Commercial Loans and Fun Blog

The Banks Don't Have Any Money

Every commercial loan broker will tell you that the banks are not making a whole lot of commercial loans these days. Surprisingly, the reason why isn't just because they are afraid to make new commercial loans.

Another important reason is that many banks are fully-invested. In plain English, they don't have the money to make new commercial loans.

This lack of liquidity is not the result of loan losses associated with the subprime meltdown. Few small banks were involved in the deal-flow of subprime loans. When the music suddenly stopped, the small banks were not left holding a huge volume of unsold subprime residential loans. It is easy, therefore, to assume that the small banks have plenty of money to lend.

In fact, the opposite is true. Banks have always preferred to make short term loans, like construction loans and bridge loans. This way they constantly have a few outstanding loans paying off every month, giving them the liquidity to make new short term loans. Unfortunately, ever since the financial crisis began, their outstanding loans have not been paying off. Borrowers with construction loans and bridge loans have been unable to refinance their loans with long-term lenders. The banks have been forced to extend these short term loans into longer term mini-perms.

To make matters worse, most small banks had a great many lines of credit extended to businesses that they served. Most of these businesses are now losing money, so the businesses are drawing down on their credit lines.  This has further drained liquidity from the banks.

Lastly, this is a very difficult time for banks to attract new deposits. The prime rate is a rock-bottom 3.25% right now. The 11th District Cost of Funds Index, a fair proxy for the typical bank's cost of funds, is a whopping 2.75%. Twenty years ago a small bank could not survive on a gross interest margin of less than 6%. With sophisticated new software and ATM's, a small bank can modernly make a profit on a gross interest margin of 4%. Helloooo? Small banks are being forced to survive right now on a gross interest margin of just 50 basis points. They certainly cannot raise interest rates to compete for more deposits.

I feel like an early pioneer, whose wagon train is surrounded by angry Indians, and who learns that the cavalry detachment sent to relieve him is itself under siege by Indians.  The small banks were one of the last sources of lending that might save this faltering economy, and it now appears they too are under siege. Yikes.

Includes George's Famous Pooh-Pooh Soup Story

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Banks Are the Best Source for Commercial Loan Leads

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

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

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

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

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

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

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

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

The Wise Commercial Mortgage Broker Will Aggressively Solicit These Loans

Many banks today are terrified of making conventional commercial real estate loans. They are afraid of losing money. Using the SBA 504 loan program, however, a bank is largely insulated from loan losses. As a result, many banks are still quite anxious to make these commercial loans. If you're a commercial mortgage broker, why not try to swim downstream? You should originate the kinds of loans that the banks want to see during this credit crisis.

Under the SBA 504 loan program, a borrower can finance up to 90% of the purchase of a piece of commercial real estate. He can sometimes also finance up to 90% of associated heavy equipment he might need for his factory.

These loans are typically made by banks, with the assistance of a local Community Development Corporation. A conventional commercial first mortgage of 50% loan-to-value is made by the bank, and a piggy-back second mortgage up to 90% loan-to-value is recorded concurrently.

For example, let's suppose a widget manufacturer wished to expand its business by buying an industrial building for $1 million. The bank would make a $500,000 conventional commercial first mortgage at market rates, typically amortized over 25 years, due in ten to twenty-five years, and with a fixed rate for at least the first five years. The bank would record concurrently a $400,000 second mortgage that would eventually be sold to a local Certified Development Corporation and guaranteed by the SBA.

The buyer would therefore get $900,000 in financing on this building. He would only have to put $100,000 down. In contrast, if he applied to a conventional commercial mortgage lender, he normally would only be able to finance $700,000 to $750,000. He would have to put down a whopping $250,000 to $300,000.

But wait! It's gets better. The second mortgage is fully-amortized over 20 years. There is no balloon payment. In addition, because the second mortgage loan is guaranteed by the SBA, the interest rate is typically 1.5% lower than the underlying conventional first mortgage. The borrower gets a blended rate, between the market interest rate on the $500,000 first mortgage and the lower, subsidized interest rate on the $400,000 second mortgage, that is around 1% lower than conventional first mortgage rates.

But that's not all! Both loans are also assumable. The loan fees are also low - typically 1.5 points on the first mortgage and 1 point on the second mortgage. The SBA 504 loan program is a great deal. Plus banks actually want to make these loans.

There are some limitations. First of all, the property must be at least 51% owner-used. Usually the borrower's credit score must be at least 600 - but even this is good compared to banks today, who normally require a credit score of at least 650 on conventional commercial real estate loans.

Finally, after adding back depreciation and existing rent payments, the borrower's net income from his business, according to his tax returns, must substantiate enough income to make the proposed new mortgage payment. The coverage ratio only needs to be 1.0. In contrast, conventional commercial real estate lenders require a 1.25 debt service coverage ratio.

So if you are a commercial mortgage broker, be sure to get involved with the SBA 504 program. You can apply to scores of SBA lenders using C-Loans.com. And C-Loans is free!

Even Small and Regional Commercial Banks Have Cut Back Sharply on Commercial Real Estate Loans

As the sponsor of the C-Loans Commercial Mortgage Lender Databank, we have our fingers on the pulse of the commercial real estate lending market. The CMBS lenders started to die late last year and now they are not lending at all.

Most of the mega commercial banks got crushed in the subprime residential lending debacle. Their balance sheets are so underwater that they are making at most 2% of their 2007 volume of commercial real estate loans. Essentially the mega-banks are out of the market.

Until this last week, however, the smaller banks were still making some commercial real estate loans.  We were greatly disturbed last week, however, when several smaller commercial banks - lenders with no exposure to the subprime crisis - contacted us and confided that their balance sheets were so troubled that they too had stopped making any commercial real estate loans.

We are pretty sure that this is a trend that will continue among the surviving small and regional commercial banks. As their commercial loans to local industrial companies start to go bad (sales of widgets and other industrial products are cratering), soon most commercial banks will stop making commercial real estate loans completely - even permanent loans on standing commercial properties.

If any of your "A" borrowers are delaying their plans to pull equity out of their commercial properties, tell them that this is the last call for commercial loans from banks. If they don't close their loans in the next 90 to 120 days, they may have to wait five to ten years before commercial loans with decent interest rates reappear.

If you need a commercial real estate loan right now, please click here.

Advertise to Companies Who Are Spending Big Money to Market for Mortgages

If you're a commercial mortgage broker, you probably need more leads on borrowers seeking commercial loans. Eventually you will discover that marketing directly to the public for commercial real estate loans just doesn't work. If you send out 10,000 mail pieces, you'll usually only get around six leads and no closings.

So what does work? Residential mortgage brokers can be a wonderful source of referrals. Just pay them 20% of your loan fee in return for a name and telephone number of a prospective commercial real estate loan borrower.

Here's why advertising to residential mortgage brokers is so effective. The typical residential mortgage broker spends about $400 per month on some form of advertising - perhaps a small classifed ad in the Money to Loan section of the newspaper, a big Yellow Pages ad or a display ad in the Pennysaver or similar free grocery store magazine.

This advertisment by the residential mortgage broker probably reaches thousands of potential borrowers every month. Now if this residential mortgage broker is giving you all of his commercial loan referrals, this means that with a single $1 mail piece to the mortgage broker, you are reaching thousands of potential borrowers.

If the residential mortgage broker is spending $400 per month, then your $1 mail piece is getting leveraged by a whopping 400 times. This is marketing leverage.

Do you need to place a commercial real estate loan right now? You can submit your commercial real estate loan to 750 different commercial mortgage lenders in just four minutes using the C-Loans Commercial Mortgage Lender Portal.

Auto Repair is Hot and Retail is Not

I recently spoke on commercial real estate loan matters at the National Association of Mortgage Brokers Annual Conference in New Orleans. While at the conference, I wandered through the exhibit room and brain-stormed with the exhibitors.

Not surpisingly, commercial real estate lending was way down. Commercial lenders had scaled back their appetite for retail properties.

But one asset class was hot - of all things, auto repair! Apparently some of the larger commercial lenders had noticed that the best performing class of commercial properties in their portfolios was in fact auto repair. It makes sense. Americans are not buying new cars right now but are rather just repairing their existing cars.

One lender with whom I spoke had actually raised its loan-to-value ratios on auto repair loans from 65% to 75%, in order to encourage more commercial loan applications on such properties.

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