Stated Income Commercial Real Estate Loans

Until just four years ago no one wrote stated-income commercial real estate loans.  A stated-income loan is one where the lender does not ask for tax returns or even a Profit and Loss Statement on the borrower.  Instead, the commercial real estate lender merely relies on the borrower's income declaration on his loan application.

Four years ago you would have looked like a total rookie if you had asked for a stated-income commercial real estate loan.  Only residential lenders offered stated-income loans at the time.  Today at least a dozen large, national, commercial mortgage bankers offer stated-income commercial real estate loans.

Borrowers with good credit and more than sufficient cash flow to service their loans ("A" quality borrowers) are not afraid to show their tax returns.  It is the borrowers who are losing money in their businesses or hiding their incomes who choose to go stated-income.  Stated-income loans are therefore more risky than "A" deals and are considered subprime.  A loan that is subprime is not a loan where the interest rate is less than the prime interest rate.  Instead, a subprime loan is one where the quality of the borrower or the property is less than prime; i.e, a "B" or "C" quality borrower or property.

After the commercial mortgage banker has assembled about $150 million in stated-income commercial loans, the mortgage banker places the loans in a pool.  Then the mortgage banker borrows against this pool of mortgages.  This kind of secondary market operation is known as a collaterized debt obligation ("CDO"). 

The difference between a CDO and a normal CMBS deal is that the mortgage banker has to leave some skin in the game.  He can only borrow against 80% or 90% of the face value of the pool of mortgages.  This leaves the mortgage banker in a first loss position.  If the loans in the pool perform poorly, the mortgage banker can lose up to 10% to 20% of the value of pool, or $15 million to $30 million in our $150 million example.  

The mortgage banker makes his money on an interest rate spread.  He borrows at one rate and books his subprime loans at a much higher rate.  Normally the interest rate spread is so large that the mortgage banker makes back his $15 million or $30 million in just a few years.

But herein lies the problem.  Stated-income lenders all require immense prepayment penalties in order to lock in their interest rate spread.  Therefore virtually all stated-income commercial mortgage loans have huge prepayment penalties.

In contrast, Blackburne & Brown can make zero-point hard money commercial real estate loans with no prepayment penalty.  You can apply to Blackburne & Brown by calling Mike Thurman at 916-338-3232 or by sending an email to thurman@blackburne.com.