Episode 15: Commercial Loans | The Baker by H. Upman

Yo yo yo yo yo, and welcome back to Sticks and Stones, the podcast where we bring serious cigar smokers together with serious dealmakers. And welcome to episode 15, commercial loans. And what are we smoking on this episode? We are smoking The Banker by H. Upman. And this is the day trader. you know, they they came out with the banker a while ago and I I think they have multiple versions of it. This is the day trader. So, that is what we are getting into, boys and girls. So, let's get this party started. We're going to we're going to cut this up here real quick. Going to do my straight cut on this bad boy. And why am I doing this episode? Why why are we shooting this episode about this subject? Well, I'm glad you asked. I get so many questions from people on loans, type of loans. I'm not even talking about interest rates because the interest rates are always going to fluctuate. It all depends on, you know, the time, you know, the Fed, whatever. You know what? I'm going to refill my lighter while I'm on here. Case if you don't know, you want to purge your torch or else you're going to get you're going to get bad performance out of it. You want to make sure it's completely purged because then you're going to get like splutter and all kinds of stuff. So, I'm purging my torch right now of any residual butane. And then I like to try to dry light it, dry fire a couple times just to make sure there is no butane left in. Purge that a few more times. And basically, if you're not watching, you have something that's small enough to get where the needle is, where you where you inject the butane, and then you press it down with that small object, whatever it is. I I have a pipe cleaning tool, like a multi-tool. I'm now going to shake up my butane. And then I am going to spurt some in there. And this particular torch, I love this torch. It's from Corona Cigar Company in Orlando, Florida. But I always get problems with it. I don't know if it was just an odd size. So, you want to warm it up with your body temperature cuz you don't want to go just cold. There we go. All right. Now that now that we we've done that, we've done a little tutorial on how to purge and refill your torch. Why are we filming this episode? I'm glad you asked. Commercial loans. So, no matter what field you're in, I am in commercial real estate. If anyone doesn't know, if you're just tuning in for the first time, I'm in commercial real estate. I am a broker in two states, working on my actually going to be taking the test for my third state very soon. So whether it's real estate, whether it's sales of any kind, whether that be commercial vehicles, whether that be trailers, whatever you sell, if you're selling heavy equipment, anything of a of a high ticket price tag, you may encounter lending. You may encounter clients, customers, buyers that need lending of some sort. Need a bank. They need bank intervention. They need a loan. And a lot of people in the United States of America have purchased a home. I mean, it's a it's a pretty common thing, right? So, that's a something that you're very familiar with. A lot of people are. You're a lot of people are familiar with buying a home, right? So, you go to your go to your bank, the bank that you bank with all the time, your daily, you know, your Monday through Friday banking institution, whether that be uh JP Morgan Chase, Bank of America, TD Bank North, whoever that is, your local credit union, whatever, Capital One, whatnot, and you go and you fill out a bunch of documents, an application, ask a bunch of question or or get asked a bunch of questions. So, you answer those questions on these applications and there's a bunch of bunch of [ __ ] you got to go through. Supply your tax returns and you get a pre-approval letter. You are you're able to buy a house up to x amount of dollars and at a certain loan to value, meaning you're going to have to put x amount of percentage of that sale price down towards the the down payment and then you're able to get, you know, x amount of thousands of dollars. You're you're qual you qualify for a $600,000 home with 10% down, 90% LTB. Okay, great. Very simple. Most of those loans are, you know, straight loans, straight mortgages, 30-year fix, 25 year fix, 20 year, 20-year fix. Very simple stuff in the grand scheme of things. Then I deal with a lot of first-time commercial buyers. And I see commercial buyers in a lot of different categories, a lot of different tiers, a lot of different walks of life. So I get I get the owner operators. They started their business out of their garage. They've made a good amount of money and now they want to go and buy a small assembly facility, you know, 5,000 foot warehouse essentially and they want to, you know, continue building the dream. By the way, I am enjoying I'm sucking back on my new favorite winter cocktail, the apple oldfashioned. If you're interested, I have the recipe on our Instagram stories, I believe, where I show you the entire thing. It's it's it's really awesome and less sugar than doing, you know, your standard oldfashioned. And the bourbon I used on this is the Elijah Craig toasted barrel. Awesome stuff. Anyway, somebody who's started a business, they want to expand it, they want to buy a warehouse to do their assembly, whatever. That is called owner operator financing. That's an or that is an owner operator. [snorts] And then you have people that, you know, they have a couple of residential income producing properties or also known as rent houses and they want to step up. Let's just say they have they have two or three rent houses and they want to step up to a sixunit apartment building. Six apartments in one building. Okay, that's that's you know a quintessential commercial real estate investor. And there's all different walks of life. You know, there's institutional investors where, you know, these are people that probably a conglomerate, a couple of big companies get together and start this entity and they're buying and selling or buying and developing, you know, thousands and thousands of units, thousands of apartment buildings across the country or the world for that matter. You know, that's an institutional investor. I see all of them. I see all of them. And while I'm smoking the banker by H. Upman, I deal with a lot of buyers that are kind of firsttime and they don't really know a lot about commercial loans or commercial lending, right? So that's why I decided to shoot this podcast episode because commercial lending, commercial lenders, they're very different. They are not the average bear. So, they do things a lot differently, and there are tons of different vehicles that a lender could use to finance you a building. You do have straight conventional mortgages. You have lines of credit. You have SBA loans, which is the Small Business Administration. They offer financing to small businesses. You have to qualify. There's a there's a bunch of a bunch of fired hoops you have to jump through. But why people jump through those hoops is because the SBA will float you a loan at very low interest rates because they're incentivizing Americans to build businesses. And then you have very creative lenders. You have creative financing and that's like private equity. That's that's people with lots of money, business people that want to make more interest money than they would if they sock their money into a bank account. You go to a bank, any any one of your banks. Let's just say you've got a hund00 million sitting in your bank account and you want to make more than the 0025 or 043 whatever the interest rate is uh that your bank is offering. Let's just say you want to make more than that. you want to make, you know, 7 8 9 10 11 12% interest on your money. That's where private equity lenders come in. They will lend you money and they will get, you know, traditionally they don't do 30-year mortgages. They'll do like, you know, like a 12-ear mortgage, 15-year mortgage, something like that. and they'll they'll they'll give you a an interest rate that's traditionally a little bit higher than prime, the the the standard banking interest rate, but they're not going to their underwriting standards are going to be I I would say kind of middle of the road. They're going to they're going to want some recourse if you don't pay your your mortgage. Then you've got things like hard money loans where let's just say you want to buy a million-doll building. A hard money lender will lend you that million dollars, but they're going to do it on a very shortterm basis. And I'm talking six months, 12 months. The most I've ever seen was like a 24-month hard money loan. And the interest rate is going to be skyrocketed. It's 12, 15, 20%. Um, traditional banks, JP Morgan Chase does not offer hard money loans. Um, you know, most lenders don't do hard money loans because they're very risky. And somebody would do a hard money loan because they don't have the time. Let's let let's just say I'm just going to give you the scenario, okay? I'm going to give you the the imaginary story here. You find a building that you want and you need. It's it's of a huge value to your business. You're an owner operator and you want to buy this building and it's a million dollars and you don't have a million dollars cash to buy this building. So you go to a hard money lender and a hard money lender says, "Okay, I want 30% down." So you got to come up with 300 grand. Okay, fine. You have you have the 300 grand. I want 18% interest and I'm only going to float you this note for 12 months. You close on the property. In that 12-month period, you either have to pay off the 700,000 plus interest or you have to find a conventional loan to balloon that payment out to the hard money lender and then float you a normal mortgage, longer term, you know, 25, 30-year mortgage. There's all sorts of lending in commercial real estate and I I would say in in businesses in general, you know, lines of credit and SBA loans and all that kind of stuff, but it gets very it gets very attractive. It gets very complicated. It also gets very complicated. So, just, you know, keep that put that in in your hat. It gets very complicated. Commercial lending usually will not, we're talking conventional bank, they're usually going to be 20 to 25% down. That's kind of a general standard. It could go up from there, but the general standard is like 20 25% down. That's that's a lot of money. That's a lot of cash when you're talking about, you know, a three, four, $5 million building. Um, you know, it doesn't really matter if it's not that I say it's it doesn't matter because it's it's all money, right? It's all money, but you know, it's 56 $700,000 building. you know, a commercial lender. You know, JP Morgan Chase is going to want 25 30% down. When you are a an owner operator, banks, commercial lenders are going to have stipulations. They're going to tell you that we're not going to write the loan. We're not going to issue the mortgage to you as an individual. We're not even going to issue the mortgage to you, the business, Acme Rocket Company. We're we're not we're not issuing you the mortgage to Acme Rocket Company. You have to create an entity called 123 Main Street LLC and then you 123 Main Street LLC because the building's on one 123 Main Street. You are going to write a lease to yourself. Acme Rocket Company. I'm going by the old Roadrunner cartoons. The bank wants to know that even if Acme Rocket Company goes completely out of business, goes tits up, they didn't write a mortgage to a company that went bankrupt. They wrote a mortgage to a real estate holding company. So, you're leasing to yourself. I mean, the these are some of the things that happen in commercial real estate. This is the things that happen in commercial lending. Let's just say you tell me and you know what? Blow it out your ass. I don't I didn't pay attention to a [ __ ] word you said just now. Here's what I tell you. I tell you that commercial lending barebones. When you think commercial lending, understand it's a lot more underwriting. You have to jump through a lot more fired hoops. It's a lot more money down. You know, 20% minimum. And some banks won't even take 20%. It's like 25%. Minimum. So, it's more complicated underwriting. And it's more money down cuz after all, you're not buying a home that you're living in because you're living in it. If they take it from you, where the [ __ ] are you going to go? It's your house. So, it's a lot less down payment. You know, some people can clear for a 90% LTV, so 10% down or z like 100% mortgage, 0% down, just, you know, sign and drive or or sign and live. Commercial lending is completely different. And then you get into the really creative [ __ ] where you've got debt service loans. What's a debt service loan, an I'm glad you asked. A debt service loan is if you are a very astute, a very resourceful guy or gal, and you find a property that let's just say it's it's four units. Let's just say it's four apartments. And the net operating income, meaning the gross income less all of the expenses, the mortgage, all of the maintenance, like whatever, you know, the the the alarm system, taxes, like everything, you have net income and it's really high, you can get a loan on that building because of the really high net operating income. And at that point, the people the the lender, debt service lender, there are lenders that specifically do debt service and that's like their main bread and butter. They will write you a loan. They'll cut you a check on the asset, not your personal credit, not your business credit. They don't even give a [ __ ] who you are. If you find the deal, if you find the property that's got a high NOI or a very high upside, a very high value ad, which I have I have a podcast about value ad, but if or a podcast episode about value ad. So, if you have a value ad property, they will write you the they'll write you the mortgage based on the NOI. They'll write you the mortgage based on the property itself. They don't give a [ __ ] about you because you found a great property. But I will tell you this, a lot of people are looking for debt service loans. These people are not stupid. They didn't get where they're at because they're stupid. They're not there lending people millions of dollars because they got taken advantage of. I can tell you that right now. If you don't have a really stellar debt service property, you you ain't getting no loan. I can tell you that right now. on a really great debt service loan, you you're not putting [ __ ] down. You're putting zero down sign and mortgage. That's what's happening. But those those properties are few and far between because any property is going to have challenges. Any property is going to have challenges. You know, you're you're going to have a unit that isn't is vacant. You're going to have a unit with a tenant that is back six months rent, hasn't, you know, hasn't paid in six months. You're going to have challenges. And when you have those challenges, the debt service lenders are not going to be as apt to lend to you. So here's here's what I can tell you. I can tell you that if you're going to purchase a commercial building, a commercial property, whether that's an office, whether that's retail, whether that's a warehouse, whatever it is, a multifamily building, commercial lending is much more complicated. They're going to ask you more questions. They're going to want to see more proof, more documentation. They're going to ask you for a larger down payment. I mean, this is Hi Utman, guys. I mean, they don't doesn't it doesn't get much better than that. It's a very good stick. This is a it's a little light for my palette. It's a little light for for my strength cuz I'm usually medium to to bold body, but it's still good. As I was saying, you are you're going to be going through a lot of underwriting, which is someone going through all of your proof of income, your documentation on how you made your money, when you made your money, how much money you make, how consistent it is, what your debt to income ratios are, how profitable your business is, your net worth, like all of these things are going to go into commercial lending, I would say in a real estate application, in a real estate world, it's best to do it all cash. All cash. You can do whatever you want. It used to be back in the day when you said all cash. You got some pretty stellar deals. You held the gold, so you made the rules. It's not like that anymore. So many people have cash and are buying with cash. It's kind of like when you say, uh, you know, I'm all cash. People are like, yeah, okay. and the other three people that are interested in my building are all cash. Or there's so many people that are qualifying for so many loans today that it's it's essentially better than cash because a bank can give more money than somebody that's paying all cash. Somebody who who's paying all cash wants a better deal because it's all cash and it's an easier, more simplistic deal. But today people are clearing for so many loans, commercial loans that it's like, yeah, he's all cash, but this is like 30 40% more money. Someone's going to go with that. So, you know, all cash is a lot more simplistic. It's a lot a lot easier deal, but it doesn't hold the weight that it used to. Having said that, when you do have a commercial loan, a lender is going to ask for a lot more information. Like when you buy a building all cash, any property all cash, you don't even have to have a [ __ ] survey. It's not required because you are paying all the money. If you're buying a property that has an encroachment on it, you're you're encroaching on someone else's property, that that's your that's your [ __ ] problem. And if they if they come at you for that, if they regulate against you for that, then you know, you just lost more property because you didn't do a damn survey. But when you're buying all cash, you don't have to do a survey. You don't have to do an environmental um an environmental assessment. You don't have to do [ __ ] basically when you're buying all cash. Now, when you're buying through a commercial lender, that commercial lender is going to have some criteria, some stipulations. Okay? You're going to have to pay $2,500 for an appraisal. You're going to have to pay $1,500 $2,000 for an environmental assessment. you're going to have to pay 1,500, 2,000, 2500 for a survey, depending on how big a property is. These are all things that a bank, a lender is going to ask for. If they ask for it, that means if something pops up on any one of those reports that they don't like, they're not lending to you. So, that's those are the big differences. And then when you get into SBA loans, the SBA is they pawn it off like, yeah, it's the way that we're going to stimulate the economy and we're going to we're going to create all kinds of [ __ ] for small businesses and we want small businesses to thrive and to grow and expand and it's all [ __ ] They put you through I want to say nine out of 10 people that I know that have gotten an SBA loan. And an SBA loan doesn't have just to be on property. It could be an SBA loan for building up your business, for expanding your business, for starting your business, whatever it could be. Nine out of 10 people that have gotten an SBA loan will never do another one ever again. Never. And just to clarify, the SBA SBA loans are not actually issued by the federal government. They're backed by the federal government, but they are issued by individual banks. Bank of America, Capital One, JP Morgan, Chase, they will do SBA loans depending on if if your bank qualifies. Could be a small community bank, could be a small local bank, could be a credit union. They all issue if they meet the SBA's requirement. They will all issue SBA loans. Anyone that I know, like I said, nine out of 10 people that I know have gotten SBA loans will never do another one again. They put you through so much hell and so much restriction, so much they scrutinize everything you submit to them and ask you for more and more information. But that's not the worst part. The worst part is they give you stipulations like if you you can only get this money if you qualify by using X X amount percentage for operating expens expenses X amount of percentage for payroll and then X it's crazy it's crazy what SBA loans stipulate how you can get the money because it's not just okay you you've been approved and we've given you the money but now in order to actually disperse the money, you have to you have to jump through these following hoops. It's crazy. Let's say you're an investor. Let's say you get this like once in a-lifetime opportunity and you want to buy this property and it's it's like a retail center and there's 10 stores, nine of them are leased. You know, you have a 90% occupancy rate. commercial lenders in your mortgage documents are going to stipulate that every year, every two years, every whatever cycle it might be, they want to audit all of your leases. They want to audit your tenant list. They want to see what the permitted uses are. And if any of those conflict with their standards, they can call do your note and say, "You owe us now. We need to accelerate your mortgage and you have $8 million left on your mortgage. You owe us $8 million in 30 days. Commercial lending can get very, very complex, guys. I'm I'm not going to lie to you. I'm not going to sugarcoat it. Commercial lending can get very, very complex. It can get very difficult. in every instance of it, whether it's hard money loan, whether it's an SBA loan, whether it's a short-term loan, a long-term loan, a straight, you know, whatever, whatever you're looking at. It is more complicated. It's not complicated if you have a good mortgage broker or if you have a good banker, if you have someone who knows what they're talking about and can walk you through it and help you through it. Like I say, my personal opinion, the best the best option is going all cash if you got it like that. But if you don't got it like that, you got to get it. You have to get a loan. It is what it is. That is the type of debt that a lot of people opt for is the mortgage. So, if you got to do it, you got to do it. But just know what you're getting involved in. Have somebody who can bring you up to speed on all of this stuff. It is a very difficult subject. And don't get me wrong, commercial commercial real estate and commercial lending is nowhere near as simplistic as residential lending le residential mortgages, but the upside's far greater. The upside is far greater. You are not going to potentially, I don't say this for every single application, but potentially you are not going to make the income that you would in commercial or in residential that you would in commercial. If you have four rent houses and you're making $1,500 a month on each of those rent houses, you're making $6,000 a month. In residential, you cannot charge triple net rent in most states. So that $1,500 does not equate your mortgage payments, your tax payments, any maintenance, all of that is rolled in. So, if you've got $99 of expenses, taxes, mortgage, you just replaced an an AC unit or a boiler or a hot water heater, you made $1 that month. Sometimes there are people out there that go negative. They've got more expenses and more maintenance than they've got rent. So, they're upside down. They've got negative equity in in a rental income producing property, which it ain't it ain't producing [ __ ] It's not producing any income. It's actually producing debt in commercial with the exception of multifamily. It's just there's a lot more units potentially because you can you could buy a 100 apartment building. An apartment building with a 100 doors. That's a lot of rent. That's a lot of rental units. So, whatever your mortgage is going to be and your your taxes and maintenance and all that, for the most part, if you run things right, you have a $100 doors, you're making a lot of money each month in profit. But in most all other circumstances in commercial real estate, you can offer a triple net rent structure, meaning I want in my pocket for your call it a retail store. I want $3,000 a month in my pocket everything else that comes out of my pocket. every expense, the capex, the mortgage, and all of that stuff, the taxes, any maintenance, any of those fees, any utilities that can't be individually metered to the tenant, all gets paid back by the tenant. So, my $3,000 goes directly in my pocket. All of the expenses are all paid for by the tenant. And let's just say you've got 30 stores like that in one building. You're making a ton of pure profit money. You can't do that in residential. You just can't. So commercial might be a little complex. Commercial lending might be a little difficult. It might be a little misunderstood, but a if you need to expand your business, you have no choice. You're going to have to go and get a commercial property one way, shape, or form. So you have no choice. But if you're looking to invest in commercial, it's a great investment. If you have the right team behind you that knows what they're doing, you can close on a commercial property and make a good amount of money, more than you would in the stock market, potentially more than you would in a bank, just collecting the interest, more than you would in a CD, you know, because money market accounts, the CDs are probably four, 5% max. You know, you can make a lot more than that in commercial real estate, but you have to know your way around the lending or have someone who does that can advise you, direct you, so on and so forth. It's just it's a fact of life, guys. It's it's a it's something that we're so used to in the United States. You know, maybe in other countries, they do a lot of cash deals. They don't do lending or lending is is a lot different than it is here in the States, but it's just something that we got to deal with. It's something. It's a fact of life. And if you're going to get involved, get yourself a good lender. Get yourself a good commercial lender. Figure out what type of lending you want. And then find a good lender in that arena. Whether that be a debt service lender, whether that be an SBA lender, whether that be a traditional lender, private equity, and learn what you got to go through. And then once once you do, getting a loan like that is great. And then once you have a successful goaround with it, you'll be doing it over and over and over again. It is a necessary evil. I know a lot of people that have had bad experiences and will never do it again. You know, shied away from commercial real estate, commercial investing, and they will never do it again. Um, I feel really sorry for those people because it is it's a great opportunity. It's a great investment tool if you have the right team behind you. So, I encourage it. Highly invite everyone to ask me any questions that you would. I would connect you with a lot of different lenders in the states that I I broker real estate in. Texas, New Jersey, soon to be New York, and also Florida. So, you know, if you have the questions, if you want to talk to lenders, I've got multiple you could talk to, but I highly recommend it. I highly recommend you understand what you're going to get involved in. I highly recommend you understand the types of interest rates, the the types of paybacks, you know, like in your in a in a business application, you know, you you write a mortgage on your property. Let's just say the building is a million dollars and you do really great one year. You signed a 30-year mortgage, a 20-year mortgage, and in year two, you did so well that you made enough money to buy the building 10 times over. You want to accelerate the payments because you don't want to payments anymore. You don't want to pay the interest. You want to pay it all off. If you if you signed a mortgage with a prepayment penalty, if you pay the note off within a certain time period, you're going to have to pay a penalty. what that penalty is. It's all in the documents that you signed, you know, but this is all stuff that you wouldn't necessarily know. You would have to have someone explain all of this to you. Commercial loans are great. They're great for a lot of reasons. They help people buy properties, buy other businesses, buy things that they need, equipment, vehicles, whatever, without using a lot of your own money. You know, do you have a billion dollars where you can pay $3 million for a building and not feel it? I don't know. God bless. You don't need any loans. But if you are on tight margins and you are trying to expand your business or start your business, you're going to need loans of some kind. You're going to need a mortgage. You're going to need a line of credit. You're going to need a lot of different things. And it and it's great it's great to have. It's great to have access to those tools because they are tools, but you just you have to know what you're doing. You have to know or at least be educated by someone who does know what they're doing. So, you know, I feel that this is a great subject. I feel like this is a subject a lot of people don't know about. I feel like this is a subject that a lot of people get burnt in the world of business, you know, and it and it causes them to never want to talk about loans or, you know, buying anything big like ever again. And I think that's wrong. I think it's it's a disservice to anyone any professional any professional to your clients. It's a disservice to your clients if you are a professional and you are not properly explaining and advising to your clients what they are looking to do, what what barrel they're looking down. But if you need access to the cash, if you need the loans, I highly recommend you surround yourself with a good team that knows what they're doing, that can help you and advise you and lead you to success. Because as fiduciaries, as professionals, licensed professionals, that's what we want. We want our clients to be successful. Because when our clients are successful, we are successful. And when our clients are successful and we're successful, it's a it's a great marriage. It's a great relationship. And when we're both successful, they will continue to come back to you and they will refer other people to you because of that level of success. Those are my only thoughts. my only those are my opinions the way I think my viewpoint can't speak for everyone else but that is all I have for episode 15 guys with the banker day trader by Hupman and my now completely gone Apple winter old-fashioned we spoke this evening about commercial lending and the different types and I didn't cover all of them you know I was just speaking in generalities you know there's a lot of other really sophisticated types of loans phones. But I hope you enjoyed this. This is all I have for tonight. Hope this gave you some sort of insight and I pray that you stay blessed and above all else, keep it rolling, baby. For sticks and stones, I'm