Commercial Loans and Fun Blog

It Has Never Has It Been Harder to Close a Commercial Loan

A buddy of mine recently sent me an interesting email that says it all about placing commercial loans today.

George,

... The markets have been turned upside down. There is a real disconnect today with what the borrowers want and think they can get and what they can realistically can get from the lending community.

We just funded a $6.5 million loan for a self-storage project at a 6.95% rate for ten years. The borrower wanted a NON-recourse loan. While there were several hundred lenders in that market for that product 18 months ago, today there are none. The exception, the life companies, are at 55% LTV. Our deal was 61% LTV without 12 months of stabilized income. The life companies would not even take a hard look at the deal. The borrower was VERY well qualified, with lots of cash and a great financial statement.

We went to over 120 lenders who would make a loan on this property type in So Cal and found only ONE who would do the deal. The deal closed, and the lender has now eliminated self-storage as a product they will lend on.

Borrowers in most cases are still not realistic about what they will accept vs. the market. There is no 100% financing. The borrower must have 25% to 35% equity in the deals today. For refi's the borrower must have a DSCR of at least !.25:1, and even Fannie Mae wants 1.20:1 for apartments. And FNMA has a new requirement that they want you to own at least four multi-family projects, or have owned that total (in the past), if they are to consider you for a loan ...

R. H. Adams

This mortgage broker had to submit his commercial loan to 120 different commercial lenders before finding the one commercial lender who would do the deal. He didn't quit. To his credit, he pushed on and on until he found a home for the deal. You will probably have to do the same with your own commercial loans.

I have often said, "Sometimes placing a commercial loan is as difficult as finding a wife for your best friend. You can set him up with a lovely girl that is the right age, the right size, the right level of beauty, and the right religion ... and still there is just no chemistry or fireworks. All you can do is keep setting your friend up with new ladies. It becomes a numbers game."

So if you are trying to place a commercial loan with a bank or a life insurance company today, you may have to submit your commercial loan to 50 to 100 commercial lenders ... until you find just the right chemistry.

Here Are Some Quick Valuation Methods Used By Commercial Real Estate Brokers and Appraisers

Suppose you are a commercial loan broker or commercial mortgage banker. A commercial borrower comes to you and applies for a multifamily loan on his 32-unit apartment building. He absolutely needs $3 million in apartment financing. Is his commercial loan request reasonable, or is he wasting your time?

If you knew approximately how much his apartment building was worth, you could quickly check the loan-to-value ratio to make sure that it didn't exceed 75%. Few multifamily lenders, other than Fannie Mae, Freddie Mac and the FHA, will make apartment loans in excess of 75% LTV today.

One quick technique is the Gross Rent Multiplier. Take the annual rent of the apartment project and multiply it by the typical multiplier for your area. For example, suppose the annual gross rents for this project are $500,000 (about $1,300 per month per unit). If apartment buildings in this area are selling for a Gross Rent Multiplier of between 7 and 9 and the project is just of average quality, you might multiply $500,000 by 8 to give you a rough estimate of value of $4 million. A loan request of $3 million versus a $4 million value (75% LTV) is about the maximum loan amount that the borrower could hope to get.

Another technique is a market approach to valuation called the Price Per Unit. Suppose comparable apartment projects in this area are selling for $90,000 to $130,000 per unit. Because the subject apartment building is average and it is located in an average area of town, you might choose to use $110,000 per unit.  Thirty-two units times $110,000 per unit gives you an estimated value of around $3.52 million. Gee, a $3 million loan against a $3.52 million property isn't looking too promising. If you're busy, maybe you don't take on this loan, especially if the borrower absolutely must get $3 million.

"But, George, my office is located in Billings, Montana. I don't have a clue how much apartment buildings are selling for per unit in Atlanta, Georgia."

Here's a trick. The commercial brokerage firm of Marcus & Millichap (marcusmillichap.com) is well-known for refusing to take listings on over-valued multifamily properties. In other words, if the market value of an apartment building is $3 million, they won't list the building for $4 million.  So go to their web site, find some nearby and comparable apartment buildings, and determine the listing price per unit. Then you should probably reduce the price per unit by 7% to 10% to get a rough estimate of the market.  You can do the same thing using LoopNet.com.

Another commercial property valuation technique, the Capitalization Method, could be used to value the multifamily property. Suppose the borrower hands you a fact sheet containing a reasonable looking pro forma operating statement. If you knew that apartment buildings were selling in that area for 5.75% to 6.75% cap rates, you could merely divide the NOI by the cap rate to arrive at a rough estimate of the value of the building. For example, suppose the borrower provides you with a reasonable-looking pro forma perating statement. According to his own numbers, his NOI is just $220,000 per year. If you divide $220,000 in net operating income by an estimated market cap rate of 6.25%, you'll get around $3.5 million.

This borrower is probably hosed. He has a $3 million ballooning loan, and yet the building is only worth around $3.5 million. Unless this guy can bring another $400,000 in equity to the closing table, he may end up losing the apartment building in foreclosure. His best bet is to plead with the lender for an extension or a loan modification. By quickly valuing the property, you may have saved yourself a lot of wasted effort.

If you need a loan on apartment building, you can apply to 750 commercial lenders in just four minutes using C-Loans.com.

Interesting Report from National Mortgage News Online

No one can be terribly surprised that the other shoe has finally fallen.  According to a June 22nd report from National Mortgage News Online:

Commercial Real Estate Prices Fall 8.6% in April

Commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices decreased 8.6% in April, leaving the index at 25.3% below its level a year ago and 29.5% below the peak in prices measured in October 2007.

According to Moody's, the large negative return for April likely reflects that deals closed during that month were negotiated at the end of 2008 and in the first quarter of 2009, when securities markets and overall sentiment were plunging. "The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real estate markets," says Moody's managing director Nick Levidy.

The South has been the worst performing region over the last year, with an annual decline of more than 20%. Commercial real estate has performed worse in Southern California than in the Western region as a whole. In Southern California, the office market has been the worst performer, with prices dropping 22.2% in the last year.

Make a PDF of Your Commercial Loan Package and Email It to Scores of Commercial Lenders

If you are a commercial mortgage broker, you just have to use the new PDF-creator software on C-Loans to make your commercial loan packages. It's free!

Just input your commercial loan into C-Loans.com as usual. Go ahead and submit your commercial loan to six commercial lenders.

After you have submitted your commercial loan to six commercial lenders, an option will appear that allows you to create a PDF with just one click. After your commercial loan package has been converted to a PDF, simply save it to your desktop.

Once the commercial loan PDF is on your desktop, you can then create an email addressed to 40 or so commercial lenders and attach the PDF.

You can even attach color photo's to your commercial loan package, making it look very, very professional. And remember, both C-Loans.com and this software are free.

A Broken Condo is a Project That Didn't Sell Out

Commercial loan brokers should be on the look-out for broken condo projects. There is a good chance to make a nice commercial loan brokerage commission.

A broken condo project is a residential condominium project that didn't sell out. The unsold units are usually converted back to multifamily rental housing.

I spoke with a major commercial loan officer at a large bank today. This bank makes portfolio apartment loans. I asked him if it is possible to finance broken condo's.

His reply surprised me. He indicated that, of course, that if none of the condo units were sold, that a normal apartment loan is a no-brainer.

But he also indicated that if only a handful of the units were sold that a portfolio loan on the rental units would be possible.

However, he stressed that if too many of the units were sold as condo's that such a deal would be impossible. How many is too many? Certainly if 25% of the condo units had been sold, the deal would be difficult to finance. I was left with the clear impression that if only 10% to 15% of the condo's had been sold that his bank would definitely consider financing the apartments.

Need a commercial or multifamily loan? You can apply to hundreds of commercial lenders in just four minutes using C-Loans.  And C-Loans.com is free!

It's Getting More Difficult for Hard Money Lenders to Raise Lending Capital

If you are commercial mortgage broker, you should not be trying to place large, hard money, commercial loans. Large commercial loans just aren't closing these days.

One of the reasons why is because hard money commercial lenders are having a difficult time raising money. Before the real estate crash of 2007, most hard money commercial loan brokers raised their money using mortgage funds. When the markets crashed, all of their depositors try to pull their money out of these funds. The situation has not improved since October of 2007.

Therefore very few hard money commercial lenders still have mortgage funds with which to make large commercial loans. Instead, if a hard money commercial lender wants to fund a commercial loan today, he has to syndicate a fresh group of private mortgage investors. This is a whole lot of work.

Therefore very few hard money commercial lenders are making commercial loans larger than $3 million today.

Need a commercial loan? You can apply to 750 different banks and hard money commercial lenders in just four minutes using C-Loans.

Cap Rate is Short for Capitalization Rate

You have probably heard the term cap rate many times, but what does it mean? Here's an easy way to understand the concept as it applies to commercial real estate. A cap rate is simply the return on your investment if you bought a commercial property for all cash.

For example, let's suppose that you buy for $1 million an office building that is leased out to an insurance broker. The insurance broker pays you $9,000 per month in rent, but there are also expenses, like real estate taxes, insurance, property management and a small reserve where you set aside money every year to eventually replace the roof and the HVAC system. Let's assume your net operating income (NOI) is $77,000 per year.

To compute the cap rate at which you bought the building, you merely divide your anticipated NOI by your purchase price.  In this case, $77,000 divided by $1,000,000 is 0.077. To express this cap rate as a percentage, we merely multiply 0.077 by 100% to produce a cap rate of 7.70%.

In plain English, a 7.70% cap rate means that you - as a passive commercial real estate investor - will earn a 7.7% annual return on your $1 million investment in this commercial property. Please also remember that for the purposes of computing a cap rate that you should assume that the buyer did not use a commercial real estate loan to finance the property.

You can't use the same cap for every commercial property. Some commercial properties are far more desirable than others. For example, let's suppose that Microsoft Corporation was the tenant on this property, and they signed a lease for 20 years. Arguably Microsoft is one the strongest credit tenants in America. If you - as the owner of the commercial property - had a lease with a strong, credit tenant, other investors would be very envious of you. In fact, they would offer you a lot of money for this property, perhaps as much as $1,800,000.

Now remember, the net operating income is still just $77,000 per year. If you sold the commercial building to another commercial real estate investor, who wanted a very reliable income stream, for a whopping $1,800,000 - he would be buying this same commercial property for just a 4.3% cap rate. Would someone really buy a piece of commercial real estate with a cap rate of just 4.3%? Maybe ... if indeed the property was leased to a major credit tenant for twenty years. By the way, a credit tenant is usually publicly traded or a large private entity with a strong S&P rating.

On the other hand, suppose you owned an old industrial building in a seedy part of town that was leased to an auto parts manufacturer. Suppose this auto parts manufacturer sold its parts mainly to General Motors, and the auto parts company wasn't making a lot of money. Let's further suppose that the neighborhood immediately surrounding your property was filled with prostitutes and drug dealers.

Even if this property was generating the same $77,000 in net operating income, you might not be able to sell the property for very much money. Any potential buyer might think to himself, "Geesh, if I drive over to collect the rents or to check on the condition of my property, I'm putting my life in danger. Yuck." This investor might not be willing to buy the property for less than a 12% cap rate.  Seventy-seven thousand dollars divided by 12% is just $641,000.

Remember, the more desirable the commercial property, the lower the cap rate a buyer will require before he buys it.

Scanners With Document Feeders Are Becoming Essential

Commercial mortgage loan brokers now only really need three pieces of equipment - a reliable cell phone, a laptop computer, and a combination copier / fax machine / scanner.

The need of a commercial loan broker of a good cell phone is obvious; but have you ever considered whose phone number you are promoting? Let's suppose that you send a thousand mail pieces and 3,000 emails every month for two years. Further suppose your marketing pieces encourage your clients to call the main office number for your broker.

Now suppose your broker goes belly-up. Oops! All of those clients and referral sources will be calling a disconnected phone number. Yikes.

Or suppose a commercial real estate agent really needs a commercial mortgage loan for his client. He calls your office and asks for you, but you're out of the office. "Is there another commercial loan agent there with whom I could speak?" You've just lost a commercial loan and potentially a good commercial real estate agent.

The moral of the story is this: Promote your personal cell phone number, not the office number of your broker.

Let's talk about laptop computers. I recently converted to an Apple MacBook, and I absolutely love it. No longer do you have to spend hours updating your virus protection software and malware protection software. Sure, an Apple MacBook costs an extra $600; but the machine so worth it.

Don't worry about software. Microsoft makes Office software for the Mac. This means that I can still use the fabulous Apple OSX software and still communicate with my office. There is Word, Excel and PowerPoint for the Mac, and my staff at our commercial loan office can easily open with their PC's any file I create on my Mac. It's heavenly.

But the machine that gets me hot and sweaty is my new, combination copier / fax machine / scanner with autofeeder. The other day a broker faxed a commercial loan package to me. Because the original commercial loan package had been faxed to him, I was working with a second generation fax. The copy quality was starting to decline.

I printed out the commercial loan package and then scanned it using the autofeeder. I then clicked a few times on my laptop and created a PDF, which I simply emailed to my office. The quality did not degrade, and my commercial loan officer at Blackburne & Brown was able to issue a loan approval letter the same day.

This combination machine was not expensive. It was less than $300 and I absolutely love it. It's a Canon MX700 and I even bought it using the reward points on my credit card.

The Latest Skinny on SBA Loans and SBA Lenders

A buddy of mine in the SBA loan business called me today, and we chatted about a number of very important changes to the SBA loan program. The Federal government is trying to get credit flowing again to the economy, so they have made SBA loans much more attractive.

First of all, until the end of the year or until money runs out, the SBA is now waiving its guarantee fees (points) on 7a loans and on the debenture portion (the second mortgage portion) of 504 loans. You will recall that the 504 loan program involves a conventional first mortgage loan from a bank up to 50% loan-to-value and a piggy-back second mortgage loan from a certified development corporation up to 90% loan-to-value.

The second thing the Federal government has done to make SBA lending more attractive is that the SBA has increased its guarantee of SBA loans from 75% of the loan amount to 90% of the loan amount. This should encourage SBA lenders to start approving more deals.

The third incentive is the SBA has effectively extended the repayment term of its loans. In the past, the real estate portion of an SBA loan had a term of 25 years, but that portion of the loan used to finance the acquisition of machinery or equipment had a term of just 10 years. If the borrower also wanted some working capital, the repayment of this portion of the loan had to be amortized over just 7 years. A weighted-average loan term was used. Now, if more than 50% of the loan is being used to acquire real estate, the entire SBA loan can be amortized over 25 years.

The SBA also announced two weeks ago that 504 loans can now be used for refinances, as opposed to just the purchase, of real estate and/or equipment. The announcement was somewhat unclear, however, and further clarification is expected from the SBA.

In general, the volume of SBA lending is way down. CIT Financial, the largest SBA lender in the country, is back in the market. CIT is now a national bank with one branch in Utah. More importantly, CIT, as a bank, now has access to the discount window at the Fed.

Banco Popular, the second largest SBA lender, has severely trimmed its SBA lending infrastructure. While the bank is still in the market for SBA loans, their SBA loan volume is down by more than half. So is the SBA loan volume of Bank of America and JP Morgan Chase.

Former giants in the SBA lending market - Temecula Valley Bank, UPS Financial, Small Business Loan Source, and Business Lenders - have all closed down their SBA lending divisions.

The secondary market for the conventional portions of 504 loans has completely dried up. These attractive first mortgage loans used to sell for 6 to 15 point premiums because of the implicit guarantee of having the SBA in a second mortgage position. The good news is that the Obama administration has earmarked a sizable amount of money aimed at buying up these 504 first mortgages in hopes of jump-starting this market.

The second mortgage portion of 504 loans are being written at a fixed rate of 5.67% today (3/31/09) for 20 years. The underlying first mortgages are typically written at an interest rate that is 1% to 1.5% higher than the 504 second mortgages. Wait a minute? Higher than the second mortgage? Yes, because unlike the second mortgages, these first mortgages are not credit-enhanced by the SBA.

I learned today that SBA 7a loans have a modest prepayment penalty during the first three years. It's a declining prepayment penalty of 5% in year one, 3% in year two, 1% in year three, and no prepayment penalty thereafter.

The SBA 504 program has a stiffer prepayment penalty. The bank making the underlying first mortgage is not allowed to charge a prepayment penalty. The second mortgage, however, has quite a stiff prepayment penalty - 10% in year 1, 9% in year 2, 8% in year 3, and so on. There is no prepayment penalty on the second mortgage after 10 years.

Gas station loans are still not being guaranteed by the SBA.  (Blackburne & Brown is happy to finance gas stations right now.)

While the SBA will still guarantee hotel loans, very few SBA hotel loans are being made by SBA lenders. SBA lenders are worried about declining trends. In other words, they are comparing this year's revenues to last year's revenue - and the trend is usually too negative. The expression - declining trends - is the hot, new buzzword in SBA lending.

If an SBA lender were to finance a hotel today, it would probably be a hotel highly visible from a busy highway. Many more business travelers are driving rather than flying because of the recession. The hotel lucky enough to get SBA financing would probably be a limited service hotel, typically without a restaurant and with far lower nightly rates. It would probably have less than 100 units.

The more expensive full service hotels, typically close to airports, are suffering far worse than the cheaper limited service hotels off of busy highways. These full service hotels would also require large loans, and lenders are loathe to make large hotel loans today.

Finally, if an SBA lender were to finance a hotel today, it would probably be a hotel with interior corridors. Older hotels and motels usually have exterior corridors, and women traveling on business today are likely to avoid such hotels due to security concerns.

The maximum SBA 7a loan is $2 million. Therefore, if a borrower wanted more than $2 million or if he wanted a fixed rate loan, the SBA 504 program would be the right program.

C-Loans recently received a loan that otherwise would have been perfect for the SBA; however, the borrower was a non-profit organization.  The SBA will not guarantee loans to non-profit organizations.

Conventional commercial real estate lending is down by more than 80% from early last year. SBA lending is also down by 60% or more. The Federal government's efforts to increase SBA lending is a noble effort. Let's hope it works.

Need an SBA loan? You can apply to dozens of different SBA lenders in just four minutes using C-Loans. And C-Loans is free!

When Money is Tight, Wraparound Loans Get the Job Done

A good way to understand wraparound mortgages ("wraps") is to follow a little story. Once upon a time Ida Investor bought an office building. The cost of the office building was $1,400,000 and she put down $350,000 (25%) in cash. Hometown Bank made a $1,025,000 new first mortgage for ten years at 6.25% interest.

Ida Investor made a shrewd investment. The City of Hometown started to boom. The value of her office building skyrocketed, and just four years later Bobby Buyer offered to purchase the property was a whopping $2 million.

The problem was that commercial loans had dried up. Neither Hometown Bank, nor any of the other banks near Hometown, Montana, were making any new commercial loans.

Fortunately Ricky Realtor, Ida's real estate broker, had a solution. Bobby Buyer would give Ida Investor $400,000 in cash (20%) as a down payment.

Ida Investor would then carry back an all-inclusive mortgage (wraparound) in the amount of $1,600,000 at 7.25%.

Bobby Buyer would pay Ida Investor one payment every month, an amount sufficient to amortize a mortgage of $1,600,000 at 7.25% over 25 years. It would then be Ida Investor's responsibility to make the payment on the existing first mortgage, which had been paid down from $1,025,000 to just $1,000,000.

Since Ida Investor's existing first mortgage balloons in just six years, the all-inclusive mortgage (wraparound mortgage) would have a similar due date. These two mortgages would be coterminous; i.e., they have identical maturity dates.

Why bother with the wraparound structure?  The reason is because Ida Investor really wanted all cash on the sale. She didn't want to carry back a garden-variety second mortgage at a lousy 7.25% interest. Bobby Buyer, however, would never agree to pay Ida Investor 9% interest on the second mortgage.  He was way too stubborn.

The wraparound structure solved the problem. How? Remember, Ida Investor's old first mortgage had an interest rate of just 6.25%. The amount of the old money - wrapanese for the existing mortgage being wrapped - was $1,000,000.

The amount of the new money - wrapanese for the amount of the equity inside Ida Investor's new all-inclusive mortgage - is $600,000. Remember, the gross wrap was for $1,600,000 and the existing mortgage was $1,000,000. Therefore Ida Investor's equity in the wrap is $600,000.

Now let's get back to Ida Investor's return on her equity in the wrap. She's earning the wraparound interest rate of 7.25% on her $600,000 equity inside the wrap, which works out to be $43,500 per year in interest income.

But Ida is also earning 1% interest - the difference between 7.25% and 6.25% - on the existing $1,000,000 first mortgage that is being wrapped. This is an extra $10,000 per year in interest. If you add $10,000 to $43,500 you get $53,500 in annual interest income on Ida Investor's $600,000 equity in her wrap, or an annual interest return of almost 9%.

Look for more wraparound mortgages to be made on commercial properties in the coming years, as the banks remain tight-fisted about making commercial loans.

Need a commercial loan?  You can apply to 750 different commercial lenders in just four minutes using the same mini-app by using C-Loans.com. C-Loans is the internet's most popular commercial mortgage portal. And C-Loans.com is free.