Where's Waldo?

I was embarrased today to look down and realize that it's been almost the whole week since I've updated the blog! This week, I've been spending time behind the wheel or in front of people, not at the desk.

Lots of great stuff going on, including an owner-occupiped property purchase at 90% LTV. This property may be eligible for a 30-year amortization.

The 30-year amortization is the newest crush I have. I've seen experienced commercial realtors and bank officers get pretty surprised when I show this product. When cash flow is the imperative, (and for most business owners, that's going to be the case), the math can be pretty impressive. On a 90% purchase transaction for a $300,000 property, the difference between the usual 15-year amortization and at 30-year would be $435 a month -- $5,184 per year. That's assuming that the 15-year loan has a lower interest rate, which isn't always the case.

Now that loan isn't for everyone. If your goal is to actually physically own the property, you should explore a 15-year fixed rate loan. (Fortunately, I can find that for you too.) If your first priority is cash flow, let's run some numbers and find out if a 30-year loan works for you.

New rules 1-5

What does the "credit crunch" mean for a local entrepreneur? Someone who wants to buy a 12-plex apartment house, or a gas station, or an office building?

It means a lot of things: it means we run an increased recession risk, as some of the big companies are dancing on the edge of bankruptcy. It means that if you have the nerve to buy while prices are falling, you can get into some very good deals. It means that some lenders are running away from you and others are running towards you.

But in short summary, here are the new rules 1-5 for what it means:

Rule 1: Make sure your debt is structured in ways that make sense for you.
Rules 2-5: See Rule 1.

Let's say, for instance, that the cash flow of your property is just okay. If an economic turndown means that you could be losing money, you should investigate a rate/term refinance. We have some 30-amortizations that can increase cash flow.

Let's say you need to free up some operating reserves. If you can lock in a good payment for 5 to 7 years now, and still free up cash, now's a great time to do that.

In my own opinion, the worst thing you can do is to hold on to an adjustable rate commercial mortgage. If property values fall, you may not be able to refi out of it.

Take a look at your payments now and make sure that the loans you're in are the loans you can be in for another 3-5 years. If not, call me today.

How will Rudd and Brown color the credit crunch?

Hope everyone had a great Thanksgiving. I would have preferred my long weekend to include a KU victory over at Arrowhead Stadium, but you can't have everything -- including a win over a very good, very fast team you've just spotted 14 point lead.

Over the long weekend, Australians decided to go moderately socialist by electing the Labor Party, headed by Kevin Rudd, who has described himself as an "economic conservative" who believes in an "activist government".

Leaving aside that head-spinning level of cognitive dissonance, what I'm wondering is what kind of trouble this spells for the worldwide credit-crunch. With the recent elevation of Gordon Brown to be the United Kingdom's Prime Minister, two of the most important economies in the Anglosphere are headed by people who, like Barney Frank here in America, believe in legislating first and asking questions later.

When times are bad, bad ideas become attractive, and in a democracy, there is a lot of pressure to "make an example" or "punish the bad guys." While real reform is needed in how banks account for their off-book assets, and in how investments are valued, something tells me that a torches-and-pitchfork approach will hurt more than it helps.

Why you need a broker

It's a terrific example of the psychology of the marketplace. Commercial lending standards are tightening, even as default rates are microscopic.

If you're a lender having to foreclose on a gas station or an office park, one foreclosure is probably too many. But given that default rates are .4% of commercial loans, and that those default rates haven't increased much, it's a pretty sound investment.

Yet instead of turning to this as a revenue stream, many lenders are running away from the market. That's why having a broker is a good move for anyone trying to do something unusual or a little out of the box -- you need someone who knows who's running away from business and who's running towards it with a checkbook.

I want to believe...

Is there a commercial real estate bubble about to burst? I don't know. Maybe, maybe not.

But there's little question in my mind that some people are looking for one.

Take this article from Seeking Alpha about the Blackstone Group.

The author focuses his attention on this pull quote:

During the periods presented, weakness in the sub-prime residential lending area spread to general commercial real estate lending. Although there was no evidence that these credit problems have significantly affected the underlying operating fundamentals of the investment portfolio, valuation multiples have declined modestly.

From this paragraph, the author concludes that Blackstone was issuing loans with subprime-like sloppiness in underwriting, that assets are declining because of systemic flaw in their approach, and that from here on out Blackstone will be able to say "I told you so" to investors when the shoe finally drops.

Maybe. I have to say that seems like an alarmist interpretation of what looks to me like fairly standard CYA language.

In that same vein "the underwriting shoe is finally going to drop", there's this little quote from a Financial Times story posted to MSNBC:

Industry insiders insist that underwriting standards for commercial loans are better than those for subprime residential mortgages.

This is at the end of a story that's about how investors are fleeing the securitized debt world.

Now maybe it's my turn to over interpret, but I don't think you need to be the Amazing Kreskin to find the disbelief in that last paragraph. In the alternative commercial loans I do, for instance, there's always a counterweight to what's unusual. If there's a very high LTV, there's very good income and/or credit. If there's bad credit, there's a great cash flow or great value for the lender. Also, since the lender engages the appraiser, not the loan officer, there's very little way to game the system, as happened in subprime.

The reporter was no doubt told all of this and more. But instead we get a mental picture of someone leaning across the table and shaking their fingers.

Cool networking idea

I come across a lot of networking ideas each week, but Kansas City's Small Business Monthly has an article with some really neat ideas for managing your networking.

Meeting new people and cultivating current relationships is an essential part of any business venture. It's awfully easy to let this become haphazard. This article essentially gives you some ideas on how to plan your networking, making it more goal-directed.

A terrific property and a great example

Just down the street from me, near the interection of 87th and Lenexa, is a prime medical building. The realtor who has the listing emails me the following information:

The property is a one story medical office building built in 1984 and is in excellent condition. The structure is wood frame with stucco and brick with aluminum framed, tinted windows and doors lining the east and west sides. Entrances can be found on all sides of the building. The structure has a pitched roof with composition shingle covering for easy maintenance and is only approximately three years old. The ceilings are finished with acoustical tile and recessed lighting. There are reception/waiting rooms, conference rooms, two large private offices, four restrooms, and storage area. The medical office space includes a lead lined x-ray room, typical patient rooms and nurse stations. WAC is zoned and new with auto sensors in every room for patient comfort. Currently, a doctor has a lease for approximately 2,855 square feet at $14.50 per square foot or $3,449.79 per month until July 3 1, 2009. The balance of the building of approximately 4,372 square feet is available to either lease out or be occupied by an own/user. The purchase price of the property is $980,000, which is below the 2004 bank appraisal by Gretzinger Appraisal Company of $1,000,000.

In the traditional model, the doctors who purchased this building would need to bring about $200,000 to the closing table. Then they'd spend tens of thousands more on new equipment as well. With the lending programs we have that are specifically dedicated to medical professionals, we have the capacity to lend 100% of the value of the building, including new equipment that might be brought in.

Is this the right loan program for everyone? Of course not -- no one particular loan is right for everyone. But for a new practice that wants to keep cash reserves intact, we have the ability to put them in a great building.

If you want to schedule a viewing of the property, call me at 913-712-8442 and I'll put you in touch with the listing agent.

Two other hot programs

I came across two new lenders today, each with a very interesting program.

One lender has a strong program for hotels and motels. This lender is getting hospitality owners into long-term amortizations and fixed rate programs, which they're finding useful. I don't know too many hospitality owners, but I'd like to try this out and see if it's as good as advertised.

Another lender has conforming rates for multi-family housing. These are loans that are usually at or over prime, so anything that starts with a "6" is pretty attention-getting.

What's hot right now

Every so often, I ask my lenders to let me know if there’s anything hot going on in their programs. A few things that have come up:

1) High LTV on multi-family is back! One of my lenders now has multi-family housing loans up to 90% LTV, purchase or cash-out. 6-unit minimum, 680 minimum FICO, very flexible on debt service ratios.
2) Another lender has stated income purchase deals for office or warehouse properties, up to 90% LTV. (700 minimum FICO, 12 month rent-roll required with application.) This lender also has rate/term or purchase deals with below prime rates for income producing properties with value of $500,000+.
3) Lastly, I have another lender with accounts receivable loans for businesses with slow payers. (Work must have already been performed.)

Let me know if you have questions on any of these programs or anything else.

Will transparency save the world?

Another entry where 3 separate stories came together for me to make a point.

For starters, just in case you're keeping score at home, the commercial paper market shrank again, making this the 12th consecutive week. This week's shrinkage was a little over 1% of the market. Do that over 12 weeks and you're starting to take a haircut.

And while I don't pay as much attention as I probably should to those who insist that the world is ending, (at least financially), there is more than one person who's shouting very loudly that the sky is falling. (I can't help but think many of these are giving their money to Ron Paul for President.) Roger Ehrenberg of Information Arbitrage seems more grounded than most of the writers I'm reading, and he points out that there are some very serious potential outcomes to the subprime meltdown, and that at the bottom, they involve a root cause of secrecy and and abuse of trust.

Then, in one of those happy Internet coincidences, I came upon this article from a local Kansas City blog, with the lovely name of Tasty Data Goodies. Without giving the whole article away, the idea is that the future of business is in instant and accurate data exchange. The problem with the subprime meltdown wasn't a lack of information, it was a lack of good data, and also, if you believe some stories, an active disinterest in good data.

Being able to tell what's really happening would go a long way towards preventing another meltdown, and it would create more jobs in a new field that's only really bloomed since 1997 -- knowing how to find and synthesize the world's open secrets.

Killing the patient to cure him....

Brian Brady brings us news from Capitol Hill, where Barney Frank has introduced legislation aimed at preventing another subprime meltdown.

It's your standard federal intervention -- locking the barn door after the horses have run off. But because Representative Frank has never worked outside of government in his life, it's worse than the usual nonsense. As is usually the case for politicians who have no business world experience, Frank puts all of the blame on "Wall Street fatcats" and (because let's face it, they're easy targets) mortgage brokers.

It's a bill that would neither help the borrowers or mend the actual problems that caused the meltdown in the first place. (I would say that this is a case of destroying the village in order to save it, but the problem is that no one ever actually said that.)

After you're done reading Brian's article, find your Congressional contacts and place a phone call asking him or her to work on defeating HB 3915. In your call to the staffer, be sure to ask for a written reply.