Are new industries get rich quick areas and so very risky?
Are you a business owner who want to sell and retire?
Do you want all of your equity, and to sell your business within 30 days??
We buy small businesses on terms and provide you business with your hard earned equity!
Call now 972-891-9364
Monday, April 27, 2015
Saturday, November 22, 2014
lease-option.net
Sell or Lease Your House Today!!! Transferred? Bad Tenants? Need Fast Cash? Behind on Payments? House Vacant? Moving? Double Payments? Divorce? Estate Sale?..... House Simply Won’t Sell? Here Is Your Quick and Easy Solution: - Fast Closing – Even Within 48 Hours - Instant Debt Relief! - Cash!!! - Freedom From Maintenance Hassles! - Guaranteed Written Offer Within 48 Hours! Call Toll Free 24 Hr. Recorded Message: 888-418-4062x101 www.sellhousesfastin36hrs.com www.lease-option.net www.ljjewelpropertieshousehunters.net www.cashbuyersfast.com
http://lease-option.net
Cashbuyersfast
Sell or Lease Your House Today!!! Transferred? Bad Tenants? Need Fast Cash? Behind on Payments? House Vacant? Moving? Double Payments? Divorce? Estate Sale?..... House Simply Won’t Sell? Here Is Your Quick and Easy Solution: - Fast Closing – Even Within 48 Hours - Instant Debt Relief! - Cash!!! - Freedom From Maintenance Hassles! - Guaranteed Written Offer Within 48 Hours! Call Toll Free 24 Hr. Recorded Message: 888-418-4062x101 www.sellhousesfastin36hrs.com www.lease-option.net www.cashbuyersfast.com www.ljjewelpropertieshousehunters.net
http://cashbuyersfast.com
Sellhousesfastin36hrs
Sell or Lease Your House Today!!! Transferred? Bad Tenants? Need Fast Cash? Behind on Payments? House Vacant? Moving? Double Payments? Divorce? Estate Sale?..... House Simply Won’t Sell? Here Is Your Quick and Easy Solution: - Fast Closing – Even Within 48 Hours - Instant Debt Relief! - Cash!!! - Freedom From Maintenance Hassles! - Guaranteed Written Offer Within 48 Hours! Call Toll Free 24 Hr. Recorded Message: 888-418-4062x101 www.sellhousesfastin36hrs.com www.lease-option.net www.cashbuyersfast.com www.ljjewelpropertieshousehunters.net
http://sellhousesfastin36hrs.com
ljjewelproperties
Sell or Lease Your House Today!!! Transferred? Bad Tenants? Need Fast Cash? Behind on Payments? House Vacant? Moving? Double Payments? Divorce? Estate Sale?..... House Simply Won’t Sell? Here Is Your Quick and Easy Solution: - Fast Closing – Even Within 48 Hours - Instant Debt Relief! - Cash!!! - Freedom From Maintenance Hassles! - Guaranteed Written Offer Within 48 Hours! Call Toll Free 24 Hr. Recorded Message: 888-418-4062x101 www.sellhousesfastin36hrs.com www.lease-option.net
http://ljjewelpropertieshousehunters.net
Monday, August 18, 2014
PLACING A COMMERCIAL LOAN WHEN
THE BANKS ARE JUST TOO TERRIFIED TO LEND
First I’m going to depress you, and then I’m going to give you some terrific, practical tips.
The Tightest Commercial Mortgage Lending Market in 25 Years
Commercial real estate has already tumbled by 40%. Bank economists are secretly telling
their executives that a double dip recession is a serious possibility. Commercial real estate
could potentially fall another 40% from here. The banks are scared.
As a result, conventional commercial mortgage lending is down by more than 70%
compared to 2006. The entire conduit industry has completely evaporated. Investors no
longer want to buy bonds backed by commercial mortgage loans (commercial mortgage
backed securities).
The conduit industry used to make over 50% of the total dollar volume of commercial
mortgage loans. Imagine that – an industry that used to make around 53% of all of the
commercial mortgage loans in the country ‐ has been effectively nuked off the planet.
Life companies still make commercial mortgage loans ‐ if the commercial property is
almost brand new, if the loan amount is larger than $5 million, and if the borrower can be
satisfied with a loan amount that is just 55% loan‐to‐value.
The savings and loan industry has contracted almost out of existence. There are only two
surviving mortgage REIT’s in the entire country that are still making commercial mortgage
loans today, and both of them charge hard money rates.
This leaves only the commercial banks and a handful of hard money lenders still making
commercial mortgage loans.
Banks will make you a conventional commercial mortgage loan today, but they will do so
willing only if the borrower is a big depositor. If your borrower is not a “good bank
customer” (someone who maintains huge cash deposits with the bank), your commercial
loan will probably be cut back from 75% loan‐to‐value (LTV) to just 55% to 63% LTV. The
borrower’s credit will have to be almost perfect, and his commercial property had better be
pretty snazzy‐looking. And, of course, it will have to be fully‐leased.
What if the deal has a small black hair? Your borrower may have to pay hard money rates.
Ouch.
Bottom line: If you hope to place a commercial mortgage loan today, you are going to have
to work hard.
Where Should You Start?
What happened when the borrower applied to his own bank? You need to find this out
because the borrower’s bank could have an offer on the table that you will never be able to
beat. I often tell brokers, “The only lender who can make a cheaper commercial loan than
the borrower’s own bank is his mother.” The borrower’s bank doesn’t want to lose his
deposits, so the bank can often be pressured into making a commercial loan. When it does,
their loan terms can seldom be beaten by any other bank.
If the borrower’s own bank wouldn’t help him, try another small bank located in the town
where the borrower lives. Be sure to sit down with the bank president (branch manager)
and offer to move all of your borrower’s bank accounts to this new bank, if he
accommodates the client’s commercial loan needs. Bankers are always looking for new
deposits, especially bankers who work for small banks.
What if your borrower doesn’t maintain large enough cash balances to attract a bank? You
may want to refinance his personal residence and just store the cash proceeds in his
checking account until after you find a bank willing to make him a commercial loan.
Remember, banks will only make a loan when the borrower is sitting on a pile of cash.
Commercial Lenders Like to Make Local Loans
If your borrower doesn’t maintain large enough cash balances to attract a bank, you should
submit his commercial loan application to some banks located close to the subject
commercial property. All banks greatly prefer to make commercial loans in their own
backyard.
Match the Size of Your Loan to the Size of the Bank
Small banks make small loans. Large banks make large banks. Don’t try to submit a
$200,000 commercial loan to Bank of America or a $20 million loan to the tiny 1st National
Bank of Smallsville.
Be Prepared to Submit Your Commercial Loan Application to 50 to 150 Lenders
Before the Great Commercial Lending Drought, the first commercial lender to whom you
submitted a commercial loan would often fund the deal. That almost never happens
nowadays. Today a broker will often have to submit a commercial loan request to 50 to
150 banks before finally finding one who really wants to do the deal.
.
Look for Government Commercial Loan Programs
Earlier I used the term “conventional commercial mortgage loan”. By this I mean a loan
that is not guaranteed by the government. When times are scary, banks and other
commercial lenders greatly prefer to make loans that are guaranteed by the U.S.
government, such as SBA loans and USDA Business and Industries (B&I) loans.
You have probably already heard about Small Business Administration (SBA) loans. The
property must be 51% used by the owner’s business. The Federal government then
guarantees up to 90% of the loan, so the lending bank has very little money at risk. Banks
and other SBA lenders, because 90% of the loan is guaranteed, will often lend up to 90%
loan‐to‐value on owner‐user commercial properties.
But there is another government loan program about which you may not have heard – the
U.S. Department of Agriculture’s (USDA’s) Business and Industries (B&I) loan program.
This is a government guaranteed loan program for commercial and industrial properties
located in rural areas.
The USDA B&I program is modeled after the SBA loan program. The Federal government
will guarantee up to 90% of an eligible loan, in exchange for a guarantee fee. The loan must
still be made by a bank, but since a bank only has 10% of the loan at risk, the bank will
often make a commercial or industrial real estate loan up to 90% loan‐to‐value.
A rural area, for this program, is a rural city or town with fewer than 50,000 residents. The
city or town cannot just be a small city located in a highly populated area, where one city
runs into another. It has to be an area with a low population density. The USDA’s site has
a map of every town in America, and you can plot your property on the map and see if it
falls into an eligible area.
http://eligibility.sc.egov.usda.gov/eligibility
Now the really cool thing about a USDA B&I loan is that the property does not have to be an
owner‐user building. It can be a rental property.
Since banks are making few conventional commercial real estate loans, you should try
hard to fit your loan request into the parameters of some government loan program –
such as SBA loans, USDA loans, Fannie Mae or Freddie Mac apartment loans, or one of
HUD’s apartment construction loan programs.
Where to Find Commercial Lenders
Since the only lenders making commercial real estate loans at reasonable rates today are
banks, you could rephrase the above expression to, “Where can I find banks making
commercial real estate loans?”
Since just about every bank will make a commercial real estate loan, if the borrower
promises to be a big depositor or if the loan is located close to the bank and it is very, very
secure, we could even shorten the question to, “Where can I find banks?”
Unfortunately 20 to 40 banks may not be enough. During the Great Commercial Lending
Drought, you may have to submit your commercial deal to 50 to 150 different banks.
You can find additional banks by going to maps.yahoo.com. Bring up a map of the subject
property’s location. Then, in the Find a Business field, type in the word, “bank.” You’ll find
hundreds of banks located near almost every commercial property in the country.
Summary
Placing a commercial real estate loan during the Great Commercial Lending Drought is not
going to be easy. You will probably have to submit your commercial loan application to 50
to 150 commercial lenders.
If none of these banks wants to do the deal, you can find more banks located close to your
property using maps.yahoo.com.
Then it is merely a matter of being persistent. If your deal is bankable and you keep
presenting it to banks, eventually you should find a bank willing to do your deal.
Got a Good Commercial Deal That is Not Quite Bankable?
Call our hard money lending company
Lloyd Carrington Jr.
Interstate Financial Group Inc.
3629 US HWY 80 EAST #220
Mesquite, TX 75150
972‐891‐9364 Office
866‐486‐0197 Fax
lloyd@interstatefinancialgrouponline.com
http://interstatefinancialgrouponline.com
THE BANKS ARE JUST TOO TERRIFIED TO LEND
First I’m going to depress you, and then I’m going to give you some terrific, practical tips.
The Tightest Commercial Mortgage Lending Market in 25 Years
Commercial real estate has already tumbled by 40%. Bank economists are secretly telling
their executives that a double dip recession is a serious possibility. Commercial real estate
could potentially fall another 40% from here. The banks are scared.
As a result, conventional commercial mortgage lending is down by more than 70%
compared to 2006. The entire conduit industry has completely evaporated. Investors no
longer want to buy bonds backed by commercial mortgage loans (commercial mortgage
backed securities).
The conduit industry used to make over 50% of the total dollar volume of commercial
mortgage loans. Imagine that – an industry that used to make around 53% of all of the
commercial mortgage loans in the country ‐ has been effectively nuked off the planet.
Life companies still make commercial mortgage loans ‐ if the commercial property is
almost brand new, if the loan amount is larger than $5 million, and if the borrower can be
satisfied with a loan amount that is just 55% loan‐to‐value.
The savings and loan industry has contracted almost out of existence. There are only two
surviving mortgage REIT’s in the entire country that are still making commercial mortgage
loans today, and both of them charge hard money rates.
This leaves only the commercial banks and a handful of hard money lenders still making
commercial mortgage loans.
Banks will make you a conventional commercial mortgage loan today, but they will do so
willing only if the borrower is a big depositor. If your borrower is not a “good bank
customer” (someone who maintains huge cash deposits with the bank), your commercial
loan will probably be cut back from 75% loan‐to‐value (LTV) to just 55% to 63% LTV. The
borrower’s credit will have to be almost perfect, and his commercial property had better be
pretty snazzy‐looking. And, of course, it will have to be fully‐leased.
What if the deal has a small black hair? Your borrower may have to pay hard money rates.
Ouch.
Bottom line: If you hope to place a commercial mortgage loan today, you are going to have
to work hard.
Where Should You Start?
What happened when the borrower applied to his own bank? You need to find this out
because the borrower’s bank could have an offer on the table that you will never be able to
beat. I often tell brokers, “The only lender who can make a cheaper commercial loan than
the borrower’s own bank is his mother.” The borrower’s bank doesn’t want to lose his
deposits, so the bank can often be pressured into making a commercial loan. When it does,
their loan terms can seldom be beaten by any other bank.
If the borrower’s own bank wouldn’t help him, try another small bank located in the town
where the borrower lives. Be sure to sit down with the bank president (branch manager)
and offer to move all of your borrower’s bank accounts to this new bank, if he
accommodates the client’s commercial loan needs. Bankers are always looking for new
deposits, especially bankers who work for small banks.
What if your borrower doesn’t maintain large enough cash balances to attract a bank? You
may want to refinance his personal residence and just store the cash proceeds in his
checking account until after you find a bank willing to make him a commercial loan.
Remember, banks will only make a loan when the borrower is sitting on a pile of cash.
Commercial Lenders Like to Make Local Loans
If your borrower doesn’t maintain large enough cash balances to attract a bank, you should
submit his commercial loan application to some banks located close to the subject
commercial property. All banks greatly prefer to make commercial loans in their own
backyard.
Match the Size of Your Loan to the Size of the Bank
Small banks make small loans. Large banks make large banks. Don’t try to submit a
$200,000 commercial loan to Bank of America or a $20 million loan to the tiny 1st National
Bank of Smallsville.
Be Prepared to Submit Your Commercial Loan Application to 50 to 150 Lenders
Before the Great Commercial Lending Drought, the first commercial lender to whom you
submitted a commercial loan would often fund the deal. That almost never happens
nowadays. Today a broker will often have to submit a commercial loan request to 50 to
150 banks before finally finding one who really wants to do the deal.
.
Look for Government Commercial Loan Programs
Earlier I used the term “conventional commercial mortgage loan”. By this I mean a loan
that is not guaranteed by the government. When times are scary, banks and other
commercial lenders greatly prefer to make loans that are guaranteed by the U.S.
government, such as SBA loans and USDA Business and Industries (B&I) loans.
You have probably already heard about Small Business Administration (SBA) loans. The
property must be 51% used by the owner’s business. The Federal government then
guarantees up to 90% of the loan, so the lending bank has very little money at risk. Banks
and other SBA lenders, because 90% of the loan is guaranteed, will often lend up to 90%
loan‐to‐value on owner‐user commercial properties.
But there is another government loan program about which you may not have heard – the
U.S. Department of Agriculture’s (USDA’s) Business and Industries (B&I) loan program.
This is a government guaranteed loan program for commercial and industrial properties
located in rural areas.
The USDA B&I program is modeled after the SBA loan program. The Federal government
will guarantee up to 90% of an eligible loan, in exchange for a guarantee fee. The loan must
still be made by a bank, but since a bank only has 10% of the loan at risk, the bank will
often make a commercial or industrial real estate loan up to 90% loan‐to‐value.
A rural area, for this program, is a rural city or town with fewer than 50,000 residents. The
city or town cannot just be a small city located in a highly populated area, where one city
runs into another. It has to be an area with a low population density. The USDA’s site has
a map of every town in America, and you can plot your property on the map and see if it
falls into an eligible area.
http://eligibility.sc.egov.usda.gov/eligibility
Now the really cool thing about a USDA B&I loan is that the property does not have to be an
owner‐user building. It can be a rental property.
Since banks are making few conventional commercial real estate loans, you should try
hard to fit your loan request into the parameters of some government loan program –
such as SBA loans, USDA loans, Fannie Mae or Freddie Mac apartment loans, or one of
HUD’s apartment construction loan programs.
Where to Find Commercial Lenders
Since the only lenders making commercial real estate loans at reasonable rates today are
banks, you could rephrase the above expression to, “Where can I find banks making
commercial real estate loans?”
Since just about every bank will make a commercial real estate loan, if the borrower
promises to be a big depositor or if the loan is located close to the bank and it is very, very
secure, we could even shorten the question to, “Where can I find banks?”
Unfortunately 20 to 40 banks may not be enough. During the Great Commercial Lending
Drought, you may have to submit your commercial deal to 50 to 150 different banks.
You can find additional banks by going to maps.yahoo.com. Bring up a map of the subject
property’s location. Then, in the Find a Business field, type in the word, “bank.” You’ll find
hundreds of banks located near almost every commercial property in the country.
Summary
Placing a commercial real estate loan during the Great Commercial Lending Drought is not
going to be easy. You will probably have to submit your commercial loan application to 50
to 150 commercial lenders.
If none of these banks wants to do the deal, you can find more banks located close to your
property using maps.yahoo.com.
Then it is merely a matter of being persistent. If your deal is bankable and you keep
presenting it to banks, eventually you should find a bank willing to do your deal.
Got a Good Commercial Deal That is Not Quite Bankable?
Call our hard money lending company
Lloyd Carrington Jr.
Interstate Financial Group Inc.
3629 US HWY 80 EAST #220
Mesquite, TX 75150
972‐891‐9364 Office
866‐486‐0197 Fax
lloyd@interstatefinancialgrouponline.com
http://interstatefinancialgrouponline.com
Capital escaping you?? Preferred Equity, Interstate Financial Group Inc., aka interstatefinancialgrouponline.com
UNDERSTANDING PREFERRED EQUITY
What on Earth is Preferred Equity?
Explained in Simple, Layman’s Terms
Get excited. Preferred equity makes closing commercial real estate deals
much easier.
If you are a buyer of commercial investment real estate – like multi-tenant
office buildings and strip centers – preferred equity allows you to buy the
property with a much smaller down payment. Commercial brokers, you
should be doing dog-flips over the possibility of getting your commercial
real estate buyers into properties with just a 25% down payment.
If you are a banker, preferred equity allows you to close safe, new,
commercial real estate loans at just 58% to 63% loan-to-value, even though
your borrower is insisting on 75% financing.
And if you’re a commercial mortgage broker, imagine being able to compete
against Bank of America, Wells Fargo Bank, or JP Morgan Chase on a new,
$2 million, commercial permanent loan – and then winning! How could you
possibly win against these behemoths? Because you can often get the
borrower more leverage. You can lend up to 75% loan-to-value, or maybe
even 80% LTV, when these big banks are limiting their deals to a much
lower LTV. In many cases, it’s not the lender with the lowest interest rate
that wins. The winning lender is often the one willing to loan the most
money.
“That all sounds great, Lloyd, but what on earth is preferred equity?”
The best way to understand preferred equity is to listen in on a conversation
between Bob Young, a 40-year-old owner of a successful tool and die
company, and Steve Elder, his father-in-law, a 65-year-old retired real estate
broker.
The younger man wants to buy a $1.5 million strip center in a suburb of
Austin, Texas. He applied to the bank for $1,125,000 loan, which is 75% of
the purchase price. His plan was to put down $375,000 in cash, which is
25% of the purchase price. Bob is pretty excited about this deal because
there was been very little new commercial construction going on in Austin
for the past six years, during which time the population has swollen by
another 65,000 residents.
Unfortunately, the bank came back and said, “I’m sorry, Bob. We like the
project, and your credit is impeccable, but Loan Committee is still pretty
nervous about the economy. The most we’ll lend is $1 million. You’ll have
to come up with an extra $125,000 in down payment.” The problem is that
Bob doesn’t have an extra $125,000 in cash to put down - hence his visit to
his father-in-law.
After hearing about the fundamentals of the purchase, Steve Elder says,
“The deal sounds fine, Bob. I have the dough to invest, but at this stage of
my life, I’m looking for immediate income, not the chance to double or
triple my investment over the next five years. Why don’t I just loan you the
$125,000 and take a second mortgage on the property?”
[Important note!] “Unfortunately, Mr. Elder,” Bob replied, “banks won’t
allow second mortgages on commercial properties anymore. After the Great
Recession, they are worried about overburdening the property with debt. If
money gets tight, the owner might be tempted to use the monies earmarked
for repairs and maintenance to make the payments on the second mortgage.
The repairs would go unmade, the property would physically deteriorate, the
roof might start to leak, the tenants might start to move out, and the bank
might end up foreclosing on a vacant building infested with mold.”
“Bottom line, Mr. Elder,” Bob concluded, “banks simply will not allow
second mortgages on commercial properties anymore.”
“You know, Bob,” says the old-time real estate broker. “you’re a good
businessman, and you have been a great husband to my daughter. I’m
going to help you. Here’s how we’ll structure the deal.”
“I’ll go in with you to buy this property. I’ll contribute $125,000 in equity,
and we’ll add my equity dollars to your $375,000 down payment to raise the
$500,000 down payment required by the bank. The bank will make its $1
million first mortgage, and there will be no other debt on the property.”
“You and I, Bob, will form a limited liability company, and we’ll put in the
Operating Agreement a customized agreement on how we’ll split the cash
flow and the profit. After all, you’re still a young buck, and you won’t be
ready to retire for another 25 years. The most important thing to you, since
you’re still getting a monthly paycheck, is the chance to double or triple
your money.”
“In contrast, I’m 65-years-old, and I’m retired. I need monthly income.
Therefore, I’ll trade you. I’ll give you all of the upside profit, after I get a
preferred return of, say, 16% annually. You can have the rest of the profit.
My investment is what is called a “preferred equity investment.”
“Will the bank allow this? Your investment is sort of like a second
mortgage.” the younger man asked.
“Sure, the bank will allow it,” replied the old veteran. “Unlike a mortgage,
the monthly payments on a preferred equity investment do NOT have to be
paid. If the cash flow on the property is tight, the owner can simply allow
the preferred equity payments to accrue and defer. Of course, the unpaid
preferred equity payments compound monthly at a 16% annual rate, so you
probably would not want to miss too many payments. The preferred return
would quickly eat up the owner’s equity.”
“Mr. Elder,” Bob commented, “I greatly appreciate your help, but why does
your preferred return have to be so HIGH? 16%? Ouch!”
“Bob, this deal has to make sense for both of us. I could take my $125,000
and invest in hard money first mortgages yielding 12%. This would be far
less risky.”
“Just think about it,” Mr. Elder continued. “If you lost your commercial
tenants, I might be forced to make the $6,300 monthly payments on the first
mortgage every month for God knows how long, until we find new tenants;
otherwise, the bank would simply foreclose and wipe us out.”
“I couldn’t even sue you to collect my $125,000 investment because I’m an
equity investor, rather than a lender. You will never even sign a note
promising to repay me,” Mr. Elder explained. “My investment is equity, not
debt. My repayment is totally dependent on the success of this venture.
Yields of 16% to 22% are quite common for equity money.”
“But Mr. Elder,” Bob complained, “how can I make any money when I have
to pay 16% for capital?”
“There is an old saying in finance, Bob,” the wise veteran counseled. “The
Lord forgives everyone except he who fails to crunch the numbers. You
need to do the math. Sure, you’ll be paying 16% on $125,000 – but because
of our combined down payment, you will get to borrow $1 million at just
4.875% interest! Your weighted average cost of funds on your $1,125,000
total capital stack is just 6.1%. By historical standards, that’s incredibly
low, even lower than the cap rate on this strip center. You’ll actually be
earning a positive spread on your debt. In other words, you’ll enjoy a
handsome positive cash flow.”
“But it gets better, Bob,” Mr. Elder joked, using his best imitation of a
Ronco TV advertiser’s voice. “I’ll let you prepay me, in full or in part, at
any time, without penalty. Therefore, if you have a good month, and the
property throws off an extra $3,000 that month, you can send that $3,000 on
to me and thereby reduce the amount upon which you are paying 16%.”
“Bob, this is a good deal for both of us. You should do it.”
This is a Lloyd Carrington Jr. speaking now.
You can use our preferred equity for more than just the purchase of
commercial real estate. For example, let’s suppose you have a $2 million
balloon payment coming due on your office building, but your bank will
only lend you $1.6 million. i may take a $400,000
preferred equity position in your building to make up the shortfall.
I.F.G.Inc.is looking for preferred equity deals, between $100,000
and $600,000, nationwide. (We might consider up to $1 million in
California or in one of the economically booming areas of Texas.) We do
not invest in new construction or land deals, and our appetite for renovation
deals is very limited. Renovations almost always cost twice what the
developers project.
We greatly prefer garden-variety rental properties, such as apartment
buildings, office buildings, shopping centers, strip centers, retail buildings,
industrial buildings, and self-storage facilities. We do not like special use,
single purpose properties; but we might consider a newer, flagged hotel.
Do you have a potential deal? Please call Lloyd Carrington Jr. at 972-891-9364
or email lloyd@interstatefinancialgrouponline.com. In the Subject line, please type,
“Preferred Equity Deal.”
http//::interstatefinancialgrouponline.com
What on Earth is Preferred Equity?
Explained in Simple, Layman’s Terms
Get excited. Preferred equity makes closing commercial real estate deals
much easier.
If you are a buyer of commercial investment real estate – like multi-tenant
office buildings and strip centers – preferred equity allows you to buy the
property with a much smaller down payment. Commercial brokers, you
should be doing dog-flips over the possibility of getting your commercial
real estate buyers into properties with just a 25% down payment.
If you are a banker, preferred equity allows you to close safe, new,
commercial real estate loans at just 58% to 63% loan-to-value, even though
your borrower is insisting on 75% financing.
And if you’re a commercial mortgage broker, imagine being able to compete
against Bank of America, Wells Fargo Bank, or JP Morgan Chase on a new,
$2 million, commercial permanent loan – and then winning! How could you
possibly win against these behemoths? Because you can often get the
borrower more leverage. You can lend up to 75% loan-to-value, or maybe
even 80% LTV, when these big banks are limiting their deals to a much
lower LTV. In many cases, it’s not the lender with the lowest interest rate
that wins. The winning lender is often the one willing to loan the most
money.
“That all sounds great, Lloyd, but what on earth is preferred equity?”
The best way to understand preferred equity is to listen in on a conversation
between Bob Young, a 40-year-old owner of a successful tool and die
company, and Steve Elder, his father-in-law, a 65-year-old retired real estate
broker.
The younger man wants to buy a $1.5 million strip center in a suburb of
Austin, Texas. He applied to the bank for $1,125,000 loan, which is 75% of
the purchase price. His plan was to put down $375,000 in cash, which is
25% of the purchase price. Bob is pretty excited about this deal because
there was been very little new commercial construction going on in Austin
for the past six years, during which time the population has swollen by
another 65,000 residents.
Unfortunately, the bank came back and said, “I’m sorry, Bob. We like the
project, and your credit is impeccable, but Loan Committee is still pretty
nervous about the economy. The most we’ll lend is $1 million. You’ll have
to come up with an extra $125,000 in down payment.” The problem is that
Bob doesn’t have an extra $125,000 in cash to put down - hence his visit to
his father-in-law.
After hearing about the fundamentals of the purchase, Steve Elder says,
“The deal sounds fine, Bob. I have the dough to invest, but at this stage of
my life, I’m looking for immediate income, not the chance to double or
triple my investment over the next five years. Why don’t I just loan you the
$125,000 and take a second mortgage on the property?”
[Important note!] “Unfortunately, Mr. Elder,” Bob replied, “banks won’t
allow second mortgages on commercial properties anymore. After the Great
Recession, they are worried about overburdening the property with debt. If
money gets tight, the owner might be tempted to use the monies earmarked
for repairs and maintenance to make the payments on the second mortgage.
The repairs would go unmade, the property would physically deteriorate, the
roof might start to leak, the tenants might start to move out, and the bank
might end up foreclosing on a vacant building infested with mold.”
“Bottom line, Mr. Elder,” Bob concluded, “banks simply will not allow
second mortgages on commercial properties anymore.”
“You know, Bob,” says the old-time real estate broker. “you’re a good
businessman, and you have been a great husband to my daughter. I’m
going to help you. Here’s how we’ll structure the deal.”
“I’ll go in with you to buy this property. I’ll contribute $125,000 in equity,
and we’ll add my equity dollars to your $375,000 down payment to raise the
$500,000 down payment required by the bank. The bank will make its $1
million first mortgage, and there will be no other debt on the property.”
“You and I, Bob, will form a limited liability company, and we’ll put in the
Operating Agreement a customized agreement on how we’ll split the cash
flow and the profit. After all, you’re still a young buck, and you won’t be
ready to retire for another 25 years. The most important thing to you, since
you’re still getting a monthly paycheck, is the chance to double or triple
your money.”
“In contrast, I’m 65-years-old, and I’m retired. I need monthly income.
Therefore, I’ll trade you. I’ll give you all of the upside profit, after I get a
preferred return of, say, 16% annually. You can have the rest of the profit.
My investment is what is called a “preferred equity investment.”
“Will the bank allow this? Your investment is sort of like a second
mortgage.” the younger man asked.
“Sure, the bank will allow it,” replied the old veteran. “Unlike a mortgage,
the monthly payments on a preferred equity investment do NOT have to be
paid. If the cash flow on the property is tight, the owner can simply allow
the preferred equity payments to accrue and defer. Of course, the unpaid
preferred equity payments compound monthly at a 16% annual rate, so you
probably would not want to miss too many payments. The preferred return
would quickly eat up the owner’s equity.”
“Mr. Elder,” Bob commented, “I greatly appreciate your help, but why does
your preferred return have to be so HIGH? 16%? Ouch!”
“Bob, this deal has to make sense for both of us. I could take my $125,000
and invest in hard money first mortgages yielding 12%. This would be far
less risky.”
“Just think about it,” Mr. Elder continued. “If you lost your commercial
tenants, I might be forced to make the $6,300 monthly payments on the first
mortgage every month for God knows how long, until we find new tenants;
otherwise, the bank would simply foreclose and wipe us out.”
“I couldn’t even sue you to collect my $125,000 investment because I’m an
equity investor, rather than a lender. You will never even sign a note
promising to repay me,” Mr. Elder explained. “My investment is equity, not
debt. My repayment is totally dependent on the success of this venture.
Yields of 16% to 22% are quite common for equity money.”
“But Mr. Elder,” Bob complained, “how can I make any money when I have
to pay 16% for capital?”
“There is an old saying in finance, Bob,” the wise veteran counseled. “The
Lord forgives everyone except he who fails to crunch the numbers. You
need to do the math. Sure, you’ll be paying 16% on $125,000 – but because
of our combined down payment, you will get to borrow $1 million at just
4.875% interest! Your weighted average cost of funds on your $1,125,000
total capital stack is just 6.1%. By historical standards, that’s incredibly
low, even lower than the cap rate on this strip center. You’ll actually be
earning a positive spread on your debt. In other words, you’ll enjoy a
handsome positive cash flow.”
“But it gets better, Bob,” Mr. Elder joked, using his best imitation of a
Ronco TV advertiser’s voice. “I’ll let you prepay me, in full or in part, at
any time, without penalty. Therefore, if you have a good month, and the
property throws off an extra $3,000 that month, you can send that $3,000 on
to me and thereby reduce the amount upon which you are paying 16%.”
“Bob, this is a good deal for both of us. You should do it.”
This is a Lloyd Carrington Jr. speaking now.
You can use our preferred equity for more than just the purchase of
commercial real estate. For example, let’s suppose you have a $2 million
balloon payment coming due on your office building, but your bank will
only lend you $1.6 million. i may take a $400,000
preferred equity position in your building to make up the shortfall.
I.F.G.Inc.is looking for preferred equity deals, between $100,000
and $600,000, nationwide. (We might consider up to $1 million in
California or in one of the economically booming areas of Texas.) We do
not invest in new construction or land deals, and our appetite for renovation
deals is very limited. Renovations almost always cost twice what the
developers project.
We greatly prefer garden-variety rental properties, such as apartment
buildings, office buildings, shopping centers, strip centers, retail buildings,
industrial buildings, and self-storage facilities. We do not like special use,
single purpose properties; but we might consider a newer, flagged hotel.
Do you have a potential deal? Please call Lloyd Carrington Jr. at 972-891-9364
or email lloyd@interstatefinancialgrouponline.com. In the Subject line, please type,
“Preferred Equity Deal.”
http//::interstatefinancialgrouponline.com
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