Commercial Loans and Fun Blog

History never repeats itself, but it does often rhyme. -- Mark Twain

President Biden met with China’s president, Xi Jinping, this week in Bali, Indonesia. By all accounts, the meeting went well; but I have some serious concerns.

Regardless of your political affiliation, can you honestly say that good ‘ole Joe came across as a master military strategist - another Genghis Khan?  I seriously doubt President Xi came away from the meeting saying, “From a military point of view, this guy Biden scares the hell out of me.”  The meeting reminded me a lot of the Munich Agreement.

On September 30, 1938, Germany, Italy, Great Britain, and France signed the Munich Agreement, by which Czechoslovakia would surrender its border regions and defenses (the so-called Sudeten region) to Nazi Germany. German troops occupied these regions between October 1 and 10, 1938.

Hitler had threatened to unleash a European war unless the Sudetenland, a border area of Czechoslovakia containing an ethnic German majority, was surrendered to Germany. The leaders of Britain, France, and Italy agreed to the German annexation of the Sudetenland in exchange for a pledge of peace from Hitler. Czechoslovakia, which was not a party to the Munich negotiations, agreed under significant pressure from Britain and France.

Chamberlain returned to his official residence at No. 10 Downing Street. There a jubilant crowd shouted, “Good old Neville!” and sang, “For He’s a Jolly Good Fellow.” From a second-floor window, Chamberlain addressed the crowd and invoked Prime Minister Benjamin Disraeli’s famous statement upon returning home from the Berlin Congress of 1878, “My good friends, this is the second time in our history that there has come back from Germany to Downing Street peace with honor...

I believe it is peace for our time.”

“Today, the Munich Agreement is widely regarded as a failed act of appeasement, and the term has become a byword for the futility of appeasing expansionist totalitarian states.”  [Wikipedia]

Update on the Coming War With China:

1.  The Heritage Foundation’s latest Index of U.S. Military Strength has characterized American military power as “weak.”

2.  China is now mounting hypersonic missiles on its carriers.  We are sooo screwed. Suppose your son or daughter was in the Navy and serving on a carrier.

Would you please forward this article to a friend?

Joke Du Jour:

"I can picture in my mind a world without war, a world without hate.  And I can picture us attacking that world because they'd never expect it." — Deep Thoughts by Jack Handy.  (Just kidding!)

The Case Against a Recession:

We are about to have another great recession, right? Everyone says so, so it must be true.  Maybe, but maybe not.  Where are the malinvestments?

You will recall that a malinvestment is a foolish investment made by millions of people that erases much of their wealth.  “Mal” is Latin for bad.

Examples of malinvestments include tulips in 1634 in Holland (Tulipmania), joint-stock investments in the South Sea Company in Britain in 1720 (South Sea Bubble), the Mississippi Bubble in France that burst in 1720, and various railroad stock bubbles and canal bubbles in the 1800’s.

In more recent times, we had a real estate bubble, especially in office buildings, prior to the Tax Reform Act of 1986.  We called them see-through office buildings because you could see right through these vacant, new office buildings.  Then we had the Dot-Com Bubble of 2000, where the malinvestment was in the dot-com companies that never made a dime.

In 2008, we had the subprime mortgage crisis, where the malinvestment was subprime mortgages and residential real estate.

As I look around today, however, I just don’t see any malinvestments – those boneheaded investments where a large percentage of the investing public takes a bath so bad that they stop spending money.

But what about stocks?  True, stocks are getting hammered.  Stock prices were way too high; but there is nothing wrong with most of the underlying companies.  They will survive.  Earnings will increase.  The investments in these companies weren’t boneheaded.  Investors just paid too much.

And much of the money used to buy stocks was in 401k’s and other retirement plans. Most investors can afford to wait for PE ratios to once again make sense.

What about real estate?  Did home prices soar too high?  The buyers were able to get 30-year mortgages at historically very low rates, so most of such purchases still made good sense.  I don’t think buying a home in recent years was a malinvestment, even enough prices have soared.

If there have been no glaring malinvestments, are we still guaranteed to have a bad recession?  Maybe not.

The country’s banks have incredibly strong balance sheets, and they are making gobs of money.  Banks are paying almost nothing for deposits, and then they are investing in Treasury bills and bonds with higher yields.  Profits for bankers right now are like shooting ducks in a barrel.  It’s hard for banks to to lose.

In addition, banks in the U.S. have $6 trillion in excess deposits; i.e., our banks have a ton of liquidity.  Our banks are strong as an ox.

How about company failures?  Only seventy large companies filed for bankruptcy in 2021, down significantly from 155 in 2020 and below the annual average of 78 filings since 2005.  In the first half of 2022, only 20 large companies filed for bankruptcy, compared to midyear totals of 43 in the first half of 2021 and 89 in the first half of 2020.  The 20 bankruptcies in the first half of 2022 were the lowest midyear total since the second half of 2014.  Wow.  Pretty darned good, huh?

Won’t rising interest rates lead to mass unemployment?  The unemployment rate as of September is only 3.5%, the lowest in decades.  There are 10.7 million unfilled jobs in the U.S. right now.  Mass unemployment seems very unlikely.

But “everyone” says we are going to have a recession.  A recent Bloomberg page-one article said the chances of a recession next year are 100%.  Hmmm.

In 1984, Wendy’s Restaurant featured a commercial with the elderly actress, Clara Peller, where she hilariously shouted, “Where’s the beef?”  Maybe next year we will all be shouting, “Where’s the recession?”


Final Funny:

When my three-year-old granddaughter was told to pee in a cup at the doctor’s office, she unexpectedly got nervous.  With a shaking voice, she asked, “Do I have to drink it?”

Update on the Invasion of Taiwan:

In 1941, my father, a West Pointer and an artillery captain, commanded the shore batteries on Oahu Island in Hawaii.  Wait, what?  1941?  Oahu?  Like in Pearl Harbor?  Yup.  He had no ammunition for his French 75mm field guns, the guns that guarded the landing beaches.  No ammunition - can you imagine?  The Japanese could have walked ashore.

"Relax, Captain," said each commanding officer in turn.  "The Japanese will never attack Hawaii."  Uh, huh.  

Folks, it is the height of folly to think that history only happens to the other guy.  Think of those poor folks in the Twin Towers.  For them, history didn't happen to the other guy.

China will almost certainly invade Taiwan this April - just seven months away.  Why?  April is the time of year when the seas in the Taiwanese Strait are calm enough for landing craft.  

While the U.S. has no hypersonic missiles right now, Lockheed has only two more tests before it is ready to start mass-producing them.  Lockheed expects to begin deliveries of our own hypersonic missiles in December of 2023.

Therefore, if China is ever going to invade Taiwan (and start World War III - a conventional war), it has to be in April of 2023.  Got expansion plans for your company?  It's your call, but maybe you should wait until April passes.

You're Invited to My Beer Party:

About two years ago, I held a Zoom party called, "Beer Drinking With George."  We had sixty guys and gals, and each had to turn on his video and hoist his beer.  We all had a ball.  

So my next Zoom party will take place around May 1st of 2023.  It will be called, "The Laugh at George Party."  I soooo hope I am thoroughly humiliated, and we all laugh like like hell  "George is an idiot.  George is an idiot."  :-)

I have two wonderful sons, whom I adore, who are aged 37 and 35.  Putin is drafting guys up to age 50.  Hell, I have a lovely 24-year-old daughter who could be drafted and trained to operate a missile launcher on a destroyer.  You ladies have been pushing for equal rights.  There is an old saying, "Be careful what you wish for."  Yikes.  Sobering thought, huh?

Won't you please forward this article to your
investor buddies, realtor buddies, and mortgage broker buddies?

Joke Du Jour:

"A new study reveals that the average fast-food chicken nugget is almost 60 percent fat.  The study also says that the average fast-food customer is almost 60 percent chicken nuggets.” — Conan O'Brien

Commercial Loan Lesson:

Banks will often grant commercial lines-of-credit to profitable businesses.  Generally, a company will need to show a steady profit of 1.5 times the size of the requested line-of-credit.  For example, if you wanted a $150,000 line-of-credit, the company would have to consistently show a profit of at least $225,000.

But what if the company is a C-corp, as opposed to an LLC?  Amazon is a C-corp, and so is Wal-Mart, Tesla, IBM and the rest of the big boys.  C-corp's pay taxes on their profit, and then the owners pay again - double taxation - when they receive dividends.  

The way is get around this is for the owners of the corporation, if it is closely-held, to suck out all of the profits in the form of big salaries and bonuses.  When the company's profit has been drawn down to break-even, the C-corp has no income taxes to pay.  Voila!  Business 101.

I had a retarded banker tell me the other day that my borrower, the sole owner of a family corporation, had to show a $225,000 profit in his C-corp. in order to qualify for a $150,000 line of credit, despite pulling out a huge salary every year.  

That meant that he would have to pay $67,500 in unnecessary Federal income taxes (30%) plus another $18,000 in unnecessary State income taxes (8%).  The bank would also charge around $15,750 (7%) in interest for its line, so altogether our borrower would have been required to pay $101,250 every year, just to borrow $150,000.

The bank underwriter wouldn't budge.  I would never call some precious little girl, born with Down Syndrome, retarded.  But this banker?  He was clearly retarded.  Haha!

Scary New Facts About the War With China This April:

In 1987, the U.S. agreed to an Intermediate Range Ballistic Missile Treaty with Russia.  We couldn't legally build intermediate range missiles; but China, which was not a party to the treaty, built scores and scores of mobile (truck borne) intermediate range missiles capable of destroying our carriers.  In 2019, President Trump withdrew from the treaty; but it may have been too late.

Right now, China can hit us with their hypersonic missiles, but we can't reach their mobile missile launchers, if we could even find them.  Hence, all of my earlier blog articles about the French knights and the English longbow men at the Battles of Agincourt and Crecy.  A tiny number of Englishmen, with their longer-range weapons, absolutely destroyed huge French armies.

If China is going to invade Taiwan, it will almost certainly be this April, just seven months away.  This is the soonest when the ocean tides will be calm enough for the China's invasion craft.

Folks, I want to be wrong here.  I want you guys to laugh at me and call me retarded [chuckle] when April passes, and the invasion doesn't start.  "George is retarded, George is retarded!"  :-)

If we can just get past April, our new hypersonic missiles, currently being tested and hopefully soon to be mass-produced by Lockheed, can be delivered to the Army, Navy, the Air Force (air-launched), and the Marines (island-launched), followed by deliveries to Japan, Australia, and Taiwan.

But I Keep Hearing Scary Stuff:

1. Chinese officials and oligarchs are being ordered to immediately liquidate any overseas holdings (Treasuries, real estate, US stocks, US bonds, etc.) and return the money to China.
   
   
2. China is building coal-fired power plants like crazy to provide energy to the country, in the event that oil supplies are cut off during a war.  Apparently China has a lot of coal.
   
   
3. China is stockpiling food and fuel for the upcoming naval embargo.
   
   
4. The Chinese Navy and their Marines practice their invasion maneuvers, strikes, and landings almost daily.
   
   
5. President Xi is poised this month to essentially be appointed Dictator-For-Life.

if the Chinese are ever going to come, this attack is likely to happen this April, before Lockheed starts distributing our own hypersonic missiles.  From the Chinese point of view, time is not on their side.  Tick-tock.

If Donald Trump died and made me King, I would pull all of carriers back 2,500+ miles from the Chinese coast.  Our jets can't reach China's mobile missile launchers anyway, even if we could find them.  There is no point in having our precious young sailors aboard those carriers die for nothing.  

If our subs can sink enough of China's landing crafts and supply ships, and if Taiwan can hold on long enough for our own intermediate range hypersonic missiles to finally arrive, maybe we might have a fighting chance.  But if DraftKings was taking bets on the upcoming war, I sadly would have to place my bets on China.

Please, Mr. President, move our carriers out of range.  And don't wait until April!

If I was the war planner for China, I would launch our carrier-killer missiles right now. If the missiles missed or failed to do much damage, I would simply not launch the invasion of Taiwan.  If, on the other hand, Chinese hypersonic missiles sunk one or two American carriers (they are very accurate), no additional American carriers would dare approach Taiwan.

Mr. President, please move our carriers now.

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.”

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.

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.

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.

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.

Why aren't you guys committing murder to 
get this hard money and servicing course?

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.

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?

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.

Won't you please...

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.  

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.

Joke 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.

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.

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.

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.

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.

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

Short 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.

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

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.

Servicing Performing Loans is Easy

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.

(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.

Today'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.

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.

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.

You should be willing to KILL
to get loan servicing rights.  :-)

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.

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.  

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.

In 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.

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.

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.

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.

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."

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?

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.  

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.

The money in this business is in
loan servicing fees.

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.

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.  

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.  

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.

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.

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.

This 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.

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?

The real income in commercial real estate finance is in servicing
fees.  Work every day to build your loan servicing portfolio!

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.

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.

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.

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.

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.