Commercial Paper - Posted by MN~Chicag0

Posted by John Behle on November 11, 1998 at 15:03:28:

By “Commercial” I assume you are referring to notes secured by “Commercial” real estate. I have experience in the Commercial end of real estate and through my CCIM courses, but do not buy much commercial paper.

The due-diligence, analysis and risks are quite a bit different - as are the capital needs. Commerical valuation is based heavily on the business and income aspect. A particular business or even industry can be quite volatile. I look at Commercial deals primarily for the land value only, unless they are fairly small and in my local area.

For example, I am dealing with one right now that is a second on a stable. Worst case scenario is to subdivide the property and build homes. Works for me.

As far as the attorney, I’d view him as a potential buyer only (Put a chain on your wallet). Try to flip him a few deals. He doesn’t sound like a player until you have a substantial portfolio.

I get the impression you have done few deals. Concentrate on buying a few notes first and look for a couple smaller investors or someone to sell the notes to. When you’re looking for 5 million, you are either talking some sophisticated people or a broker pretending to be a principle. Either way, it’s a little pre-mature.

Start by flipping 3-5 notes. Then find an investor that will buy the notes with you having an option to either buy them back (at a profit to him/her) or the right to improve the notes. When I started, I stuctured that kind of deal with investors.

We based the profit split on splitting the difference between the cash profit or increase in yield when the note was paid off early or “yield enhanced”. So, the investor buys a $30k note for $22k. You create an early payoff of $28k. You and the investor split the $6,000 profit and do it again.

Or… you buy the note at a 14% yield and increase the yield to 24%. You split the 10% yield increase. You’ve created a cash flow. At times I would sell my cash flow back to the investor at a good yield for cash.

The key is to get started, do it safely, build a track record and build the investors. Once you have a portfolio of 500k+, then you can start looking at options of large investors, stock offerings, debentures, LLC shares, LP’s or whatever.

Schools and small businesses can be good investors. Pension funds of the businesses need a good rate of return. Universities and colleges can have foundations or cash to invest. Cash Flow is their major need sometimes. There are several that invest in paper. Learn about C.R.U.T.'s (Charitable Remainder Uni Trusts). There are some exciting applications where people can bail out of bad capital gains problems, get a tax write off, cover their initial capital (or inflation adjusted), and invest in paper providing a nice cash flow for themselves and a great donation later to a qualified charitable organization (like a University, Habitat for Humanity, a church, etc.)

That one’s a little beyond the scope of this, but works beautifully. It’s nice to be a hero insolving people’s tax problems while creating capital to build a paper portfolio at the same time.

Self Directed IRA’s are also an extremely good source of paper investment capital. Less than a dozen phone calls to financial planners usually results in hundreds of thousands. Yet, like I said before, they will usually want to sell a track record, so start popping a few deals.

Commercial Paper - Posted by MN~Chicag0

Posted by MN~Chicag0 on November 11, 1998 at 09:54:56:

John:

I made a presentation yesterday with an attorney
who is heavily involved with real estate and investor
money. My intent was to put together a $5 million
fund for notes.

His response was, “You don’t need a fund. I just did
a $33 million deal with a 3.5% interest rate spread.
You find the deals. I have all the money you can need.”

Not quite what I expected. I know nothing about the commercial end of the note business. This individual
said he was expecting a lot of fall out in this market
over the next 6 months, and there would be more situations
available.

Have you had experience in the commercial end? This was
something over my head, and I know he is very precise in
his business dealings. The thought of improving a large
portfolio occurred to me, but, I did not know how applicable
it may be on the commercial end. This particular situation
involved a foreclosure loan.

I didn’t pursue the idea of going after $15,000-$30,000
notes after his little speech. It would not have been
appropriate in the context of the conversation.

Any ideas on what to pursue, if anything, on the
commercial end?

Thanks.