Just as I was finishing up my new training course on The Practice of Commercial Mortgage Brokerage - How to Fix Your Commercial Mortgage Business if You're Not Making Any Money (available 11/20/12), I received the following email from a sweet but obviously new commercial mortgage broker:
“Would any of your contacts fund a $50 million construction loan on a renewable energy project in Mexico?”
What a perfect teaching opportunity! Let’s count together just how many important reasons why such a deal would never close. The first three reasons are glaringly obvious. The last two reasons are a bit more subtle:
- The loan is much too large for a newbie commercial mortgage broker. Remember, to qualify for a $50 million loan, the borrower would need a net worth of roughly $50 million. Don’t forget that the borrower’s Net-Worth-to-Loan-Size Ratio is supposed to be at least 1.0. Borrowers with a $50 million net worth don’t often apply to newbie commercial mortgage brokers. Borrowers with a bona fide $50 million net worth typically have a dozen different bankers soliciting their business regularly.
- Very few banks are making commercial construction loans right now. Those few banks that are making commercial construction loans will seldom exceed 58% loan-to-cost. This means that on a $50 million project, the developer would have to cover 42% of the total project cost, which equates to $21 million. Not a whole lot of developers can contribute $21 million to any project these days.
- The property is located in Mexico, making this an international loan. International loans almost never close. Why? Because most countries levy a 30% tax on the interest income of foreign banks.
- Daisy chains don’t close. You’ll recall that a daisy chain is a deal that goes from broker to broker. Blackburne & Sons is a small hard money shop, and our maximum loan is around $2 million. There is no way we could fund a $50 million deal. This means that we would have to broker out the deal ourselves, making this a broker-to-broker deal; i.e., a daisy chain. Daisy chains don’t close! (Unless each broker charges just a tiny fee – say, 15 to 25 basis points – and all of the brokers quickly get out of the final lender’s way.)
- The collateral for the loan will be a highly-unusual property type, an alternative energy project. Properties like ethanol plants are always far more difficult to finance than plain vanilla commercial properties, like shopping malls. Trying to finance an unusual property type during the Great Recession is a pipedream.
Folks, this nice lady broker is not likely to feed her family with a commission earned on the closing of this deal.
She needs to spend her time soliciting her referral contacts for do-able deals, like a $1.2 million refinance of a ballooning loan on an apartment building.
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