In my last post about mini-perms, we learned that a permanent loan is a first mortgage, secured by a multi-family or commercial property, with a term of at least five years and at least some amortization. A permanent loan cannot just have interest-only payments for the entire term. There must be some principal pay-down during the loan, usually using a 25-year amortization
Permanent loans are made by - starting with the commercial real estate lenders with the lowest interest rates - life companies, conduits, commercial banks, savings banks, credit unions, ABS lenders, and finally hard money lenders.
You are reminded that a commercial bank, as opposed to an investment bank or a merchant bank, is that garden-variety institution on every street corner that accepts guaranteed deposits and makes loans. A commercial bank has a big steel vault and maintains large amounts of cash on hand.
A big steel vault - please remember that. I offer a free training course to any mortgage broker who introduces me to a commercial real estate loan officer working for a bank. Guys, just please remember that this loan officer must work in an office with a great big, honking, shimmering, shinning, steel vault; otherwise, he is not a banker. It's easy to to find these bona fide bankers to trade for my wonderful courses.
An investment banker is a stock broker on steroids, like a Merrill Lynch or a Morgan Stanley. Investment bankers help companies to go public, and they also deal in securities.
Merchant bankers make actual equity investments in companies, as opposed to making loans to them. You will recall that equity investments have no required interest payments. Equity investors merely share in the profits, if any. In real life, I have never met a true merchant banker. If someone ever comes up to you at a trade show and calls him a merchant banker, be on alert. He is almost certainly either a blowhard or a fraud.
So now that we understand permanent loans, we can now tackle takeout loans. A takeout loan is just a permanent loan that pays off a construction loan.
Example:
David Developer builds an office building using an uncovered construction loan from Nearby Bank. (I'll blog on uncovered construction loans this month.) Upon completion, and after the building has reached 90% occupancy, David applies to Money Center Bank for a permanent loan to pay off his ballooning 12-month construction loan. The permanent loan to pay off Nearby Bank's construction loan is therefore a takeout loan.
Please note that while all takeout loans are permanent loans, not all permanent loans are takeout loans. For example, suppose ten years from now, David Developer has to refinance his ballooning takeout loan from Money Center Bank. That new permanent loan from Mid-Market Bank would not be a takeout loan.
Clever, Clean Funny:
A first-grade teacher, Ms. Brooks, was having trouble with one of her more precocious students. The teacher asked, "Harry, what exactly is your problem?"
Harry answered, "I'm too smart for the first grade. My sister is in the third grade, and I'm much smarter than she is. I think I should be in the third grade too." Ms. Brooks finally had enough. She took Harry to the principal's office.
While Harry waited in the outer office, the teacher explained the situation to the principal. The principal told Ms. Brooks that he would give the boy a test. If he failed to answer any of his questions, he was to go back to the first grade and behave. She agreed.
Harry was brought in and the conditions were explained to him. He happily agreed to take the test. Principal: "What is 3 x 3?" Harry: "9." Principal: "What is 6 x 6?" Harry: "36." And so it went with every question the principal thought a bright third-grader should know. The principal finally looks at Ms. Brooks and tells her, "You know, I reckon Harry can go to the 3rd grade."
But Ms. Brooks is still skeptical of the little bugger and says to the principal, "Not so fast. Let me ask him a few questions." The principal and Harry both agree.
Ms. Brooks asks, "What does a cow have four of that I have only two of?" Harry, after a moment: "Legs." Ms Brooks: "What is in your pants that you have, but I do not have?" The principal wondered why would she ask such a question. "Pockets," replied Harry, to the Principal’s great relief.
Ms. Brooks: "What does a dog do that a man steps into? Harry: "Pants." By now, the principal is sitting forward with his mouth hanging open. Ms. Brooks: "What does a man do standing up, a woman does sitting down, and a dog does on three legs?" Harry: "Shake hands." (Dang, this kid is smart!)
The principal is now trembling with apprehension as Ms. Brooks asks the last question. Ms Brooks: "What word starts with an 'F' and ends in 'K' and indicates a great deal of heat and excitement?" Harry: "Firetruck."
The principal breaths a huge sigh of relief and tells the teacher, "Put him in fifth grade. I got the last five questions wrong myself." Hahahaha!
Personal Note:
The entire Hunger Games series is now available for free on IMDB. May the odds ever be in your favor.
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"A company in the U.K. is making news for developing a new vegetable called a Brussel-Kale, which is a hybrid of Brussels sprouts and kale. They said, 'We got the idea from a child's nightmare.'" -- Jimmy Fallon
