Tag Archive : commercial

Fourteen Tips For Starving Commercial Loan Brokers

In our home we try to get the children to help out. One day our youngest son came into the living room and asked, “Does anyone want a cup of coffee?” “Yes, please!” we said. He replied, “What kind of coffee do you want? Capitated or decapitated?”

This old blog article about the commercial loan brokerage business is one of the best of my forty-year career. If you are making $500,000 per year, you don’t have to read it.

My best blog article EVER?

You’re reminded that I am largely retired now. If you need a commercial loan, please contact one of my two wonderful loan officers, Alicia Gandy (our Loan Goddess) and George IV (my wonderful son, who is old and very experienced in his own right):

Warm Regards,


George Blackburne, III

Spotting An Advance Fee Commercial Loan Scammer

Every year hundreds of commercial property owners get conned out of millions of dollars by advance fee scammers.

An advance fee scammer is a criminal pretending to be a commercial mortgage lender.  He will issue a very fancy-looking conditional commitment letter, which will call for some huge “good faith deposit” or “third-party report fee”.  Once he gets the deposit, he will disappear with your dough and stop returning phone  calls.

These advance fees could be anywhere from $20,000 to $100,000.  We are talking about serious money.

How can desperate commercial property owners be so foolish?  Forty-five years ago, I worked at an old-time finance company, where we made personal loans, secured by cars, vacuums, and sticks – the personal property (furniture, TV’s, etc.) – of working people.

My old branch manger, my very first boss, taught me a very important lesson about con men. “If you are in a room with one-hundred people, pick out the one person who you are absolutely sure is not the con man.  He will be your con man.”  Con men are very, very good.

Okay, but how can a commercial property owner or commercial loan broker spot one of these advance fee scammers?  Here are some techniques:

  • Are the rates that this commercial lender is offering very low or very high.  If your deal has been turned down by three of four other lenders, and yet this “commercial lender” is offering you a very low rate and low points, there is a superb chance that this “commercial lender” is just a con man.
  • On the other hand, if the interest rate and the points are brutally high, this commercial lender might legitimately want to make a commercial loan to you.  He’ll fund your loan, when nobody else will, because he is desperate for borrowers.


  • Take a close look at this lender’s website.  The first thing to look for is an actual physical address, as opposed to just a P.O. Box.  In order for a process server to serve a complaint at the start of a lawsuit, he needs to able to find the defendant.  If the con man refuses to provide a street address, it is because he is ducking other process servers.  If he has no street address, you should run for the exit!
  • Look up the lender’s address on Google Maps.  You should see a picture of the property.  Is it some gleaming office tower or just a little rental house?  If a commercial lender has the dough to make multi-million-dollar commercial loans, he should have a pretty nice-looking office.
  • Does a receptionist or the loan officer answer the phone every time you call, or are you always forced to leave your name and number for the loan officer to call back?  Any legitimate commercial lender, who has the dough to lend millions of dollars, can afford a receptionist.  If you have to leave a phone number each time, it suggests the con man may be screening his calls from prior, pissed-off marks.


  • Please grasp this critically important concept.  In order to make multi-million-dollar commercial loans, the lender needs dough to lend.  So many people forget this!  A life company gets its dough to lend from life insurance premiums.  Commercial banks, credit unions, and Federal savings banks (former S&L’s) get their dough to lend from their depositors.  Real estate investment trusts (REIT’s) get their initial capital to lend by selling shares in their corporation.  (They then borrow from banks to achieve additional leverage.)  Hard money mortgage funds have depositors (although these hard money funds are rapidly going the way of the dinosaur.)  Blackburne & Sons, my own hard money shop, gets it dough by assembling a different syndicate of wealthy private investors on every loan.  There are always savvy investors willing to make prudent loans during a crash, as long as the rate is a little higher and the LTV is a little lower.
  • So ask your con man straight out.  Where do you get your dough to lend?  In most cases, the con man will mumble something about “various investors” or the fact that he doesn’t reveal his sources.  Uh, huh… sure.  Miserable butt-wipe!  Heavens I love owning my own company.  I get to say stuff like that.  Haha!  That expression, “various investors”, is a red flag for either a con man or a commercial loan broker masquerading as a commercial lender.
  • Looking at the lender’s website again, can you find an Investor tab?  I find that very, very reassuring.  REIT’s and mortgage funds have shareholders and depositors who provide the capital to lend.  Is entry into the Investor tab even protected by a password requirement?  If so, I am feeling even warmer and happier.


  • Is there a Loan Servicing Department tab.  Such a tab really, really warms the cockles of my heart.  It suggests that this commercial lender actually services its own loans.  That is a huge, positive indicator.
  • Is there a News Releases or Press Releases tab on his web site.  Do the press releases look legitimate?  If so, I am feeling better.
  • Is there a tombstone section on his web site?  Many legitimate commercial lenders have such closing announcements; but it’s always possible that a really smart con man might have created such a fake section to seduce you.


  • Life companies are the only class of commercial lenders who have correspondents to originate and service their loans in certain areas, like Chicago or Los Angeles.  Every other legitimate class of commercial lenders services its own loans.
  •  So ask your con man, do you service your own loans?  If not, run for the exit.
  • How narrow is your commercial lender’s lending niche or area?  If he tells you that he only makes commercial loans, between $1 million and $7 million, on convenience stores in the Northeast, that sounds very legitimate.
  • On the other hand, if he makes loans from $100,000 to $50 million, on any kind of commercial property, located anywhere in the country, at best he is just a commercial loan broker masquerading as a lender.  If the deposit is huge, he is surely a con man.
  • Google the company name of the commercial lender, along with that of the loan officer, the company president, and the company owner.  Lots of juicy stuff will often show up about con men.
  • But here’s the thing:  If you looked up this article on the internet, you already know the answer.  Your commercial lender is too good to be true.  He is too sweet of a talker.  Your subconscious mind has picked up some clues.  Trust such warning signs!  Your commercial lender is a con man – an advance fee scammer.






The Operating Expense Ratio And Commercial Loans

In negotiating an income property loan, the size of loan the borrower can obtain is usually more of a sticking point than the rate or the loan fee.

Since income property loan sizes are generally limited by the debt service coverage ratio (i.e., cash flow), rather than the loan-to-value ratio, the operating expense figure that the lender uses in his calculations is critical.

Suppose a property has the following Pro Forma Operating Statement:




Gross Scheduled Rents $100,000
Less 5% Vacancy & Collection Loss 5,000

Effective Gross Income: $ 95,000

Less Operating Expenses:

Real Estate Taxes $12,500
Insurance 2,550
Repairs & Maintenance 5,890
Utilities 7,345
Management 4,865
Fees & Licenses 987
Painting & Decorating 3,986
Reserves for Replacement 1,900

Total Operating Expenses: 40,023

Net Operating Income: $54,977

Then we hereby define the Operating Expense Ratio as follows:

Operating Expense Ratio = Total Operating Expenses divided by
the Effective Gross Income

Using our example above:

Operating Expense Ratio = $40,023 ÷ $95,000 = 42.1%

Appraisers and professional property managers often keep track of the operating expenses of the buildings they appraise or manage, and they publish their results. For example, the National Association of Realtors publishes the results of their surveys annually in several hardbound books including Income and Expenses Analysis-Apartments and Income and Expense Analysis Office Buildings.

Lenders have access to these type of publications, and they therefore are reluctant to accept at face value operating expenses supplied by the borrower when their operating expense ratios are less than those experienced by similar buildings in the area.

While it might be possible to operate an apartment building IN THE SHORT RUN at an operating expense ratio of less than 30 to 45%, in the LONG RUN, the end result will be a seriously deteriorated building.

It might be possible to get a lender to accept an operating expense ratio as low as 28% on a very new building, if it had fewer than 10 or so units, and if it had no pool and very little landscaping, and if you had authentic source documents to back up your claim. But in general, lenders will very seldom accept an operating expense ratio on apartments of less than 30 to 35%, and have been often known to use 40 to 45%.

The following are factors that will influence the lender to use a higher operating expense ratio:

  1. Lack of individual metering of utilities
  2. Swimming pool
  3. Elevator
  4. Extensive landscaping
  5. Low income area and/or tenants
  6. Presence of families with children

The larger the project, the larger the required operating ratio.  Large projects usually entail extensive recreational facilities and pools, and they often require full-time on-site management teams.

Operating expense ratios are not as useful in evaluating most commercial or industrial properties.  The reason why is because the space can be rented on a triple net basis, a net basis, or a full service basis.

Certain commercial properties, however, have surprisingly predictable operating expense ratios”

  1. Self storage facilities:  25%
  2. Mobile home parks:  25%
  3. Non-flagged hotels and motels:  50%
  4. Flagged hotels:  60%
  5. Residential care homes:  85%  (food, nurses, etc.)

    If you are a commercial loan broker, and you are not calling every commercial real estate loan officer, working for a bank or credit union, within 20 miles of your office, you are missing out one of the biggest feasts in commercial real estate finance (“CREF”) in forty years.  Please grasp this concept:

    Almost every bank in the country is turning down almost every commercial loan request that it receives.  Helloooo?  What are they doing with these turndowns?

    These bankers would welcome anyone who could help them service their high-net-worth clients, especially since you will be taking the deals to a private money lender, like Blackburne & Sons, as opposed to a competing bank, which might steal their client.

By George Blackburne

Now Is The Time To Contact Banks For Their Commercial Loan Turndowns

Quick funny:  Tomorrow is the National Home-School Tornado Drill.  Lock your kids in the basement until you give the all clear.  You’re welcome.  Haha!

For the past two weeks, we have been discussing the fact that just about every commercial bank in the country is out of the commercial mortgage market.

The CMBS market remains broken for now too, although the Fed’s recent purchase of billions of dollars worth of commercial mortgage-backed securities has helped to prevent a complete collapse of the CMBS market.  CMBS lenders will likely survive to lend again in a year or so.

ABS lenders are also out of the market.  You will recall that ABS stands for asset-backed securities, which are smaller securitizations of an eclectic collection of debt obligations.  An ABS pool might contain subprime auto loans, scratch-and-dent residential loans that have been kicked out of some regular securitization pools, aircraft loans and leases, equipment loans and leases, credit card loans, movie residuals, and non-prime commercial loans.

As a result of recent huge declines in the value of asset-backed securities, ABS commercial real estate lenders; like Silverhill, Velocity, and Cherrywood; are now out of the market right now.

We also discussed how several hundred commercial hard money lenders nationwide are either out of the commercial loan market or have completely closed their doors.  The slaughter has been particularly bloody among those hard money shops that use a mortgage pool to fund their loans.

As soon as the coronavirus crash started, most of their private investors lined up to withdraw their money from these hard money mortgage funds.  This left these hard money shops with no new money with which to lend.  Suddenly they had zero loan fee income coming in, so they didn’t have enough money to make payroll and to keep their doors open.

Bottom line:  When a borrower goes out searching for a commercial loan today, he is going to get turned away by just about every lender.  

Isn’t this wonderful?!  As a commercial loan broker, you make your dough helping borrowers find commercial lenders.  When every bank in the country was making commercial loans, most borrowers didn’t need you.  Now they do.

Commercial real loan officers, working for banks, are telling their prospective borrowers, “I’m sorry, but our bank is not making any new commercial real estate loans right now.”  In other words, the bank is out of the market.

I can also tell you that, after having survived the S&L Crisis, the Dot-Com Meltdown, and the Great Recession, most commercial banks are going to remain out of the market for several years.  Whenever banks bolt to their hidey-holes, they come out very, very timidly.

Those of you who have read and understood my articles about how the Multiplier Effect can sometimes work in reverse should be able to understand the huge deflationary pressures building in the U.S., as well as China.  You may not want to go “all-in” on the stock market, even though Gilead Sciences announced last night that their new therapeutic drug for the coronavirus is doing very well in a large trial.  That huge deflationary tidal wave from China is still coming.  Chinese small business owners have been traumatized, and a new drug does little to immediately restore their savings accounts.

You think it’s bad now?  In 20 years, our country will be run by people home-schooled by day drinkers…

Since banks are turning down every new commercial borrower, it is therefore an incredible time to call bankers for their commercial mortgage turndowns.  The bankers will be grateful to have someone – anyone – to service their frustrated clients.

It also makes good sense to also tell these bankers that you will not be taking their good customers to some competing bank.  “All of your bank competitors are out of the market too.”  Tell them that you have some reasonably priced private money with no prepayment penalty.

Make sure you gather the contact information on every commercial real estate loan officer working for a bank that you meet.   You can trade each bank commercial loan officer for either a free commercial mortgage underwriting manual, a free loan broker fee agreement, a free commercial mortgage marketing course, or a free regional copy of The Blackburne List containing 750 commercial lenders.

These trades are made under the Honor System.  Please don’t cheat.  You can trade trade a banker for ONE of the above four goodies.  If you want all four goodies, please find me four bankers.

And this guy must work for a bank or credit union.  ABC Bank.  First National Bank.  Helloooo?  Banks have huge metal vaults with tens of thousands of dollars in cash on hand, right?  Mortgage companies are NOT banks.  You are not a commercial loan officer working for a bank.  You can’t fill in your own name.  Nice try.  Sorry.

When this is over, what meeting do I attend first… Weight Watchers or AA?

Have you ever coveted my famous, nine-hour course, How to Broker Commercial Loans?  I will give you this course for free if you gather up twenty commercial real estate loan officers working for banks for me.

But where do you go to find these bankers to call?  Simple go to Google Maps and type in your office address.  In the Nearby field, type in “Banks”.  Voila!

Screen Shot 2020-04-17 at 12.15.29 PM

Since we can’t eat out, now’s the perfect time to eat better, get fit, and stay healthy.  Hellooo?  We’re quarantined!  Who are we trying to impress?  We have snacks, and we have sweatpants.  I say we use them!  🙂

Commercial Mortgage Rates Today:

Here are today’s commercial mortgage interest rates for permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans.

Be sure to bookmark our new Commercial Loan Resource Center, where you will always find the latest interest rates on commercial loans; a portal where you can apply to 750 different commercial lenders in just four minutes; four huge databanks of commercial real estate lenders; a Glossary of Commercial Loan Terms, including such advanced terms as defeasance, CTL Financing, this strange new Debt Yield Ratio (which is different from the Debt Service Coverage Ratio), mezzanine loans, preferred equity, and hundreds of other advanced terms; and a wonderful Frequently Asked Questions section, which is designed to train real estate investors and professionals in the advanced subject areas of commercial real estate finance (“CREF”).

By George Blackburne

Commercial Loans And Revolvers

A great many residential lenders make revolving lines of credit (home equity loans) on owner-occupied homes; so it it natural for lots of commercial loan brokers to ask if their investor clients can get a a line of credit, secured by an apartment building or an office building.

As a general rule, the answer is, “No.”  Commercial real estate lenders do not make lines of credit secured by investment real estate estate.  At least I have never seen or heard of it done in my 43 years in the commercial loan business.

Therefore, I was quite surprised to receive a newsletter from the fine folks at George Smith Partners – one of the oldest commercial mortgage banking firms in the country – that contained the following tombstone:

“George Smith Partners placed a structured senior and collateralized line of credit revolver in a cash-out execution for a business in Los Angeles. The first loan was structured to be self-liquidating over 15 years with a fixed rate of 3.90%. The $1,000,000 second trust deed is a true revolver that can be used as a check-book and has no limitations on uses.”

“The second loan is priced at 3.75% (Prime minus 1%).  Funds may be drawn down, re-paid and re-drawn without additional bank approval.  There is no non-utilization fee.  As the credit line is collateralized, there is no mandatory clean-up for funds outstanding over 12 months.”

A revolver is revolving line of credit that allows the borrower to borrow some dough, pay interest on it a for a few months, pay it off, allow the line of credit to rest for six weeks, borrow some more money, pay half of it back, paying interest on the outstanding balance monthly, and then pay off the remaining balance in full.

This particular revolver had no utilization fee.  In other words, the borrower does not pay a fee each time that he draws down on his line of credit.

There was no annual clean-up for funds outstanding over 12 months either.  Bank regulators require that unsecured lines of credit to be rested (paid down to zero) for at least thirty days every year.

In this case, because the revolver was well-secured by commercial real estate, the bank did not require an annual clean-up.

So where do you go to get a revolver on commercial real estate?  I dunno.  Until recently, I would have sworn that such lines of credit, secured by commercial real estate, were never made.

Apparently, however, such revolvers are occasionally being made.  But then some people swear there is a Santa Claus, and I have never seen him either.  Folks, revolvers are very, very, VERY rare; and they are no doubt reserved for commercial loans of least $5 million, made to borrowers with almost as much dough as Michael Bloomberg, who apparently is $500 million poorer these days.  Haha!

Article By George Blackburne


Commercial Financing Advice – Commercial Lenders to Avoid

This commercial financing article will describe the importance of avoiding “problem commercial lenders”. The article will NOT name specific lenders to avoid, but key examples will be provided to illustrate why prudent commercial borrowers should be prepared to avoid a wide variety of existing commercial lenders in their search for viable commercial financing.

I have been advising business owners for over 25 years, and I have encountered many commercial financing situations which have involved commercial lenders that I would not recommend as a result. These problematic situations have especially involved commercial mortgage loans, credit card factoring and unsecured business loans. As a direct result of these experiences and daily conversations with other commercial financing professionals, I do in fact believe that there are a number of commercial lenders that should be avoided. This conclusion is typically based on more than one negative experience or an obvious pattern of lending abuses.

I have published many articles which are designed to assist commercial borrowers in avoiding commercial financing problems. One of the most serious commercial financing situations is a commercial lender that causes problems for their commercial borrowers on a recurring basis. It is particularly this type of commercial lender which prudent commercial borrowers should be prepared to avoid unless viable alternative commercial financing options do not realistically exist.

Here are a few examples of why certain commercial lenders should be avoided.


I have published an article which discusses the tendency of many banks to say “YES” when they mean “NO”. Such banks will typically attach onerous commercial financing conditions to business loans instead of simply declining the loan. Business owners should explore other business loan alternatives before accepting commercial financing terms that put them at a competitive disadvantage.


For commercial real estate loans, commercial appraisals are an unavoidable part of the commercial loan underwriting process. The commercial appraisal process is lengthy and expensive, so avoiding commercial lenders which have displayed a pattern of problems and abuses in this area will benefit the commercial borrower by saving them both time and money.


In smaller metropolitan markets, it is not unusual for a dominant commercial lender to impose harsher commercial financing terms than would typically be seen in a more competitive commercial loan market. Such commercial lenders routinely take advantage of a relative lack of other commercial lenders in their local market. An appropriate response by commercial borrowers is to seek out non-bank commercial financing options. It is neither necessary nor wise for commercial borrowers to depend only upon local traditional banks for commercial financing solutions. For most commercial loan situations, a non-local and non-bank commercial lender is likely to provide improved commercial financing terms because they are accustomed to competing aggressively with other commercial lenders.

Copyright 1995-2007 AEX Commercial Financing Group and Stephen Bush. All Rights Reserved.

Contact AEX Commercial Financing Group about free AEX Commercial Loan and Business Cash Advance Reports. Stephen Bush is the CEO of AEX Business Financing – Commercial Mortgage [http://aexllc.com] Solutions. Steve provides business opportunity – business finance and SBA loan working capital management assistance throughout the United States.

Article Source: https://EzineArticles.com/expert/Stephen_Bush/56547

Article Source: http://EzineArticles.com/414265

The Cost Of Commercial Real Estate Appraisals

By George Blackburne

A borrower can expect to pay between $2,000 and $4,500 for an appraisal, if he needs a commercial loan. Multifamily appraisals are slightly less. The reason why commercial real estate appraisals are so expensive is because each commercial property is unique. In addition, the appraiser has to perform an extensive rental comparable’s analysis, an income and operating cost analysis, a comparable sales analysis, and a cost analysis.

Commercial real estate appraisals can be quite extensive, as thick as thirty to fifty pages. The appraiser needs to determine, for example, if each lease provided to the appraiser reflects the current market rent of the property or whether the rental amount is out-of-date, meaning it is too high or too low.  The lease might even be fraudulent.  This can often only be determined by checking the rents of a number of similar properties nearby.

Did the borrower provide the appraiser with his actual operating expenses or did he fraudulently slip in some understated expense numbers, in order to make his net operating income look higher?

The appraiser also has to carefully analyze the cost of the commercial building’s construction, to help determine the fair market value of the building and to determine if the rental rate is reasonable.

Image if a developer could build an office building for just $1 million and lease it out for $1 million per year.  Clearly something is wrong; otherwise, why aren’t capitalistic developers rushing to build competing office buildings?  That lease for $1 million per year smells awfully fishy.

Whether the borrower pays $2,000 to $2,500 for a commercial appraisal or $4,000 to $4,500 for the appraisal depends on the qualifications of the appraiser.

It is the commercial lender who determines the minimum qualifications of the appraiser.  If the loan amount is small, a bank may only require a General Certified Appraiser.  If the loan amount is large, or if the property type is unusual (think movie complex), the bank will likely require a MAI appraiser.

A General Certified Appraiser is one who has been extensively training in the three approaches to value – the Income Approach, the Sales Comparison Approach, and the Cost Approach.  In order to be awarded the General Certified Appraiser designation, the state will usually require a large number of training courses in the valuation of commercial property, will test the candidate extensively, and will require that he or she have a certain level of appraisal experience.

General Certified Appraisers are usually pretty good, and they typically charge between $2,000 to $2,500 for an appraisal of a commercial property valued up to $6 million or so. Small banks and hard money lenders are the commercial lenders who will most often require just a General Certified Appraiser.

Larger banks, when valuing commercial properties worth more than $6 million to $7 million or so, will usually require a MAI Appraisal.

MAI stands for Member, Appraisal Institute, a private, well-respected professional  association.  The Appraisal Institute defines a MAI Appraiser as an appraiser who is  experienced in the valuation and evaluation of commercial, industrial, residential, and other types of properties, and who advise clients on real estate investment decisions.

MAI Appraisers are like the CPA’s of the appraisal industry.  They are the top of the food chain.  They are most highly trained and experienced commercial real estate appraisers in the industry.

MAI Appraisers will typically charge between $4,000 to $10,000 for an appraisal assignment.  For most commercial property owners, borrowing from a bank, the MAI appraisal will cost you between $4,000 and $4,500.

Borrowers, brokers, and mortgage brokers should never order the appraisal themselves.  If they do, the cheapest commercial lenders will NOT be able to use it.

Do you remember the Savings and Loan Crisis back in 1986, when over 1,000 S&L’s went bankrupt?  They lost billions of dollars, in large part due to bad appraisals.  Developers were ordering the appraisals themselves from crooked MAI appraisers.  They would shop an appraisal assignment until a MAI Appraiser promised to bring in the appraisal at the value the developer wanted.  The joke back in those days was that MAI stood for “Made As Instructed.”

The law that eventually cleaned up the appraisal industry was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 – pronounced FIRREA (like diarrhea).

After the passage of FIRREA, state laws were passed to license and regulate real estate appraiser.  The appraisal industry became far more professional and ethical, and the prestige of the Appraisal Institute itself recovered its lustrous reputation.

But let’s get back to the issue that a borrower or a broker must never order the appraisal themselves.  Under FIRREA, it is illegal for an insured bank or savings and loan association to accept and use an appraisal ordered by a borrower or a broker.

It is too late?  Are you stuck with a $2,000 or $4,000 appraisal that no bank will accept?  My own hard money shop, Blackburne & Sons, will often accept commercial real estate appraisals ordered by competing lenders.

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Commercial Loans And Programmatic Equity

A company named JCR Capital sent me an email flyer several months ago advertising their equity capital for value-add real estate investments.

Value-add commercial real estate investments typically target properties that have in-place cash flow, but they seek to increase that cash flow over time by making improvements to, or repositioning, the property.  In other words, the property has tenants, but they are paying substantially below the potential rent that the property could be getting.

In a value-add investment deal, the transaction’s sponsor makes an active effort to elevate the income stream of the property, typically through a significant capital improvement program, such as a partial or property-wide renovation.  Examples of such improvements might include new paint, new signage, renovating the lobby, and improving the security of the property and the parking area, etc.

In their marketing flyer, JCR Capital advertised preferred equity, joint venture equity, and programmatic equity.  Programmatic equity?  What the heck is programmatic equity?

Before we get into programmatic equity, lets first do a quick review of the term, “equity”.  Equity is not just the difference between what your house is worth and the balance on your first mortgage.

Equity – in the context of real estate – is the money that the owner stands to lose before “the bank” loses its first penny.  Obviously, “the bank” could also mean a credit union, a life company, a conduit, or any other type of real estate lender.

Equity is often referred to as the first-loss piece.  If anyone is going to lose any money on a real estate deal, the first guy to lose a chunk out of his tush is the equity holder (the owner).


ABC Development Company specializes in turning around big apartment projects that have become run down.  In downtown Washington, DC, ABC Development learns of a 360-unit apartment project within two miles of Capital Hill.  The well-located apartment project was once filled with ambitious, young political staffers; but when the old man died, and his wife took over the management, the condition of the property and the rents plummeted.

ABC Development can acquire the property for just $32 million, but the renovation costs are another $9 million.  With an interest reserve and the other necessary soft costs, the total project cost is $46 million.  The bank, with whom ABC Development has a relationship, will only loan up to 70% of the total cost because the project has become a big drug house and a gang hang-out.

A huge renovation project like this needs to be structured like a construction loan.  Who remembers the four elements of Total Cost?  Of course, there is the land cost (in this case, the cost of the land and the building), and then there are the hard costs (bricks and mortar).  What else?  Soft Costs – that’s right!  Good job.

But you are still forgetting the fourth element of Total Cost (of a development project). It’s the contingency reserve.  A good rule of thumb when computing the contingency reserve is to use 5% of hard costs and soft costs.  Why not 5% of the land cost?  Because by then the developer already knows the cost of the land.  There is NOT going to be a cost overrun in connection with the land.

Therefore the total cost of a development project is the land cost, plus the hard costs, plus the soft costs (interest reserve, architectural fees, engineering fees, points, closing costs, etc.), plus the contingency reserve.

Okay, now let’s get back to ABC Development’s big value-add deal.  We said the total cost was $46 million, and the bank was willing to lend $32.2 million – which is 70% of the total cost.  Therefore ABC Development will need to contribute $13.8 million.  The development company has $3.8 million to contribute, so it will need an equity provider willing to put up the remaining $10 million.

This is the type of value-add deal that would be perfect for the nice folks at JCR Capital.  Their transaction sizes include equity contributions of between $5 million and $50 million nationwide.  (We are talking large deal sizes here, folks.  The property should at least be worth $20MM.)

Okay, But What the Heck is Programmatic Equity?

As Sam explained to me, “Programmatic equity is where we provide a facility of capital, say $25 million to $50 million of committed capital, for a particular strategy that a sponsor is pursuing.”


Let’s suppose that a developer specializes in buying large, older, mobile home parks, and then the developer repaves all of the streets, tears out the landscaping and puts in far-nicer lawns and bushes, puts in a new pool and a new clubhouse, enforces the park rules about skirts and storage sheds, squeezes out the mobile homes being used as rentals, squeezes out the ugly and/or single-wide coaches, and then dramatically raises the rent.

When everything is stabilized, the developer then sells the mobile home park to a REIT.  This is his program.  He has flipped four parks already, and he has identified fifteen other parks in need of his program.  He needs just $3 million in equity to satisfy each bridge lender providing the underlying first mortgage, but in order to renovate all fifteen parks, he might eventually need a total of $45 million in equity.

A provider offering programmatic equity might go all the way down to just $3 million on each mobile home park because the sponsor will be doing 15 of these projects.   The provider might offer the developer a capital facility (kind of like a line of credit) of $30 million in equity to start renovating these large, old, mobile home parks.

By George Blackburne

Less Than Interest-Only Payments Big And Commercial Bridge Loans

Last week I wrote a blog about how historically aggressive private money commercial bridge lenders are getting.  This month George Smith Partners, the big commercial mortgage banking company (the original founder started George Smith & Company decades before I founded Blackburne & Sons forty years ago) released a newsletter, FinFacts, containing the following tombstone:

“George Smith Partners (“GS P”) placed a $10,900,000 non-recourse loan for the refinance of an underperforming stabilized 50-unit multifamily community in Los Angeles.  The Sponsor recently acquired the asset at approximately 50% below market from an affiliate party, and GSP was able to facilitate approximately $3,000,000in cash out proceeds at closing.”

“A portion of the loan proceeds will be used to renovate units as they become vacant in order to achieve current market rents.  GSP identified a non-institutional lender (private money lender) who was comfortable with the cash out proceeds and who understood the history and dynamics of this non-arms-length acquisition.  The non-recourse loan is fixed for 1.5 years with a 7.99% interest rate and 4.99% pay rate.”


Interest Rate:  7.99% with 4.99% pay rate
Term:  18 months
LTV:  70%
Recourse:  Carve-Outs Only
Fees:  1.0%
Prepayment:  None; no exit fee

The reason I brought this closing to your attention is because the Big Girls (the originator of this commercial loan at GSP was a lady) are arranging large commercial bridge loans with less than interest-only payments.

Article Provided By By George Blackburne

Commercial Loans On Build-To-Rent Communities

Nearly a decade ago, there was a foreclosure crisis. Realtors were buying old houses and flipping them. Now, the strategy is to buy new and rent out. This new asset class that is taking the private equity market by storm. It started in Arizona, spread to the Sunbelt, and is now spreading across the country.

This new real estate asset class; a class of real estate that competes with apartment buildings, office buildings, and shopping centers; is the build-to-rent community (“B2R”).  A build-to-rent community is a tract of brand new single-family homes that is constructed, not to be sold, but rather to be rented out to residential tenants.  The tract of, say, 60 homes, is then professionally managed and sold to an institutional investor as a reliable source of income.

My friends at George Smith Partners recently published the following tombstone:

George Smith Partners successfully advised on $12,000,000 in joint venture equity financing and $23,900,000 in non-recourse senior construction financing for the ground-up development of a 185-home build-to-rent community.  Single-family-for-rent communities are a newer asset class and this project was among the first in the market.  These communities offer the experience of living in a single-family home with the ease and cost of living in an apartment building.

The Sponsor expects the project to be well received as there are distinct competitive advantages over the existing apartment product in the market place for several reasons including the new construction, low density and both interior and exterior privacy.

Institutional real estate investors absolutely love this new class of real estate.  The homes in B2R communities usually rent at significant premiums anywhere from 15% to 30% above equivalent-size apartments or single-family rental homes, located in traditional for-sale neighborhoods.

B2R communities typically lease three to five times faster than traditional multifamily housing.  Developers report strong pre-lease periods, often ending up with a waiting list.  Typically all of the homes are rented in three to four months, versus ten to fourteen months for multifamily.

Another reason institutional investors love B2R communities is because the homes are brand new.  Because these home are brand new, they are usually immune from some of the typical repair factors that come in at 15 or 20 years of ownership.  There is a general contractor warranty.  There is also a limited product warranty of the appliances.  The only major operating expense for landlords is the landscaping.

Rents for single-family homes are growing fast at 4.5% annually now, compared with 3% rent growth for multifamily apartments.  There is also much less turnover in single-family rentals, and the rental market is much less volatile than the home sales market.  People will always need a place to live.

Renters are also digging these new B2R communities.  The huge millennial generation is aging into marriage and parenthood.  Not all of them want, or can afford, to buy a home.

Most of these B2R communities are pet-friendly and include a resort-style pool and spa, a covered ramada, walking paths, optional garages, and an electric-charging station.  They often offer the highest available Internet speeds.  The pool, exercise facilities, and planned social activities bring residents together, which doesn’t always happen in apartment buildings.  The homes often offer keyless entry and tablet-controlled security, climate control, and entertainment systems.  There are sometimes even smart front gates at the communities.

Institutional investors are learning that there is a cultural move away from your typical garden apartment with elevators, swimming pools, tennis courts and common areas. Homeownership is looking less desirable to some, particularly in the affordable arena, and renters now have a chance, for very close to the same price, to rent a three-bedroom, two-bath or a four-bedroom, three-bath home that they can call their own.

The renters obviously don’t own their home, but as long as they pay their rent and behave like good neighbors, they can reasonably expect to live there for twenty years.  The stigma associated with renting, along with the historical drive toward homeownership, is waning.

The American Dream is changing.  The last recession hurt a lot of people, and homeownership is at a 20-year low.  Most single-family renters fall into one of two categories:  Baby Boomers who are downsizing and Millennials.

Millennials are often saddled with large amounts of student-loan debt, and they either can’t or won’t buy a home.  Renting affords them a more mobile lifestyle.  The same goes for Boomers, many of whom lost their homes to foreclosure during the recession and are gun-shy about purchasing another.

B2R communities satisfy these renters’ need for a single-family home, and the landlord takes care of the exterior maintenance to boot.  It’s a unique lock-and-leave, managed experience more akin to the apartment world, with detached-home benefits.

Renting a detached home is attractive for many of the same reasons as renting an apartment: the portability/flexibility of a lease, no exterior maintenance, and no mortgage debt.  A single-family home offers more space and privacy, with a backyard, attached garage, and other features not available in multifamily housing.  I read where one developer of B2R communities automatically puts a dog door in every home.  Smart.

Multifamily is vertical, with neighbors above and below you, and it’s noisy.  With single-family homes, you have none of those acoustical issues.

There is a veritable ocean of capital now seeking B2R communities.  Consumer rental demand that is driving these institutions to want much greater levels of inventory of this product.  Institutional investors are learning that new B2R communities are a very safe product.

“I’ve got clients, multiple, well over a couple billion dollars worth of capital looking to place in this space,” said a new Phoenix-based commercial brokerage firm focused on single family rental and build-to-rent investment portfolios.   They are looking to acquire 5-6,000 homes in the next two years.”

Toll Brothers, a luxury homebuilder, recently announced its commitment to invest $60 million in a $400 million venture that will build homes specifically for rent in seven major U.S. cities.

Lennar, the nation’s largest homebuilder by revenue, experimented with a build-to-rent community in Sparks, Nevada, and announced in July its plans to move further into the space.

Clayton Homes, the 15th largest site-builder and home manufacturer, also recently revealed its build-for-rent home communities, to be built within its market.

By George Blackburne

Using A Cap Rate To Value Commercial Properties

This may be the most instructive training article that I have written in several years, so I strongly encourage you to study it.  (Note: This is NOT the subject vet clinic.)

Sometimes in the commercial loan business, you have to value a property based strictly on a capitalization rate (“cap rate”).

Several years ago, I took on a commercial loan on an owner-occupied veterinary clinic.  The vet had gone through a divorce, and he had been forced to file for bankruptcy three years earlier.  He could therefore not qualify for a SBA loan.

The property was located in a town of over 75,000 people, so he could not qualify for a USDA business and industry loan either.  USDA B&I loans are very similar to SBA loans; but they are designed for rural areas.  Any town with a population of 50,000+ people is not considered sufficiently rural.

The loan had to go to a bank or credit union, so I was forced, absent an appraisal (always let the bank order the appraisal), to somehow create a pro forma operating statement on an owner-occupied veterinary clinic.  Hmmm.  How could I do that without having any idea of the market rent of a vet clinic?  Here is what I came up with, and I must say, it was brilliant.

I knew that the vet had bought the facility for $500,000 two years earlier.  To add in some property appreciation over the past two years, I multiplied $500,000 by 103%, which assumed a 3% annual appreciation rate.  To get the second year’s value, after more appreciation, I multiplied the result by 103% again, producing a value after two years of $530,450.

Then I pulled a cap rate of 8.5% out of thin air.  Poof.  Remember, I am trying to get my client a commercial loan here, and any commercial broker (a commercial real estate salesman who specializes in selling commercial-investment real estate) will tell you that my cap rate assumption was probably about right.  I might have used 5.5% for a nice apartment building and 6.5% to 7.5% for a retail or industrial property.

You are reminded that a cap rate is just the return on his money that an investor would earn if he paid all cash for the property, assuming you built in a replacement reserve of around 3% of the Effective Gross Income.  The Effective Gross Income is the number you get after taking off 5% for vacancy and collection loss.

Now please remember where we are going.  We are trying a create a believable pro forma operating statement on an owner-occupied vet clinic, when rental comp’s cannot be found.  You could look for a week and not find another vet clinic within 50 miles that was simply rented from some passive investor.

You will recall that a pro forma operating statement is just an operating budget for the upcoming year, assuming you built in a replacement reserve to eventually replace the roof and the HVAC unit.

Quick Joke:

My wife and I had just finished a meal at one of our local restaurants when I realized I’d left my wallet at home. As the wife headed to the door to retrieve her purse from the car, she told the waitress what had happened, adding, “But don’t worry, I’m leaving my husband for collateral.” The waitress took one look at me and asked her, “What else you got?”

If you are not working towards building your own loan servicing portfolio, get out of the business. The money is in servicing.

Back to the Lesson:

Even though we have absolutely no rental rate comparable’s, we can now compute the net operating income (“NOI”) on the vet clinic.  We simply multiply the value of the building ($530,450) times the cap rate (8.5%) to arrive at the NOI ($45,088).


 To value any commercial-investment
property using the income approach, we
simply divide the NOI by the cap rate.

For example, if an apartment building had a net operating income of $300,000; and we knew that apartment buildings in the area were selling at 5.5% cap rates, we would simply divide $300,000 by 5.5% to arrive at a value of the apartment building of $5.45 million.

To value a commercial property –

Value = Net Operating Income / Cap Rate

Now let’s get back to our veterinary clinic.  We are trying to build a pro forma operating statement, while hampered by the fact that we have no rental comp’s.

To get a net operating income, we simply move the formula around –

NOI = Value of the Property x Cap Rate

NOI = $530,450 x 8.5%

NOI = $45,088

We’re getting there!  But your commercial lender will want to see a Gross Income, a 5% Reserve for Vacancy and Collection Loss, some expenses, including a management fee, and a 3% Reserve for Replacement.

The expenses are easy.  We just assume that the property is leased on a triple net basis (“NNN”)!  The tenant (our vet) pays the taxes, the insurance, the repairs, the utilities, etc.   Poof.  Suddenly we have no expenses to worry about.  Am I good or what?  Haha!

But your commercial lender will still want to see you taking off 5% for Vacancy & Collection Loss.  He will want to see you taking off 3% for Management and another 3% for Reserves for Replacement.

We know that the NOI is just 94% of the Effective Gross Income, after taking off 3% for Management and 3% for Reserves.  Therefore to get the Effective Gross Income, we simply divide the NOI by 94%.

To get the Gross Income, we start by knowing that the Effective Gross Income is 95% of the Gross Income, because we have to take off 5% for Vacancy and Collection Loss.  Therefore we simply divide the Effective Gross Income by 95%.  Voila!  We’ve done it.


Gross Income:                                         $50,364
Less 5% Reserve for Vacancy:                $ 2,398
Effective Gross Income:                          $47,966

Less 3% For Management:                     $ 1,439
Less 3% Replacement Reserves:           $ 1,439

Net Operating Income:                            $45,088

Take pride in your understanding of today’s lesson.

Did I lose you?  Remember, I had to create a pro forma operating statement, so the lender could compute the debt service coverage ratio on your commercial loan request.

The problem was that there were only about twenty veterinary clinics within 50 miles of the subject property, and all of them were owner-occupied.  There were no rental comparable’s, so I couldn’t just say, “Steve’s Vet Clinic is leased for $3.00 sf, so the market rent of the the subject property must be $3.00 sf as well.”

By assuming a reasonable and believable cap rate, we were able to work backwards to create a reasonable pro forma operating statement.

By the way, this commercial loan successfully (and easily) closed with a credit union, despite the recent bankruptcy.  Hoorah!

By George Blackburne

Commercial Loans, Cap Rates, And The “Quality” Of Income

This is the perfect time to talk about the “quality” of income. Real estate crashes seem to strike about every ten to fourteen years, and it has been thirteen years since the Great Recession. If we were to have another commercial real estate crash, would you rather own a building leased to Betty’s Gift Shop or one leased to Amazon.com?

The quality of income refers to the likelihood that you are going to receive it.  All money is green, whether it comes from the headquarters of the Catholic Church in America or from Boom-Boom’s Place, LLC, a chain of gentlemen’s clubs in southern Louisiana.

But is it likely that Boom-Boom’s Place may have a little trouble making its rent payments or its mortgage loan payments if the economy completely tanks?  Guys are less likely to be drinking five beers a night and spending $30 on tips to the dancers if they are out of work.

Okay, obviously, we would rather be on the receiving end of $7,000 per month from Amazon.com than from Betty’s Gift Shop; but in order to win that deal, we have to make some sacrifices.

Amazon.com, Inc. signs a lease for a small industrial building, perhaps used to repair its delivery trucks.  Upon the execution (signing) of the lease, the owners of the little industrial building offers the property for sale.

Now normal industrial buildings in Portland are selling at, say, 6.5% cap rates.  In other words, if an investor paid all cash for a garden-vareity industrial building in Portland, he could expect to earn, after paying all expenses and setting aside a little money every year to eventually replace the roof and the HVAC system in 12 years, a return on his money of around 6.5%.

A cap rate is just the return on your money if you paid all cash for a commercial building.

Wake up, folks! The money in this industry is in loan servicing fees!

Before computing that return on your money, always remember that you need to set aside a little money every year to replace the roof and the HVAC system.  This is called the replacement reserve.

Okay, so the seller has a building leased to Amazon.com for $7,000 per month.  Your accountant tells you that you need to set aside $850 per month to eventually replace the roof, repave the parking lot, and replace the HVAC system.  So the investment is scheduled to yield $6,150 per month.

Since industrial buildings in Portland typically sell at a 6.5% cap rate, you compute the value as follows:  Six-thousand-one-hundred-fifty dollars per month times twelve months suggests an annual net operating income (“NOI”) of $73,800.

If you divide the annual net operating income (NOI) by the proper cap rate (expressed as a decimal), you get its value.

Okay, so $73,800 divided by .065 (6.5% expressed as decimal) equals a value $1.14 million.  Therefore you submit your offer of $1.14 million.  The selling broker falls out of his chair laughing.  What the heck?

“George,” he says, “Betty’s Gift Shop might sell for $1.14 million (a 6.5% cap rate), but this is Amazon.com!  The world could be in complete chaos, yet a buyer could absolutely depend on Amazon making its rent payments.  There are investors out there who need the security of predictable payments, and they will pay far extra to buy that stream of predictable payments.”

“George, I have offers on this building of $1.5 million, $1.72 million, and finally $1.85 million.  That works out to a 4% cap rate.”

When a real estate and stock market crash is coming, it’s all about the quality of the income.

By George Blackburne

Commercial Loans And The S&L Crisis

Wow.  If you walked into the executive offices of some savings and loan associations in the early 1980’s, the wealth and opulence would have amazed you – walls paneled with expensive oak, glistening marble floors imported from Italy, and genuine crystal chandeliers hanging from the ceiling.  On the walls you would often find wildly-expensive oil paintings created by the great masters.

If invited, you might dine in the executive dining room, where highly-paid chefs would treat you to a masterpiece of culinary delight.  The President of the S&L might even fly in on the corporate jet to meet you.  And hence came the famous expression…

In other words, if the president of a publicly-traded S&L started spending money like a drunken sailor, dump your stock.  The orgy of excess spending all came crashing down just a few years later, when this lavish spending and some reckless underwriting caught up to the S&L’s.  But how did we get here?

From the year 1933, which represented the bottom of the Great Depression, until the year 1986, Federal Reserve Regulation Q limited the interest rate that banks and S&L’s could pay on time deposits (CD’s).

In other words, suppose you owned a bank, and your bank desperately needed more deposits.  The other banks in town were paying just 2.0% on C.D.’s, but you were willing to pay 2.5% interest to your depositors.

Guess what?  You couldn’t do it.  Regulation Q limited you to just 2.0%.  Your bank was not legally allowed to offer 2.5%.  In order to compete, banks offered free toasters or free transistor radios in order to attract depositors.

Then in 1986, Federal regulators relaxed Regulation Q.  As long as your bank was healthy, you could offer whatever interest rate you wanted in order to attract new deposits.

Suddenly, wealthy real estate developers were opening their own banks and S&L’s.  Hot money was quickly being moved from bank to bank, as certificates of deposit matured.  Whichever bank or S&L in the entire country was offering the highest interest rate would get these fast-moving deposits.  After all, the deposits were insured by the Federal government.  It didn’t matter which bank a depositor chose.

But as interest rates on bank certificates of deposit increased, it became increasingly difficult for a bank or an S&L to make a profit.  There was a practical limit as to how high of an interest rate an S&L could charge for a mortgage loan.

To make matters worse, the bleeding heart California Supreme Court, in an infamous decision known as Wallenkamp v. Bank of America, had ruled in 1980 that a due-on-sale clause in a mortgage was unenforceable.  Other states soon followed suit.

Prior to this boneheaded decision, a bank could make a 30-year home mortgage at a fixed rate of, say, 3.5%, knowing that the vast majority of homeowners would move and sell their house every seven years.  When they sold their homes, the mortgage would have to be paid off.  If interest rates crept up to 4.25%, it was not the end of the world for the bank because the loan would almost certainly be paid off in just a few years.

As interest rates on both C.D.’s and mortgages marched upwards due to raging inflation, banks and S&L’s soon found themselves actually losing money on the older fixed-rate mortgages in their portfolio.  They might be forced by inflation and competition to pay 6% on deposits, while earning just 3.5% on a mortgage loan that potentially could stay on the books for the next 30 more years!

Banks did not suffer as badly as savings and loan associations.  Banks always wrote fewer mortgage loans than S&L’s.  Banks, in those days, also priced many of their business loans at 2% over prime.  As the prime rate marched ever upwards, so did the interest rate charged to their borrowers.

But S&L were only allowed by charter at the time to make mortgage loans, not business loans.  These mortgage loans were almost universally fixed rate loans.  The fixed rate on the mortgages in the portfolio of an S&L soon became too low for most S&L’s to make a profit.  Remember, the prime rate reached 21.5% in 1981, as inflation approached 16% annually.

The Explosion of Construction Lending:

Savings and loan associations therefore became desperate to earn more income.  They found this additional income in the form of construction loans.

Construction loans, assuming the project goes well, are very profitable for a bank or an S&L.  The bank gets to earn its two-point loan origination fee (competition has since forced this typical loan origination fee down to just one modernly) on the entire loan amount, but in the early months, the bank has only a tiny fraction of the loan outstanding.   Cha-ching.  This works out to a huge yield for the bank.

In addition, construction loans are short term.  Banks greatly prefer short term loans because they can get their money back and then go into turtle mode if they see a recession coming.

Therefore, in the early 1980’s, commercial construction lending went wild.  The skylines of every football team city in the country were lined with huge construction cranes, as huge office towers and hotel towers climbed towards the heavens.

The Savings and Loan Crisis:

Then the government changed the tax law.  No longer could depreciation losses be used to shelter the incomes of the rich and of high-income earners, like physicians.  They began to dump, and even walk away from, their commercial real estate holdings.  Prices plummeted by 45%.

At the same time, the price of oil also plummeted.  Oil-producing regions like Texas and Colorado saw their incomes shrivel and their office buildings soon emptied.  The era of see-through buildings had arrived.

A see-through building was typically an office tower with no tenants and no tenant improvements.  Because the building was just an empty shell, you could literally look in one window and see the seagulls flying outside of the far windows.

The S&L’s Crisis rolled across the country, starting in the East first, reaching Texas 18- months later, and finally reaching California 18-months after that.  The crisis came to a head and resulted in the failure of 1,043 out of 3,234 savings and loan associations in the United States between 1986 and 1995.

The rest is history.

By George Blackburne

Lending Capital For Commercial Real Estate Investors

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How To Market Your Commercial Real Estate Loan Business

All too often I see small business owners missing the mark with their marketing. Sure, it’s easy to do when you specialize in a specific industry niche and you spend your time engulfed in industry sector jargon. However, it’s best to put yourself in your potential customer’s shoes and think your marketing through from their perspective, addressing their most important questions. Your customers want to be able to trust you, to know you are looking out for their interests and that you don’t just see them with Dollar Signs in your sunglasses.

Below is a sample page, perhaps good for a website, brochure, email, or letter. Why not look this over and consider how you might form your own message. Use your own voice, your own style and remember you are talking to your customer across the table for the first time. You know what questions they will ask. Show that you care, that you are working for them, and will go out of your way to get them the best rates, and great service. Here is the sample:

Commercial Real Estate Loans

Are you looking to purchase an income property such as an apartment building, small office building, or retail center? Would you like to put several rental properties in your real estate portfolio into one commercial mortgage? Wish to find a suitable piece of land and develop that property? Do you need a loan for acquisition and construction?

Do you want to buy a business property with a business on it; a restaurant, carwash, service station, laundry mat, hotel, etc.? Are you looking for a commercially zoned property with a warehouse or industrial building on it? Are you expanding an existing business and/or want to own the property under your business rather than paying the monthly lease?

Are you in the agricultural sector, looking for specifically zoned farming property; land for a vineyard, orchard, or crop such as berries, vegetables, or flowers? We have significant experience to make this happen. Our area in Southern CA has one of the best climates in the world, and incredible top soil for growing almost anything.

We can assist with all types of commercial real estate loans including government-guaranteed loans such as FHA, USDA, and HUD. If you are looking for an SBA 7(a) loan or a CDC/SBA 504 loan for commercial real estate we can get it done.

We can assist you with traditional commercial mortgages, commercial bridge loans, or commercial hard money loans. We also have lines on non-traditional sources for hard money commercial real estate loans, which are custom tailored to you needs for complicated projects outside the normal scope of typical commercial real estate loans and mortgage offerings.

— — — —

Why not try something like this? Just because the Federal Reserve has raised rates doesn’t mean you have to let new deals and new clients move to your competitors. I hope you will please consider all this and think on it.

Lance Winslow has launched a new provocative series of eBooks on Innovation in America. Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank; http://www.worldthinktank.net.

Article Source: https://EzineArticles.com/expert/Lance_Winslow/5306

Article Source: http://EzineArticles.com/10053305

Commercial Loans and the Leased Fee Estate

When underwriting commercial loans, commercial lenders need to be very careful about properties that are leased out for far more than their fair market value.  A story will make this clear.

GrandpaJack was a brilliant man.  He was also a darned fool.   Forty-five years ago, he spotted the fact that Silicon Valley on the San Francisco Peninsula was inching southward towards the cheaper land in San Jose.

Grandpa Jack therefore bought a large, vacant lot on the corner of First Street and Trimble Road, where it approached Milpitas, figuring it would be great location someday for R&D and flex space.

Thirty years later, the world was beating a path to his doorstep, begging to build and lease back a 200,000 square foot high-tech manufacturing facility.  Anxious to provide for his family for several generations into the future, Grandpa Jack leased the entire facility in 2004 to Oracle Corporation for a flat fee of $1.92 million per year ($9.6 per square foot per year).

When discussing commercial lease rates, it is customary to always speak in terms of rent per square foot per year.

Judging by his vision, Grandpa Jack was brilliant.  Judging by his choice of Oracle as his tenant, Grandpa Jack showed even more brilliance.  Oracle Corporation, the financial behemoth, sailed comfortably through the Great Recession.  Grandpa Jack’s three children got every single rent payment on time.

But Grandpa Jack made one bonehead mistake.  He leased his massive R&D building at a fixed rental rate for a whopping thirty years.  He didn’t even build in an annual CPI increase.  Today the market rent for R&D space in San Jose is $20 per square foot (per year).

We are now finally able to discuss a leased fee estate.  A leased fee estate is the ownership interest that the landlord or lessor maintains in a property under a lease, with the rights of use and occupancy being conveyed or granted to a tenant or lessee. In other words, it is the ownership interest in a leased property.

In plain interest, the property you own is leased out to someone.  What is your property worth when it is burdened or blessed with the existing lease?

Now the concept of a leased fee estate comes up most often in MAI appraisals.  A good MAI appraiser will usually only bring up the concept of a leased fee estate when the property is leased out for a long term at far under the market rate or at far over the market rent.

Now Back to Grandpa Jack:

Let’s suppose the huge R&D building was not burdened with the below-market, long-term lease to Oracle.  If it was rented out at $20 per square foot (pop quiz:  per month or per year?), the building would be worth – at a 7.5% cap rate – $40.5 million.

But the property is NOT leased out at $20 per square foot.  It is burdened with a long-term lease of just $9.60 per sf, which is less than half the market rate.  At a 7.5% cap rate, the leased fee value of the property is just $19.5 million.

“But George, what about the fact that in 15 more years the lease expires, and the owners can renegotiate the rental rate to market?”

A good MAI appraiser will take out his trusty Hewlett Packard 12C hand-held calculator and will perform a discounted present value calculation, taking into account a rental rate of $9.60 sf for 15 years and $20 sf thereafter.

Unfortunately for the heirs (Grandpa Jack passed away in 2006), the reversionary value of the property fifteen years hence, when the old lease expires, does not affect the present value of the leased fee estate as much as you might think.  It has to do with the fact that the big pop in value doesn’t happen for a long period of time.  By the way, reversionary value refers to the value of property upon the expiration of a given time period.

Another Example – It Works Both Ways

Sun-Mei Chang is a dynamic, Chinese-American woman.  Sun-Mei is always on the move, and she could sell anything to anyone.  She is a bona fide Alaskan icebox saleswoman.

She buys a closed elementary school (30,000 sf) from the county for pennies on the dollar, and then she spends just $25,000 sprucing it up a little.  Next she convinces a state-sponsored trade school to rent the property for a whopping $15 per sf.  The market rent is just $6 per sf – but like I said, Sun-Mei is a world-class saleswoman.

Then Sun-Mei applies for a loan against this property.  If the property was valued solely on an income approach, this former school would be worth a fortune.  If the appraiser is a good MAI appraiser, he should quickly spot the fact that the existing lease rate is much higher than the market.

A competent MAI appraiser would therefore submit his finished report with two different values, the value of the leased fee estate and the fair market value – assuming the big lease did not exist.  The value of the leased fee estate would be on the order of $3.8 million, but the fair market value might only be $1.52 million.

When underwriting commercial loans, commercial lenders need to be very careful about properties leased for far more than their fair market value.  Not every MAI appraiser is well-trained enough to produce a report with two different values.  The lender has to be careful not to make too large of a commercial loan because if the property comes back in foreclosure, the lender will probably only be able to lease it back out at $6 per sf.

Commercial Loans and the Relaxation of the Debt Yield Ratio

First a correction.  A few days ago, I wrote a blog article about how deflation is sweeping the world.  In that article, I mentioned that deposit rates in Germany are slightly positive.  I am pretty sure that this statement was wrong.

Listening to Bloomberg today, I just discovered that the yield on ten-yield German bunds is a negative 0.46%.  The world is deflating so fast that this yield fell by a full 0.02% in a single day.  That’s a pretty big move.  No wonder the Fed is trying to get ahead of deflation in America.

I couldn’t find the current yield on bank C.D.’s in Germany right now, but they simply must be negative because German banks are making hundreds of billions of dollars in commercial loans to large German businesses at a negative interest rate.

Holy crappola!  Is this a wild and crazy world or what?  This negative yield means that if you want the safety of loaning money to the German government, you have to pay the German government almost one-half of one percent per year for the privilege.

Now on to Today’s Training:

The Debt Yield Ratio is different from the Debt Service Coverage Ratio.

The Debt Service Coverage Ratio is a financial ratio, used when making commercial real estate loans, designed to determine if the property generates more than enough net income (typically 1.25x) to make the loan payments on the proposed loan.

The Debt Yield Ratio, in contrast, is a financial ratio, used when making commercial loans, designed to make sure that the amount of the new commercial loan never gets too large in relation to the net income thrown off by the property – no matter how low interest rates get.  This latter point is critical.

In the lead-up to the financial crisis in 2008, conduits brought amazingly low interest rates on commercial loans to prime commercial real estate.  Because interest rates were so low (in comparison to prior years) in 2005, 2006, and 2007 that investors were able to achieve historically sky-high loan-to-value ratios, sometimes as high as 80% loan-to-value!

Because the buyers of commercial real estate could now buy trophy properties with 80% leverage, thousands of wealthy investors poured into the trophy commercial real estate market.  Up-up-up went prices.  Down-down-down went cap rates.  The property valuations and the size of the loans against them went crazy.

Bam!  Then the Great Recession struck.

Down-down-down went the values of trophy commercial real estate.  Borrowers defaulted on their huge CMBS loans.  The bonds backed by commercial mortgage-backed securities (IOU’s backed by huge pools of commercial real estate loans) took horrendous losses.

After taking horrendous losses, the buyers of commercial mortgage-backed securities lost their appetite for these bonds. In 2009, the CMBS industry contracted almost out of existence.  Dozens of conduit lenders (specialized mortgage companies originating commercial loans destined for securitization) closed their doors.  It was a bloodbath.  An entire industry – the conduit industry – was almost wiped off the face of the earth.

Finally – slowly – the appetite of CMBS buyers returned, but they were determined to never again invest in bonds backed by commercial loans that were far too large in comparison to the amount of net income being generated by underlying the property.

The result was the creation of the Debt Yield Ratio.  At first, a conduit could not originate a CMBS loan with a debt yield of less than 10%.  This kept most conduit loans at less than 60% loan-to-value.

Why would any borrower be content with a $7 million loan against his office building if the loan-to-value ratio was only 58%?  The answer was that the conduits were the only lenders making non-recourse commercial loans.

Okay, life companies were also making non-recourse commercial loans, but their properties had to be breathtakingly beautiful.  Conduits, on the other hand, would make large, non-recourse, commercial loans on average-looking commercial properties.

The new wave of CMBS loans performed spectacularly in 2011, 2012, and thereafter, so the appetite of CMBS investors became ravenous.  More and more exceptions to the 10% minimum Debt Yield Ratio were made until 9% became the norm.

I am sure that conduit Debt Yield Ratios have fallen below 9%.  Does anyone out there work for a conduit?  What are conduit Debt Yields today?

This article was triggered by the rate sheet of a money center bank.  Now this bank is a portfolio lender, rather than a conduit lender, but they recently publicized a minimum Debt Yield Ratio of 5% for apartments, 6% for commercial, and 8% for multifamily.  Wow.  The market is truly ravenous for commercial loans.



Commercial Loan Tidbits

Commercial loan demand in late March and April is typically very, very weak. Commercial real estate investors don’t want to mess around with paperwork, especially when they have just finished the painstaking task of preparing their tax returns. In most cases, their complicated tax returns are not even done yet for 2020, so they have little choice but to put off shopping for a commercial loan until their tax returns are done in the mid-part of April.

The sun is also shining.  Many avid golfers are looking forward to their first rounds of golf for the year.  Many a nun has been run over by a golfer speeding to the first tee box.  Haha!

I once asked my mentor in commercial real estate finance (“CREF”) from 45 years ago, Bill Owens, what I should do when the commercial loan market slows to an absolute halt.  “Sometimes you just have to go fishing.”

Bill would actually fly to Mexico and go deep sea fishing off the coast of Baja California.  Lucky guy.  With the drug gangs rolling bags of severed heads down the middle of Mexican highways (this actually happened) in Guadalajara, I wonder if he still goes to Mexico to fish?

Why should you care if commercial loan demand is weak?  Suppose you own a business, and you have a balloon payment coming due on your commercial or industrial building in the next year.  It might make sense to apply right now, especially if 2020 wasn’t a great year for your company.

Commercial banks are very optimistic about the future.  With the passage of the whopping $1.9 trillion stimulus package, you can bet their Boards of Directors are  screaming at their Senior Vice Presidents of Loans to make some stinking commercial loans.  Commercial loans can be very profitable for the bank.

If your marginal commercial real estate loan request is the only lending opportunity available to the bank this month, your deal may suddenly look a little stronger.  Kinda reminds me of when I used to go to nightclubs as a bachelor-hound-dog 45 years ago.  I suddenly got taller (I’m only 5’5″ tall) and better-looking as last call approached.   Hey, girls can wear beer goggles too.  Haha!

If you are not working every day towards building a loan servicing portfolio, get OUT of the business. The money commercial real estate finance is in servicing!

By George Blackburne

Light Commercial Bridge Loans Versus Heavy Commercial Bridge Loans

Another Great Recession might be on point.  The mainstream business media picked up the same theme on Thursday and Friday, as the Dow lost ground. There will be some severe economic consequences from the coronavirus.

Even if COVID-19 never gets out of control in the U.S., hundreds of thousands of small businesses in China are in serious trouble, especially with tens of millions of their workers confined to their homes.  The owners of most small businesses in China have no more than four months worth of operating expenses in savings, and small businesses employ 60% of China’s workers.

And the thing is, many of these small Chinese companies manufacture parts for American companies.  As a result, the worldwide supply chain has been shaken.  We can’t manufacture our own high-value goods without many essential parts coming from China.  Container ships coming in from China are coming back only 25% full.

Clusters of COVID-19 are now out of control in South Korea (602 cases, 3 deaths), Japan (135 cases, not counting cruise ships), Italy (132 cases), and Iran (43 cases, 8th deaths).  A worldwide pandemic is a virtual certainty.

I am writing this article on Sunday afternoon.  It will be interesting to see if the U.S. stock market get hammered on Monday.

Now on today’s training in commercial real estate finance.

In this week’s FinFacts, a superb, free publication of George Smith Partners, one partner, after returning from this year’s Mortgage Bankers Association Commercial Real Estate Finance (“CREF”) Conference, wrote about the competitiveness of bridge lenders:

“Bridge Lenders:  Floating rate bridge loan spreads used to be stratified, ranging from 2% to 6% over LIBOR, depending on the transaction dynamics.  That’s so 2017 (the old days).  Now there’s a race to the bottom occurring, with lenders bunched up at 2% to 4% over LIBOR.  More and more of them are pushing to the bottom of that range.”

“So how do lenders differentiate themselves?  Deal structure, credit officers are casting a wider net (One lender even remarked: We will do some funky stuff), source of capital (mortgage REIT vs CLO execution vs leveraged debt fund), flexibility, certainty of execution (we met with senior committee members that stressed their lean and efficient approval process), and borrower costs (exit fees can be waived).” and increased leverage.  Lenders are more willing to listen to stories.  For  example:  We will look at heavier risk for strong sponsors.”

“Also, more heavy bridge loans (major renovation, unoccupied properties) are being priced almost like light bridge.  As one lender remarked: No cash flow, no problem, for the right deal.  Geographic:  Secondary and tertiary markets are being considered, and the right deals are being priced tightly.  Yet many high-yield lenders are still in business, now offering high-leverage, non-recourse construction loans or going very high up the capital stack.  The net needs to widen as nearly every lender indicated that their marching orders are to increase production over 2019.”

Okay, so what on earth is the difference between a heavy commercial bridge loan and a light commercial bridge loan? A light bridge loan is where there is only some minor renovation and/or the property is a proven location.  You may be able to negotiate a bridge loan at just LIBOR plus 2.0% or LIBOR plus 3.0%.

Examples of Light Bridge Loans:

  1. You just found a good tenant for your standing office building, but you need $350,000 to pay for tenant improvements.
  2. Your borrower’s restaurant has been a money-maker for 20 years (proven location), and the borrower needs another $1 million to expand his seating capacity by another 35 tables.

A heavy bridge loan is one involving substantial construction and/or market risk.  If you can even find an interested bridge lender, you may have to pay as much as LIBOR plus 4% or even higher.

    1. You are converting an old hotel to student housing.  All kinds of problems happen when you open the walls of older buildings (termites, asbestos, illegal wiring and/or substandard plumbing).
    2. You need $1.5 million to convert an existing, vacant retail building to a restaurant, and there is no guarantee that the market will appreciate a restaurant in this particular location.  Maybe the people located in the surrounding area don’t make enough dough to dine out often.  Maybe the new restaurant has inadequate parking or is hard to negotiate by car.  We have all seen restaurant after restaurant fail in the same location.
    3. You are converting the shell of a failed big box retail store to self storage, a popular adaptive re-use.  That’s more than a trifling of construction, plus you have risk that people don’t like two-story self-storage buildings.

P.S.  I wonder if the Chinese Communist Party (“CCP”) will survive this crisis.  The average Chinese citizen despises the tight control of the CCP, but they tolerate it because the CCP has been improving their lives annually.

What happens when the growth rate in China plummets from 6% to 7% annually to a negative number?  The largely-peaceful protestors in Hong Kong taught the Chinese people how to bring a government to its knees.  Think this is a far-fetched scenario?  Everyone was shocked at the speed at which the Russian Communist Party lost power.  Could beautiful young Chinese girls soon be sticking flowers into the gun barrels of surrounding Chinese soldiers?

Most of you are too young to remember this, but when Russian soldiers and tanks surrounded the Russian pro-democracy protestors in 1991, led by Boris Yeltsin, some beautiful Russian girl started sticked flowers in to the gun barrels of the Russian soldiers.  In less than an hour, the surrounding Russian army brigade changed sides and pointed their guns outwards, protecting the protestors.

Boys are so easy.  🙂

By George Blackburne

Commercial Loans And Modern Monetary Theory

Now that I have mentioned it, you will start to hear the term, Modern Monetary Theory, all of time.  The commentators use it a lot on Bloomberg, CNBC, and Fox Business.  The financial commentators will often just use the acronym, “MMT”.

According to Wikipedia, Modern Monetary Theory (MMT) is a macroeconomic framework that says monetarily sovereign governments should sustain higher deficits and print as much money as needed because they do not need to worry about insolvency, and inflation is a distant possibility.

The key to MMT is that the sovereign government borrows in its own currency, pays it back in its own currency, and controls the printing press to print more of its own currency.  Countries in the European Union – France, Spain, Italy, and Greece – are examples of sovereign governments that do NOT have this option.  They use the Euro, which is a currency that they don’t control.

Interesting note:

Since I started this article, Boris Johnson and his conservatives won a landslide victory in the United Kingdom.  The U.K. will be leaving the European Union (Brexit) on January 15th.  The pound has soared!  Apparently investors think that the Brits are going to do better financially without Europe.

The Japanese, in contrast to EU members, can borrow in yen and repay their debt in yen.  If the debt service on Japan’s debt, denominated in yen, becomes unbearable, Japan can simply print hundreds of trillions of yen, buy back their own debt, and retire it permanently.

In other words, as long as inflation remains tame, the U.S. should go ahead and pass a $1.5 trillion infrastructure spending plan, even if the deficit soars to $2.5 trillion annually.  We spend the money to repair our bridges and upgrade our airports.  Then we take another look at inflation.

If inflation is still tame, we could increase military spending by another $1 trillion and bolster our missile forces, bolster our missile defense forces, and greatly expand our Space Force.

I read a military journal article this morning where one of our leading air force generals (just forced into retirement) begged the country to prepare for war in space.  China is already working on a space mothership (think of it as an aircraft carrier in space – see the picture above) from which attack space ships will fly out to destroy our constellation of satellites.  “… and you don’t believe we’re on the Eve of Destruction?”  (Famous hippie song from the 1960’s.)

So go ahead and spend that $1 trillion on defense and then take another look at the inflation rate.  Has inflation increased from 1.75% to 4.5%?   In that case, maybe the country dials back on any extra MMT spending.

Is it a good idea?  I am convinced that a world war is coming, so I am all for it.  If we can spend enough in space and on missiles, maybe China won’t attack us.  I’ll gladly live with some inflation, if that means that my precious kids (and now grandkids) get to live.

But absent a war, is it a good idea?  If Trump died and made me king, I would use the power of the printing press to buy up many of the nicest apartment buildings, office buildings, and shopping centers in Rio de Janeiro, Jakarta, Seoul, Ho Chi Min City, Bangkok, and Manilla.  I would intentionally devalue the dollar to make our manufacturing companies more competitive.  In the process, the rents from those trophy properties would be sweet.

But you know that’s not what is going to happen.  Opportunists like Andrew Yang are going to promise to give away $1,000 per month to every American voter, in order to rise to power.  We are going to teach our people – instead of working hard to advance themselves – to stay home all day, take drugs, and play video games.

In the words of Alexander Fraser Tytler, the famous Scottish historian, in 1807:

“A democracy cannot exist as a permanent form of government.  It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.  The average age of the world’s greatest civilizations has been 200 years.  These nations have progressed through this sequence:  From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage.”

He made this famous observation way back in 1807.  Our 200 years of power are long past.  Hail Chairman For Life, Xi Jinping!  It’s important to get in good graces with our future rulers early.  Haha!

By George Blackburne

Please Pay Special Attention Commercial Real Estate Brokers

Why do almost all gas stations now have convenience stores?  Answer:  A convenience store is an extra profit center.  The gas pumps pull in the customers, and while they are waiting for their tanks to fill, the convenience store sell them sodas, snacks, lotto tickets, and hot dogs.

Right now your real estate web site is like a gas station without a convenience store.  You are leaving all kinds of dough on the table.  Over the next five to six years, C-Loans.com could pay you enough dough to pay for a year of college for one of your kids.

But what I am asking you to do is a lot of hard work.  You might have to spend up to… gasp… two whole minutes on this project.  It’s exhausting work earning that kind of money.  Phew.

Just send an email to your web site guru.  “Hey [Steve], please create three new hyperlinks on my home page.  Please find a place to put one at the top, one in the middle, and one at the bottom.  The top link should say, ‘Commercial Loans’.  The middle link should say, ‘Commercial Real Estate Loans’.  The bottom link should say, ‘Commercial Financing’.  Please point all three links to C-Loans.com.”

Just cut and paste the above paragraph and send it to your webmaster.  Voila.  You’re done.  You’ve just added a convenience store to your gas station – a new profit center.

Now here is what happens:  C-Loans is programmed to automatically capture the URL of the referring site and print it at the bottom of our loan application.  It’s automatic.  We don’t have to think.  Bam!  Right there at the bottom of our loan application are the words, “This loan was referred by billsmithrealty.com.”

When the deal closes, we look up the owner of Bill Smith Realty and send him a check for 12.5 basis points.  That’s what happened a few years ago with Alan Dunn, the owner of a site named SpyderCube.  We ended up closing a $17 million commercial loan for Alan’s customer, so we sent Alan a check for a whopping $21,250.

Alan was even asleep when he made that $21,250.  The deal came in late at night.  Can you imagine the thrill of getting a call, “Hey, Alan, I have some good news for you.”  Hot snot, I’ll bet that we made his whole day.

And here’s the thing.  That potential borrower is your referral forever.  Maybe the first deal falls out, but the borrower comes back and applies for a different loan two years later.  You still get paid.  He’s your guy.

Here is another wonderful thing.  C-Loans is not a commercial real estate lender, limited to its own lending programs.  C-Loans does not make loans.  C-Loans.com is merely a  commercial mortgage portal where borrowers can submit their deals to 750 different lenders.  We have life companies, conduits, banks, credit unions, savings banks (S&L’s), REIT’s, hard money lenders, SBA lenders and USDA business and industry specialty lenders.

C-Loans lenders will make permanent loans, construction loans, bridge loans, SBA loans, USDA B&I loans, mezzanine loans, preferred equity investments, SBA construction loans, and USDA construction loans.  A link to C-Loans gives you a chance to earn a big referral fee on ANY kind and size of commercial real estate loan, from $100,000 to $500 million.  Yes, our conduit lenders have made loans of this size on chains of major hotel franchises or portfolios of office buildings.

Important note:  C-Loans usually earns at least 37.5 bps. per closing, so we can afford to pay you 12.5 bps.  On deals of greater than $5 million, our best-rate lenders only pay us 25 bps., so your referral fee would be 8.33 bps.

“Gee, George, this all sounds great and everything, but how do I know that you won’t cheat me?”  For one thing, we didn’t cheat Alan Dunn, and there was no way he would have known that we had closed that big deal.  I am also an attorney, licensed in both California and Indiana.

Lastly, my hard money commercial lending shop, Blackburne & Sons, has been in business for 40 years now.  The average daily balance in our trust accounts is $400,000; and after a loan payoff, there could be several million dollars in that account.  If I ever decide to go bad, I am gonna steal the millions in that trust account, not your stinky ‘ole referral fee.  🙂  Fortunately, I have managed to resist the temptation for 40 years.  I am proud to say that both of my sons and I are Eagle Scouts.  There was a time when that mattered.

But hey, while 100,000 people in this industry may know me, I might be a complete stranger to you.  Trust but verify, some would say.  So here is my proposition:  If you create five or more commercial financing links across your real estate web site, we will create for you a special partner link.  With a special partner link, you will get a copy of every deal that comes from your site.  Just create the five (or fifteen) commercial loans links on your real estate website, and we will create this special partner link for you.  It takes us about 30 minutes to create such as a partner link, so we obviously don’t want to have to create the link unless we are getting some really good visibility.

Now back to the good stuff.  After awhile, you are going to have several hundred of your loan clients registered on C-Loans as your guys, and you are likely to close two or three deals every year going forward.  Every year going forward – think about that.  You will have your old referrals and then you will add to that base of potential referral fees even more clients every year.

And if you create at least five links on your website to C-Loans, you can also use your partner link to imbed commercial real estate loan links in your regular newsletters to your clients.  Remember, with a partner link, you get a copy of every commercial loan application generated by your site or one of your newsletters.

I could see a time when one of your clients applies for a purchase money loan using C-Loans, and you suddenly realize that he is looking to buy another apartment building.  (Please read that last sentence again.)

Important note:  We cannot track links inside of newsletters because there is no referring URL.  To embed commercial financing links in your newsletters, you will need for us to prepare a partner link for you.  Therefore, please create your five referral links to C-Loans.com right away and then contact Tom Blackburne at 574-210-6686.

Now some real estate brokers only like a little bit of referral income, so they only create one Commercial Loans link to C-Loans.com on their home page.  Smarter real estate brokers like to make a TON of referral fee income, so they put three links to C-Loans on every one of their interior web pages.

The way you can easily do this is to have your website guru edit the template of your pages to add these three links.  Then, whenever your webmaster creates a new web page for you, the links automatically appear on the new page, without anyone having to think about adding them.  The more links to C-Loans, the more chances you have have of earning a $21,250 referral fee.

In conclusion, I urge you to add a convenience store to your gas station.  Just cut and paste the following message into an email to your webmaster:

“Hey, [Steve], please create three new hyperlinks on my home page. Please find a place to put a link at the top, one in the middle, and one at the bottom. The top link should say, ‘Commercial Loans’.  The middle link should say, ‘Commercial Real Estate Loans’.  The bottom link should say, ‘Commercial Financing’.  Please point all three links to C-Loans.com.”

Now, the really, really smart guys will add the following:

“In addition, [Steve], would you please edit the template you use to create new web pages for our site to add these three links (top, middle, bottom)?  This way, the next time you create a new web page for us, the new page will automatically contain these three links.”

Voila!  You have now added a convenience store to your gas station.  I said it would take a whopping two minutes, and you did it in just 97 seconds.  🙂

By George Blackburne

Questions:  Call Tom Blackburne at 574-210-6686.


Commercial Loan Rates Being Quoted By Banks Today

This is going to surprise you, but commercial banks, credit unions, and federal savings banks (the old S&L’s with a Federal charter) all quote pretty much the exact same interest rates and terms on commercial real estate loans.

This is true for huge commercial banks in Los Angeles and for little credit unions in Maine.  No matter where the property is located, as a commercial loan broker, you will always know what to quote.

To be clear, we are talking about commercial real estate loans on standard commercial rental properties, like office buildings, shopping centers, retail buildings, and industrial buildings.

The rates and terms will be a little more scattered for multifamily properties.  Some banks, especially savings banks, love-love-love apartment buildings.  They will quote delicious interest rates and terms.

Smaller commercial banks are less enamored with apartment buildings because their owners seldom keep huge deposits in their company checking accounts.  If they have cash, they immediately go out and buy another building.  In contrast, widget manufacturers might keep large balances in their bank for the the new bank to win.  Banks, especially smaller ones, are all about deposit relationships.

Before we get into the interest rates being quoted by banks on commercial loans today, let’s first talk about terms:


Most banks will quote a 25-year amortization.  A twenty-year amortization is to commercial loans what a 30-year amortization is to home loans.  It’s the norm.

If the property is older than, say, than 35-years, the bank might insist on just a 20-year amortization because the property is getting pretty long in the tooth.  The building is not going to last forever.  The bank needs to eventually get their principal back before the termites stop holding hands.


Most commercial banks today will give you a ten-year term on your commercial loan.

Fixed on Adjustable:

The typical bank commercial loan is fixed for the first five years.  There is one rate readjustment at the beginning of year six, and then the rate is fixed for the remaining five years.

When the rate readjusts, what is adjustment tied to?  In other words, what is the index and what is the margin?

This is going to surprise you, but most banks don’t say!  What????  The promissory note will simply say, “The rate will readjust to whatever the bank is quoting at the time for similar commercial loans.”

What if the bank tries to raise the interest rate to 20%?  This could actually happen, if the dollar were to suddenly collapse.

In such a case, the bank would give you a window in order to pay off their loan, without penalty, with a new loan from a cheaper lender.  A window is a period when there is no prepayment penalty.  Most commercial real estate loans from banks give the borrowers a 90-day window after a rate readjustment.

Prepayment Penalty:

Banks differ on prepayment penalties.  The penalty could vary from 1% to 2% during the entire 5-year term, to a declining prepayment penalty of 3% in year one, 2% in year two, 1% in year three, and perhaps 1% in years four and five.

So what do you quote on a $300,000 permanent loan on a little retail building in Bum Flowers, Alabama?  I want you to quote 3%-2%-1% and none thereafter.  No bank is going to refuse to make a good commercial loan if it can get a declining prepayment penalty of 3%-2%-1%.

Will a bank ever make a commercial real estate loan with absolutely no prepayment penalty?  The deal would have to be very, very good to get them to waive it completely.

Interest Rate:

Banks all quote pretty much the exact same interest rate – between 2.75% to 3.5% over five-year Treasuries, depending on the quality of deal (more on this below).

Five-year Treasuries as of January 22, 2021 were 0.44%.  Therefore the bank is going to quote you between 3.19% to 3.94% today.

You can always find the latest commercial real estate interest rates and Index values by going to our wonderful Resource Center.  Be sure to bookmark this wonderful reference source.

Quality of the Deal:

Here are the factors that affects bank interest rates on commercial loans –

    1. How much cash does the borrower keep in the bank?  The more liquid your borrower, the lower his interest rate.
    2. How old is the property?  The younger the building, the lower the rate.
    3. How gorgeous is the building?  The prettier the building, the lower your rate.
    4. How desirable is the location?  If your building is located on the bets street in town, you may get the bank’s very lowest commercial loan interest rate.
    5. Assuming you are at a bank of suitable size, the larger the loan, the lower the rate.  Big banks make big commercial loans.  Small banks make small commercial loans.  Match the size of your bank to the size of your deal.
    6. How close is the building to the bank?  The further your building is from the bank, the higher the interest rate you will probably get.

Moral of the Story:

Always apply to a local bank.

By George Blackburne

How To Succeed As A Commercial Loan Broker

Here are some tips on how to succeed as a commercial loans broker:

Tip #1:  Never waste one nanosecond on international loans.  International loans never close.  The problem is one of taxation.  No country in the world wants a bunch of foreign banks to come into their country and take all of the good loans, thereby weakening their own banks.  As a result, if a foreign bank makes a loan across international borders, the host country will tax their interest income at some ghastly rate – higher than 30%.  As a result, if you need a loan in Mexico, and no local bank will do the deal, you need to use the Mexican subsidiary of some foreign bank; Deutsche Bank of Mexico or Citibank of Mexico.  If the subsidiary bank is chartered in Mexico, the tax laws aren’t quite as brutal.  I still would never waste time working on international loans.  You could work on international commercial loans for ten years, full-time, and never close a deal.

Tip #2:  Commercial banks, credit unions, and savings banks (former S&L’s) make 75% of all commercial real estate loans these days.  Start there.

Tip #3:  Big banks make big commercial loans, and small banks make small ones.  Therefore match the size of your deal to the size of the bank.

Tip #4:  Stay local.  Banks greatly prefer to make commercial loans close to one of their branches.  The closer the bank, the more likely it is that Loan Committee will approve the deal.

Tip #5:  It’s easy to find commercial banks and credit unions in Maine, even if you are located New Mexico.  Simply go to Google Maps and type in the address of your commercial property in Maine.  Click the “Nearby button” and then type in “banks.”

Tip #6:  The smaller the commercial loans, the more likely the deal is to close.  Small commercial loans close.  Larger deals?  Not so much.  I would much rather have a pipeline of three small commercial loans than a pipeline of thirty commercial loans larger than $3 million.  Small commercial loans close.

Tip #7:  This is going to sound terribly self-serving, but AnalytIQ Group loves to close small commercial loans in remote areas.  You will have much less competition working on these small or remote commercial properties, compared to competing against fifty other commercial loan brokers in your local big city.

Tip #8:  When you market for commercial real estate loans, you will speak daily with four or five wealthy real estate investors every single day.  Even if they never send you a package, be absolutely sure to keep their contact information and the following additional data:  (1) month of year, e.g. June of 2021; (2) the loan amount; (3) type of loan (first mortgage, construction loan, etc.); (4) property type; (5) city where the property is located; and (6) state where the property is located.

Tip #9:  Someday you will want to send out the following, individually word-processed letter:  “Dear Dr. Su:  You may recall that in June of 2021, ABC Commercial Mortgage Company had the pleasure of working on a $1,300,000 first mortgage on your medical office building in Kansas City, Missouri.  I am writing to you today about earning 8% to 10% interest in first trust deeds.”

Tip #10:  Your ultimate goal in this business is to someday become “the lender” and be able to approve your own loans.  The real money in commercial mortgage finance is also in servicing income.  Commercial mortgage bankers service their own loans, and they are rich.  Commercial mortgage brokers do not service their loans, so when the inevitable real estate depression hits, they are crushed.   Servicing income continues, even during real estate depressions (45% declines).

Tip #11:  Don’t get too excited about construction loans.  They seldom ever close for commercial loans brokers because if the developer had enough skin in the game (equity in the deal), some local bank would have made the deal in a nanosecond.  Banks love construction loans, so if no local bank will do the deal, there is a big problem.

Tip #12:  Don’t waste money advertising in newspapers, online magazines, or on Google Adwords.  You will spend a fortune and never close a deal.

Tip #13:  The best commercial leads come from referrals.  Build yourself a newsletter list of commercial bankers, commercial brokers (commercial realtors), property managers, other commercial lenders, residential mortgage brokers (on a referral fee basis only), residential real estate brokers, attorneys (who know you), CPA’s (who know you), and estate planners (insurance agents).

For More Information Or Help On Closing Commercial Loans Contact AnalytIQ Group.

By George Blackburne

SOFR – The New Commercial Loan Index That Is Replacing LIBOR

Last week I blogged on the problems associated with LIBOR.  It is abundantly clear that something needs to be done to replace the LIBOR index as a measure of market interest rates.

I pointed out that $350 trillion in financial instruments worldwide are currently tied to LIBOR.  Regardless of which index the authorities end up using to replace LIBOR, the switchover is going to be tricky.  I can see in my mind’s eye some greedy attorney affixing a bib and rubbing his hands together in glee.  Yum.

The index that will be replacing LIBOR, at least here in the U.S., is the secured overnight financing rate (SOFR).  The secured overnight financing rate is a benchmark interest rate for dollar-denominated derivatives and loans.  The Federal Reserve Bank of New York began publishing the secured overnight financing rate (SOFR) in April 2018 as part of an effort to replace LIBOR.

The daily secured overnight financing rate (SOFR) is based on actual transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets.

Photo by Andrea Piacquadio from Pexels

Benchmark rates, such as the secured overnight financing rate (SOFR), are essential in the trading of derivatives—particularly interest-rate swaps, which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs.

Interest-rate swaps are agreements in which the parties exchange fixed-rate interest payments for floating-rate interest payments. In a “vanilla” swap, one party agrees to pay a fixed interest rate, and, in exchange, the receiving party agrees to pay a floating interest rate based on the secured overnight financing rate (SOFR)—the rate may be higher or lower than SOFR, based on the party’s credit rating and interest-rate conditions.

In my earlier blog article, I pointed out that LIBOR had become the rate at which banks do not lend to each other because most banks are up to their gills in liquidity.  LIBOR had become nothing more than a guesstimate.  SOFR is therefore preferable to LIBOR since it is based on data from observable transactions.

Unlike LIBOR, there’s extensive trading in the Treasury repo market—roughly 1,500 times that of interbank loans as of 2018—theoretically making it a more accurate indicator of borrowing costs.

Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020.  This transition is expected to increase long-term liquidity, but it also may result in substantial short-term trading volatility in derivatives.

While SOFR is becoming the benchmark rate for dollar-denominated derivatives and loans, other countries have sought their own alternative rates, such as SONIA and EONIA.

Time will tell whether SOFR is a suitable replacement for LIBOR.  The difference between the two indices was that LIBOR was based on unsecured loans between banks, whereas SOFR was the rate that banks would loan to each other, but only if such loans were backed by rock-solid collateral.

What is going to happen if a Chinese destroyer trades missiles with an American destroyer?  Talk about “living in a powder keg and giving off sparks.”  Such an event could easily trigger World War III.

Suddenly the investment world goes into a risk-off mode.  Corporate bonds and stocks would likely plummet, while Treasuries and gold would likely soar.  Because SOFR is based on well-secured, inter-bank loans, SOFR might not increase that much.

At the same time, the demand for non-US-government debt will almost certainly plummet.  Yields on investment grade bonds could soar to over 20% in a matter of 48 hours.

What damage will be done to the U.S. financial system because SOFR materially understates real interest rates in the system?  Remember, over $80 trillion in financial instruments are already tied to SOFR.  I dunno; but it can’t be good.

My own company, Blackburne & Sons, will always be in the market – even during war time – to make commercial real estate loans.

That being said, the Company is moving more into the syndication business.  We are putting together syndicates to buy income-producing properties for all cash.  In other words, there will be zero debt.  That is where everyone should be if war does break out – trophy properties that are owned free and clear.

By George Blackburne

Commercial Real Estate Lending Case Looking For an Expert Witness

The opposing side is claiming that obtaining an MAI appraisal is not enough when making a commercial real estate loan.  They are claiming that every commercial lender should obtain two additional broker’s professional opinions, in addition to the expensive MAI appraisal.

If you currently work as a commercial real estate loan officer or as a senior commercial real estate lending executive for either (1) a commercial bank; (2) a credit union; (3) a nonprime ABS/Wall Street lender, such as Silverhill, Cherrywood, Velocity, etc.; or (4) a hard money commercial lending shop, you might be a good candidate to testify in this case as an expert.

Sorry, guys, but the testimony of a typical commercial loan broker might not help, unless have been an unusually successful commercial loan broker for more than twenty years.

The good news is that you will almost certainly not have to travel anywhere.  In this time of COVID, the entire case will probably be held using Zoom, so we are just talking about three or four hours of depositions and testimony before a computer screen.

Obviously you will receive an expert witness fee for your time, and having testified as an expert witness looks great on a resume and your website.

Will you serve a good cause?  If so, would you kindly write to me at the email address below, telling me of your current employment, your commercial real estate lending experience, and to what you might testify on the subject of the standard of care for commercial real estate lenders in connection with MAI appraisals.

I receive on average 1,350 emails per day, so it is critical that your Subject line please read exactly as follows, “Expert Witness.”

Thank you.

George Blackburne III, Esq.

By George Blackburne

Where Debt Funds Get Their Dough To Make Commercial Bridge Loans

Some more green shoots are visible as the bridge lenders are starting originations also.  The warehouse lending market (big banks lending to debt funds) has started up again, with more cautious leverage.  The warehouse lenders will also monitor loan collateral more closely.

The difference between a commercial mortgage banker and a commercial mortgage banker is that commercial mortgage bankers service many of the loans that they originate, normally for life companies.

The money in commercial real estate finance (“CREF”) is in loan servicing fees.  As I often say, “It’s the loan servicing fees, silly.”   An easy way to remember this is that mortgage bankers are rich, and mortgage brokers are poor.  Want to start earning huge loan servicing fees?

So where do debt funds get their dough their large commercial bridge loans.  We are talking here about bridge loans from $5 million to $100 million.

The general rule is that the sponsors of a debt fund will put up several million dollars of their own dough.  Then they will go out to wealthy individuals that they know, using a private offering, to raise, say $200 million.  They will make, say, $160 million in bridge loans.

Then they will go to a commercial bank and pledge the first mortgages in their portfolio for a $200 million to $250 million line of credit, giving them $400 million to $450 million in lending capital.

As the debt fund makes a profit, some of the earnings are retained as equity, giving the debt fund the ability to borrow even more.

But where do the sponsors of the debt fund go to raise their original $200 million?  Who invests equity into a debt fund?  The answer is mostly wealthy investors, family offices, hedge funds, and opportunity funds.

But what is a hedge fund?  A hedge fund is a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains.  Investopedia defines a hedge fund as an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.

There are two cool things about a hedge fund.  First of all, these public offerings do NOT have to be registered with the SEC.  Registration is a phenomenally expensive process, required before a company can go public, that involves extensive audits going back several years and immense legal documents.  The process can take almost two years, and the up-front cost is well in excess of $1 million  There are also ongoing legal costs of another $1 million per year.  Yikes.

Now remember, hedge funds do NOT have to be registered.  Why?  Because every investor in a hedge fund needs to an accredited investor, i.e., have a net worth, exclusive of his personal residence, of at least $1 million.  The SEC assumes that accredited investors are either smart enough to understand the risk or can afford to pay an advisor.

The second cool thing about a hedge fund is that a hedge fund can publicly advertise for more investors.  They just need to make sure that every investor is accredited.  This freedom to advertise is a huge deal.

So what is an opportunity fund?  An opportunity fund invests in companies, sectors or investment themes depending on where the fund manager anticipates growth opportunities.  In plain English, the manager invests wherever the opportunities lie.

Important note:  Opportunity funds often buy shares of stock in companies, known as equities.  In contrast, most hedge funds invest primarily in debt instruments.

Another difference between a hedge fund and an opportunity fund is that hedge funds investments are not publicly-traded investment instruments.  Opportunity funds, in contrast, are public offerings, offered to the general investing public.  In other words, you don’t have to be accredited to invest in an opportunity fund.  Interests in opportunity funds are typically offered by insurance plans, mutual funds, and other investment firms.

Some opportunity funds focus on real estate itself, REIT’s, and real estate debt instruments, such as mortgages, debt funds, mezzanine debt, and preferred equity.

Another concept to grasp is the concept of one fund investing in another fund.  A hedge fund might invest in a debt fund.  An opportunity fund might invest in a debt fund.  Therefore most debt funds are a fund of funds.

Now where the debt fund makes its dough is that it can often borrow for as little 3.5% to 4.0% and then make loans at 6% to 9%, plus loan fees.

Clearly debt funds are leveraged, and if the bank holding its credit line gets freaked out and calls its line of credit, the debt fund could be forced into liquidation.  The recent report by George Smith Partners that the warehouse lending market is loosening up is great news for debt funds and the availability of large commercial bridge loans.Commercial Mortgage Rates Today:

Here are today’s commercial mortgage interest rates on permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans.

Be sure to bookmark our new Commercial Loan Resource Center, where you will always find the latest interest rates on commercial loans; a portal where you can apply to 750 different commercial lenders in just four minutes; four HUGE databanks of commercial real estate lenders; a Glossary of Commercial Loan Terms, including such advanced terms as defeasance, CTL Financing, this strange new Debt Yield Ratio (which is different from the Debt Service Coverage Ratio), mezzanine loans, preferred equity, and hundreds of other advanced terms; and a wonderful Frequently Asked Questions section, which is designed to train real estate investors and professionals in the advanced subject areas of commercial real estate finance (“CREF”).

By George Blackburne

How To Get Commercial Loans in This Crisis

Wrap your head around the concept that every business owner in the entire country needs cash right now.  His bank is definitely not going to loan it to him.  Banks today are terrified.  Here is exactly how to find some small commercial real estate loans during this Coronavirus Crisis.

I want to emphasis the word, “small” commercial loans.  Small commercial loans close.  Commercial loans larger than $1.5 million have a closing rate that is 1/20th of smaller deals.  One-twentieth (1/20th)!  You are foolish to work on commercial loans larger than $1.5 million right now, when every large commercial lender in the country is hunkered down in his bunker.

Go to Google Maps and type in the address of your office.  You will notice on the map a number of businesses plotted close to your office.  Ignore the big businesses, like the huge car dealerships and the huge national banks, like Chase.

Then call them up and ask to speak with the owner.  At first the receptionist might try to protect him from you, thinking that you are a salesman.  Explain to her that your company loans money to businesses, and right now her boss’ business almost certainly needs money.  You might also mention that you are located right around the corner from her boss’ business.

Perhaps the first time you will be sent to voicemail, but that’s okay.  Make your pitch and leave your phone and email address.  You might call the receptionist back and explain that you left your name and number on his voicemail; but if she will please give you her boss’ name and email address, you can send him more information about a coronavirus business support loan.

I just invented that term tonight.  Sounds pretty good, huh?  A coronavirus business support loan.  If the receptionist fights you, you might politely remind her that her job might depend of her boss getting some business support cash right now.

Instead, focus on the small restaurants, the mobile home parks, the auto repair shops, the hairdressers, the RV parks, and the little retail shops.

Now the first time you reach out to the boss of the auto repair shop, he might not respond.  Keep leaving messages.  Make a call list, and try to call thirty small, nearby businesses every day.  Explain that your mortgage company is located right just down the street, but that you are working from home right now due to the crisis.

Send the business owner a new email every four days, personally addressed and referencing his particular business.  “Hey, Steve, this is Don from Jackson Mortgage, right around the block from you.  I drive by your auto repair shop there on Madison Avenue almost every day.  You must need cash right now, and I may be able to help.”

As the days go by, slide left and right on Google Maps to find even more businesses to solicit.  It is important that your potential customers – and their receptionists – understand that you are located very close to them.  You are not some call center located in the Philippines.

When you get a deal, please do NOT call or email me.  I’m retired.  Phew!  Stressful times.  Haha!  Instead, please call Alicia Gandy, our largest commercial loan originator, at 916-338-3232 x 310.  We call Alicia our Loan Goddess.  Yes, she’s that good.  You can also call my wonderful, first-born son, George Blackburne IV, at 916-338-3232 x 314.

Remember, because you know Blackburne & Sons, you know one of the only conventional commercial lenders in the entire country still making commercial real estate loans.  We just closed a $1.65 million commercial loan on a hotel in the heartland on Friday.

Final lesson:  Alicia Gandy – we call her our Loan Goddess – will be absolutely killing it over the next two years.  Her fastest and best service will go to those commercial loan brokers who brought her deals when the market was saturated with competing hard money mortgage funds.  These loyal commercial loan brokers have a relationship with her.

Those competing hard money mortgage funds are all gone now – along with the dinosaurs and the dodo birds.  Going forward, you also need to develop a relationship with Alicia and George IV, so they will be especially loyal to you when the proverbial stuff hits the fan.

Remember, Blackburne & Sons put together a fresh syndicate* of wealthy private mortgage investors on every deal.  There are always savvy investors willing to invest when blood is running in the streets.  It’s just a matter of price (interest rate).  Therefore, we were able to stay in the market every single day of the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

We are a small family company, and only a handful of brokers know us.  That’s huge for you!  So get out there and feast.  Every business owner in America needs money right now.

Hard money mortgage funds rely on fresh deposits to make new loans.  When the financial markets are in turmoil, not only do new deposits dry up, but existing investors line up to withdraw.

Remember, every business owner in America needs money right now.

Banks Stop Making Commercial Construction Loans New Construction Is Doomed

Are any of you guys savvy stock pickers?  If so, you might want to consider shorting those companies which provide services to the construction industry.  For example, those companies that manufacture, deliver, and/or set up huge construction cranes are likely to face some tough years ahead.

Why?  There may be very little new commercial construction – apartments, office buildings, shopping centers, residential subdivisions – over the next three years.

The reason why is because the banks have stopped making new commercial construction loans.  Banks are terrified right now, and the first thing that banks do when they get scared is to stop all commercial real estate lending.

This lending freeze is especially true of commercial construction loans.  I have lived through three commercial real estate crashes in my forty years in commercial real estate finance (“CREF”) – the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  Each time commercial real estate declined by almost exactly 45%.  Remember that number – 45%.  Commercial real estate may decline by 45% again as a result of this Coronavirus Crisis.*

It’s almost like a game of musical chairs.  Whichever banks are caught with construction loans outstanding are the ones that take the largest losses during the commercial real estate crashes that seem to happen about once every twelve years.

It is important to grasp the concept that local commercial banks make 95% of all commercial construction loans.  Construction loans are are funded gradually, as the work progresses.  If you just gave a developer $5 million to build an apartment building, he’s likely to skip the country, along with Lola La Boom-Boom, to some sunny beach to South America.

Because Lola looks awfully good in a string bikini, we simply cannot trust Don Developer with all of the money at once.  Instead, the proceeds of the construction loan are paid directly to Don’s subcontractors, and they are paid only after the subcontractors have correctly completed their work.  The bank has to sign off on this work too, after it has made a progress inspection.  A progress inspection is a quick inspection by a bank employee to verify that certain construction work has been properly completed.

Every ten or fifteen days the bank has to send a loan officer out to the construction site to take a look at the progress of construction.  The subcontractors will be clamoring to get paid.  Some huge New York bank, for example, couldn’t possibly fly a loan officer all the way out to Phoenix every two weeks to make these inspections.  This is why commercial construction loans are almost always made by local banks.

“But George, if the banks are too scared to make construction loans right now, why can’t some other type of enterprising commercial lender start making them?”

There are several problems with this.  First of all, banks offer construction loans at rates as low as 4.25%.  I actually had to look up the current rate on commercial construction loans for this blog article, and do you know where I went?  I actually went to our new Commercial Loan Resource Center, which always shows you the latest interest rates on commercial real estate loans.  Haha!  If you have not checked out our new Commercial Loan Resource Center, you are really missing out.  Totally free.

A competing commercial real estate lender (private money lender) might have to charge 8% to 11% for a construction loan, and that higher interest cost would cut deeply into the developer’s profit.  An extra 4% interest on a $5 million construction loan is real money.

The second problem is that construction loans have to be disbursed as the work progresses.  That means that the lender has to sit on his dough, not earning any meaningful interest, until the developer is ready to draw down on his loan.  That’s not very attractive for non-bank commercial lenders (think private money lenders).

The private money lender could fund the entire loan proceeds into a builder’s control account and demand that the developer pay interest on the entire loan amount from Day 1; but this would be horribly expensive for the developer.  A builder’s control account is an independent escrow set up to hold the proceeds of a construction loan until certain work is done.

The last problem with having a private money commercial lender make construction loans is that the lender will often be located too far away to make timely progress inspections.  Suppose the lender is based in San Diego and the project is located in Phoenix.  Progress inspections would be hard… but not impossible.

It has occurred to me that a great many developers across the country have started residential subdivisions, and they personally guaranteed their acquisition and development loans (“A&D”).  They had their normal bank all primed to make the construction loan, once the horizontal improvements were in place.

An A&D loan is a loan to a developer to buy the land, to get it properly zoned, and to complete the horizontal improvements.  It’s like a pre-construction loan.

Horizontal improvements including the clearing of the land, grading of the land, compacting the land, and installing streets, curbs, water, sewer, and power.

Now imagine you’re a very good homebuilder, a responsible guy who tries not to use excessive debt or take too many chances.  You have successfully built out and sold off five previous residential subdivisions.  You have built up a respectable $7 million net worth.  You take out a $4 million A&D loan on your next subdivision.

Suddenly the Coronavirus Crisis hits, and the $4 million balloon payment on your A&D loan, which you have personally guaranteed, is due in just three more months.  Your bank notifies you that they will not be making any construction loans for the foreseeable future.  You contact two dozen other banks, and they all say the same thing.  “Quick, Jack, what do you do?”  (Famous movie line.  Can you name it?  Hint: The bad guy lost a finger defusing a bomb.)

I think there is a real opportunity for some mortgage funds, if any of them have survived, to fund the completion of this project for the developer and to charge him an equity kicker of an absolutely insane percentage (85%?) of the profits.  What choice does the developer have?  He personally guaranteed the A&D loan!  He simply must get out from under that personal guarantee.

An equity kicker is additional interest, in addition to the nominal interest rate, that takes the form of a share of the increased value of the property or a share of the profits upon sale.  A common equity kicker might be 10% to 30%.  The nominal interest rate is the interest rate stated or “named” on the note.


If your brother-in-law is a union carpenter, he would be smart to apply right now for a job delivering goods for Amazon or Wal-Mart.  His construction job is not coming back.  There will be very few commercial construction loans funded over the next three years, which translates to very few required construction jobs.

*President Trump and the Fed are determined not to let commercial real estate fall by 45% again, so they are using massive deficit spending and even more massive quantitative easing to keep the U.S. economy from deflating like a pierced balloon.  The problem is that China is not taking similar inflationary steps.  I fear a deflationary tidal wave coming from China later this year, and that wave will impair much of Trump’s and the Fed’s inflationary efforts.  I will blog on what this deflationary tidal wave might look like later in the week.

By George Blackburne

Nearly Every Commercial Bank In The Country Is Out Of The Commercial Mortgage Market

If you need a commercial real estate loan right now, there are very few remaining commercial lenders from whom to choose.

Because of the Coronavirus Crisis, almost every commercial bank in the entire country is out of the commercial mortgage market. 

Commercial banks are herd animals, and they are easily frightened.  They are all waiting for the danger to completely pass before venturing timidly back into the market.  “Oh, my Goodness, are we going to have a depression?”  (Actually, we might.)

If you are a real estate developer, and you will be trying to get a commercial construction loan later in the year, you may really be screwed.  I just can’t see the banks coming back into the commercial real estate loan market for a very long while.

Quick Training Note:

In the first paragraph, I used the term, commercial bank, rather than just bank.  This is to contrast a commercial bank from an investment bank or a merchant bank.  Investment banks (think Goldman Sachs and Morgan Stanley) sell equity investments (stocks) and help companies to go public. 

A merchant bank is a very different animal.  Merchant banks today make very high interest rate loans (mezzanine loans, preferred equity investments, and venture equity), or they make direct equity investments in start-ups and young companies.

Merchant banks are often subsidiaries of bank holding companies and life insurance company holding companies.  They are where the super-rich owners of banks and life companies speculate and gamble in high finance.  There are probably fewer than 50 bona fide merchant banks remaining in the entire country.  If you are ever at a commercial real estate finance trade show, and some guy describes himself as a merchant banker, 99% of the time he is full of poop.

The second training note is that 95% of all construction loans are made by commercial banks.  This means that very few commercial construction loans will be made over the next three years.  If your brother-in-law is a union carpenter, working in commercial construction, he may not be working for awhile.

Okay, Back to the Destruction of the Commercial Lending Market:

Last week I wrote that the asset-backed securities (“ABS”) market is drying up.  This means ABS commercial lenders, like Silver Hill, Velocity, and Cherrywood, are likely to remain out of the commercial loan market for a very long time.

CMBS bonds – investments secured by large first mortgages on shopping centers, office towers, and industrial centers – have taken a beating since the start of the Coronavirus Crisis.  I think the plunge in CMBS bond values must be more than 20%.  I can’t see bond buyers rushing back into a low-yield market, where they just lost 20% of their principal.

As a result, no new CMBS loans are being closed… at all… period.  The CMBS industry never completely recovered from the Great Recession, and this new setback may leave the industry without even the slightest wind in its sails for several more years.  

It’s really a shame.  The CMBS loans written over the past five years have truly been of superb quality.  “Hey, Federal Reserve and the Treasury Department, you can buy CMBS bonds right now, save the entire industry, and earn some really nice yields, all at no real risk to the U.S. taxpayer!”

But commercial real estate income has coodies right now.  Eeeuuu.  Don’t touch it.

The abhorrence of any type of commercial real estate income is so bad that Freddie Mac and Fannie Mae, in their SBL apartment loan programs, won’t let their underwriters use one penny of income from any commercial units.  Let me explain this more clearly.

SBL stands for Small Balance Loans.  Both Fannie Mae and Freddie Mac have competing apartment loan programs with terrific, low interest rates.  Their Small Balance Loan programs are for apartment loans of between $1 million and $7 million.

Many apartment buildings in big cities are built as relative high-rises, and they have retail units on the ground floor.  Perhaps one of the retail units will have a convenience store, a hairdresser, or a clothing store.

This type of building, with retail units on the bottom floor and apartments above them, is known as a mixed use building.  Mixed use does not mean a mixed combination of office and retail units, nor does it mean retail units on the street and self storage units in the back.  That is known as a mixed commercial center.

Historically, Fannie Mae and Freddie Mac will finance mixed use buildings, as long as the income from commercial units does not exceed 20% of the total scheduled income.  But no longer.

While Fannie Mae and Freddie Mac will still finance mixed use buildings, they will not use even one penny of scheduled commercial income.  The deal has to fly based solely on the income coming in from from the residential units.  In other words, they will only go around 12% loan-to-value on mixed use properties right now.  I’m kidding, of course, about the 12% LTV.  They might even go 13% LTV.  Haha!

Income from commercial real estate has coodies.  Eeeuuu!

But then the bombshell dropped this week about hard money lenders.  With the banks, the CMBS lenders, and the ABS commercial lenders out of the market, you would think that the hard money lenders would be making a killing.

A dear friend of mine, a fellow old veteran, read to a list to me this week of twenty-one of the largest commercial hard money lenders in the country that had either dropped out of the market or completely closed their doors.  The list was a veritable bloodbath.

Each of these failed commercial hard money lenders had one thing in common.  They were funds.

I have written extensively over the years that most hard money mortgage funds are almost Ponzi schemes.  In order for the sponsor of a hard money mortgage fund to survive, it needs to be constantly bringing in new deposits and making new loans.  It needs those new loan fees to make payroll and to pay for loan servicing and for the management of the inevitable foreclosed properties.

But here’s the thing.  Every twelve years or so (four times now since 1980), commercial real estate crashes by 45%.  We had the S&L Crisis, the Dot-Com Meltdown, the Great Recession, and now the Coronavirus Crisis.  Am I saying that commercial real estate will crash by 45% in this crisis?  No one knows for sure, but if history holds true to form…

So when commercial real estate crashes, the private investors in these hard money mortgage funds all line up to withdraw.   Yikes, there is no new money with which to make new loans.  Any payoff’s go to the investors lined up around the block to withdraw.  No loan fee income is flowing into the sponsor of the hard money mortgage fund.  He has no money with which to pay his loan servicing, property management, and accounting staff.  Bam!  The company goes belly-up.

So twenty-one of the largest commercial hard money mortgage funds have gone belly-up in the past three weeks.  Who does that leave to make commercial loans?

Blackburne & Sons is one of about forty surviving commercial hard money shops that syndicate every loan that they make.  We do not use a pool to fund our loans.  We send out an announcement to our wealthy private investors, and then we assemble a syndicate of these guys to fund each loan.  Every deal uses its own syndicate, and every syndicate has different members than the deal before.

I know that this sounds painfully slow, but the truth is that with email and DocuSign, it can be a very speedy process.


Well over 98% of all commercial real estate lenders in the entire country are out of the market, and they are likely to remain out of the market for several years.

Even hard money lenders have gotten crushed.  Fortunately, about forty hard money shops that syndicate every commercial loan have survived to help out through the Coronavirus Crisis.

Heavens, the world was doing so well.  A trade deal had been reached with China.  Unemployment was at fifty year lows.  Real wages were increasing by over 3% per year.  And then, bam!  “Man plans, and God laughs.”  — old Yiddish saying

Attention Commercial Loan Brokers:

My Heavens, this is the greatest time in the history of commercial loan brokerage for you to make money.  You could make hundreds of thousands of dollars this year brokering commercial loans; so turn off Netflix and get your tail to work!

You can’t rely on referrals in this market.  Your will have to find the commercial borrowers yourself.  But here’s the thing – every business owner in the entire country needs cash right now!  It’s like shooting ducks in a barrel.

Go onto Google Maps.  Plot your home or office address.  Surrounding your office you will see scores of businesses.  Call them!!!!!  Speak to the owner.  Does he own his commercial building?  If so, you already know he needs cash.  Start gathering up his loan package and get it to a commercial hard money shop that syndicates its investors to fund deals.

Naturally, I recommend Blackburne & Sons.  Oh, my goodness, you could make soooo much money right now.  American businessmen desperately need you because you know the one place to get money.  Work!

By George Blackburne

Commercial Lending And a Market Crash

The Coronavirus Crisis is now the fourth commercial real estate crash that I have experienced in my forty years of running our family commercial mortgage company, Blackburne & Sons.  They seem to happen about once every twelve years.  Each time commercial real estate fell by exactly 45%.

To those of you who are commercial loan brokers, you should keep working!  There is some serious money to be made during these crashes.  The old, savvy real estate investors know that the best time to invest is when blood is running in the street.

The first commercial real estate crash began in 1986, when President Reagan changed the income tax laws to eliminate the tax shelters previously provided by commercial real estate.

Prior to 1986, a surgeon earning, say, $500,000 per year could shelter, say, $150,000 of his income from taxation by buying highly-leveraged apartment buildings or commercial properties.  The depreciation from these rental properties provided a paper loss – often without too much of a negative cash flow.  These paper losses could be used to reduce the amount of the physician’s taxable income.

When rich guys could no longer use depreciation to shelter their earned income – bam – the value of commercial real estate suddenly plunged like a falling rock.  By the time the crash was over, commercial real estate values had fallen by a whopping 45%.  Please remember that number – 45%.

Savings and Loan Associations (“S&L’s) were heavily invested in first mortgages on commercial properties.  By 1992, one-third of them had failed.  The Resolution Trust Corporation (“RTC”) came in, closed up 3,234 of these S&L’s, and then sold off their foreclosed apartment buildings and office buildings at fire-sale prices.

The RTC offered these buildings at just 50% of an already-depressed fair market value, but the purchase had to be for all cash.  Since 95% of banks in the country were out of the commercial real estate loan market, hard money brokers had an absolute field day.  So did the commercial loan brokers who stayed in the market, originating commercial loans for them.  (Please read that last sentence again.)

In October of 2002, the NASDAQ crashed by 78%, when most of the big dot-com stocks melted down.  Commercial real estate crashed by 45% during the Dot-Com Meltdown.  Once again, there is that magical number:  45%.

Once again, almost all of the banks pulled out of the commercial lending market in 2002, and they stayed out for more than four years.  Banks are nothing but a bunch of frightened herd animals.  Once the bottom (nadir) of the real estate cycle had been found, banks should have been making commercial loans like crazy.

During every one of the commercial real estate crashes in my lifetime, commercial real estate fell by 45%.  After hitting a bottom about two-and-half years into each crisis, commercial real estate recovered to new highs within three years.

But I was thrilled that the banks were a bunch of scarety-cats.  Surviving hard money shops (“Aye, there’s the rub,”), like Blackburne & Sons, made a killing after the Dot-Com Meltdown.  We were the only guys at an all-girls school dance.  Our best commercial loan brokers, who brought us all of our deals, made a killing too.

During the Great Recession, commercial real estate once again fell by 45%.  There is that number, 45%, again.  Just as during the previous crises, the banks immediately dropped out of the commercial loan market, and they stayed out of the market for far too long.

Hundreds and hundreds of hard money mortgage companies also closed up shop during the Great Recession, leaving Blackburne & Sons, and just a handful of others, as the last men standing.  Once again, as the only guys at the dance, we all found lots of dance partners.  We made a ton of superb quality loans.  The commercial loan brokers who brought us these deals made a fortune.

Why did so many competing hard money shops close their doors?  Answer:  Because most of them were structured as funds.  As soon as the crises hit, all of their investors lined up to withdraw their investments.  Previously, these mortgage funds made 85% of their money by making new commercial loans and earning new loan fees.  With no new money flowing into their funds, these hard money shops had no dough with which to make new loans and to earn new loan fees with which to make make payroll.

The situation is even worse today for hard money shops.  Ninety-five percent of them are structured as mortgage funds – as opposed to just 55% of them before the Great Recession.  Your favorite hard money commercial lender?  I’d be surprised if it ever made a commercial loan again.

Do you own a hard money commercial mortgage fund.  Don’t be pissed at me for telling the truth.  You’re screwed, but you can still save your company.  Announce to your investors immediately that you are now charging 390 basis points (3.9%) for loan servicing fees and property management fees.

The single best thing you can do for your hard money investors is to stay in business –  calling for late payments, force-placing fire insurance, exercising your assignment of rents, getting receivers appointed, moving properties out of Chapter 11, hiring property security companies, cleaning up the properties, winterizing the properties, renovating the properties, renting the properties, and selling the properties.

Yeah, your private investors will be pissed at you for awhile.  Remember, however, that most of then are invested in several different hard money mortgage funds.  When their other hard money shops close up entirely, their whole attitude will change.  The portfolios of these competing mortgage funds will get devastated by vandals, breaking pipes, and even worse, by greedy attorneys and their fees.  Your investors will bless you for raising their loan servicing fees and property management fees, thereby staying in business.

Anyway, now back to the needs of our commercial loan brokers.  Blackburne & Sons doesn’t use a mortgage fund.  We syndicate every new commercial loan that we make – maybe 30 investors or so per deal.

Now the sexy thing about being a syndicator is that wealthy private investors always have dough to invest.  It’s merely a matter a price (interest rate).  Therefore Blackburne & Sons intends to stay in the market, making commercial real estate loans, every single day of the Coronavirus Crisis – just like we did during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

If you are a commercial loan broker, your eyes should be seeing dollar signs right now.  The banks are now out-of-the-market, and so are 95% of the commercial hard money mortgage funds.  Commercial loan brokers by the tens of thousands have probably resolved to find another occupation.

Because of the Coronavirus Crisis, commercial real estate is likely to once again fall by 45%.  All of the banks will soon be out of the market.  They will no longer be competing against you.  You have broken into the clear.  The businessmen near you who own commercial real estate surely need money, and you know one of the few commercial lenders still making loans.   Go feast!

Contact every business owner you know who owns commercial real estate.  Do you need cash?  Seriously, who doesn’t need cash right now?

By George Blackburne

Time to Rush To Get a Conduit Commercial Loan

Conduit loans, also known as CMBS loans, enjoy a fixed rate for a whopping ten years.  Unlike a fixed-rate commercial loan from a bank, there is no rate readjustment after five years.  The rate is fixed for the entire ten years.

And with ten-year Treasuries at just 0.79%, there has never been a better time in history to get ten-year, fixed-rate conduit loan.

Conduit loans are priced at some negotiated spread over the higher of ten-year Treasuries or corresponding interest rate swaps.  Here is where you go to find ten-year Treasuries.  Here is where you go to find today’s interest rate swaps (as known as the swap rate).  Here is another site that provides interest rate swaps.

Today (3/8/20), ten-year Treasuries are at 0.79%, and ten-year interest rate swaps are at 0.81%.  Therefore we will use the higher of the two indices – interest rate swaps.

Okay, but what is the spread or margin over the index?  Conduits are pricing their office, retail, and industrial commercial permanent loans at 140 to 290 basis points over the index.

Therefore, we are talking about conduit commercial loans priced at between 2.21% to 3.71%.  Wow!  So who gets the 2.21% rate, and who has to pay 3.71%?  It depends on the loan size, the risk, the debt yield ratio and the tenancy.

The larger the deal, the smaller the spread.  The safer the deal, the lower the spread.  For example, if your property is located on Madison Avenue in New York City, you will enjoy a lower spread than a deal located on a nice retail street in Salt Lake City.  Madison Avenue is a more proven location.

There are some properties, however, that sell for such incredibly low cap rates – for example, Madison Avenue in New York City – that the debt yield can be too low.  This is a bad thing.  Sometimes the debt yield ratio on that Salt Lake City property can be more attractive to a CMBS investor.

Do not confuse the debt yield ratio with the debt service coverage ratio.  Interest rates are so low that it is easy for most commercial properties to offer a 1.25 or higher debt service coverage ratio today.  The ratio is almost irrelevant when it comes to conduit-size deals ($5MM and larger).

The quality of your tenants also determines your spread over the index.  Quality refers to strength of your tenants.  If you have a shopping center anchored by Target or Krogers, you will enjoy a tighter spread than a shopping center anchored by a mom and pop grocery story.

CMBS loans are made by commercial real estate mortgage investment conduits “REMIC’s”, known as conduits.  There are specialized commercial mortgage companies that originate large, cookie-cutter commercial permanent (long term first mortgage) loans for eventual securitization.  In layman’s terms, a conduit loan is a very plain-vanilla first mortgage on one of the four basic food groups – multifamily, office, retail, and industrial properties.

Is your deal kinky?  Does it need a long story to explain it.  If so, its probably not a conduit-quality deal.

But it is important to note that your property does NOT need to be almost brand new and very beautiful.  Life company lenders demand such properties, but most conduits would be perfectly happy to make $8 million permanent loans on forty-year-old neighborhood shopping centers or on occupied, downtown, office buildings.

Every commercial lender prefers to make loans on multifamily properties, so the spreads on multifamily deals are about 10 bps. tighter.  You will not be shocked to learn that hospitality spreads are fifty basis points higher than standard conduit deals.

What about loan-to-value ratios?  You will seldom get a conduit lender to go higher than 65% LTV on a hotel.  The loan-to-value ratios on the four basic food groups are typically between 70% to 75%.  The higher the LTV and the lower the debt yield, the higher the spread (and eventually the higher the interest rate) that the borrower will pay.

Lastly, conduit lenders do NOT lock in their rates at application.  Most of them will, however, lock in their spreads, while the conduit commercial loan is in processing.  That being said, there will be a floor of 5 bps. to 10 bps. below the interest rate quoted at application.  In other words, if interest rates go up during application, the borrower will have to pay a higher rate.  If interest rates fall, the borrower might enjoy a slightly lower rate.

Investors, I know you are all freaked out that you might die from this coronavirus (its out to kill all of us “old-gomers”); but you can apply for a conduit loan from the safely of the virus bubble in your home.  Focus.  If you can close a conduit commercial loan during this crisis, your cash flow, and that of your heirs, will be fantastic!  Git ‘er done. Ten-year Treasuries may never be lower.

By George Blackburne

PIP Commercial Loans

George Smith Partners recently released a tombstone about a commercial loan closing that used a financial term of which I had never heard:

“George Smith Partners arranged $23,750,000 in bridge financing for the refinance of a 229-key, full-service hotel located in Downtown Minneapolis, Minnesota…  The Property, built in 1986, underwent a PIP in 2017.”

What in heavens is a PIP?

A PIP is a Property Improvement Plan required by a brand or franchise – usually a hotel franchise, like Marriott or Hilton – to maintain or improve standards.  Often the property owner needs to obtain a secondary loan or refinance the property.

A property improvement plan (PIP) is required to bring a hotel in compliance with brand standards.  According to HVS, an effective PIP should help owners gain market share, increase guest satisfaction, drive revenue performance, and enhance profitability.  Elements like lighting, faucets, and fixtures are foundational for brand standards, but now energy-efficient equipment upgrades are entering the equation.

One hotel franchisor recently said that her company is pushing hard to incorporate sustainability measures into the conversion process. There are things that the franchise is recommending in order for the franchisee to run an efficient building.

For instance, if a boiler system has a 30-year life expectancy, but it’s only 20-years-old, the franchisee might consider changing it out early because there is no down time, new systems are 30 percent more energy efficient, and there is a good ROI attached.  “We’re looking at mechanical systems, chillers, boilers, and things that are not very sexy,” she says. “It’s really important in looking at how much it’s going to cost to operate that piece of property.”

Property Improvement Plans (PIP’s) are not cheap.  PIP costs can vary greatly with different brands, hotel sizes, and property locations.  One of the most popular PIP’s, Holiday Inn’s Formula Blue, usually costs between $10,000 and $25,000 per room.  Since the average Holiday Inn Express location has around 75 rooms, that adds up to between $750,000 and $1.875 million in total costs.  Hampton Inn’s Forever Young Initiative is another popular PIP, which experts estimate will cost between $15,000 and $40,000 per room.

Yikes.  That’s real money. SBA loans are often, but not always, utilized to finance a PIP.  It is important to understand the types of improvements a prospective hotel owner can make using SBA funds.  Experienced hotel owners often focus on the following areas:

  • Renovations to exterior facades – including signage, roofing, and colors
  • Room and lobby updates such as lighting and fixtures
  • New amenities such as indoor/outdoor pools and fitness areas
  • Expand or improve parking
  • Replacing mechanical items that are close to end of their useful life – such as the roof or heating system.

Instead of obtaining secondary financing, many property owners choose instead to refinance the entire property.  Because ten-year Treasuries are so low, this is the best time in history to refinance your property with a CMBS loan.

Article By George Blackburne

CMBS Hotel Lenders Are Out of the Commercial Loan Market

No sooner had I written a blog post last week about the attractiveness of CMBS loan rates right now, than I got a message for one of my subscribers informing me that conduits are no longer making hotel loans.

By the way, CMBS lenders are still making their large permanent loans on the Four Basic Food Groups – multifamily, office, retail, and industrial – at incredibly low interest rates today.

It makes sense why the conduits have stopped making hotel loans.  Hotel occupancy rates are getting slammed right now by the Coronavirus Crisis.

Conduits make large, cookie-cutter, commercial real estate loans that are quickly aggregated into large pools and securitized into commercial mortgage-backed securities (“CMBS”).

Conduits are not portfolio lenders. They can’t just say, “Well, hotels are getting clobbered right now, but the world is not going to stop needing hotels. Since all of our commercial lending competitors are out of the hotel loan market right now, our bank will sneak in there and make a bunch of juicy loans on some of the very nicest hotels in the country.”

Because conduits are not portfolio lenders, they can’t hold commercial loans on their lines of credit for very long.  They need to sell them off quickly.  They can’t hold these loans for two years, say, until the hotel market recovers.

Conduit is short for commercial real estate mortgage investment conduit, a specialized type of commercial mortgage company that originates loans for the CMBS market.

The thing that is special about conduits is that they get to sell their loans to a special kind of trust, called a pass-through trust, created by Congress, which does not have to pay taxes on its income from these commercial mortgages.

This special pass-through trust assembles a whole bunch (100 to 300) of these large, cookie-cutter, commercial loans into a pool.  Then the trust sells pass-through securities, backed by the stream of payments and payoff’s coming from the first mortgages in this pool.  We call them pass-through securities because only the securities buyer (bond buyer) has to pay taxes on his interest income, not the pass-through trust.

Think of an old-fashioned C-corp.  The C-corp pays taxes on its net income, and then the stock owners pay taxes on their dividends.  C-Loans is a C-corp.  Yikes.  It’s a form on double-taxation.

Congress created authorized commercial mortgage investment pass-through trusts to avoid this double-taxation.  (They had created residential mortgage pass-through trusts a couple of decades earlier.)  This move to avoid double-taxation created the commercial Real Estate Mortgage Investment Conduit industry (“REMIC”) industry.

By the way, a portfolio lender is a lender that makes its loans using its own dough and intends to hold these loans for the entire term.  A bank is an example of a portfolio lender.  A family office is another example of a portfolio lender.

A commercial lender using a line of credit from a bank is not a portfolio lender because the bank that is providing the line of credit is probably going to reevaluate that credit facility annually.  There is no guarantee that the bank will renew it.

Therefore, a commercial lender using a line of credit will need to sell off the commercial loans in his portfolio on a regular basis.  He won’t hold them until maturity.

Lastly, I have used the term, “large commercial loan”, throughout his article.  Conduits seldom make commercial loans of less than $5 million.

Some Thoughts on the Coronavirus Crisis:

You will recall that I made you uncomfortable (and probably bored) a few months ago when I described how the virus would soon become a pandemic and that it would cause another great recession, or possibly even a full-blown depression.

I just wanted to remind you that Chinese small business owners, who employ 60% of the Chinese workforce, have been traumatized.  They are not going to want to take on additional debt.

The Chinese Communist Party can order the Chinese banks to lend, but it can’t order small business owners to borrow.  When banks can’t find willing borrowers, yet they keep raking in monthly payments, the multiplier effect kicks into reverse.  Any monthly payment that is not recycled into a new loan reduces the Chinese money supply by a factor of twenty.

In other words, if a Chinese bank takes in a $1,000 loan payment and doesn’t immediately recycle it into a new loan, a whopping $20,000 gets sucked out of the Chinese money supply.  In the parlance of economists, $20,000 is destroyed.  During the Great Recession, about $4 trillion were destroyed.

The reason why this is important is because even if a cure, or even an effective treatment, for coronavirus is discovered today, the average Chinese small businessmen has already been traumatized.  He is not going to be borrowing even more money from the bank.

China is facing a horrible deflationary vortex, where tight money leads to company failures, which leads to employee layoffs, which leaves fewer workers with money to buy products, which leads to less demand, which leads to more company failures and more layoffs.  Its an ugly feed-forward cycle, a deflationary vortex.

If President Xi died and made me Emperor, I would put a moratorium on the loan payments on all bank consumer loans and bank business loans in the country.  The Chinese Central Bank (“CCB”) can easily replace the dough lost by the country’s banks.  After all, the dough is just digits in some computer.

Now if you hear the Chinese doing such a thing, there may be hope for us all; but absent that, prepare for a deflationary tidal wave coming out of China.  Despite what you might think, we do NOT want China to fall into riots and chaos.  They make the industrial parts and the medicines that our manufacturers need.  They buy a poop-ton of our industrial and agricultural products.  We should not wish them ill.

Article By George Blackburne

Commercial Loans and a Most Unusual Kind of Land Loan

When a bank makes a commercial construction loan, it is certainly not going to take all of the risk.  A bank will usually require that the developer cover at least 20% to 30% of the total project cost – land cost, hard costs, soft costs, and a contingency reserve equal to 5% of the hard and soft costs.

Usually this takes the form of the developer contributing the land free and clear of any liens, plus having paid much, if not all, of the engineering and architectural fees.

Therefore I was shocked to read a tombstone sent out by my friends at George Smith Partners, one of the oldest commercial mortgage banking companies in the country.  You will recall that a tombstone is a closing announcement designed to show the types of commercial loans that a particular lender makes.

The tombstone boasted of the closing of a $4 million non-recourse land loan in Beverly Hills, at 8% interest for one year.  This land loan was made at 90% loan-to-cost (LTC)!  Ninety percent on a land loan???  I know that Colorado oregano is now legal in California, but 90% LTC on land is an insane amount of leverage.  (In this particular case, the cost was the same as the fair market value.)

So I wrote to my buddy, Bryan Schaffer (a very good man), and asked, “Bryan, I don’t understand.  What is the exit strategy?  Any construction lender is going to expect the developer to contribute the land free and clear, and it might require even more developer’s contribution.”

Before I share with you Bryan’s answer, I need to explain that, prior to the Great Recession, banks were allowed to give developers credit for the appreciation in the value of their land.  For example, suppose a developer purchased some land for $1 million, and three years later, because he bought shrewdly, the land now appraises for $3 million.

Back then, the bank was allowed to value that land at $3 million for equity purposes.  Therefore, if the developer only owed $500,000 on this $3 million piece of land, the bank would say that the developer contributed $2.5 million in equity towards the proposed construction loan.

But then the Great Recession hit, and construction lenders took huge losses.  To curb what Federal regulators deemed as reckless commercial construction lending, banks were only allowed to value land at the developer’s actual cost – in this case, just $1 million.  This has greatly restricted commercial construction lending over the past decade.

We are now ready to reveal Bryan’s answer to the question, “A land loan of 90% loan-to-value?  What the heck have you been smoking?”  Haha!

“George, It is very hard to get the full appreciated value of the land.  On this deal, if you just did a construction loan, most lenders would only give the developer his basis (actual cost), which was $1.4 million.”

“With a $4MM land loan and an appraisal at $4.4 million, the bank will give us at least a $4 million value for land – and most likely the full $4.4 million value.  At some banks, if he deposits the $4 million (from the loan proceeds), they will loan him the entire $4 million against it at a very low rate, which he will use to pay off his land loan.  He will get the full $4 million to $4.4 million credit (for the value of the land) and will also show $4 million of liquid assets, but it will be in a restricted account.”

“So the hard money loan cost him $200K to $300K, but in exchange he does not have to bring in fresh cash of $2-3 million and likely also looks better for future loans because he has the $4 million in a restricted account.  It is a little bit of a financial game, and it is only good for someone that does not have the cash.  Hope that helps, Bryan.”

Did you get lost?  It helps to understand that banks only want to lend to developers with lots of cash on hand.  Our developer will take this $4 million in land loan proceeds and stick it into the account of the bank which will make the new construction loan.  It’s a restricted account, so the dough can only be used to construct the proposed 12-unit apartment building.

Because the land has a whopping $4 million loan against it, the bank can’t just value the land at the developer’s cost of $1.4 million.  It makes no sense, so the bank is forced to value it at least at $4 million.  And since the bank is already breaking the Fed’s rule about valuing the land at the developer’s actual cost, they will probably cave in and value the land at its $4.4 million appraised value.

So the land loan costs the developer $200,000 to $300,000 in loan fees and interest – but it reduces by $2 million to $3 million the amount of equity the developer has to contribute to the property.

As Bryan explained, its kind of a shell game (1) to make the developer look liquid and rich; and (2) to get around the Fed’s rule that bank construction lenders must value the land at the developer’s actual cost.  I suspect that there are a lot of parties winking at each other.  Haha!

By George Blackburne

How Conduit Commercial Loans Are Priced

I have a great training article about commercial loans for you today.  How do conduits price their commercial loans?  After all, commercial lenders cannot buy a forward commitment from Fannie Mae or Freddie Mac, like a residential mortgage banker; yet most commercial loans today are fixed rate loans.  How on earth do the commercial loan officers, working for these big-time commercial lenders, know what to quote?

In a prior training article, I explained that most commercial bankers quote their fixed rate commercial loans at 275 to 350 basis points over five-year Treasuries.  You will recall that a basis point is 1/100th of one percent, so 300 basis points equals one 3.00%.
Suppose you call your local commercial bank and speak to a commercial loan officer about a commercial loan.  He will look up five-year Treasuries and see that on July 3rd, 2019 they stood at 1.74%.  He will then add between 2.75% (275 basis points) and 3.5% (350 basis points) to 1.74% to determine what rate to give you.
Does your client keep more cash on deposit than Fort Knox with his current bank?  If so, in an effort to win your client’s deposit accounts, the banker might quote you 4.49% for a ten-year, fixed rate commercial loan, with one rate readjustment at the end of year five.  If your client is a mere mortal, rather than a cash demigod, the bank will probably quote him 5.24%.
But these quotes are from banks.  How would a conduit lender quote his commercial loan?  After all, conduit loans are usually larger than $5 million, and the properties are reasonably desirable.  Their rates on commercial loans have to be more attractive than bank loans, right?
You will recall that conduits originate commercial loans for the CMBS market.  CMBS stands for commercial mortgage-backed securities.  Think of a CMBS loan as a huge, fixed-rate, commercial real estate loan written to cookie-cutter standards.
CMBS lenders have very little flexibility (that darned cookie cutter), but if you qualify, you get a ten-year, non-recourse, fixed rate commercial loan at a rate that is at least 40 basis points cheaper than what a bank can offer.  When you are talking about a commercial loan of $10 million, 40 basis points is real money.  In addition, conduit loans are FIXED for the entire ten years!
So when you call a commercial loan officer at a conduit, how does he know what to quote you?  Remember, unlike residential loans, you cannot lock your rate on a commercial loan.  When you apply for a conduit loan, you have to take the current fixed rate at the moment of closing, and the process takes at least 75 days.  Every day, from the time of application until the day of closing, your interest rate will change.
So I recently asked my good friend, Tom Lawlor at Morgan Stanley, how conduit commercial loans are priced.  Here are his kind answers:
Q:  Are CMBS loans still quoted based on swap spreads?
A:  Conduit loans are quoted as the greater of (matching) Treasuries or swap spreads, plus an agreed upon margin.
Swap spreads are financial instruments where nervous corporate Treasurers will swap their adjustable rate loans from the bank for a fixed rate loan from some speculator.  Obviously, for taking the risk that interest rates might skyrocket, the speculator makes a handsome profit on the deal.
Swaps spreads change daily, and you can find them posted here.
Your client is seeking a $12 million, ten-year, fixed rate, non-recourse commercial loan from a conduit.  Because your client is seeking a ten-year commercial loan, the conduit quotes him a negotiated margin over the greater of ten-year Treasuries (notice the matching term) or ten-year swap spreads.
On the date that the attorneys draw the loan documents, ten-year Treasuries are 2.00% and swap spreads are 2.15%.  The conduit will therefore use the greater of the two indexes.
Q:  What are some typical margins over swap spreads for multifamily?
A:  140-185 bps
Q:  What are some typical margins for office, retail, and industrial properties?
A:  The margins are similar to those of multifamily.  Pricing is most determined by the debt yield ratio or the debt service coverage ratio (DSCR), with the margins on hotel loans being 15-30 bps wider.
Because I didn’t want you to get confused between the speads over the index and swap spreads, I have used the term, margin.  In real life, where the lofty conduit lenders dwell (remember, their minimum loan is $5 million), they use the term, spread, over the index, rather than margin.
By George Blackburne

Commercial Loans And The Deflation Spreading Across the World

Prices and interest rates across the entire world are declining.  This could be wonderful news for those of us in the commercial loan business.

Before I explain, I want to bring you up to date on a blog article that I wrote last week postulating that a world war with China and Russia may be brewing.  This was a pretty important article, and I urge you to read it first.

In that article I commented, “It seems to me that the behavior of China recently is that of a belligerent who thinks that he can win.”

No sooner had I finished this article than a joint air exercise between Russia and China so threatened South Korean and Japanese airspace on Thursday that the Japanese and South Korean jets had to fire two looooong bursts of 20 mm cannons to drive them off.  In the meantime, the Russians and Chinese mapped and measured both South Korean and Japanese jet fighter launch areas.

Please be sure to note the scary term, joint air exercise.  Russia and China are now practicing for a war against us.  Holy crappola.

In a recent article in Atlantic Magazine, a military analyst disclosed that in recent war games simulating a great-power conflict in which the United States fights Russia and China, the United States “gets its ass handed to it.”

Now on to deflation.  It’s hard for most people to understand even the possibility of deflation.  The money supply can only grow, right?

In a future article, I will explain why deflation is as powerful as gravity, and why it is a constant threat to capitalism.  For now, however, please accept the fact that the horrible deflation we experienced in 2008 could easily happen again.

Even now modest deflation is occurring in most first-world countries, except the U.S. — including Germany, Japan, England, France, Sweden, Holland, and Denmark.  This deflation is producing some bizarre situations.

The amount of bonds in the world that have a negative yield continues to rise, making a fresh swing high this month, and now sits at a U.S. dollar equivalent of $10.5 trillion.

This debt pile consists mainly of sovereign bonds from Japan and European countries.  In a sense, the deflation which Japan experienced in the 1990s and noughties, has now spread…to Europe in the noughties and 2010s.  By the way, the term, noughties, is a British one that means the decade from 2000 to 2009.

At first glance, bonds with a negative yield make no sense.   Why would a rational person ever lend money to someone and pay them for the privilege of doing so???  The reason why a rational person might lend money at a negative interest is because that person expects the prices of the stuff they can buy with that money (goods and services) to fall even further.  In other words, the lending person has sizable deflationary expectations.

Can’t the government just “print money like crazy” to create inflation and positive interest rates?  Japan has tried this since 1989.  Recently the Japanese Central Bank got inflation up to the rip-roaring rate of 1% last year – only to now see it fall towards zero again.

The fact is that negative-yielding bonds and bank loans in Japan and Europe are likely to continue is because the banks can make a profit lending money at a negative interest rate.  At a negative interest rate?  What the fruitcake?

Yup.  In Europe, depositors sometimes have to pay the bank something like 0.5% annual interest to keep their money on deposit with the bank.  If the bank can loan the money out to a strong company at a negative annual interest rate of just 0.1%, the bank still picks up a 0.4% annual gross profit on the spread.  (Note:  Deposit rates in Germany are slightly positive today.)

Are you ready?  Get ready for it.  Mortgage rates in Denmark briefly went negative last year.  You take out a mortgage to buy a house, and the bank gives you a loan at a negative interest rate.  Go figure, huh?

This Could Be Wonderful for the Commercial Loan Business:

I promised you earlier some good news about commercial loans.  Do you remember refinance-mania?  This was largely a residential mortgage phenomena.  Well, because interest rates have fallen so far recently, hundreds of billions of dollars in bank commercial loans are about to be refinanced by smart commercial loan brokers and hungry banks.

Interest rates in Japan and Europe are about 1.5% lower than in the United States, so U.S. Treasuries are skyrocketing in price right now, as Japanese and European investors, desperate for a positive yield, are snapping them up.  This will lead to falling commercial loan rates from banks and an absolute bonanza for commercial loan brokers.

Hot snot, this is gonna be good!  🙂

Commercial Loans and Why Interest Rates Are Falling Like a Rock

The ten largest economies include (1) the United States; (2) China; (3) Japan; (4) Germany; (5) United Kingdom; (6) India; (7) France; (8) Italy; (9) Brazil; and (10) Canada.  I was personally surprised to see that the economies of both Brazil and Canada made the top ten.

Most of these economies are shrinking in population, and this is extremely deflationary.

Why is a shrinking population deflationary?  In order for the money supply of a modern economy to grow, its banks need to make new loans.  In order to make new loans, banks need borrowers.  If the number of potential borrowers is shrinking, eventually the country’s money supply – and hence inflation – will shrink.

Why is deflation so bad?  A little bit of deflation is not terrible.  It makes the dollars of working Americans go further.  For example, if the price of a new bike for your kid falls from $70 to $62 over two years, that is surely not a bad thing.

But there is a dark side to deflation.  For one thing, deflation makes it harder to make the loan payments on your existing debt.  For example, if your mortgage payments are fixed at $2,000 per month, and the prevailing wage rate is falling at 2% per year, you could be in for a world of hurt if you have to change jobs and accept a new one at the lower wage rate.

The second problem is that deflation slows an economy because people postpone their purchases.  For example, why buy a new car for $50,000 this year when the price will probably fall to $46,000 next year?  Why not just postpone your purchase until next year?  If enough Americans delay their purchases of a new car, the automotive industry will soon tank and tens of thousands of workers will be laid off.

Lastly, significant deflation usually comes with a contracting economy, layoffs, falling demand, and job insecurity.  Deflation can easily become self-feeding.

This is so important that I am going to say it again.  Deflation can easily become self-feeding.  A modern economy can quickly cycle down the drain.

So the cycle goes as follows:

People stop having children.  The number of potential borrowers shrinks.  As the number of potential borrowers shrinks, banks make fewer loans.  The money supply then contracts, and a wave of deflation sweeps the country.  As deflation washes over a country, it becomes harder for borrowers to raise the dough to make their loan payments.  As more borrowers start to default, the banks get frightened and stop lending; but they keep gathering in their loan payments.  Because the Multiplier Effect works in reverse at the rate of 20:1, for every $1,000 received in loan payments that is not immediately recycled back out into a new loan, a whopping $20,000 get sucked out of the country’s money supply.

Then you REALLY have deflation, like we had in 2008, when at least four trillion dollars was destroyed.  Yes, money can be destroyed.  How else do you think the Fed could have injected $4 trillion into the economy without creating horrible hyperinflation?

The U.S. used to be the one shining star in terms of population growth.  Most of this population growth came from immigration.  The U.S. birth rate is not large enough to replace itself.  With the U.S. now preventing migration from the south, the population of the U.S. will soon start to decline.

Even China, which has lifted its One Child Policy, is shrinking.  The cost of education is high in China, so the typical Chinese family is saying, “Naw, no thanks.  One child is enough.”

Adding to this deflationary trend is the graying of each of the top ten economies.  Over a billion retired folks across the modern world are saying, “I’m done.  Take my life’s savings and give me an income.”

The problem is that there is FAR too much savings, too little growth potential, and not enough workers to do all of the work.  The young people are saying, through their lack of loan demand, “We don’t need your stinky money, old man and old lady.  We’ve got more than enough money to do what we want.”

There is too much saving retirement chasing too few borrowers.  Therefore, the price (interest rates) must come down.

Grasp this concept:  There is now almost $11 TRILLION dollars invested in bonds, CD’s and business loans with a negative yield.   Most of this is in Europe and Japan.  Did you know that in Europe you now have to pay your bank to accept your deposits?!

Investors in Europe and Japan are so desperate for yield that they are snapping up U.S. Treasury securities.  Did you know that the yield on the U.S. ten-year bond dropped from 2.03% yesterday to just 1.88% yesterday?!!!  The ten-year U.S. bond yield may drop below 1% within the next 18 months – maybe even within one year.

I don’t want the world.  I just want to refinance every commercial building in America with a lower interest rate.  Is that too much to ask?  🙂