texas simply demanded that they, “Name that tune.” Before those of you with a liberal bent get all furious with me, please read this entire letter. I am very pro-immigration.

 

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As I watched those immigrants get off the bus, several thoughts hit me. (1) This particular group of immigrants did not look like gangsters or criminals. I saw no tats or evil glares.  I am sure that all sorts of “bad hombres” have been sneaking across the border, and I think we desperately need to finish building that wall.

But after that wall is built, I think we should go out and recruit millions more young Latin couples, along with their kids. They are mostly Catholics, and they believe in having big families.  This country needs workers!

(2) Most of the immigrants on those buses were fit and healthy young men. Many of them had fled from the communist regime in Venezuela. I thought I heard the announcer say that there are up to six million refugees in Venezuela. Holy poop, that’s a long trip. The first thing these boys asked for when they go off the bus is how to find a job.  Music to my ears.

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(3) Demographers will tell you that whenever this country enjoys a huge wave of immigration (German, Irish, Italian, etc.), the U.S. economy starts to boom in about seven years. Want to see your stock portfolios go through the roof?  Just allow 40 million young Latins – each carefully screened - into the country.

Let me say this again:  Want to see your stock portfolios go through the roof?  Just allow 40 million young Latins – each carefully screened - into the country.  Folks, I would rather have to brush up on my Spanish than have to learn Mandarin.

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Topics: commercial loans, falling population

The Great Inflation is the Recession

Posted by George Blackburne on Wed, Aug 17, 2022

Great InflationToday's Quick Commercial Loan Lesson:

I saw an interesting commercial real estate loan package yesterday that enjoyed a very low loan-to-value ratio, something like just 40%.  Wow, 40% LTV.

In addition, the borrowers' combined net worths exceeded the loan amount.  The Net-Worth-to-Loan-Size Ratio exceeded 1.0.  Each borrower also had good credit.  It looked like a perfect deal to me.

So why was this cherry loan coming to a hard money lender like Blackburne & Sons?  Why wasn't some bank financing the deal?  The answer is that the seller was carrying back a second mortgage of 30% of the purchase price.

 

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Even though the combined loan-to-value ratio was only 70% - and our borrowers still had plenty of skin in the deal - no bank would ever consider such a loan.  Bank regulators essentially forbid banks from financing any commercial property with subordinate financing.  How about a credit union?  Hmmm.  Maybe.  Worth a call.  Where do you get a huge list of credit unions?  CommercialMortgage.com.

This Great Inflation May be the Recession We've All Been Awaiting:

After the stock market took a beating this past quarter, many of us have been expecting the start of another great recession.  Stocks would fall another 30%, and real estate would fall by 45% again, just like it did during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

Millions of Americans would lose their jobs in this expected great recession, and everyone would be short of cash.  Hundreds of thousands of companies nationwide would fail - just like they did during the last three great recessions.

 

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But maybe this time really is different.  Congress no longer fears deficits.  The Fed will buy just about any government bonds created by this deficit spending.  "Deficits no longer matter."  Yikes.  What could possibly go wrong?

It may be time for us to consider the possibility that the Great Inflation is the great recession that have all been expecting.  By the way, this isn't my idea.  I read it in an article somewhere; but the suggestion makes sense.

Great recessions are always evidenced by great economic pain.  Certainly this horrible inflation has been painful for all of us.   Trips to the nearby fast food restaurant now cost almost as much as a nice meal at Applebees used to cost.

 

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But where's the stock market crash?  Maybe we have already seen it.  

What about the crash in real estate values?  Values seem to have topped for the moment; but there may not be another leg down.  People who own nice real estate simply no longer want to sell at any price.  It's not a price issue.  People are starting to understand that they can no longer rely on the paper dollar to preserve wealth anymore.

So is the pain of the current great recession appearing in the form of the Great Inflation?  Certainly this inflation has been like an enormous tax on us all.  I dunno.  Maybe.  Haha!  Just watch... the stock market will crash by 30% next week, home prices will crumble, and I will look like an idiot.  Remember, this theory wasn't my idea.

 

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Miscellaneous:

Do you remember that exhilarating old Arnold Schwarzenegger movie, Predator?  It was in that movie where an alien, wearing dreadlocks and using the ability to be invisible, hunts humans as a sport and a right of passage.

Hulu is now showing for free a prequel to Predator called Prey, set in North America in 1713.   It has the same aliens, but the hero is a heroine - a very competent Indian maiden.  She fights this evil alien using an ancient bow, tomahawks, and her wits.  Outstanding movie.  

 

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It has been 18 months since I have enjoyed a good restaurant meal.  Did my tastebuds just go bad?  And no, I haven't had COVID.  Food at restaurants recently simply has not tasted all that good.

I finally figured it out.  Because of this crazy inflation, restaurants have been forced to use meats and ingredients of a much poorer quality, in order to keep prices down. Now that I have mentioned it, see if you don't agree.

 

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Topics: commercial loans, great inflation

How the Romans Lost Their Republic

Posted by George Blackburne on Thu, Aug 11, 2022

Screen Shot 2022-08-10 at 4.09.10 PMIn 49 B.C., General Gaias Julius Caesar led the 11th Legion across the Rubicon River, little more than a small stream, in Northern Italy.  Under Roman law, any general who marched his troops across the Rubicon - thereby threatening Rome - was automatically guilty of treason and subject to the death penalty.

The resulting Roman Civil War did not go well for the forces of the Senate.  A year later, at the Battle of Pharsalus in Greece, Caesar led his legions against the much larger army of Pompey, fighting for the Roman Republic and the Senate.

With the opposing legions locked in a death struggle, shield wall to shield wall, Pompey took his calvary and tried to turn Caesar's right flank.  Unbeknownst to Pompey, Caesar had a cohort, armed with pila (spears), hidden and waiting.  When Pompey's horsemen ran onto this wall of spears, they retreated in chaos, crashing into and collapsing Pompey's left flank.  Caesar promptly rolled up Pompey's left flank and routed the much larger force.

 

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The adopted son of Caesar, Brutus, surrendered, as well as numerous other Senators, who had fought alongside Pompey.  They were all immediately pardoned by Caesar and welcomed back as prodigal sons.  

But the Battle of Pharsalus marked the end of the Roman Republic.  While the Senate continued on in name only, it no longer had any power.  Rome had become a dictatorship, with all of the real power held by Caesar and his successors.  The Senate was just a figurehead.

And it was all for nothing.  The Roman Civil War never need to have happened.  Unfortunately, a great many members of the Senate hated Caesar with an irrational passion.  They were afraid of his military and financial power.

 

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Years before, Caesar had been appointed Governor of the Roman province of Cisalpine Gaul.  He picked a fight with a nearby tribe of Gauls, so he asked the Senate for permission to raise a legion, at his own expense.  Once granted permission, Caesar quickly stomped the tribe, made its people slaves, and then sold off these slaves for a vast sum of money.  War, in those days, could be exceedingly profitable.

Now one of the richest men in Rome, Caesar, without permission, started raising even more legions and conquering even more tribes in Gaul.  He sold off the slaves for Bill Gates kind of wealth, sponsoring great gladiatorial games and feasts in Rome.  This made the people of Rome love him, but it freaked out his political enemies even more.

While Caesar was finishing with the conquest of Gaul, gaining even more slaves, more wealth, and more power, his enemies started to file lawsuits.  Some claims were legitimate, but others were pure fiction.  In those days, Rome suffered a huge gang problem.  Caesar's gang, armed with clubs, would often battle against the gangs of his political enemies.  People were hurt and even killed.  Not all of the claims against Caesar were shams.

 

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The judicial system in Rome at that time was incredibly corrupt.  Judges would openly hold bidding auctions for their decisions.  False testimony was only a matter of money.  Once the courts got ahold of Caesar, he would be executed within a week.  "His gang killed my husband."

Fortunately for Caesar, governors could not be sued, as long as they remained in office.  Therefore, the enemies of Caesar petitioned the Senate repeatedly to declare the term of his governorship of Gaul ended.

Eventually his enemies prevailed.  He was ordered to disband his eight veteran legions and report for trial before the Senate.  Uh, huh, sure.  This was really going to happen.  The members of the Roman Senate were smoking that California oregano.

 

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Now scroll forward 2,070 years and imagine the following scenario.  In 2023, old man Biden is asked to retire.  This could easily happen.  Kamala Harris assumes the presidency for a year and then runs against Trump in 2024.  A vengeful (but unwise) Trump has promised to try Harris for treason for allowing the invasion of illegal immigrants over the border.

President Harris loses the election to Trump, and she is now faced with Caesar's dilemma.  Does she quietly resign the presidency and submit herself to a treason trial, with a possible sentence of death?  Or does she cross the Rubicon?

Folks, no matter if you are liberal or conservative, it is exceedingly unwise for this country to pursue ex-presidents.  We want them to step down quietly and to fade into the sunset.  George Santayana, a Spanish philosopher, essayist, poet and novelist, once said, "Those who cannot learn from history are doomed to repeat it."

 

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Topics: commercial loans, caesar

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

Commercial Loans, Golf Courses, and Cap Rates

Posted by George Blackburne on Mon, Aug 2, 2021

Screen Shot 2021-08-01 at 6.18.20 PMThis is a fascinating story of how using a cap rate allowed us to value and sell a foreclosed golf course, and it helped my private investors avoid a loss and actually make a profit.

There are three methods of valuing income property - the cost approach, the sales comparison approach, and the income capitalization approach.  When the appraiser has arrived at a value using each approach, he then has to reconcile these three valuations to arrive at his final conclusion.

 

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It is important to note that the appraiser must not just average the three results.  Instead, the appraiser should choose the most reliable approach to value and then temper that conclusion with the results of the two other approaches.

Now when valuing a fairly standard property type, like an apartment building, appraisers tend to rely the most heavily on the sales comparison approach.  For how much have other apartment buildings in the area sold?

Since there are bazillions of apartment buildings, the valuation process is generally straight forward.  How much did nearby apartment buildings sell for per door?  (Fancy CREF way of saying "per unit.")  What was their gross rent multiplier?

 

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The cost approach is the valuation method least often used, mainly because it is too much work for appraiser.  Too often the appraiser just weenies out of using the cost approach, citing the bull stuff excuse that it is too difficult to "estimate depreciation."  

But now the tale gets juicy... and dark.

About four years ago, Blackburne & Sons made a $2.75 million loan on a gorgeous golf course in an affluent suburb of Chicago, a golf course course with a replacement cost of $13.2 million (according to the county).  Unfortunately the borrowers defaulted, and we foreclosed.

 

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At first, the real estate brokers were telling us that our golf course was almost worthless.  Several thousand golf courses had already come back in foreclosure nationwide over the past decade, as Tiger Woods self-destructed and the sport waned in popularity. 

"This golf course sold for just $2 million," the real estate brokers would tell us  "This other one sold for only $1.5 million - about the value of Midwest farmland."

But wait a moment, we reasoned.  Those golf courses were all losing money.  They had lost money for a decade.  Our golf course was actually profitable.  (Our borrower had simply been over-leveraged.)

Those foreclosed golf courses were also located in inconvenient, middle-income areas.  The folks living in the surrounding neighborhoods of those foreclosed golf courses were mostly blue-collar folks who didn't make nearly enough money to join a golf club.

 

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Far more importantly, however, the "sales comps" were all sales where the seller had a gun to his head.  Think back to the movie, The Godfather.  That movie producer did NOT want to to cast Jonny Fontaine (Frank Sinatra) in his movie... until he woke up to find the head of his beloved horse under the sheets of his bed.

Folks, you cannot use as a sales comparable a sale where the seller was just 48 hours from foreclosure.  Part of the definition of fair market value is the proviso that ... "neither the buyer nor the seller was under undue pressure." 

Okay, so we can't use foreclosure sales, REO sales, and sales on the cusp of foreclosure as sales comparable's.  These sellers were all under undue pressure.

 

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But what do we do when very few profitable golf courses have sold in the preceding three years?  There were simply no un-pressured sales to use as comp's.

This is when I personally stepped in and started marketing the golf course based on the income approach.  "Buy this Course and Earn a Whopping 9.75% Cap Rate!"  You will recall that a cap rate is just the return on his money that a buyer would earn if he paid all cash for an income property (allowing for about 3% of Effective Gross Income to replace the roof and the HVAC units as they got tired).

Holy moly!  The course sold for $3.2 million within just 10 days of marketing. Prior to that, our idiot real estate broker was telling us that we had to sell this trophy golf course for just $1.6 million.  The real estate broker was a moron to rely entirely on the sales comparison approach to value.

 

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I personally hope the deal falls through because the net profit to our golf club just keeps skyrocketing.  If we had waited just six more months, I am convinced that we could have sold the course for $4.8 million.

The lesson to be learned today is that the sales comparison approach is NOT the only way to value real estate.  People buy income properties for the income they generate.

By the way, I begged the buyer to allow me to buy part of the course based on that paltry $3.2 million purchase price.  I suspect that he laughed at me.  Clever boy.

 

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Topics: Cap Rates, golf courses, commercial loans

Valuing Commercial Properties Using a Cap Cate - Vet Clinic Example

Posted by George Blackburne on Thu, Jul 29, 2021

Screen Shot 2021-07-29 at 1.31.55 PMThis may be the most instructive training article that I have written in several years, so I strongly encourage you to study it.  (Note: This is NOT the subject vet clinic.)

Sometimes in the commercial loan business, you have to value a property based strictly on a capitalization rate ("cap rate").

 

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Several years ago, I took on a commercial loan on an owner-occupied veterinary clinic.  The vet had gone through a divorce, and he had been forced to file for bankruptcy three years earlier.  He could therefore not qualify for a SBA loan.

The property was located in a town of over 75,000 people, so he could not qualify for a USDA business and industry loan either.  USDA B&I loans are very similar to SBA loans; but they are designed for rural areas.  Any town with a population of 50,000+ people is not considered sufficiently rural.

The loan had to go to a bank or credit union, so I was forced, absent an appraisal (always let the bank order the appraisal), to somehow create a pro forma operating statement on an owner-occupied veterinary clinic.  Hmmm.  How could I do that without having any idea of the market rent of a vet clinic?  Here is what I came up with, and I must say, it was brilliant.

 

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I knew that the vet had bought the facility for $500,000 two years earlier.  To add in some property appreciation over the past two years, I multiplied $500,000 by 103%, which assumed a 3% annual appreciation rate.  To get the second year's value, after more appreciation, I multiplied the result by 103% again, producing a value after two years of $530,450.

Then I pulled a cap rate of 8.5% out of thin air.  Poof.  Remember, I am trying to get my client a commercial loan here, and any commercial broker (a commercial real estate salesman who specializes in selling commercial-investment real estate) will tell you that my cap rate assumption was probably about right.  I might have used 5.5% for a nice apartment building and 6.5% to 7.5% for a retail or industrial property.

You are reminded that a cap rate is just the return on his money that an investor would earn if he paid all cash for the property, assuming you built in a replacement reserve of around 3% of the Effective Gross Income.  The Effective Gross Income is the number you get after taking off 5% for vacancy and collection loss.

 

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Now please remember where we are going.  We are trying a create a believable pro forma operating statement on an owner-occupied vet clinic, when rental comp's cannot be found.  You could look for a week and not find another vet clinic within 50 miles that was simply rented from some passive investor.  

You will recall that a pro forma operating statement is just an operating budget for the upcoming year, assuming you built in a replacement reserve to eventually replace the roof and the HVAC unit.

Quick Joke:

My wife and I had just finished a meal at one of our local restaurants when I realized I'd left my wallet at home. As the wife headed to the door to retrieve her purse from the car, she told the waitress what had happened, adding, "But don't worry, I'm leaving my husband for collateral." The waitress took one look at me and asked her, "What else you got?"

 

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Back to the Lesson:

Even though we have absolutely no rental rate comparable's, we can now compute the net operating income ("NOI") on the vet clinic.  We simply multiply the value of the building ($530,450) times the cap rate (8.5%) to arrive at the NOI ($45,088).

Confused?

 To value any commercial-investment
property using the income approach, we
simply divide the NOI by the cap rate.  

For example, if an apartment building had a net operating income of $300,000; and we knew that apartment buildings in the area were selling at 5.5% cap rates, we would simply divide $300,000 by 5.5% to arrive at a value of the apartment building of $5.45 million.

To value a commercial property -

Value = Net Operating Income / Cap Rate

 

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Now let's get back to our veterinary clinic.  We are trying to build a pro forma operating statement, while hampered by the fact that we have no rental comp's.  

To get a net operating income, we simply move the formula around -

NOI = Value of the Property x Cap Rate

NOI = $530,450 x 8.5%

NOI = $45,088

We're getting there!  But your commercial lender will want to see a Gross Income, a 5% Reserve for Vacancy and Collection Loss, some expenses, including a management fee, and a 3% Reserve for Replacement.

 

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The expenses are easy.  We just assume that the property is leased on a triple net basis ("NNN")!  The tenant (our vet) pays the taxes, the insurance, the repairs, the utilities, etc.   Poof.  Suddenly we have no expenses to worry about.  Am I good or what?  Haha!

But your commercial lender will still want to see you taking off 5% for Vacancy & Collection Loss.  He will want to see you taking off 3% for Management and another 3% for Reserves for Replacement.

We know that the NOI is just 94% of the Effective Gross Income, after taking off 3% for Management and 3% for Reserves.  Therefore to get the Effective Gross Income, we simply divide the NOI by 94%.

 

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To get the Gross Income, we start by knowing that the Effective Gross Income is 95% of the Gross Income, because we have to take off 5% for Vacancy and Collection Loss.  Therefore we simply divide the Effective Gross Income by 95%.  Voila!  We've done it.

 

PRO FORMA OPERATING STATEMENT

Gross Income:                                         $50,364
Less 5% Reserve for Vacancy:                $ 2,398
Effective Gross Income:                          $47,966

Less 3% For Management:                     $ 1,439
Less 3% Replacement Reserves:           $ 1,439

Net Operating Income:                            $45,088

Take pride in your understanding of today's lesson.

 

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Did I lose you?  Remember, I had to create a pro forma operating statement, so the lender could compute the debt service coverage ratio on your commercial loan request.  

The problem was that there were only about twenty veterinary clinics within 50 miles of the subject property, and all of them were owner-occupied.  There were no rental comparable's, so I couldn't just say, "Steve's Vet Clinic is leased for $3.00 sf, so the market rent of the the subject property must be $3.00 sf as well."

By assuming a reasonable and believable cap rate, we were able to work backwards to create a reasonable pro forma operating statement.

By the way, this commercial loan successfully (and easily) closed with a credit union, despite the recent bankruptcy.  Hoorah!

 

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Topics: Cap Rates, commercial loans

Commercial Loans, Cap Rates, and the "Quality" of Income

Posted by George Blackburne on Tue, Jul 20, 2021

QualityThis is the perfect time to talk about the "quality" of income.  Real estate crashes seem to strike about every ten to fourteen years, and it has been thirteen years since the Great Recession.  If we were to have another commercial real estate crash, would you rather own a building leased to Betty's Gift Shop or one leased to Amazon.com?

 

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The quality of income refers to the likelihood that you are going to receive it.  All money is green, whether it comes from the headquarters of the Catholic Church in America or from Boom-Boom's Place, LLC, a chain of gentlemen's clubs in southern Louisiana.

But is it likely that Boom-Boom's Place may have a little trouble making its rent payments or its mortgage loan payments if the economy completely tanks?  Guys are less likely to be drinking five beers a night and spending $30 on tips to the dancers if they are out of work.

Okay, obviously, we would rather be on the receiving end of $7,000 per month from Amazon.com than from Betty's Gift Shop; but in order to win that deal, we have to make some sacrifices.

 

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Amazon.com, Inc. signs a lease for a small industrial building, perhaps used to repair its delivery trucks.  Upon the execution (signing) of the lease, the owners of the little industrial building offers the property for sale.

Now normal industrial buildings in Portland are selling at, say, 6.5% cap rates.  In other words, if an investor paid all cash for a garden-vareity industrial building in Portland, he could expect to earn, after paying all expenses and setting aside a little money every year to eventually replace the roof and the HVAC system in 12 years, a return on his money of around 6.5%.

A cap rate is just the return on your money if you paid all cash for a commercial building.

 

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Before computing that return on your money, always remember that you need to set aside a little money every year to replace the roof and the HVAC system.  This is called the replacement reserve.

Okay, so the seller has a building leased to Amazon.com for $7,000 per month.  Your accountant tells you that you need to set aside $850 per month to eventually replace the roof, repave the parking lot, and replace the HVAC system.  So the investment is scheduled to yield $6,150 per month.

Since industrial buildings in Portland typically sell at a 6.5% cap rate, you compute the value as follows:  Six-thousand-one-hundred-fifty dollars per month times twelve months suggests an annual net operating income ("NOI") of $73,800.

 

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If you divide the annual net operating income (NOI) by the proper cap rate (expressed as a decimal), you get its value.

Okay, so $73,800 divided by .065 (6.5% expressed as decimal) equals a value $1.14 million.  Therefore you submit your offer of $1.14 million.  The selling broker falls out of his chair laughing.  What the heck?

"George," he says, "Betty's Gift Shop might sell for $1.14 million (a 6.5% cap rate), but this is Amazon.com!  The world could be in complete chaos, yet a buyer could absolutely depend on Amazon making its rent payments.  There are investors out there who need the security of predictable payments, and they will pay far extra to buy that stream of predictable payments."

 

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"George, I have offers on this building of $1.5 million, $1.72 million, and finally $1.85 million.  That works out to a 4% cap rate."

When a real estate and stock market crash is coming, it's all about the quality of the income.

 

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Topics: cap rate, commercial loans

History:  Why Caesar Crossed the Rubicon and Why You Should Care

Posted by George Blackburne on Fri, Jul 2, 2021

CaesarThe date was around 50 years before the birth of Christ.  The Roman Republic had wonderfully prospered under a truly republican form of government for almost 400 years.  At the time, there were no kings, no emperors, no dictators, or no Caesars in Rome.  The Senate alone ruled the city-state.

In 49 B.C., Julius Caesar was then the governor of Gaul.  Gaul consisted about a dozen smaller kingdoms, which combined would eventually become France.  Caesar had conquered each kingdom and province in turn.  As he moved from province to province, he sold the captured people of Gaul into slavery.  Caesar made an immense amount of money in the process.

 

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In terms of relative wealth, Caesar was the Bill Gates of his era.  He was not the single richest man in Rome, but he was definitely one of the top three or four.  

Caesar had also raised and paid for EIGHT of his own legions, and he did so without the Senate's permission.  "Aye, there's the rub."  (Hamlet, Act 3, Scene 1.)  Eight legions were a lot in those days.  The Senate had only given its quasi-permission to raise one legion.  The Senate controlled only 12 or 13 legions, and they were scattered all over the Roman Empire.  The Senators of Rome were genuinely scared.

Two more bits of background before Caesar crosses the Rubicon.  First of all, the Roman judicial system was totally and completely corrupt.  The judges all took bribes, and sometimes they even had the parties bid against each to see who would pay the largest bribe.  Justice in Rome could not be found in the courts.  The ruling of the Judge was already decided before most trials even started.

 

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Now the last bit of background.  Rome had already suffered several bloody civil wars, so the Senate had passed an inviolate law.  Any Roman general who brought a legion across the Rubicon River in northeastern Italy was immediately declared an outlaw and an enemy of the state.  It became the duty of every Roman citizen to kill him.

Okay, so Caesar is in Gaul, putting down the occasional uprising, collecting even more slaves, and getting even richer in the process.  But Caesar had enemies in Rome.  Many rich and powerful political families had their own gang of thugs, including Caesar.  These gangs would all use clubs to crush the skulls of any political enemies caught walking the streets of Rome.  Swords were strictly forbidden.  To carry a sword in the city limits was an automatic death sentence.

As the body count grew, lawsuits were filed against Caesar.  The suits weren't just about money.  Many of these lawsuits were quasi-criminal in nature, and if Caesar was ever brought to trial, he could expect to be murdered in jail on his very first night.

 

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The good news was that Caesar was immune from civil litigation as long as he was the Governor of Gaul.  The bad news was that Caesar's (five year?) term as Governor was about to expire.  The Roman Senate ordered him back to Rome to stand trial. Remember, the trials were all fixed, and the order from the Senate was effectively a death sentence.

So what does a general with EIGHT legions do?  Caesar marched his most loyal legion across the Rubicon (really just a large stream) and headed for Rome.  Oops.  The Senate looked around and realized that the forces they had to face the most brilliant general since Alexander the Great were pathetic.

The Senate and the Roman Army therefore fled Rome to Greece, and the Roman Civil War ensued.  The Senate eventually raised seven legions in Greece to Caesar's four, but in the big showdown - a fierce battle in Greece that pitted Roman versus Roman - Caesar pulled off a brilliant battlefield move.  Together with the fact that his troops absolutely adored him and the fact that his troops were all seasoned veterans, Caesar's forces routed the young, inexperienced troops of the Senate.

 

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The Roman Republic was dead.  Never again in history was the Roman Senate anything more than just a figurehead.  The real power always rested thereafter in whoever was Caesar.

Let me put this differently.  The Roman Senate brought a bull-pucky legal suit against Caesar, and they lost the Republic.

Have you figured out yet why I am writing about Caesar and the Rubicon today?  The undeniably blue State of New York brought criminal charges this week against the Trump Organization, citing a scheme to defraud, conspiracy, grand larceny and falsifying business records. 

 

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Now folks, I am not saying that an army of Trump supporters is going to descend from the hills and overthrow the American Republic.  C'mon, guys, get real.  

But I do believe it is historically ignorant for the State of New York to set the insanely dangerous precedent that any American president who loses power will be instantly exposed to, and assailed with, charges from the states controlled by the opposite party.  Think about President Duarte in the Philippines, who instructed his army, the police, and his own hit squads to instantly shoot 6,000 (20,000?) drug dealers.  Why would I bet that Duarte will declare marshal law and extend his own term?

Let me be clear and not beat around the bush.  Those New York State prosecutors are so historically ignorant that they should not be allowed to have children.  (Don't hold back, George, tell us what you really think.  Hahahaha!)  C'mon, you New York prosecutors.  You are attorneys.  You all studied history.  You should know better than to set such a dangerous precedent.

 

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For God's sake, the single most important thing about America is that political leaders and parties can change power in America peacefully.  If you make an outgoing President or a political party fear for their freedom or their own physical safety when they step down from power, how long will it be before America is no longer a republic?

Imagine the following scenario:  Admiral Smith anticipates a Chinese invasion of Taiwan, and through the use of a distributed defense, where missile launchers are spread out over 50 different islands, ships scattered in the South China Sea, and 60 rusting old trawlers pressed into service as missile ships, we sink the entire invading Chinese fleet.

Admiral Smith retires from the Navy, greatly adored by servicemen from all five  branches of the service.  Don't forget that we now have the Space Force, who surely played a huge role in the First Chinese War.

 

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Admiral Smith runs for President, and he wins in a landslide.  But a great many Americans grow to hate him.  He has raised taxes, and he used the additional income to build more underground missile plants and to build new American shipyards in Mexico and Canada.

The American economy has been on a war footing for too long, and it has suffered.  Inflation stands at 12% annually, and good-paying, non-military jobs are scare.  Millions of Americans come to hate Admiral Smith, even though he keeps warning them that China will soon attack again.

The State of Utah then files criminal charges against Admiral Smith for having only two wives.  C'mon, guys, I am just having some fun here; but my point is that the State of Utah files some bull-pucky charges that carry a life sentence.  Yikes.

 

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So Admiral Smith appeals to the military, who absolutely love him and agrees with all of his warnings and preparations for the next Chinese war.  Congress is "temporarily" closed, as Admiral Smith declares marshal law and extends his own term.  "I have no choice but to protect America from China."

So to the prosecutors in New York, I call you historically ignorant.  You have set an insanely dangerous precedent, and you may have just cost us the American Republic.

"Those who cannot remember the past are condemned to repeat it." -- George Santayana

 

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Topics: commercial loans, Trump charges