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"FLASH" of Lightning )
Financial Brokers for Business & Commercial Loans June 2007
In this issue
  • Investment Real Estate - How Do I avoid the Pitfalls?
  • Key Commercial Loan Rates
  • Seller Carry Backs, the key to making deals happen
  • Ask the Broker?
  • Greetings Harlan,

    Welcome to "Flash" of Lightning, our monthly newsletter.

    We've written this brief newsletter to keep you, our friend and client abreast of the latest information regarding all areas of financing. We will share with you relevant articles that pertain to financing either commercial projects or business acquisitions.

    Signature
    Harlan A. Friedman, President & Broker

    Investment Real Estate - How Do I avoid the Pitfalls?

    Now that we have concluded our discussion about investment types, I now want to shift our focus in the coming newsletters to Financing lessons we have learned over the years.

    These case histories will hopefully shed some light on how lenders think. Most of the following examples are going to be what I termed great lessons learned, however with no economic return for the investor or us the broker.

    Why do I choose to share our failures with you?, because as Thomas Edison stated he did not fail 10,000 times, he instead found 10,000 ways not to create a light bulb.

    Why would anyone want to buy Mobile Home Parks? More and more investors are contacting us to help them finance the purchase of a Mobile Home Park, but again I ask you why? The reason is very simple THEY ARE A CASH COW! as so aptly said by our recent investor, Michael.

    Michael's company is a development firm that is constantly looking to purchase existing parks. His company loves the cash flow from the leases. His company turned to our firm to help secure financing for a park that was located out of state.

    We were able to secure a great loan for him at very attractive rates and points, the problem was that at the end of the day we were unable to close the loan because the property did not appraise at the purchase price.

    So why would I talk about a loan that did not close... It is to make a point that we can learn from misfortunes, and what we learned was that no matter how the property cash flowed, a key ingredient of a mobile home park as with other commercial ventures is the final appraisal of the property by the lender A cardinal rule when working with a lender is not to contract with an appraiser. Most lenders will not accept an appraisal that they did not order.

    So save your money and let the lender order the appraisal or you may wind up having to pay for two appraisals.

    The investors were a bit gun shy on this transaction because the owner of the park owned more than 25% of the coaches. Another key underwriting point is that the investors or lenders do not like to lend on parks that own the coaches outright as well. Many of the lenders that specialize in the area of mobile home park loans will not lend on park owned coaches. In actuality they will deduct the fair market value of any park owned coach from the purchase prices.

    Most parks are owned by an investor who leases out the spaces to the owner of the individual mobile homes. The investor then gets a monthly rent check with none of the traditional headaches that come along with traditional multi family income properties.

    The rental income for the individually owned units remains in place for as long as the owner or the tenant of the mobile home has his space in the park. Many of the nicer parks also have other income based amenities that increase the projects bottom line.

    Key Commercial Loan Rates

    Key Commercial Loan Indexes

    Fed Prime Rate 8.250%

    10-Year CMT 4.900%

    30-Year CMT 5.010%

    USD 6 MOS LIBOR 5.390%

    As of June 1, 2007

    Seller Carry Backs, the key to making deals happen

    What is a seller carry back? A seller carry back is exactly that - a seller holds a portion of the note, so in essence the seller becomes a banker to you the borrower.

    The sellers security position; either first trust deed holder or second trust deed holder depends on the size of the note carried back. For example if the larger loan amount is held by a financial institution and not the seller the sellers position would be second; that of subordinate to the financial institutions first position.

    If on the converse the seller has the predominant loan amount the sellers position would be that of a first note holders position. (In actuality, though most financial institutions are not going to subordinate to a sellers note.) The banks usually insist that they are in first position no matter what the size of the sellers note.

    With a seller carry back, the borrower makes payments directly to the seller for the amount of the loan they financed. Generally speaking these payments are less than what a bank would be charging, because they are usually short term loans with no scheduled principal reduction. Therefore the entire loan would become due at maturity.

    By working directly with the seller you can help the seller solve many of their problems, and in return he becomes your partner in the land development transaction.

    Sellers often believe that they can get a better price for their real estate if they carry the paper that evidences the debt themselves.

    Here are some of the reasons

    Buyers may have qualification issues, and if that's the case you as a buyer may not be as concerned about the interest rate, price and terms and therefore the seller as the one assuming the risk will get a higher price and you get the deal that you were not bank qualified for.

    The Seller will get greater after-tax profits. By the seller carrying paper they will not be taxed on the amount of the sale, but their tax will be based on the installments paid over the years.

    In other words a large capital gain may "push" them into a higher tax bracket, but if the sale is spread out over a period of years, the seller may not be pushed into a higher tax bracket.

    Although the above paragraphs reflect the use of a seller carry back note in the area of real estate development, these notes are also used to a greater extent with the purchase of a business.

    As I've stated in many of these newsletters 95% of all business bought for under $500,000 are all business that are operated out of leased property. therefore there is no real estate security. Most lenders, where there is not significant collateral, will not lend for a "biz op". Therefore the major source of financing for biz ops are seller notes.

    Who better to lend against a business opportunity than the previous owner. Worst case scenario, if the borrower defaults the seller keeps the down payment the borrower put up and they take their business back and resell it.

    When structured correctly a seller carry back can be the difference between closing a deal and having to walk away from the deal because of no financing.
    A bank does not want to take a business back with no real estate value.

    Ask the Broker?

    I am a successful commercial developer and have not had a difficult time finding financing in the past. Now it seems that I spend more time looking for financing than building projects.

    Can you explain this trend and why hiring a broker to find my financing may be in my best interest?
    J.P.

    J.P; It's a great question and one that can have many answers. I believe the reason we are seeing such a tightening in the market for development finance is because of the market influences that are all converging at one time in our economic market place.

    Some of the experts in the Real Estate industry are equating this calamity to the Perfect Storm, where three storm converged at one time. However this storm is actually five storms coming together.

    The five pieces of the economic storm are the following:

    Highest amount of developer unsold standing inventory
    Highest number of investor properties on the market
    Economic turmoil with interest rates and the Sub Prime melt down.
    Bank Foreclosures and Repossessions are at an all time high
    Lastly the normal move ups and move downs of a typical real estate cycle.

    With all the above happening how can a seasoned developer like you not expect to spend more time searching for financing.

    Your next part of your question is simpler to answer. By using an individual or a company whose sole purpose is to search for money for their clients, they become the captain who knows how to weather the perfect storm by finding safe havens along the route.

    Commercial finance brokers know where the money is, and more importantly what lenders are lending in what market.

    Please email your questions to "Ask Your Financial Broker" at Askthebroker@loanforbiz.com.

    P.S. If you are interested in joining our company please contact either Harlan or David directly. We will be expanding this year and would like to have you join us. For those financially astute individuals we offer a proven system to build your commercial finance business along with comprehensive training.

    UP-Coming Seminars
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    Call the Office at 858-592-0659 for upcoming topics, times and dates.

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    Lightning Commercial Funding, Inc. | 16486 Bernardo Center Drive | Suite 100 | San Diego | CA | 92128