I received an email this morning from Stanley J. Paine Auctioneers alerting me that 1070-1078A Blue Hill Avenue, Dorchester is scheduled to be auctioned at 10 AM on Friday, September 25th. After some quick research, I noticed that the mortgagor is Church of God of Good Shepherd, LLC and the mortgagee is Commonwealth Equity Funding, LLC. This simple nugget of information may not give the layman a lot of information but it gives the competent real estate professional a whole world of background. Commonwealth Equity Funding, LLC is, what is known in the real estate industry, as a hard money lender.
Hard money lenders are generally lenders of last resort for too many organizations like storefront churches. I’ve spoken with the leadership at many storefront churches during my real estate career and many use the financial strategy of “God will help us find the money”. You can see how that strategy would work with Bank of America.
In this mortgage agreement, the Church of God of Good Shepherd, LLC (herein referred to as “Church”) asked Commonwealth Equity Funding, LLC (herein referred to as “Commonwealth Equity”) for money that it probably didn’t have so that it could buy 1070-1078A Blue Hill Avenue. Why? The Church probably didn’t have a history of good credit or a history of good income or a combination of both and that’s why it was probably denied the ability to secure a mortgage from a more traditional lender like a banking institution or a credit union. What the Church did have was plenty of cash.
A Quitclaim Deed filed at the Suffolk County Registry of Deeds on August 30th, 2013 shows that the Church agreed to buy 1070-1078A Blue Hill Avenue for $440,000. The Church bought the property from another religious organization known as Calvary Temple, Inc. (herein referred to as “Calvary Temple”). A Commercial Mortgage and Security Agreement filed at the Suffolk County Registry of Deeds on August 30th, 2013 shows that the Church agreed to a first mortgage of $264,000 with Commonwealth Equity and a Real Estate Mortgage also filed at the Suffolk County Registry of Deeds on August 30th shows that the Church agreed to a second mortgage of $44,000 with Calvary Temple. That means that the Church plopped down $132,000 as a down payment to the mortgagee(s) plus the costs of acquisition.
Hard money lenders typically require a minimum down payment percentage of 30% wherein conventional mortgagees, like banks and credit unions, typically require a minimum down payment percentage of 20% without triggering added costs like private mortgage insurance (PMI). Hard money lenders typically lend for 9 to 18 months wherein conventional mortgagees typically lend for 5 years to 30 years. Hard money lenders typically charge an interest rate of between 11% and 15% wherein conventional mortgagees typically charge an interest rate of 3% to 6%. Hard money lenders typically charge 2% to 5% in closing cost points wherein conventional mortgagees typically charge 0% to 2% in closing cost points.
For comparison’s sake, I recently helped the seller of 60 Hollingsworth Street, Mattapan with the sale of the property and the borrowers were able to get a $245,000 mortgage loan through Citizens Bank. They got a 30 year mortgage at a 4% interest rate with a down payment of $185,000 or, alternatively, a 45% down payment. The borrowers monthly payment is approximately $1,100 and it cost the buyers approximately $5,700 or 2.3% in settlement charges to buy the property. The borrower at 1070-1078A Blue Hill Avenue got a $265,000 mortgage loan through Commonwealth Equity. They may have gotten, using typical hard money rates and terms, a one year mortgage at a 12% interest rate with a down payment of $132,000 or, alternatively, a 30% down payment; the borrowers’ monthly interest only mortgage payment amortized over 30 years may have been $2,640 per month with and it may have cost $7,920 or 3.0% in closing cost points to originate the loan. Note: the Church got a no interest second mortgage of $44,000 directly from the seller, Calvary Temple.
Hard money lenders have their place in the local real estate economy. They help to grease the wheels of real estate markets across Boston. Many real estate developers turn to hard money lenders instead of traditional lenders like banks and credit unions because the lending standards, which include: credit; income; paperwork; and time burdens, are usually greatly reduced. Hard money lenders generally don’t care about the financial health of the borrower because the risk that hard money lenders are taking is more of a market risk and a property risk rather than a borrower risk. To put it bluntly, hard money lenders have little overall risk with market risk being their largest risk. Endeavor Capital is arguably Boston’s largest hard money lender and it’s making a killing.
This isn’t a hard money lender witch hunt. I’m not blaming Commonwealth Equity for making this hard money loan to the Church. I’m not blaming the Church for taking this hard money loan from Commonwealth Equity. It takes two parties to come to any arm’s length agreement.
My questions are:
- Why did Commonwealth Financial make the hard money loan to the Church? What were Commonwealth Financial’s motives?
- Given the relatively short duration of the loan, did the Church have an exit strategy? If so, what was the Church’s exit strategy?
- Did Commonwealth Financial care if the Church had an exit strategy or not? Should it have cared or not?
There’s a lending strategy known as “loan to own” which is, in my opinion, a predatory lending strategy. The lender makes a loan to a borrower knowing that the borrower can’t keep the borrower’s side of the agreement. Some borrowers are in such dire straits that they’ll agree to almost any terms if it will stave off eventual foreclosure. Isn’t the “loan to own” strategy inherently part of a hard money lender’s strategy? If so, to what degree should this strategy be implemented?
Churches are notoriously hard to finance. The Charles Street African Methodist Episcopal (AME) Church (herein referred to as Charles Street AME) has been the most notable recent example in Boston. “Banks foreclosing on churches in record numbers” was the title of an article by Tim Reid which mentioned the Charles Street AME back in 2012. The Charles Street AME was forced to enter bankruptcy protection and ultimately sell property that it owned at 567-757 Warren Street, Dorchester which it finally did in 2014 for $2,900,000.
Below is the complete list of commercial properties currently available for sale in Dorchester and Mattapan through MLSPIN.
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