Commercial Loans and Fun Blog

Banks Are Discounting Commercial Loans to Get Them Off the Books

Posted by George Blackburne on Mon, Jan 24, 2011

All across the country banks are turning to their commercial mortgage borrowers and saying,

bank building"Look, our regulators are concerned about your commercial loan.  We know your commercial real estate loan is current right now, but the vacancy rate for commercial space in your area is pretty high.  Here's what we're going to do.  Right now you owe us $5 million.  If you pay us off in the next 90 days, we'll accept just $3.5 million."

Bankable commercial borrowers are therefore hitting the streets in search of a new bank that will help them off their old bank at a huge discount.  But here's the problem:

Paying off a commercial loan from a bank at a discount is a form of default.  The next bank will not enthusiastically make a loan to a borrower who has just short-changed his old bank for hundreds of thousands of dollars.

So what should the investor do?  

In real life, the investor simply has to take advantage of the discount; otherwise, the first bank will eventually foreclose on his property.  To find a new commercial mortgage lender, however, the investor will need to use a non-bank commercial lender, like a REIT or a hard money lender.

Essentially mortgage REIT's and hard money lenders are the same thing these days.  There are only two surviving commercial mortgage REIT's in the country, and both of them are more expensive than the cheapest hard money lenders.

Bottom line:  The investor has to bite the bullet and use a hard money lender to pay off his existing bank.  The moment this hard money loan is closed, however, he should immediately apply to a small bank near his home or office - one that will appreciate his deposits - to refinance the new hard money loan and its high interest rate.

The wise investor will choose a hard money lender with low points and no prepayment penalty, even if that means living for a few months with a high interest rate.  The idea is to keep the cost of this bridge loan to a minimum.

My own hard money shop, Blackburne & Sons, recently funded a deal where, in addition to convincing the bank to accept a large discount, we were finally able to convince them to also subordinate part of their debt to our new loan.  These are indeed strange times when a bank can be convinced to subordinate part of their debt; but they were wise to do so.  Now a new permanent lender will be able to come in and refinance both our new bridge loan and the bank's small subordinate second mortgage.

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Do you need a bridge loan to pay off your existing bank at a discount?  These loans are called DPO loans, which stands for Discounted Pay-Off loans.  Such loans need to be made by hard money lenders, and you can submit your DPO loan to several hundred hard money lenders in just four minutes using  And C-Loans is free!

Topics: DPO loans