Commercial Loans and Fun Blog

Posted by George Blackburne on Sun, Nov 6, 2016

Self storage.jpg For those of you just getting started in commercial mortgage brokerage, this is a particularly important training article; however, even those of you who are very experienced in brokering commercial loans may find some useful nuggets.

The scenario: You get a lead call for a commercial loan. The borrower needs a $1.2 million refinance on his self storage facilty in Provo, Utah. The borrower is on the phone right now, and he wants a loan quote. What interest rate do you quote him? If he likes your quote, he may want to get started right away. What documents do you ask for? As the mad bomber asked Keanu Reeves in the thriller, Speed, "Pop quiz, Hotshot, what do you do (quote)?"

This is a small commercial loan, one that is unlikely to be made by some big national lender. You're located in Sacramento, California, and you have no idea to which commercial lender you will eventually take this deal, but you do know that the best lender for the deal will probably be located near Provo, Utah. After all, banks greatly prefer to lend close to one of their branches.

Here's the good news. Most banks across the country charge roughly the same interest rate on commercial loans. They are almost always within 0.25% to 0.50% of each other. Therefore you don't need to know precisely what some bank in Provo, Utah is going to charge. You just need to know what a Sacramento bank would likely charge on a $1.2 million permanent loan on a self storage facility close to Sacramento. In practice, the two different banks - even though they are one thousand miles away - will charge almost exactly the same thing.
Okay, but what would a Sacramento bank charge for a commercial loan on a property in Sacramento? This one is simple: Simply go to the Current Commercial Mortgage Rates page on CommercialMortgageRates.co. (Note, this is a dot-co, not a dot-com. The owner of the dot-com version wanted thousands of dollars for the domain.) I update these rates weekly, so they are very current. STOP! Before you step away for coffee or you go to the bathroom, please be sure to bookmark this page. Please do not read further until you have done this.
"Okay, George, I see from the rate sheet what interest rate I should quote, but how many points should I quote?" Commercial banks typically charge only one point on commercial loans, so you, as a commercial loan broker, will need to add your loan brokerage commission on top. Here is a training article I have written about the size of a reasonable loan brokerage commission.
What amortization should you quote? A twenty-five year amortization is to commercial mortgage finance what a thirty-year amortization is to residential mortgage finance. The vast majority of all commercial loans have a 25-year amortization. If a commercial property is older than 40 years old, the bank may even insist on a 20-year amortization. After all, a commercial property does not have an unlimited lifespan. A thirty-year amortization, however, is common for multi-family properties.
What about the term of the loan? Most banks would greatly prefer to write their commercial loans with a term of just five years, but if they are pushed, most banks will agree to a ten-year term. Certainly most commercial borrowers will insist on a loan term of at least ten years. Commercial real estate loans with terms longer than ten years are only possible on SBA loans and USDA loans - government guaranteed commercial loans which are eligible to be re-sold by the bank in the secondary market. Remember, most conventional commercial real estate loans are portfolio loans. In other words, the bank is stuck with that commercial loan for the entire ten years.
Will the interest rate be fixed or adjustable? Almost all commercial loans these days are fixed rate loans. (In two years, when the inflation rate and interest rates start to climb, this may change.) You are NOT going to get a straight, ten-year, fixed rate commercial loan from a bank. The loan will most likely be fixed for the first five years. Then it will readjust just once at the beginning of year six "to a market rate." Then the typical bank commercial loan will be fixed for the remaining five years. What will be the index and the spread over the index? This may shock you, but most bank promissory notes are silent on the subject. The bank will typically use language like, "Whatever rate the bank is currently quoting on similar commercial loans." Don't worry about it. I have never had a borrower raise the issue.
What about a prepayment penalty? Most banks have a modest prepayment penalty on their portfolio commercial loans. The one you will most often see - and the prepayment penalty that you should quote is - 5% in year 1, 4% in year 2%, 3% in year 3, 2% in year four, and 1% in year 5. There will typically be a three-month window after the rate readjusts one time at the beginning of year 6, during which window the loan may be paid off without penalty.
What about assumability? Bank commercial loans are NOT assumable and must be paid off when the property is sold.

You now know how to quote a commercial loan. Voila!

Okay, the borrower is interested, and he wants to know what documents that he should send you.

Now an idiot would ask his borrower to send him a long laundry list of items, and that idiot loan officer, if he is on commission, would surely starve. Borrowers don't enjoy fetching huge piles of documents. They will look for any excuse not to gather it right away. In the meantime, some competing commercial mortgage company is likely to quote the borrower 2% interest, fixed for fifty years, with a negative two points, and 150% loan-to-value. The competing quote is obviously BS, but guess which loan officer is going to get the borrower's loan application?
Here is a rule that I pound into the heads of my loan officers, "The loan officer who asks for the least number of documents wins the deal."
Perhaps the best way to ask for documents is as follows, "Please send me whatever package you can send me right away, as long as it includes: (1) a Rent Roll or Schedule of Leases; (2) last year's actual operating expenses; and (3) color photo's on the property."
The idea is to get the borrower moving in your direction. He's at rest at the moment, and the Law of Inertia says that a body at rest tends to stay at rest. If you can get him to send you the tiniest of packages, he becomes a body in motion, and a body in motion tends to stay in motion.
Once you get the income and expense numbers, you can whip up a quick Pro Forma Operating Statement. At today's low interest rates, just about every commercial loan cash flows very adequately, so then you can call the borrower back and ask for the next round of documents. "Great news, Mr. Borrower! I crunched the numbers on your deal, and the numbers worked out well. Now all I need is an old financial statement and two years' tax returns."
Remember this important rule, "The commercial loan officer who receives the borrower's tax returns first wins the loan." But wait, George, shouldn't I then ask for tax returns right away? No! Borrowers dread standing in front of a copy machine for 20 minutes and making copies. They need the postitive reinforcement of you crunching the numbers first to get fired up enough to copy their tax returns.
Armed with the cash flow numbers and the borrower's financial statement and tax returns, you now have enough of a package to start submitting your deal to lenders. That will be the subject of a future training article.

Got a commercial loan sitting on your desk right now? Do you need some commercial lenders for your deal? You will love our brand new commercial mortgage portal, CommercialMortgage.com. It is much faster and easier than C-Loans.com, and the new site works great on your cell phone. This new portal also has four times more commercial lenders.

Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months?

How would you like a free directory of 2,000 commercial real estate lenders?

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Good Commercial Loan Brokers Issue Very Specific Loan Quotes

Posted by George Blackburne on Thu, Oct 11, 2012

Let me set the stage here. You’re a commercial mortgage broker. A potential borrower calls his own bank asking for a commercial real estate loan, but the bank is forced to turn him down. Fortunately, the kindly banker recommends your commercial mortgage company and suggests to the borrower that he call you.

So your phone rings, and the borrower tells you that he needs a commercial real estate loan. You ask for the details, and he share them with you. He says, “I need a $700,000 refinance of my industrial building in Chicago, Illinois.”

Now your commercial loan office (if you are smart, a bedroom in your home) is located 200 miles away in Minneapolis, Minnesota; however, you are confident that you can find a lender to make his loan.

Question: How do you quote the loan?

Now you have several commercial banks that have closed commercial real estate loans for you in Minnesota, and they usually quote you between 4.5% to 4.75%, 1 point, 25 years amortized, 10 years due, with one rate readjustment (based on a spread over Treasuries) after five years, and a prepayment penalty of 3% in year one, 2% in year two, and 1% thereafter.

George’s Answer:

As a commercial mortgage broker, you should quote your borrower a very specific rate and term, even though you might not yet have a specific lender picked out for the deal.

Now I do not want you to lie and issue some lowball quote for a loan that you suspect would be impossible to deliver. No-no-no!

I just want you to make a detailed, specific quote based on the knowledge that most banks throughout the country offer commercial real estate loans at roughly the same rates and terms. Therefore, if your local banks in Minnesota are quoting 4.5% to 4.75% for a loan that is amortized over 25 years and due in 10 years, you can be reasonably sure that the banks in Chicago will be quoting pretty much the same terms.

So you might quote the borrower: 4.625%, 2 points (one of those two points is your fee), 25 years amortized, 10 years due, with a rate readjustment after five years, and a prepayment penalty of 3% in year one, 2% in year two, and 1% thereafter.

“Why is it so important that my commercial loan quote be so precise and exact? Why can’t I just give a range?”

When an experienced commercial property investor calls his bank, the bank loan officer doesn’t generally give him a loan quote with a very wide variance. The banker doesn’t quote him, “You rate will be between 4.5% and 12%.” No, the banker is usually far more precise. He might say that your rate will be between 4.5% and 4.75%, but that’s about as much variance as he typically puts in the quote.

If you give your borrower a quote of between 4.5% and 12%, the borrower will know that you are just a broker. You don’t want to come across as “just a broker”. I don’t want you to lie, and if the borrower asks you directly if you are just a broker, you tell him the truth.

Nevertheless, the wise commercial loan salesman will come across confidently and specifically, as if he has been representing that bank in Chicago for a decade. (Remember, at this point we don’t know what bank in Chicago might make this loan; but we do know that most banks across the country quote their commercial real estate loans at roughly the same rates and terms.)

“But George, what if I am wrong? What if I can’t deliver that exact quote?”

Don’t worry about it. All you can do is quote the most likely rate and terms for which the borrower is likely to qualify. You are not issuing a low-ball quote. You are issuing a reasonable, market rate quote.

However, good ethics require that you notify the borrower the moment you learn that you will not be able to deliver the quoted rate.

“Bob, I’m just calling today to let you know that the rate is more likely going to be 5.25% than 4.675%. The reason why is that this area of Chicago isn’t the greatest. Do you still want to continue?”

By this time your borrower will have spent too many hours with you providing documents to start all over. You will rarely lose him

Now I want to be crystal clear that you must not engage in bait-and-switching. No-no-no! If banks in Minnesota are quoting you 5.5% for commercial real estate loans, you must not quote your borrower a 4.625% rate for his Chicago deal. That would be immoral and illegal.

I’m just saying that commercial banks across the country quote very similar programs on commercial real estate loans, so its reasonable – and a good sales practice – to issue very specific commercial loan quotes, even if you do not have a specific bank in mind when you make the quote.