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My first article on commercial lending

National Mortgage Professional
Mar 24, 2014

My first article on commercial lendingJoe Cornoplanning committees, redevelopment agencies, community action agencies

I am a cutting edge trainer. I teach ahead-of-the-curve concepts and systems. The commercial lending arena is in real need for atypical thinking, so I've written my first article on the subject. However, be forewarned that this article contains original thought about commercial lending.

Let me start by instructing you to join groups like planning committees, redevelopment agencies, (RDAs) and community action agencies. They are government organizations, but they all seek public input and support. They need the public to assist in general plans, deprived and economic declining focusing, etc. Join and chair committees, and research perspective involvement.

These groups tend to secure government funds to do special projects. I know of a contractor who served as a public citizen on an RDA committee. He ended up owning two downtown buildings funded by redevelopment loans. So this is one source of funds for commercial investments.

The agency knew him from his previous volunteer service and gave him an escape clause on the funds - after improving and refurbishing the buildings, if the buildings did not make a profit within two years, the loans would be forgiven and he'd own the properties free and clear.

He leased space out to businesses that have difficulty turning a profit - a health food store, a travel/tour agency - and the building remained in the red. Now, with the liens forgiven, the buildings make great profits. Oh, and after the spaces were leased to other businesses, he borrowed against them for other commercial investments. I warned you, so do not e-mail me with any moral attitude about the above scenario. It is true and it happened.

Don't forget water boards. Oh my, water is almost a traded commodity like gold and silver these days! If you can know where water is going to be allocated or know an inexpensive source of water for a golf course, commercial loans can be gained solely on the commitment of a secured water source.

This same contractor also built residential subdivisions. But instead of having the city or county develop water pumping and staging systems, the contractor "volunteered" to build the drop structures, holding ponds, pumping stations, etc. When other subdivisions wanted to develop around the established water system, they had to pay the contractor - not the municipality - to route through the private water systems to get it to their projects. Yes, it is public water, but it's routed through a private water system. Then, when the contractor was ready to relocate, he sold his water system company and invested in additional projects, including commercial. The contractor did all of this in California, and as of my last communication with him, he is doing it all over again in the state of Washington.

There are many ways to obtain investment funds from sources other than Small Business Administration loans and banks. Start a commercial fund. Please make sure that you follow all of the laws and employ a licensed securities agent. Collect and pool funds to purchase commercial properties. People invest for a return, yet the return is based on appreciation and/or profit of the commercial property. You, in effect, sell shares of the property to the pooled funds; let's say, 49 percent of the value or purchase price of the commercial property. Would a commercial lender loan 51 percent of the price or value against the property? You bet they would. You now hold 51 percent ownership, the pooled fund individuals own 49 percent and the property is financed (leveraged) 49 percent. Not a bad way to make a property's cash flow, and you share in 51 percent of the profits. You could form an S corporation or limited liability company.

You could break up hotels and other commercial properties into units. Each room in the hotel would carry an individual deed of trust and the purchaser would finance their purchase with pooled funds that you control. In reality, this is already being practiced in the hotel industry. However, it is not being practiced in commercial buildings with specific space/suite industry.

I'm already almost out of space and I have yet to cover taking your own individual concept to the bank. Residential lenders grew in loan products as a result of companies going to Wall Street and large direct lenders. Show the bank a new way to securitize and benefit their funds. The famous 100 percent loan-to-value loan and option adjustable-rate mortgages were results of private companies taking programs to the funding sources. Use real estate investment trusts, publicly traded institutions and federally chartered banks to pass your ideas by. You need to prove to them that the risk is less than five percent, and you may need to have a few of the loans privately funded and seasoned, but that is where another pooled fund comes into play - and that's another article. I did warn you, didn't I?

Joe Corno is president of Utah-based We Be Consulting and Seminars. He may be reached at (801) 836-2077 or e-mail [email protected].

Published
Mar 24, 2014