First a word from Lou Barnes, economist and Fed watcher extraordinaire from Boulder, who writes this week:

“The headline is “non-farm payrolls,” today’s report a meager April gain of 115,000 jobs, about the same as March, but only half the figure in the three prior months, gains that made us think we were at last getting somewhere.

Wages last month rose by $0.01 per hour, one whole cent, 1.8% year over year. Same for GDP. The average workweek in April — unchanged. The percent of the 24-54 age cohort at work is stuck at early-’80s levels, about 7,000,000 below the 2000 peak. Of those at work, another 8,000,000 are part-time because they can’t find full time, the U-6 measure at 14.5%, improved a bit in prior months, stalled in April. Demand for labor has improved, but remains very, very thin.

10-year T-notes today at 1.87% have cracked long-term resistance at 1.90%, bets going down that the Fed will ease again.  Stocks are having a hard time despite Fed prospects, and today’s sinking-before-Fed is out of prior pattern”

WE await the new crowd funding rules, which may or may not really kick start startups and small business.  Chck out www.fundinglaunchpad.com .

As the Launchpad noted in April, there are four forms of crowdfunding:

• Donations-based crowdfunding: “Contributors donate towards a creative, community, or business-oriented project in exchange for tangible, non-monetary rewards such as an e-card, T-shirt, pre-released CD, or the finished product.6 Donation-based crowdfunding platforms include Kickstarter and IndieGoGo.”
• Microfinance: “Contributors align to provide financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. Kiva.org is a prominent microfinance platform.”
• Peer-to-peer (or social) lending: “A method of debt financing that enables individuals to borrow or lend money without the use of an official financial institution as an intermediary. Examples of lending platforms include LendingCircle and Prosper.”
• Investment: “Contributors earn securities – equity, debt, or revenue sharing – in exchange for their contributions. Investment crowdfunding is generally considered illegal in the US9 but is an emerging option in the UK (Crowdcube), the Netherlands (Symbid), Australia (ASSOB), and elsewhere.”

And there’s individual, private funding, available on a limited scale here in denver through organizations like Colorado Business Loan Advisors (http:// www.coloradobla.com) . Its the un-crowd funding.

Why am I writing this in an SBA blog?

Because if you’re involved with SBA lending, you know the gruesome truth:  start-ups are perceived as so risky that despite the SBA guarantee, it’s very, very tough to qualify unless one is substantially endowed with liquidity, outside income, and collateral hopefully lightly leveraged real estate.  Otherwise fugetaboutit.

The more you know about crowd and private funding, as the days tick by and the FINRA rules get closer and closer, the more help you can provide to small business and our shaky economy.

For more on credit union financing under the SBA 504 program, go to Centennial Lending Commercial Rates and Programs May 2012.  For SBA default rates by business type, see SBA-DEFAULT-DATA by NAICS

How about a rate and program sheet?  We have great 504 offerings for the senior loan.  No prepay penalties,  Non zip zed nada.  Buy your business building and pay down your first mortgage any old time you want, all or part. Here you go: Centennial Lending Commercial Rates and Programs May 2012

Why does a 504 structure beat 7A?  It’s simple.  504 is a fixed rate structure and we do not have the “all available collateral” rule.  If you get a 7A and have under 80% leverage on your house, you get to put up the house.  Not so with a 504.

Crowd Funding is going to arrive in about 6 months and it will revolutionize financing for start-ups.  Raise up to $1MM in increments of $5,000 and do so without many of the provisions of the Securities Act of 1934.  It’s huge.  In future blogs I will tell you how to join the “crowd.”  email me at tim.thomas@centennial-lending.com and I will send you my contacts who are setting up crowd portals.

Land prices, like home prices, are at or near rock bottom here in Colorado.  It is SUCH a buyers;’ market especially for custom home lots.  Wow.  Great properties, views, golf courses, water features — they’re all on the market.

I’ll bet you can guess what’s next.  Whom do you think is making loans on improved lots out there?  Community banks?  Hard money lenders? Credit unions?  All three are lending, in varying degrees.  Hard money loans these days are 40-50% LTV and 9 – 14% interest with 3-6 points. Community bank loans float with Prime and require a good strong bank relationship.  Many community banks are wary of lot loans and wary of custom construction because of historical defaults.  Credit union loans likewise require good financial statements — but not as strong a banking relationship. And for many of us, the credit performance of our lot loans and custom construction loans has actually been fairly  remarkable through this recession, so we remain open for and receptive to this type of business.

Lot loans are NOT on anyone’s favorite collateral list. let me tell you.  It’s tough to get a lot loan.  Especially at 70% loan to value or so.  And if you have a balloon payment due on your lot and need to refinance?  All the harder.

I am proud to say that Centennial Lending, a credit union service organization owned by 13 local credit unions in Colorado and Wyoming, is making loans on improved lots.  “Improved” means ready to build, with a road and infrastructure.  Well and septic are fine if they pass certification.  Public water and sewer is better, of course.  Good credit, liquid assets and income are required, of course, because we need your strength of credit to offset the risk of the collateral.

So if you want a good quote on that lot you have had your eye on, or if you want to actually go ahead and build that custom home, or perhaps a building for investment – or a business — we can help you with a construction loan.

In fact, we finance all manner of commercial property for qualified people and partnerships and LLCs here in Colorado and in Wyoming and Nebraska.  Click here for our April Centennial Lending Commercial Rates or email us at tim.thomas@centennial-lending.com.

Yes I know this story is a bit of a shameless commercial — but Centennial and our partner credit unions are filling an important niche in the market, bringing liquidity and credit to where it’s needed, and shamelessly speaking, that’s a good thing for you, and I, and the velocity of money in these parts, don’t you agree?

Suppose you are building a new car wash.  You want the very, very best financing out there with the least possible down payment. You like the 504 because it features rates that are low and basically fixed.  And unlike the 7A, there’s no cross collateralization on your house or other available collateral. That’s a big deal.   So what is next? What’s the sequence of events?  How does the 504 work?

Step 1 is to put the package together:  financials, cost breakdown, business plan, and market study.  The very best and most comprehensive 504 application package is at www.coloradolendingsource.org.  (There are many great CDC’s in the country, and each has a good website and package, I just think CLS is the most comprehensive I have seen).

Their checklist is fabulous and they have the latest SBA financial statements, resume form and the all important SBA 912.  Get this filled out, including the Colorado Lending Source application, and you are ready to go.

Now, the 504 consists of THREE (Not two) loans.  There’s a 50% first mortgage which we call the Companion Loan.  Then there’s a bridge loan, in second place behind the companion loan.  The bridge loan is for the same amount as the net amount of the debenture *(we will not get into that right now, maybe next week). It enables you to close escrow (or build the building) before the debentures are sold.  (Debenture sales happen, and 504 debentures fund, once a month and you have to be complete and have a Certificate of Occupancy – along with any other conditions in your SBA authorization – to fund.  So most of the time you need a bridge loan to be a placeholder until you are ready to fund the debenture which pays off the bridge or construction loan.

Colorado Lending Source is a certified development company, leaders in the State and one of the best in the Nation, FYI — they will make the second mortgage, or debenture as we SBA sophisticates say.  Their approval – and the SBA authorization that follows it – is all important.

Step two: Make a complete copy of the package you did for Colorado Lending Source.  We can use that package here at Centennial, for example, to review and underwrite your first mortgage request for the companion loan.  And we can use that same package to underwrite the bridge or construction loan.

Yes, there are many criteria in selecting the right bank for your companion loan.  Rate, term, and prepay and fees are four of them.  We’d like to think we are leaders in each of these categories, though we are not the largest SBA 504 companion lender in the State, we are the most unique.  You see, Centennial, through our participating credit unions, offers 5 year reset and 10 year fixed rates with NO prepay penalty.  That’s very, very rare.

So here is a typical structure for a special purpose property (85% LTC as opposed to 90%)

Total Project Cost               $2,500,000

Companion Loan                                $1,250,000

Debenture                             $875,000

Equity Injection                   $375,000

It’s a little more complicated, because closing costs for the debenture can be financed, so the actual debenture amount is more than $875,000.  Financing your costs, like the SBA guarantee fee, and legal fees etc., is like going to the dentist.  We anesthetize you against the costs and spread them over 10 or 20 years at a low rate in the 4’s, so you do not feel the pain.

If you need help understanding the 504, and what the restrictions are, and how it all works, and how it compares to the 7A, call me at 303-746-9169, email tim.thomas@centennial-lending.com and I will walk you through everything.  Plus, I have the MAGIC SPREADSHEET that will help you get all the numbers right and structure your transaction.

This week we turn to Mike Cantwell, head of the Denver office of Johnson Capital, a major commercial mortgage banker.  Mike has some fascinating numbers.

33.4% of commercial mortgages are now held by banks and thrifts, including credit unions

• 25.6% are in CMBA and CDOs and other asset backed securities
• 14.2% are agency and GSE (Fannie Mae/Freddie Mac) portfolios
• 13.1% are with life companies
• 10.1% are private or with other investors
• And 3.5% (probably affordable housing) are with state and local government entities

And who has all the problems?

The delinquency rate last quarter, per the Mortgage Bankers’ Association, tells the tale:

• 8.56% of commercial mortgage backed securities are delinquent, not counting deals that have already been modified
• Life companies have only 17/100ths of 1% delinquency.  They “stuck to their principals” during the crisis.
• Fannie Mae and Freddie Mac are solid:  Fannie has only 0.58% delinquency (59 10ths of 1%) and Freddie Mac has 0.22%.  Their problems are on the single family, not multifamily, side of the house.
• Banks and credit unions have 3.55% delinquency.

Of the $186 billion in CRE loans funded last year, life companies led with $60 billion, followed by banks and credit unions at $50 billion; Fannie and Freddie did $44 billion and there was $32 billion securitized into CMBS.

2012 is looking pretty good for volume and a recovery in portfolio performance.  More on that next week.

Lou Barnes, Wall Street contributor and respected Boulder mortgage banker, had this to say on Fed Watch this week:

“Long-term Treasuries and mortgage rates at last broke out of a half-year-long trading range centered on 2.00% for the 10-year T-note, and 4.00% for mortgages.     (Translation:  look for further moderate increases in Treasury and mortgage rates, including commercial).

10-year Ts had for six months stayed tight to 2.00% because the Fed began to buy long Treasuries in Operation Twist, because Europe was on the edge of its own Lehman moment, and last fall the US appeared near new recession. Twist is still underway (and you can bet the Fed hates this mortgage rate rise), but a European banking collapse and new US recession are off the table.

One year ago the 10-year paid 3.75%, and mortgages cost just over 5.00%. The magnitude of European futility and risk came clear last August, 10s in one swell swoop to 2.00%.

And Europe is anything but over. Its banks protected, it has become a slow-roller, waiting to see what Club Med depressions do to local political stability and overall unity. The best long-term hope: an orderly demise of the euro, then short global recession.

In my world, rates are holding well due to competitive pressure for good deals.  Click here for rates which remain in the 4.5% to 5.25% range by and large: Centennial Lending Commercial Rates and Programs March 2012 TT

But of more Macro vs Micro nature, this from Fed Watcher Lou Barnes:  “ 227,000 net-jobs created in February, and a 61,000 positive revision to the Dec-Jan sum. That’s good news, and crowing by the party in power is justfied. However, all is relative. The good jobs numbers in the last three months are likely to have been boosted by good weather. The February numbers include a negligible gain in wages, 0.1% equal to three cents per hour, and no acceleration in hours worked. Unemployment remained 8.3%, and inclusive of “involuntary part-time” improved slightly to 14.9% — both understated by discouraged workers leaving the workforce.

Nothing matters more than jobs, because we must have tax revenue before we embark on austerity, and austerity is coming, ready or not.”

Here’s some more good news, this from Mike O’Donnell, head of Colorado’s largest CDC (Certified Development Company) and 504 guru.  Suppose your business owns a building, or you own the building and lease it back to the business.  Under the new SBA rules, which seem to have been indefinitely extended, you can REFINANCE the existing debt AND pull cash out to renovate the building AND pay off your Bank lines of credit, AND pull some cash out for working capital.

Yes, that’s right, SBA will help your business RESTRUCTURE and there’s no better way than a 504:  A first mortgage from, let’s see whom do I recommend?  Ah, YES, Centennial Lending!  Fixed rate, 4.5 to 5.25 as I write this, NO prepay penalty, unlike all those other 504 first mortgage lenders.  And behind that a SECOND that is 20 years long which as I write this is at 4.8%.  Wow.  What a GREAT time to look at refinancing your business real estate with SBA’s guarantee – AND it does not matter if the debt was not SBA to begin with!

Click here for the article and email me at tim.thomas@centennial-lending.com for more information.  Clck here for rates.Commercial Mortgages March 2012- Centennial Lending

Here is what I need to tell you, and it just hit home last Friday when one of my “perfectly good” loans,  with a reasonable LTV of 70%, DCR of 1.5 to 1, on an OK piece of real estate, got DECLINED.

I want to tell you  from personal experience what tight credit really means.

It means that your guarantors have to have a strong individual global cash flow.  At my shop 1.4 to 1.  For every dollar in debt service they PERSONALLY have, they should have $1.40 in TAX RETURN VERIFIED income.  Skimp on what you tell the IRS, mister borrower?  Don’t expect to get a good bank or credit union commercial real estate loan. Maybe a life company loan, maybe a conduit loan, if you like torture but not a bank loan and not a credit union loan.

If you have a big mortgage on the big house and our outgo is $10,000 a month, your AGI plus proven NON cash losses plus depreciation, divided by 12, had better be $14,000 a month.

Then there’s GLOBAL GLOBAL cash flow.  Total personal debt service plus  total borrowing entity debt service,  including the proposed loan, let’s call that D for Debt.  Total entity NOI, plus total DOCUMENTED (from those understated tax returns) cash available from outside sources for personal debt service equals AC for available Cash.  AC better be 1.4 times D.

Now, I know these things.  I’m an SBA 504 guy, I know how important outside income and cash is to absorb a downturn in the real estate market and I know what examiners are looking for.  But sometimes I think that a little extra debt service on the PROJECT, or a little lower LOAN TO VALUE, or a little higher LIQUIDITY can make up for a shortfall in personal global and global global.

Or maybe if global global (the big picture, total INFLOW divided by total OUTFLOW as documented by leases and operating statements AND THOSE TAX RETURNS, is high enough, then individual global shortfalls (as in, the guarantor has negative cash flow because of a huge mortgage on his huge mansion with a view and there’s nothing really showing on his AGI with all the add backs), won’t count as much.

Don’t believe it.  These days, lending is like a track meet.  Knock over one barrier in the hurdles and hang up your running shoes, you are done. There is no such thing as a compensating factor. Collateral, capacity, character, conditions of the market, cash available (aka global liquiduity) — and GLOBAL coverage, there are six C’s of credit not 5, that is the moral of my story.

So before you drive down the road and order reports, or spend ages rewriting an appraisal with all fresh comps, look at the bank statements and the tax returns.  Do that FIRST and avoid the self destruct button.

It is our job as professional commercial mortgage lenders and bankers to know these things, spot them RIGHT AWAY and take the steps that are necessary, such as:

(1) Decline the loan right away

(2) Bring in another guarantor or three

(3) Tell the borrower to go away and come back after filing his 2011 returns, maybe his 2012 returns.  And when he does so,  report every single dime and pay the tax. Because NOT BEING ABLE TO BORROW MONEY AT A GOOD RATE IS ALSO A TAX.

There, said my peace, lesson learned.  Onward!

PS, if you have a decent global we have great rates.  Click here to get rates. Commercial Mortgages March 2012- Centennial Lending

And, if you would like to discuss your deal with a banker, a life company and CMBS rep, and a credit union all at once, and enjoy a free lunch March 15, click here for an invite.  The Fine Art of Getting the Deal Financed

You can always email me at tim.thomas@centennial-lending.com. Ph 303-746-9169

No, the REAL culprit is the examiners, as we all equally know.  Or is it?  No, says Denver bank consultant Larry Martin.  Consider his citation from a recent RMA Journal article.  It’s a great story.  Sort of hits home.  Here goes:

“When we entered the room, Mr. Clark stood at one end of the table. In front of him was a large stack of currency. We took our seats around the table, alternating our stares at Mr. Clark, the money, and each other. It seemed like an eternity before Mr. Clark spoke. He began, “Gentlemen, this is the BANK’s money. It is not YOUR money. As you begin your lending careers, you will be asked by many potential borrowers to loan them the BANK’s money, and after careful analysis of all the necessary facts you may decide to do so. In certain instances, your good sense and analytical skills may tell you that the risk of loaning the BANK’s money is too great for the reward, but your heart tells you that the potential borrower deserves the opportunity to see his dream come to fruition should he receive the needed capital. At that instant, reach into your back pocket, remove your wallet, and loan him your money. But do not loan him the BANK’s money.”

I have thought of this speech almost daily for the past four decades. If we required lenders, as part of their 401(k) plans, to buy a participation in each credit decision they made (and also be happy with the rate of return on the risk incurred), I have a feeling that our losses would be significantly lower because we would have done better analytics, the bank would be properly margined, and, most importantly, each credit would be managed frequently. Also, any problems that cropped up would be addressed immediately…”

Hmm, food for thought.  Vintage 1969.

PS WE (Credit Unions) are, in fact, making commercial real estate loans, and financing rental 1-4 unit prioperties.  I lend here in Colorado and in Wyomuing and Nebraska.  Click here for rates and programs. Commercial Mortgages March 2012- Centennial Lending  We are mid 4′s on 5 year money and low 5′s for 10 years, low fees, no prepay penalties.

Ah yes AND, FYI, if you want a creative lender, or a great advisor, to refer your clients to here in Colorado, a guy who holds the hands of those startups soup to nuts and patiently helps them find financing if at all possible, let me recommend Marcus Weathersby at this web address:  www.coloradobla.com.

Have a great week!

And I understand on the life company side, spreads have narrowed to 250-300 over Treasury, which puts 10 year money at 5% for commercial.  And spreads are tighter for multifamily.  Typical agency multifamily is 75-80% LTV for a purchase or no cash out.  Commercial money at life companies is 60-70% LTV typically with 130 or better dscr.

The BANKS in our fair city of Denver are tripping over themselves here to make owner occupied commercial RE loans – I hear rumblings of rates at 4% for 5 year money and one bank bid 1.75% last week on an owner user flex building.  Insanity.

Ladies and gentlemen, these rates will NOT last! The 10 year T is on the way UP as the Greeks pretend to comply with ECB mandates and our unemployment picture improves.  NOW would be a REALLY good time to get started on that refinance or new build, or buy that building.  Take the money and run and if you need some direction email me at tim.thomas@centennial-lending.com or call 303-746-9169.

Here is what my Colleague Lou Barnes, WSJ contributor, mortgage banker and columnist, not to mention Boulderite, had to say: today:

“Gradually improving US economic data and a Greek deal of some sort have relieved immediate financial fears, and so bond and mortgage rates have risen.

The rate increase is proportional to the relief. 10-year T-notes have moved from 1.92% to 2.02%, and mortgages from just under 4.00% to just under 4.125%, roughly like your kid’s fever dropping from 105 to 104.5.

The most reassuring news here is the up-trend in the small business survey by the NFIB. Although its overall optimism is little better than the bottom of recessions going back 25 years, it has been improving each month since August, and only two months since 2007 have had better readings. The weakest internal component has been sales, now the worry fading fastest.

Another legitimate breakthrough: weekly claims for unemployment insurance have dropped again, to 348,000 last week. Wobbling near 350,000 in the last couple of months has been a straight-line decline from the 400,000+ range of the last two years, and is only about 25,000 weekly above what anyone would consider normal. However, everything about this cycle is so abnormal that nobody knows if normalized layoffs will translate in to normal hiring. “

Bottom line — we may have PASSED the low.  Time to get ON THE TRAIN!