Suppose you are a commercial real estate investor, and you buy a $5 million office building using a new $4 million loan from a conduit. You put $1 million down in cash. Four years goes by, and commercial real estate appreciates handsomely. Your $5 million office building appreciates to $8 million. You would like to pull out some cash. Guess what? You have a problem. Second mortgages are forbidden on CMBS loans. If you put a second mortgage on the property, this bad boy act triggers an acceleration of the loan, the obligation to pay the huge defeasance prepayment penalty and a springing personal guarantee of the loan, despite the fact that the loan was originally a non-recourse loan. A bad boy act is one of a number of breaches of the mortgage covenants that results in the scary legal consequences described above. Bad boy acts include fraud, toxically polluting the property, placing junior financing on the property without permission, declaring bankruptcy to delay a foreclosure, allowing the insurance to lapse, and commiting waste (intentionally or negligently trashing the property). Okay, so even though you have tons of equity, you cannot pull out your equity by placing a second mortgage on the property. What about refinancing the first mortgage? All modern CMBS loans have a punishing defeasance prepayment penalty. The original ten year loan has six years to run, so if we use 2 points per year of remaining term as our rule of thumb for computing a defeasance prepayment penalty, you are looking at a prepayment penalty of 12 points on a $4 million loan or $480,000! Refinancing is definitely out. What about a mezzanine loan? This would be the perfect alternative except mezzanine lenders will seldom bother with loans of less than $3 million. Your property won't carry a $3 million mezzanine loan behind a $4 million first mortgage. So what can you do? You could sell the property, but the buyer would have to put down a whopping $4 million in cash and assume your existing $4 million loan. Who is going to do that? The number of buyers willing to put 50% down is miniscule. As a result, you would either have to reduce your purchase price to just $7 million to find a buyer ... or more likely just suck it up and pay the $480,000 prepayment penalty. If all of these options sound terrible to you as an investor in commercial real estate, you are starting to understand some of the problems of conduit financing. That is why the Total Freedom Loan from Blackburne & Brown is so popular. Our loan has no points, no prepayment penalty, no impounds, no reserves, and no prohibition against a reasonable amount of junior financing. For more details please call Mike Thurman at (916) 338-3232. | 
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