Many years ago I frequently rubbed elbows with the hard-money world of commercial lending. As an expert educator in the world of commercial finance, I simply could not have a functioning knowledge of the industry without being exposed to what was known as “hard-money lending.” Hard-money loans typically come with some steep prices. The first fee one would usually have to pay is an “application fee.” This particular fee is
required simply for the privilege of having your funding request considered. Many such fees are non-refundable and would be as much as 1% to 3% of the value of the loan request. After your project is given a preliminary approval you may then be required to pay a “commitment fee.” This fee is anticipatory of the underwriting, inspection, legal, and appraisal costs that may or may not be necessary to process your funding request. Regardless of what the anticipated costs really are on a project, commitment fees are typically another 1-3% of the total value of a funding request and to add insult to injury, they are usually non-refundable as well. Then, assuming that all goes well during the processing of your hard money loan, just before closing you will get your written approval. However, in many instances you will be required to pay a “funding fee” which is essentially more money that you had to put up to show them your level of commitment to the funding. (Irrelevant of the fact that your other monies should have already clearly conveyed such a commitment previously.) This fee can be a mere $10,000-$50,000 or it can be greater. In most instances this fee is refunded immediately upon the funding of your deal, but it’s still cash that you’ve got to come up with just to get your deal done. (Are you tired yet?) Then, upon the closing and funding of your loan, you will be assessed approximately 15-22 points of the loan amount, plus an interest rate as high as 30 percent! Are you worn out and horrified yet?
To add insult to injury, folks, all of this is completely legal. There are no regulations on commercial lending, and even less when it comes to lending with your own private money. So really, the hard-money lenders are untouchable. With so many fees collected without even having to fund a loan, you can bet that most hard-money lenders have vicious legal dogs to do their bidding in the event of a dispute. What would possess a person to pay a non-refundable $5 million dollars simply for the privilege of applying for $50 million dollars at the cost of 20 points, an 18% interest rate, and 55% of their business revenue? It’s called desperation, folks.
Obviously this finance scenario defies all common sense to most of us reading this. I look at situations like this and say “Whoa, buddy. No deal is such a sure thing that it’s worth you putting all of this at risk. If you’re deal is that viable, then surely you should be able to qualify for “real” financing, right?” “If this is all you’ve got, walk away from the deal and wait for a more attractive one to come along.” Wouldn’t you agree?
Here’s the backside of such transactions that you should know as well. Such deals are specifically created to be devious in order to give the hard-money lender the surety of not only getting their money back, but also laying claim to all work equity, sweat equity, intellectual property, and physical property in the event they don’t receive the expected return on their loan. Some hard-money lenders actually HOPE that the client will default so that they get much more than their multi-millions of dollars lent at a 30% interest rate. Oh, and one more thing—and this is the kicker…when it comes to commercial loans—especially hard-money loans, they can be called due at any time and for any reason. Contemplate the consequences of such actions if you were to be in the middle of a billion dollar development project. Your funds could dry up at a moments notice. You’ll want to remember this component of commercial lending in a moment.
Ok. Now let’s apply this to a real life scenario. I do so because I really need you to see this philosophy up close and personal in order for your perspective to be clear when I apply it to our relationships with other nations.
Frankly, when I was first exposed to hard-money lending, I ignored it. I thought it was absolutely despicable and refused to even acknowledge its existence. But then I found a very committed clientele group. In spite of my disgust with the hard-money world, I quickly realized that there was a particular group of clientele which viewed the hard-money world as a dream come true. And if it meant keeping their passion, dream or attempt at gross profits alive, they would embrace it at any cost.
I once had a client who was an ideal guarantor for a hard-money loan. He required a loan amount of approximately $100 million for a project he wanted to get done in Brazil. He was so convinced and passionate about the success of his project and the multi-billions of dollars that he would make as a result of it that he was open to whatever he needed to do to get the money for his project. He was a very private man and thus did not want to go through all of the rig amoral of a formal loan application process. (You would be shocked at how many people pay top dollar for “quickie loans” just to avoid over exposure of their personal information.) He had not significant wealth to speak of, other than the planned wealth he had for this project—yet another reason he didn’t want to go through the mainstream commercial process, as he most likely would not qualify. To make matters worse, he had to move very quickly (“Quick” and “commercial loans” do NOT belong in the same sentence together. In spite of mostly moving out of the commercial finance industry, I’ve still got a client left-over on a deal that I’ve been working on for nearly a year, now!) If he did not act fast, he was going to lose access to the mining and harvesting rights that he had originally inherited which were responsible for making his project so incredibly profitable. So he contacted me for my help, paid my retainer fee, and we began the process. Through one of my less-offensive hard-money contacts I was able to get him preliminarily approved for his $100 million. However, it would come at a price. His up-front commitment fee was $1.5 million, his deal would cost him 13 points, and his interest rate was 12% for the first year, and then increase a whole percentage point every year for the next 5. Considering the alternatives though, this guy thought he was getting a sweet deal.
Unfortunately, money doesn't fall freely from the sky. photo c/o www.fotosearch.com
In the best interest of my clients as well as my time and efforts, I would refuse to take on a client who was not fully educated and aware of the snags that exist on a hard-money loan. As a result, I always questioned them to make sure that they at least had the processing/commitment fees in order to move forward on their deals. After all, if they are trying to go into battle, but don’t at least possess their own body armor and a horse, I simply would not take them on as a client. This particular client didn’t even balk at the amounts of money that I was talking about that he would need to provide to the hard-money lender and assured me that he had it. Upon the request of his $1.5 million dollar commitment fee, he wired the funds to the lender. After which he persisted to call me several times a day to get an update on his deal. Since I always educate and prepare my clients with proper expectations before agreeing to take them on, I finally got tired of his constant nagging and asked him what had changed on his loan scenario? Something HAD to have changed since I was quite positive when I agreed to take him on as a client that I told him that such desperate and intrusive behavior would not fly when I first took on his project. After some further pressing, he finally came clean and informed me that he had borrowed the $1.5 million dollar fee from yet another hard money lender at an interest rate of 10 points and 15% interest per day! (Nope. Not a typo folks. There’s a real ugly world out there and it’s well funded with powerful and deep pockets. Think about it folks. If you had lots of money, would you rather just put it in an interest bearing account making 5-8% interest or would you rather put out there in the form of a hard money loan earning points and high interest?)
Now, I’m sure that many of you are reading this and wondering what in the world would possess a reasonable business person to do this? Who would be so desperate that they would be willing to pay so much just for this one project? Would you be shocked if I shared with you that there are over $1 trillion dollars of these types of transactions that take place in America every year? So, why am I telling you this? Because I need you to see what desperation and ego really look like and how they can and DO skew ones vision of what is or is not an appropriate financial transaction.
When America needs more money there are only so many ways to raise it. The most obvious method to some would be to raise taxes. To be frank though, raising taxes is typically one of the least effective ways for our government to raise money. Besides being a politically charged issue, raising taxes on persons is usually not fast enough, reliable enough, and frankly, it’s usually impossible to raise an amount sufficient to “stop the bleeding” on a particular financial crisis. A financial crisis usually calls for a lot of money and fast. Raising taxes is essentially viewed as a “too late penny ante” in comparison to other methods used by our government to raise funds. When you need hundreds of billions, or even trillions of dollars, your citizens aren’t exactly your first choice for getting it—fast.
Foreign exchange photo c/o www.chairmanking.com/
While insurance salesmen or mortgage brokers may view their communities as their potential client pool, when you’re the U.S. of A, your client pool is made up of the financial heads of other nations. In such instances, I’m sure you can appreciate that such financial negotiations are only successful with international allies. I mean really, who borrows money or sells items to their enemies, right? In some instances, the money raised can be a temporary loan from a foreign nation or it can be in the form of selling off American assets. These assets can be in the form of weapons, intelligence, land, bonds or discounted currency. (The constitutionality of all of this simply cannot be fully addressed during the education of this topic. Sorry.)
As prosperous as America is, our nation has managed to be wholly dependent on the monies and OPINIONS of other nations—to the point that our sovereignty has literally been sold to the rest of the world. In other words, our currency will take a free fall off of a mile high cliff if the other nations of the world cease to view it as an attractive asset. Originally, our currency was not vulnerable to the scrutiny or slurs of others because it was backed by an unequivocal asset—gold. On top of that it was also backed by bounteous land—capable of feeding the entire rest of the world, surplus harvests, burgeoning grain mills, seemingly never-ending water supplies, valuable military intelligences, and so much more “stuff” that other nations found to be highly valuable. Our U.S. currency used to be the symbol of such lucrative assets. As such, other nations wanted to invest in our currency. For over a century ours was the currency to invest in because by comparison the other nations had so little. You know…the old “it’s easy to look like an eagle when you’re surrounded by a flock of turkeys” type of thing. Unfortunately, all of our “sitting pretty” positioning has been watered down—particularly over the last 2 years—to the point of being unrecognizable. And the desperation that other nations are presently experiencing is requiring them to reconsider investing in American in any way, shape or form.
What events are causing other nations to wise up about their U.S. holdings? Is it really that bad? Is there anything that can be done to buffer ourselves from severe financial consequences?
Unfortunately, there are events which are taking place right now that are coming upon us quickly which could cause our American market to be flooded with useless U.S. currency. To make matters more sobering such a scenario MUST be combined with another serious issue of vulnerability. Tomorrow, I will address exactly what that is.
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