Asset-backed commercial paper dwindles again

The credit crunch shows little sign of slowing down. Reuters reports today that asset-backed commercial paper shrank again last week. That's the eleventh consecutive week.

That shrinkage translates to one-half of one percent. By itself that's a rounding error. But in the overall picture, it means there continues to be less money to lend, and hence, that money's going to be more expensive.

Correction: "The Fed didn't say that"

I linked to a story on Tuesday indicating that the Fed would "do whatever is necessary" in order to protect the economy from the credit crunch that stemmed from the subprime meltdown.

Don't believe everything you read in the news, my friend. I came across this post on the Motley Fool website today. What do you know? The AP had the quote completely wrong.

AP reporters misstating quotes? That could never, ever happen.

SIVs continue to roil markets

Most of the loans that I can put a business into are ultimately going to end up in an SIV -- a "Structured Investment Vehicle". SIVs are like any other tool -- they aren't inherently good or bad, they're just tools. But because of the subprime lending meltdown, there's a tremendous amount of turmoil in the lending world around SIVs right now.

Here's an example of the repercussions: today's London Times has the story of a $2 billion SIV set up by a German bank that has gone into receivership. The Rhinebridge fund, owned by IKB, defaulted on payments to creditors last week. If I'm reading the story correctly, and if the reporter has the facts right, then there are $600 million in assets that the fund controls. So investors are "only" losing
70 cents on the dollar. I've seen worse.

Here's where things get really interesting: Today's Seattle Times reports that the King County Investment Pool has $100 million in the aforementioned Rhinebridge fund.

So King County may have just taken a $70 million haircut. To have a chance of meeting their obligation to bondholders, they have to find a way to invest their money in safer ways... but if they play it too safe, they won't make enough to pay the bonds back.

High quality commercial loans are going to be an expanding area of interest for lenders. There's a world of difference between loaning to a profitable enterprise and loaning 100% of a home's value to a family with no assets, a history of bankruptcies and three maxed credit cards.

TIP: if you can't show a profit on your tax returns, all is not lost. If your business bank statements can show a history of more money going in than out, there are loan programs that can help. Make sure your credit is good and try to keep any credit cards associated with your business either paid in full or at least below 50% of the available balance.

This is what I mean

I came across Jordan Crouch's blog today. I can tell that he is extremely good at his job, he's a good writer, and I'm honestly not trying to pick on him. But this post is exactly why I started this brokerage project.

First of all, if you look at the numbers this guy is tossing around, it's clear he's operating on the big time major league level. $400 million here, $684 million there... that adds up pretty quickly.

Jordan quotes terms that are 3, 5, and 10 years. That is going to do your average individual gas station owner or 12-plex landlord very little good.

Major commercial lenders are operating in a world where the lender, the buyer, and the seller all have attorneys on retainer, and where everyone can afford a refinance in a 5 years. If you want someone who can operate on a more everyday level... and still get you fixed rates and 30 year amortizations... then I'd be happy to see what I can do.

Commercial real estate: investing for your nest egg?

As always, there's a fine line between "investing for retirement" and "gambling." Today a trio articles caught my eye that seem to tie into a common theme, which is "you can make a bunch of money, but you can also lose your shirt. So do your homework."

First up is this happy article from the Springfield News Leader, which tells us about the "strong growth in the office and retail segments" and says that while there are some signs of slow-down there is no sign of any imminent crash.

Keep in mind that there are posts on this very blog from people who are very nervous about over-valued commercial real estate.

Does that mean that all CRE is overvalued or headed for a fall? Of course not. Like politics, all real estate is fundamentally local. It's the original case-by-case basis industry. A strip mall or office building might be a great deal even with a really low cap rate because of other factors. Similarly, an apartment building might have a terrific pro forma, but there are 6 out of 12 tenants who are sick of the winters in that building and are headed out as soon as their leases are up.

Following that article, I found this article which is both good and bad news: "The Federal Reserve will do whatever is necessary to prevent damage to the economy from the credit crunch that has gripped Wall Street...."

The good news about that statement, for entrepreneurs and people like me who help get money to entrepreneurs, is that interest rates will probably not take off like a rocket. The bad news is that there's a fairly clear signal that the underlying problems -- an overreliance on off-book collateralized debt vehicles -- may not be dealt with. Build assets now, my friend, and structure your debt wisely.

Lastly, Jeff Brown, a man I had the good fortune of talking to yesterday, has this article on his blog: the 401K as a Trojan Horse. 401Ks are sold to the public as a great way to avoid taxes. Guess what? You can easily blow yourself up with taxes using these vehicles. Read the whole thing, as they say.

What does this add up to? As the man said, God isn't making any more land. Real estate can be a terrific investment and it beats the heck out of relying on your 401K to save you by itself. However, in anything you do, you have to watch the fundamentals and make sure the math works for you, your particular risk tolerance and your particular situation.

It's the reserves

Gretchen Morgenson, in yesterday's New York Times, points out an aspect to the subprime meltdown that I haven't seen touched up on very much: where are the reserves?

Traditionally banks keep very little cash on hand. This doesn't just apply to the money they keep at the bank. As banks eat losses from lending, they in turn have to take that money out of reserves, and there's only one way to replenish those reserves, which is out of income.

Ms. Morgenson expects profits to take a big hit at the major banks for some time to come, and her analysis seems compelling to me.

What does this mean for entrepreneurs? Keep your assets handy, and if you have equity in a property, and can get it now, you may want to investigate the pros and cons of getting at that equity. It won't do you any good sitting there, but it also won't do any good to pay more for your property than you can afford. Take a look at the numbers and get a broker to run your scenario past a variety of lenders.

Is commercial the next subprime?

Lenders and brokers both are gritting their teeth and gripping the wheel with white knuckles over the question of "who's next?" Given that the business model of collateralized debt securities has taken such a beating, it's no wonder that there's a worry that commercial loans, FHA loans, conventional loans, etc., will all start falling through the floor.

It doesn't help much when people issue statements such as this:

"...inflated commercial property values, aggressively structured loans, and relatively high bank exposure for many mid-tier banks are 'a fairly toxic mix of factors.' "

Then of course there's
this graph right next to it.

Traditionally commercial loans have been on shorter amortizations and more aggressive adjustments than residential loans. The same kinds of opportunities to profit by refinancing are in front of property owners right now.

Lending money to family and friends -- what could possibly go wrong?

If you feel like setting your personal relationships on fire and making family reunions really really interesting for a long time to come, you can always start lending money.

Richard Branson is now making this easier than ever with Virgin Money -- a way family and friends can lend to each other more efficiently, and hence, spend less time and energy in blowing things apart.

Sir Richard has had some wonderful ideas in his time. I'm not sure this is one of them. Tying together love and money has a somewhat checkered history.

Kansas City's MicroWinery

Well, what's the point of living here if you don't enjoy living here? Add to your "to-do" list http://www.vintnerscellarkc.com/, Kansas City's only "microwinery."

If you were like me and completely unfamiliar with the concept of a microwinery, here's how they describe themselves:

We make our own wine on premise with the highest quality juices from around the world, as well as allow our customers to make their own wine. You can buy wine by the bottle or relax with a glass in our tuscan influenced micro-winery. For special occasions and gifts, we can create custom labels for your bottles. We will also host events at our micro winery such as birthday parties, wine tastings, teambuilders, bridal showers, etc.

Sounds like a winner to me! Call them up at (816) 943-1711.

New programs

While much of my practice surrounds commercial mortgages, there's a whole world of programs out there, especially for business owners with less than perfect credit.

Non-traditional business loans we can write include:

• Heavy equipment leasing and purchase: These loans include items for heavy trucks and other construction equipment, especially bulldozers and excavators.
• Accounts receivable financing: an excellent method for businesses to get through predictable dry seasons in revenue.
• Medical working capital: Doctors, dentists, veternarians, and other medical professionals can get immediate loans to expand their practices, consolidate debt or even handle personal expenses.

Those last loans tie together very nicely with a loan program for medical professionals that allow for a purchase of office space wtih 97% loan-to-value.

Are REITs undervalued?

REITs have taken some big hits during the credit crunch, and now some analysts are wondering if there should be an upward correction.

Does this create an investment opportunity for entrepreneurs? Maybe, maybe not. I'm a firm believer in only investing in things I understand completely, (which rules me out from most investing.)

What does seem to be the case is that the underlying fundamentals for commercial loans and commercial real estate are still sound. If anything, the credit crunch has made made lenders become more prudent:

However, because lenders are more cautious, some deals may get postponed or be slower to complete than in the past few years, she said. “We’re seeing a return to the fundamentals and deal structuring of the mid-(19)90’s and may see some dampening in investment activity, but there is a lot of momentum in commercial real estate.”

The lights are back on....

With the recent turmoil in my family, the blog went on extended hiatus. (Anyone who's caught the blogging bug knows that two weeks can seem like an eternity.)

But we're back on the air, brought to you by my new partners, Fortress Financial.

The folks at Fortress have a great approach to business, with a genuine caring and commitment to helping people build their financial futures. I really haven't run across a mortgage company so committed to helping people plan five and ten years down the road.

In memoriam: Ward Meston

Last night my father-in-law, Ward Meston, of Albuquerque, NM, passed away. In a way, he was another combat death of the Vietnam war: his death was due to Parkinson's Disease, which he contracted as a result of exposure to Agent Orange.

What strikes me most about his life was the intensity of his courage. I never saw him brag or try to intimidate anyone, but just a few of his Vietnam stories, told in a dry, matter-of-fact tone, would stay in your mind for ages. While Ward certainly didn't suffer in silence, no one could have ever called him a moaner or a complainer, or one who gave into self-pity. One time he took me out fishing. We were walking down a gravel path, with Ward pushing his walker and shuffling along, until we came to a spot about 8 feet over the creek we were taking on.

This was a slope that looked nearly vertical. I was hesitant to go down, and that was before I blew my ankles out. Ward folded up his walker, laid it down, and scrambled down the steep embankment.

He was the kind of American that we just don't see enough of these days: tough, self-reliant, and a man who made no apologies for how he lived and never asked for one. He fished waters from farm ponds to mountain streams to the deep seas, and he kept going hunting until he could no longer hold a gun. John Wayne, Gary Cooper, and Ernest Hemingway would have been proud to be in his company. He was a role model for me, he was proud of his grandchildren, and I know anyone who knew him will miss him.

What you need to know besides rate

I had a strange conversation with a commercial real estate broker the other day. Essentially he wanted to know information from me, but wasn't giving the information I needed to give him what he wanted.

One of the worst questions you can ask a broker is "What's your rate?" That very question contains a message you're probably not intending to send: in essence, you're saying to the broker that you're going to judge a loan based on one aspect that can be highly misleading.

Here are some other questions you can ask that will get you much better information, and put you in the driver's seat.

1) Is there a lock-out? A lock-out is essentially a prepayment penalty on steroids -- it keeps you from refinancing the loan for the duration of the lock-out. So, for instance, if someone puts you in a loan that adjusts every year and has a three year lock-out, you could be in bad shape.

2) Is there a pre-payment penalty and how long is it? I've seen loans with no pre-pay penalties (and they have higher rates.) I've also seen loans with fifteen year pre-payment penalties.

3) Is the loan full recourse or partial recourse? A full recourse loan sure has a lower rate, but it has a lot of consequences.

4) How is the lender treating the property? Most lenders have four tiers, and generally speaking, you'll find the same properties in these tiers. But there are exceptions -- some lenders, for example, have car repair facilities in the same tier as gas stations. Others won't touch gas stations. Some lenders care that a property is vacant, others don't.

5) What's the loan-to-value ratio? A 97% LTV ratio is a more expensive loan than an 80% LTV, but it's worth it to some people to not have to sink a bunch of cash into the property.

How to make your loan a slam-dunk

I recently got some feedback from a friend of mine on this post. He was urging me to be more positive.

Okay -- I am positive that I want your loan to close.

Well, that's probably not the kind of positivity he was talking about. So from the other end, here's what you can do to make sure your loan goes through.

1) Always be completely upfront. If there's anything about your deal that might be a little off, disclose it immediately. If, for instance, you own a building under one LLC, and you own another LLC that's paying a lease to the first LLC, that may or may not be an issue. Disclose it at the start of the process.

2) Be ready with the data. Any commercial lender I work with is going to want the same kinds of things: rent rolls, P&L statements, tax returns, Phase 1 reports, etc. You don't have to wait until you have every single piece of paper ready, but be prepared to get it. If you don't have the data easily available, that's going to be an issue -- one you should disclose early to your loan officer.

3) Explore a variety of options. Compare a lease versus ownership. Compare a refinance to a non-collateralized loan. Think hard before taking a loan with a lock-out or a pre-pay. Sometimes those are good loans, other times they aren't. This is your business, and its whole future could ride on making the right choice here.

4) Crouching Tiger, Hidden Dragon. If you didn't see that movie, the title was a reference to a continuing theme in Chinese martial arts... waiting for the opening and then moving without hesitation once it shows itself. As I wrote before, the number one deal killer I've seen is a reluctance to move on a deal when it's on the table.