|  | Commercial Real Estate Loan Tips | Commercial Mortgage Financing Blog with Daily Commercial Real Estate Loan Practice Tips. | |
Learn how to underwrite and place permanent loans, commercial construction loans, bridge loans,
SBA loans, hard money commercial loans, mezzanine loans, and preferred equity investments.
If you have any topics that you would like covered, you are invited to send an email to George@Blackburne.com
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| | February 05, 2010 | | Commercial Mortgage Lenders Are Requiring Larger Down Payments | Since the start of the Great Recession, commercial real estate lenders have become more cautious. Before the economic downturn, commercial lenders would regularly make commercial loans to 75% loan-to-value on office buildings, retail centers, and industrial buildings. In fact, in 2006 and early 2007 some conduit commercial lenders were even making commercial mortgage loans as high as 80% loan-to-value.
Today few commercial lenders will make new permanent loans much higher than 60% to 65% loan-to-value. In addition, they will not allow sellers to carry back a second mortgage behind their new first mortgage loans.
This means that real estate investors wishing to purchase commercial buildings must now put down 35% to 40% of the purchase price in cash. No surprisingly, far fewer commercial properties are changing hands.
There is a technique, however, that commercial real estate investors can use to reduce the size of their required down payments. Instead of carrying back a second mortgage on the commercial property being purchased, the seller can carry back a second mortgage on a different piece of commercial property owned by the buyer.
For example, let's suppose that an investor wants to buy a commercial center owned by a seller. The parties agree on a price of $2 million. Without using this technique, the investor would probably be required by the bank to put 40% down - or $800,000 in this example. That's a lot of dough.
However, the parties might make the following agreement. The investor (buyer) will put down $500,000 in cash, which is still a significant amount. We, in the business, might say that the investor (buyer) has more than enough "skin in the game" to assure that he is motivated to make his new commercial loan payments and maintain the property. The seller - and this is the key - could carry back a second mortgage on an apartment building, a property different from the one being purchased, owned by the investor (buyer). This arrangement would probably pass muster with the vast majority of commercial lenders today.
Need a commercial loan right now? You can apply to hundreds of commercial lenders with a single, four-minute, mini-app using C-Loans.com, the nation's most popular commercial lender portal. And C-Loans is free!
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| | January 21, 2010 | | Also a A Primer on the Farmer Mac Program |
Our hard money mortgage company, Blackburne & Sons, is actively making hard money loans on farm land and cropland nationwide. Our sweet spot is loans between $100,000 and $1.5 million.
Our farm land loans and cropland loans are typically priced between 9.9% and 12.9%, depending on the risk, with 11.9% being the most common rate. Our typical fee is 2.5 points + $950 to 3 points + $950.
Because we are so bullish on farm land, Blackburne & Sons will lend up to 65% loan-to-value, even if the farmer/operator is losing money or has poor credit. Our hard money farm loans have no prepayment penalty.
The farm land cannot usually have a house on it because the loan could then be classified as a home loan, a type of loan we are not licensed to make. However, if the purpose of the loan is clearly commercial in nature - as opposed to intended for personal, family or household purposes - and the tillable acreage exceeds 30 acres, it may still be possible for the loan to considered commercial in nature. The value of the tillable acreage must clearly exceed the value of the home.
In order to promote Blackburne & Sons' new farm land loan program, I started calling on mortgage brokers who specialize in farm loans. One of them was kind enough to give me a primer on the Farmer Mac program:
Farmer Mac is an acronym for the Federal Agricultural Mortgage Corporation, a government-sponsored enterprise (GSE), similar to Fannie Mae or Freddie Mac. Farmer Mac buys farm loans and ranch loans from banks and correspondents and then sells the loans off as mortgage-backed securities. Farmer Mac never got crazy with their underwriting standards, so they are not suffering from waves of defaults, like Fannie Mae and Freddie Mac.
The underwriting standards of Farmer Mac are very conservative:
Minimum credit score of 680.
The loan cannot exceed 50% of the farmer's total assets.
The farmer's net income must exceed 130% of the proposed payment.
The farmer must have no late payments on prior Farmer Mac or other bank mortgage loans.
Blackburne & Sons' new farm loan program is designed for "near-miss" Farmer Mac borrowers - farmers who fall slightly outside of Farmer Mac's underwriting standards.
Got a farm land deal? Please call Mike Thurman at 916-338-3232 or email him at thurman@blackburne.com.
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| | December 17, 2009 | | Lenders Use Release Clauses So Developers Can Sell Off Lots, Homes or Condo's |
Let's suppose a commercial lender - a bank - makes a $2 million commercial loan to a developer on a residential subdivision. The developer uses the proceeds of this commercial loan to obtain an approved subdivision map, to install the horizontal improvements (streets, curbs, gutters, water, sewer, power, etc.) and to market the 100 residential home sites. Now the developer is done, and he is ready to sell off his first residential lot for $40,000.
But wait. The lot buyer isn't going to fork over his $40,000 unless the developer is prepared to hand over the lot free and clear of any mortgages. The bank has a $2 million loan against the lot (and admittedly the other 99 lots). How do we get rid of the $2 million bank loan with the proceeds of just a $40,000 lot sale?
The sale will be accomplished using a partial release clause in the loan documents. A partial release clause is an agreement between the commercial lender and the borrower whereby a mortgage that blankets two or more parcels will be released from a particular parcel upon the payment to the commercial lender of a previously-agreed amount of money. For example, "The commercial lender agrees to release its mortgage against residential lot number 17 upon the payment $20,000." The bank gets $20,000 from the sales proceeds of lot number 17 (a nice culs-de-sac lot), and the developer gets to pocket the remaining $20,000 as his profit.
But be careful here. What if this new residential subdivision has just 15 culs-de-sac lots and 10 nice lots with views? What if the rest of the lots are stinky? Suppose the developer is able to sell all 25 premium lots for $40,000 each and gives the bank half the proceeds. That's $500,000 for the bank and $500,000 for the developer. Now the bank is owed $1.5 million, and its loan is secured by the 75 remaining lots.
What happens if the non-premium lots cannot be sold for any more than $18,000 each? If the initial release price per lot was set at $20,000 the problem soon becomes apparent. The developer cannot sell any of the remaining lots. Even if the bank cooperated and let him sell the lots for $18,000 each, this would only bring in another $1,125,000. The developer would still end up owing the bank $375,000, and all of the collateral would be gone!
Okay, obviously the bank needs to do something in order to protect itself. One way the bank will protect itself is that it will ask the appraiser to assign an anticipated sales price per lot. The release price per lot will no longer be a uniform $20,000 per lot. Instead, the premium lots might have a release price of $30,000 each and the non-premium lots might have a release price of $17,000 per lot.
But what if some of the lots cannot be sold for any reasonable price? What if consumers pick over the subdivision and leave 35 non-premium lots unsold? The developer would still owe the bank almost $600,000 and the bank would only have as collateral a bunch of undesirable lots.
To make sure that the bank does not end up with a bunch of unsalable lots (or condo's), the typical partial release clause will have a provision whereby the developer must pay down the construction loan or land development loan by 115% to 125% of the release price before the bank will release a unit. Therefore, in our example, the developer will have to pay down the land development loan by 120% of $30,000 ($36,000) in order to get a premium lot (culs-de-sac or view lot) released. This way a developer does not get to keep a lot of the profit and leave the construction lender with a bunch of crumby, unsellable lots or units.
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| | November 04, 2009 | | Large Commercial Loans Today Are Being Written as Floaters with Collars | The days of long-term, fixed rate commercial loans are gone for awhile. Sure, a few life companies will still make commercial real estate loans between $5 million to $25 million at a long term, fixed rate; but commercial loans from life insurance companies seldom exceed 55% LTV today.
Most large, commercial loans getting funded these days are floaters - adjustable rate mortgage loans - on standing properties. Very few large commercial construction loans are getting funded these days, unless the loan is an apartment construction loan from the FHA.
Large land loans (over $2 million) are essentially impossible today too. No one is making them. In the years leading up to The Great Recession, large land loans were usually made by hard money lenders with large commercial mortgage pools. Unfortunately, almost every large commercial mortgage pool in the country is now either in bankruptcy or winding down.
The only large commercial loans being made today are loans on standing and almost fully-leased commercial properties.
When these loans are made, they are using being made by the money center banks as floaters. Floaters are adjustable mortgage loans with a term of usually only five years. They are usually readjusted monthly according to changes in one-month LIBOR. A typical margin is 300 to 400 basis points.
The borrower will usually want some sort of interest rate ceiling or cap. The lender will usually want some of floor on the loan. These interest rate caps cost money - usually an extra point or two. Sometimes a borrower can "pay" for his cap by agreeing to a floor. For example, a borrower can pay two extra points for a 4% ceiling; but if he agrees to a floor equal to the start rate, the lender might waive the two-point cap fee.
A loan with both a cap and a floor is said to have a collar.
If you need a large commercial loan today on a standing property, please write to me, George Blackburne, at george@blackburne.com or call me at 574-360-2486.
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| | October 05, 2009 | | Is Extend and Pretend Finally Over? | It is very rare for a commercial lender to make a fully-amortized commercial loan. Most commercial real estate loans are amortized over 20 to 25 years, and they have a large balloon payment due after either five or ten years.
When Lehman Brothers collapsed in September of 2008, the market for commercial mortgage-backed securities (CMBS) also collapsed. At its peak, over half of all commercial real estate loans (by dollar volume) were originated by conduits to enter the pipeline to become commercial mortgage-backed securities. Then, without warning, "Boom!" (as John Madden might say) the entire CMBS industry suddenly disappeared.
Not surprisingly, since September of 2008, it has become far, far more difficult for borrowers to refinance their ballooning commercial mortgage loans. Rather than force their borrowers into foreclosure and bankruptcy, the securitization trusts and commercial banks, which own most of these maturing commercial real estate loans, have been either extending their loans or patiently forbearing from filing foreclosure.
This industry-wide practice has become know as extend and pretend or delay and pray.
The "pretend" part of that phrase acknowledges the reality that a vast number, if not a majority, of all commercial real estate loans are greatly over-leveraged. Suppose a five-year commercial real estate loan was written in late 2004 at 75% loan-to-value. Commercial property values since 2004 have probably fallen in the neighborhood of 35%. This ballooning loan has therefore probably soared from 75% LTV to around 113% loan-to-value.
As long as the borrower keeps making his monthly payments, however, commercial real estate lenders across the country have been extending their loans and pretending as if these loans were still adequately secured.
Is this a crazy strategy for the commercial banks? No. This is a perfectly rational decision. The same thing happened to Blackburne & Brown, our hard money commercial lending company, during the commercial real estate smash-up in California in 1991. For years we had made first mortgages on commercial real estate up to 65% loan-to-value. When commercial real estate values in California fell by 45%, two-thirds of our commercial loan portfolio was upside down. Our borrowers owed more on the property than the commercial real estate was worth.
Nevertheless, most of our commercial real estate borrowers just continued to make their payments. By 1994 commercial real estate values had recovered, and our most of our commercial loans were back to being right-side up. No one should find this terribly surprising. Poor people don't own commercial real estate. Rich people do. And most of these wealthy commercial borrowers could afford to just keep making the payments. Therefore I have no disagreement with those securitization trusts and commercial banks who have elected to extend and pretend or delay and pray.
However, the commercial loan officers at Blackburne & Brown are starting to report that more and more banks are finally demanding that their commercial real estate borrowers pay off their ballooning commercial real estate loans. They will extend and pretend no longer.
Suppose one of your commercial borrowers has a ballooning commercial real estate loan of $750,000 but he can only qualify for a $600,000 refinance. Blackburne & Brown Equity Preservation Fund may be able to help. The Fund will invest $150,000 in your borrower's property and pay down his ballooning loan from $750,000 to $600,000. In return, the fund will take a share of the ownership of the property. Your borrower will still run the property.
Got a commercial real estate deal where you need equity? Please email E.J. Ridings at ejridings@gmail.com.
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| | September 02, 2009 | | Scary Things Can Happen When You Make a Loan Against a Commercial Loan | My mentor - the man who taught me commercial real estate finance years ago - is the wise, old veteran, Bill Owens, of Owens Financial Group. "So, Bill," I asked today, "please tell me some horror stories about hypothecation loans."
You will recall from my earlier blog article that a hypothecation loan is a loan secured by a mortgage loan. The easiest way to understand what we're talking about here is to imagine a cranky old investor who owns a 36-unit apartment building free and clear. The cranky old investor sells his apartment building for $1 million, and he carries back an $800,000 first mortgage at 7% interest for seven years. It's a good deal for the investor because he couldn't earn 7% on his $800,000 in sales proceeds if he deposited the cash in the bank.
Now let's scroll forward three years. The 72-year-old old investor meets 37-year-old Blondie the Bimbo in a bar. Blondie wants a new car, a diamond necklace, and a vacation to the Bahamas. The investor needs cash. So he trots down to Blackburne and Brown and pledges his $800,000 first mortgage receivable to us as collateral for a $600,000 loan. Blackburne & Brown is comfortable with the loan because if the old man doesn't make his payments, we'll simply execute (think of it as a fast foreclosure) on his $800,000 note and mortgage. Our $600,000 investment would then be secured by a $1 million dollar apartment building.
Blackburne and Brown made several hypothecation loans last year, and we are hungry to make more. But I was nervous. I didn't know the pitfalls of hypothecations, so I asked Bill Owens, "Bill, please tell me some horror stories about hypothecation loans."
"Okay, George, try this one. A guy owns an $80,000 first mortgage note against a $100,000 house. You make a $60,000 hypothecation loan against it, evidenced by a promissory note and hypothecation (pledge) agreement against the mortgage. Then the borrower goes bankrupt, and the bankruptcy court rules that because you only had a collateral assignment of the mortgage, rather than a mortgage against the actual real estate, you are an unsecured creditor. Such a ruling, in real life, means that you will be probably completely wiped out by the bankruptcy!"
"So what should I have done, Bill?" I asked.
"You should have a taken an absolute assignment of the mortgage. Now you can still give the borrower a buy-back agreement that says he can buy back the mortgage if he makes all of his loan payments, but it is critical to take an absolute assignment of the mortgage, as opposed to a collateral assignment."
"Please tell me another horror story, Bill."
"Okay, suppose you execute (foreclose) on a $60,000 note and mortgage, secured by a $100,000 house. Then you notify the underlying borrower - the owner of the house - to start making monthly payments to you. He replies that he doesn't owe any payments for another year because he prepaid them to the original mortgage holder, in return for a discount."
"So what should I have done, Bill?"
"You should have gotten a combination Waiver of Offset and Beneficiary Statement, signed by both the mortgage holder and the underlying borrower. (A Waiver of Offset is a statement by the underlying borrower that he doesn't have any claims against the mortgage holder - such as prepaid payments.) These would act as an estoppel against any claim by the underlying borrower that he owes less than what the mortgage holder claims."
I, George, also remember that whenever you make a hypothecation loan that you should take possession of the original note and be sure to record your absolute assignment of the mortgage note.
I spoke again with Bill and he confirmed that I make a hypothecation loan that I should notify the underlying borrower that the mortgage holder has assigned the note to me and inform him that he should make all future payments directly to me.
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