So You Want To Be A Commercial Mortgage Broker? Better Read This.

This is the first of a series of articles I am writing to help give those interested in becoming a commercial mortgage broker, the cold, hard facts about the industry and how to be successful.  The rewards can be considerable but you better know what in the heck you are talking about or you will make a mess of trying to close a commercial mortgage transaction.  I will make it easy, and just hit the bullet points.  If you have any specific questions just email or call, or just call even if you don’t have any questions as sometimes I get really lonely.

When I entered the real estate industry after graduating from college, Madonna was still “Like A Virgin” and “Money For Nothing” meant making money being a rock star and not about putting borrowers into four pay option ARM’s. Cell phones looked like suitcases and Michael Jackson still had a nose.  Bottom line, 1985 was a long time ago and all that says about me is that I am old and have a lot of experience in this business.

This experience includes real estate brokerage, appraisal, consulting, mortgage banking and REO management.  There is little I haven’t experienced in this industry and I enjoy helping others succeed in this exciting but volatile industry. My bio can be found at www.platinumfundinginc.com.

I have the attention span of gnat and from I have seen, most people in this business do as well.  I don’t have ADD so I think it has more to do with my schedule in this crazy market and lack of time rather than ingesting too much unrefined sugar as a child.  People like myself want information in a Cliff Notes fashion rather than a War and Peace Fashion and that is what I will attempt to do with this series of articles.

I’ll begin my first installment while sitting in my den in high backed leather chair wearing black Tommy Bahama sweat bottoms and a t-shirt that says “Iraq – You Break”. I now set down my glass of Glenmorangie 18 and place my 3 year old Powerbook in my lap and begin to type. My lab mix Suede stares at me with a disapproving stare for not walking her tonight.  Instead, I’m here to walk you through the pitfalls of commercial mortgage lending, stripped off the BS, naked and ready for you to take advantage.

Topic 1 –Commercial Property Types, Moneymakers VS. Time Wasters.

One of the main differences between residential mortgage lending and commercial is the vast number of various property types you will find in the commercial world.  In residential lending you basically have 4 property types: Single Family, Condo, Townhouse and 1-4 unit Multi-Family. In commercial, there are many different basic property types and these each have their own sub categories.  Also, the exact definition of each property type varies from lender to lender.  I will focus on the main ones and I suggest studying a good commercial mortgage glossary to learn the most important industry terms and the subgroups of each property type.

Below is a quick list of the main property types along with some things to consider when trying determining the viability of getting these types of properties financed. I will separate them into two groups, those that are fairly easy to find investors for and those that are much more difficult.  With this first installment I will just include the easier group, I will include the harder list in my next installment.  Remember that each of these main categories each has its own subgroup which can determine which investor will do the loan and which ones won’t.  I break these down on my website and will explain the differences for you on the phone or via if you wish:

Group 1 – The Easy Group (In order, easiest to hardest in my opinion)

•    Multi-Family (5 units and up and generally offer individual apartments for rent with common area facilities, such as an entrance, lobby, elevator, stairs, hallway, walks or grounds.) These are my favorites, easy to close, plenty of investors to choose from with excellent interest rates.  Only concern is that Multi Family properties in California typically don’t cash flow on paper once they get over around 65% LTV, you can still get them done however. 

Make sure that there aren’t three families living in a one-bedroom unit, it won’t pass muster with the appraiser and you will come across this from time to time.  Find out if there are Section 8 units in the complex, as that will affect future cash flow, this will eliminate some multi-family lenders from your consideration.  If there are Section 42 units in there just run away as it won’t be worth your time in my opinion.  If you see yellow ribbons draped around the exterior of the complex, that means it’s a crime scene, not that Tony Orlando is coming back home, pass on it, better properties will come along.

•    Retail (These will typically be stand-alone buildings such as supermarkets, convenience stores, drug stores, department stores, and beauty shops – as well as strip centers, and shopping centers.) I do pretty well with most of my retail deals, the only issue I find these days is that if it’s a shopping center which has a large anchor client like a grocery store, some investors are now wanting to see operating statements from the individual store instead of just from the owner of the retail strip, this is a recent phenomenon.

Also make sure you know the tenant makeup of these retail properties as some investors won’t lend on some of the businesses that are contained in them such as restaurants and dry cleaners etc. Also, if there is a “gentlemen’s club” in the retail complex, I almost said retail “strip”, then you might want to considering passing on the deal as that puts it in a whole new category in investors eyes.  Something to do with trying to re-lease a space with a brass pole in the middle of it.

•    Office (pretty self explanatory, probably what you are sitting in now. this category includes buildings that typically house businesses that and are typically clean uses, for instance, without chemicals or ovens etc.)  You will probably only be dealing with office buildings that are a few stories tall as most of the high rises are owned by large corporations and won’t need your services.  Make yourself familiar with the concept of “office condos” as these are becoming more and more popular. If you come across an office building that contains doctors or dentists, that is a different category for most investors since these may contain some chemicals and machinery which put it in a higher risk department.  If you come across one with just lawyers in it, simply burn it down and move on.

•    Mixed Use (Mixed use properties combine residential spaces with commercial uses, such as retail or office space. Often these properties have a ground floor retail store or office with apartment(s) above, all in the same building.)  These can be tricky depending on whether or not the apartment component sits side by side with the retail component or if it’s above it etc, it’s really up to the investor and they all view these deals differently. 

You usually need at least two apartment units along with the retail portion to really be considered by most investors.  Sometimes there are property condition issues and clean use issues with these as many sit over restaurants and other uses that many investors don’t like.  Picture neon light flashing, “Emma’s Curl Up and Dye” in your bedroom window every night.

•    Warehouse / Light Industrial (There is a lot of variance in this category.  This type may include single and multi-tenant facilities that are used for warehousing, light manufacturing, distribution, research and development. This category typically does not include buildings where heavy manufacturing or specialized industrial operations such as welding occur.)  It’s important to find out if the warehouse you are financing is a clean use or not as that will determine your investor.  There are many more investors for distribution warehouses than manufacturing warehouses or the distribution of hazardous material.  When I say hazardous materials I mean toxic things like oil and gas or Michael Bolton CD’s.  Remember that a clean use is easy to get done; a dirty use is not so easy.  Remember this little phrase, if it Sparks, Smokes or Smells; it is most likely not a clean use business.

•    Hospitality (Hotels and Motels fall into this category, it’s important to find out if they are flagged or not before agreeing to find financing for these. A flagged hotel is one that belongs to a nationwide franchise, like a Hilton or a Holiday Inn and is uniform in size, shape and pricing, these are much easier to finance than un-flagged hotels) When doing a motel remember that property condition will be important, as few investors are going to be thrilled about financing a place called the “No-Tell Motel” if you know what I mean. 

•    Automotive Services (This category includes most auto repair facilities to retail auto shops and part supply stores.  Car dealerships may also be included in this category) Most any type of property that has anything to do with the automotive industry will be scrutinized rather closely as there are always toxicity concerns.  Most of these were initially financed through an SBA loan, which means that there has already been a Phase 1 inspection done on the property.  Make sure you get a copy of this to show the investor.  Some lenders will do auto repair but not a gas station, I think it has something to do with the toxic hotdogs they sell.

•    Self-Storage (This property type includes non temperature controlled storage units, cold storage, RV and boat storage facilities, and truck terminals or transit facilities).  I don’t do a lot of these personally but there are investors that like them and as long as they cash flow and are clean you shouldn’t have to much trouble finding a home for them. Some lenders consider these to be “specialty properties” as they only have one real use, which is to store your once used tread mill and high school letter jacket.  Brick, concrete and wood frame structures are easier than steel frame.  Need to be in highly populated areas.

•    Health Care (This category includes all Assisted Living or Nursing Home types of operations where a license is required to operate the business.)  Again, not my cup of tea, I want to stay away from nursing homes as long as I can.  Although I hear Bingo night is fun and they serve fish sticks on Wednesdays.  There are a few investors that specialize in these property types so you can get these done.  One thing to remember is that you will need to find out if there is any pending litigation filed against the facility. 

Well, that wraps it up for Installment 1,  my glass is empty and as my tired head falls to the side of the headrest, all I see is the rear end of my dog Suede leaving the room in disgust at my lack of attention this evening. With her bowed hind legs, she walks like John Wayne with hemorrhoids.  See you next time when we tackle those really hard to do properties.