Commercial mortgage expert Todd Tretsky:  Explains Non-recourse loans, Bad Boy Care-outs from Self Directed Accounts.

Finding a non-recourse commercial real estate loan is far more legally sophisticated than merely finding a commercial lender "foolish enough" to make a commercial loan to a borrower who wants to reserve the right to simply walk away from his obligation.  Sometimes there are important legal reasons why a commercial loan simply must be a non-recourse loan.  We'll discuss some of these important legal reasons further below.

 A non-recourse commercial real estate loan is a loan that is NOT personally guaranteed by the borrower.  If the real estate investment goes bad, the borrower can usually simply walk away from the property.

There are around seven to ten common exceptions, known as carve-outs, to this basic rule.  If the borrower commits certain Bad Boy Acts - fraud, intentional waste (taking a sledgehammer to the walls), toxic contamination, placing a second mortgage on the property without permission, failure to maintain fire insurance on the property, failure to pay the real estate taxes, misappropriation of a condemnation award or any fire insurance proceeds, or certain criminal acts by the borrower - then many non-recourse commercial loans becomes a full-recourse loans.  The borrower becomes personally liable.

However, absent the commission of some Bad Boy Act by the borrower, a commercial lender cannot come back after the borrower for a deficiency suffered as a result of making a non-recourse commercial real estate loan.  A deficiency is a loan loss left over after the property is sold in foreclosure.

Obviously commercial lenders are not crazy about the idea of making non-recourse commercial loans.  In fact, since the Great Recession the vast majority of all commercial banks making portfolio commercial loans today absolutely insist on a personal guarantee by the borrower.

A portfolio commercial loan is a commercial loan that the lender intends to keep in its own portfolio, as opposed to a commercial loan that the lender intends to later sell off in the secondary market.  CMBS lenders and ABS lenders (subprime commercial lenders who sell their scratch-and-dent commercial loans to Wall Street pools) are examples of commercial lenders who are not portfolio lenders.

Bottom line:  Since the vast majority of all commercial loans made today are made by commercial banks and credit unions, non-recourse commercial lenders are fairly rare.  If you happen to meet a commercial correspondent lender CRE-Finance - who is willing to make a non-recourse commercial loan, be sure to make a note of it.

Okay, so when is it legally necessary for a commercial loan to be non-recourse?

1.Let's suppose you own a commercial property in your IRA.  You may not legally personally guarantee your commercial loan from the bank without running afoul of the IRS.  Personally guaranteeing your IRA's commercial loan, in the opinion of the IRS, lowers the interest rate to your IRA and is a form of disallowed contribution. (Code Section 4975(c)(1)(B))

2.Commercial loans to Tenant-in-Common (TIC) investments must be non-recourse; otherwise the investments lose their tax-deferred qualification.

3.Certain irrevocable trusts have a trustee who is separate from the beneficiary, such as a family attorney serving as the trustee for the minor child of a deceased client.  If a balloon payment comes due on a commercial property owned by the irrevocable trust, the trustee certainly isn't going to be willing to guarantee some $800,000 new commercial loan.

Call CRE-Finance to help you with this very complex type of financing. We have been doing it for over 20 years.

You can reach Todd Direct at 212-851-6926 or tt@cre-finance.com

Commercial Construction Financing Explained

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Today we're going to be speaking about commercial construction financing. There are two very important terms we'll be speaking about: loan to cost and total cost. 

The total costs on a commercial construction loan include:

• land acquisition
• hard costs
• soft costs
• contingency reserve (5% or less)

So, then what is the loan to cost? It is your total cost divided by the construction loan amount, which is then multiplied by 100. 

For an example, let's say a developer in Miami wants to construct an office building. He needs $3.2 million loaned. His total costs are $3.8 million. When we divide 3.2 by 3.8 and multiply it by 100, we then get a cost ratio of 84. This is a little too high for industry standards, and most commercial lenders want to see a ratio of 80% or less because the developer has 20% equity in the project. This puts some skin in the game for them.

The best way to guide a developer to get to the total cost of 20% or more is to have the developer acquire the land. The developer should also have the architectural and engineering plans ready in order to get into a good equity situation. 

We have seen people take loans with less than 20% equity, but it's not terribly common.

Here at CRE we specialize in commercial construction loans, and if you have any questions or concerns for us, please don't hesitate to contact us!

We Structure and Customize Financial Solutions Just for You!

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Today, I want to briefly discuss innovative solutions outside of the bankable box. Here at CRE Finance, we examine transactions on a case-by-case basis. Our financing technicians have years of experience that allow them to structure and customize financial solutions just for you. Today, I want to share 10 special situations we come across:

1. Complex company structures. As we all know in commercial real estate, company structures can be complex, from individual owners to family trusts and more, we are here to help get through those complex structures.

2. Businesses outside the United States. Cheaper wages and better tax structures have taken many businesses outside of the United States; whatever it might be, CRE Finance can make things happen regardless of where you're located.
3. Concentration risk and foreign customer risk. United States real estate is red hot, especially in big cities like Manhattan and San Francisco. There is a lot of foreign currency coming through the states, but a lot of companies can't lend in them. CRE Finance can.
4. Ratio of inventory to accounts receivable are upside down. All companies have different accounts receivable -- some are profitable, some are upside down, some are seasonal, and some are year long. CRE can audit your accounts receivable and tailor lending that will help your company.
5. Specialized enterprises and criticized industries. Restaurants and bars are industries that are harder to finance, have more liability, and are somewhat criticized in the press. That doesn't stop us -- give us a call and we'll tailor a loan to your specific needs.

6. Pre-revenue businesses lack of historical performance. Some companies are startups and some entrepreneurs may have diverse business backgrounds. We would love to help people in those situations.
7. Constraints from an existing financing structure. A lot of existing structures, a lot of mortgages, that were done in the mid- to late-2000s may have various complexities that could come up. Here at CRE, we would like to help you with those.
8. Absence of a personal guarantee. Many business owners nowadays would like to have what they call a non-recourse loan, which means there is no recourse to the owner, no personal guarantee. Sometimes this is possible, but not always; we could look at the structure and advise you if we'd be able to tailor a loan to not have a personal guarantee.
9. Distressed and work out situations. Over the years, we've seen many work out situations on borrowers who have had distressed real estate. We are experts in this field.
10. When time is of the essence. In real estate and in business, when is time not of the essence? We at CRE Finance understand that your business and your real estate are important and we are here to help.

Many people are unaware that they are bankable. Many people let their real estate or business go before even trying. We want to make sure that doesn't happen to you! Give us a call or shoot us an email at any time. We would love to hear from you!