JF1387: Taking The Mystery Out Of The Commercial Bank Process with John Matheson
John was (and still is) an investor like the rest of us, who was struggling to understand and prepare for everything that came with getting a commercial loan. One day he went to a consultant who put his info into a program, tapped his fingers on the desk for a couple minutes, and said “you’re a go”. John’s life was changed now. John and the consultant teamed together to bring this program to more people, which is how commercial loan success was formed. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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John Matheson Real Estate Background:
- CEO of Commercial Loan Success
- Commercial Loan Success is a Business Loan and Investment Property Analysis Software and Education Platform.
- Based in Colchester, CT
- Say hi to him, get a free chapter of their upcoming book, and a free demo of their software at http://web.commercialloansuccess.com/Best
- Best Ever Book: Think and Grow Rich
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Joe Fairless: Best ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, John Matheson. How are you doing, John?
John Matheson: I’m great, Joe. Thank you.
Joe Fairless: I’m glad you’re great, and welcome to the show. A little bit about John – he is the CEO of Commercial Loan Success. Commercial Loan Success is a business loan and investment property analysis software and education platform. They’re not a lender, a broker, they’re a software program. Based in Colchester, CT. John is also a real estate developer. So he’s got a software company, and also he is an investor/developer.
With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
John Matheson: Oh, I’d love to, and Joe, thanks for having me on. It’s all kind of funny – my wife has a ball with this, because I’m one of the founders of Commercial Loan Success software, and I’m also a commercial real estate developer and property investor, like you and like many of the Best Ever listeners… So how do you elevator script that? It was so easy when I was just a developer.
So I guess for context, just to let the audience feel like I am one of you guys in Best Ever Listener Lan, for context, I’ve been a real estate property developer and been investing in properties for 30 years now. I’ve survived three recessions in my career, and along the way I’ve probably completed over 50 million in transactions as a principal or a professional.
I’m currently involved in ownership as a principal or JV partner in properties that are permitted or in due diligence that when they’re fully built out would value at another 70 million or so. So it’s not gonna surprise any of you that I have arranged for myself along the way many millions of dollars of commercial bank financing and private financing either… And after listening to you, Joe – and I’m a big fan of the show – I figured you’re gonna ask me and your audience is gonna wanna know how did I get to this place in my career? Well, as a real estate developer I also have a software app.
Joe Fairless: Yeah, you took the words out of my mouth… So how did you do the transition?
John Matheson: Like a lot of us in this business, I started at a young age. I had a background in real estate sales I started in my twenties. But I had a goal of specifically wanting to be a real estate developer. So my goal was specific – I didn’t wanna just own investment property, I wanted to be the developer. And to do that, I knew that I had to learn the business inside and out to learn how to get financing, both institutional and private. You know this as well as anybody – you have to be able to do both in our space.
So I learned by doing… My first transaction as a principal was small, and like many of how you in the audience started, it was for a building lot of $30,000 on which we put a new house, and it sold for $225,000. Back then you’d just think that’s the world, that you’ve just completed… And it was great though. I got my construction money from a commercial bank back then at Prime Plus Two, but what’s funny is back then the rates was 7,5%.
Joe Fairless: Wow, okay…
John Matheson: [unintelligible [00:04:04].04] Small transactions, as we all know, are fantastic and they can form the foundation of your business, they can be the stepping stone to increase your portfolio over time… But as we also all know, to advance to the next level and to get into the larger properties, which is something most of us in this business aspire to, you do need to level up into legitimate commercial financing space as well.
I remember when I sold that house, I then bought some building lots and I just kept moving and I kept getting into the bigger properties each time… And I realized at a young age that to level up you need capital, which for me meant the commercial banking relationship in earnest… And you find out along the way it’s really nothing to be afraid of; if you haven’t done it, it’s probably more scary than once you have. The process is not as difficult as many people will think it is, and if you have done it, you start to understand better how to navigate it… But like anything, you need to understand how it works, and then how you fit in.
Along the way though, what always frustrated me when I started, all the way up to a few years ago, was the unpredictability of the commercial bank process. It seemed to me like the banking process by bankers was always kept kind of a mystery, and you and I both like the same book – Commercial Mortgages 101 by Michael Reinhard…
Joe Fairless: Oh yeah, yeah.
John Matheson: …and one of the things he does a great job for all of us trying to just simplify it in his underwriting analysis where he just comes right out and says, for all of us doing just regular cashflowing properties, on the property underwriting side there’s only three things that the bank really needs – that’s the property’s NOI, the capitalized value, and the DCR; that’s generally all they need to complete the property underwriting exercise, and then they all know they’re gonna review everything else in the due diligence file, as well as the sponsor… But that’s all they really need.
Sure, we can all learn ratios and formulas and the like, but the pain was – and I’m sure the people in the audience have experienced this, too – how come we never really know if they’re gonna do the transaction the way we need it? Let’s face it, if you can work with a commercial bank lender in the regulated banking space, they are the source of the best rate and terms today, especially when compared to the expense of if you’ve got all private money for a deal, or you were online getting a lender. But you really can’t afford to be out the due diligence time, the money, the deposits, only to find that your regulated banker can’t do your deal or that you need to put in more money to make it work… And if you’ve done this long enough, we’ve all been there, and you know the absolute pain that I’m talking about.
Joe Fairless: Absolutely. Yeah, you’ve piqued my interest, that’s for sure.
John Matheson: Right? In an actual really earth-changing moment in my career I found that a lot of it had to do with how the conversation started that mattered most, and I’ll share with you now if you like a story of how I got into the Commercial Loan Success software.
Joe Fairless: Sure.
John Matheson: So coming through the last recession – and I got an acquisition and development loan back in 2009… I was one of only three people in this banking institution I was with who actually got an acquisition and development loan that year. So if you lived through the early parts of that recession, getting commercial bank money was very difficult. I ended up on a five-year term with it, and we made a decision — it was a fairly good-sized project, it was about a 20-million-dollar build-out, and we decided that we’d wait for the market to return before we actually did it, so we landbanked it, and it ended up being a great decision now, but at the time you just wonder if you’re making any sense with what you’re doing.
Joe Fairless: What’s landbank mean?
John Matheson: In other words, we just put it on our books and decided to carry it. We hadn’t pulled the permit, so we weren’t paying taxes yet at any level other than the raw land part, and we had a very low cost to carry to the bank, so we just figured we’d put it into our balance sheet and let it sit there until we were ready to build.
Joe Fairless: Okay.
John Matheson: So I’m coming up on a maturity date, which is normal in commercial developer space; if you come up on maturity, you call your bank six months ahead of time and you ask for an extension, and I had always gotten it with this bank… So I call in and I say “Hey, I’m up in June (this is like a January/February call), I’m gonna extend it and we’re gonna start to build it probably at the end of this year.”
The bank says “That’s nice, but we have decided that we’re gonna merge with another bank, and we would like you to move the acquisition piece off our books.” [laughs]
Joe Fairless: That’s one sentence that’s pretty darn cold.
John Matheson: Right?! And it’s like “Really?!” It’s like “We know you can do it, we know what you’re capable of. We know you can do it and we want you to do it, and we need you to get it done before the maturity date.” I’ve never defaulted on a bank loan in my life; I don’t even know what this means at this point in my career of as many years as I was in then… So I said to him, “Well, what happens if I don’t get it off the books in that time?” He says, “Well, I guess we have to do a foreclosure.” I said “Well, that’s nice!” It makes you feel real warm and fuzzy that day, right?
Joe Fairless: Yeah… At the same time, if it’s due in June and you’re calling six months prior and you’ve had how many years?
John Matheson: I’d been for years with it.
Joe Fairless: You’re four years — it’s also their right to do that, and they’re probably like “Well, you should have developed it for the last four years…”
John Matheson: Yeah, and of course, we had them in the discussions… They actually were in favor of the landbanking, so it was more my words, but it was more to it than that… But you’re right, they have a point, so I’m like “Alright.” So now what am I gonna do? So I start to call other lenders that I have relationships with and everybody is kind of giving me the “Well, it’s a nice project, but I’m not sure how we feel about it right now”, and I’m like “Oh, wow… So now what do I do?” I’ve actually gotta go online and google for a resolution and find a lender I don’t know and pitch my deal.
I’m sitting here and I’m looking at what’s out there, and I’m like “I’m not gonna put my social security number and financial statements online for a lender to look at…” It was around 1-2 million deal, so it was a reasonable size, and I was like “I’ve gotta find somebody for a solution.” So I started to network for a resolution, like you do everything as an entrepreneur; you’ve gotta find it in your network.
I start to call, and people start referring me to this guy named Dan Crowley, who is now my partner in Commercial Loan Success. And they say “Crowley will help you out, he’s got instant access to several banks. You’ll like him, give him a call.” So I call him and I end up getting him as “Voicemail is full.” I’m like “This is great, if the guy’s voice mail is full.”
All of a sudden, he calls me back. I say, “I didn’t leave you a message” and he says “Yeah, I always call people back when the voice mail is full off the number. What can I do for you.” So I explained him what I had – I had the proformas for the buildout, and he says “Alright, I’ll meet you. I’ll see if I can help you.” So I meet him down at this local diner, and neither one of us at our age should be in a diner, but there we are, and we were gonna have breakfast, which is the eggs and bacon, all that stuff.
He pulls out his laptop, and he’s got the back of the laptop screen that I can see, and he’s got it facing him. He says “Alright, give me your income, give me your expenses on the project” and he starts putting everything in, and we were gonna do the construction piece.
So he puts it all in, and he comes back and he says “Okay, you’re a go.” Now, he’s been tapping for like two minutes; he goes “You’re a go.” I said “What do you mean I’m a go? I’ve been working on this for a month before I met him, [unintelligible [00:11:20].09] What do you mean I’m a go? And he says “Yeah, I’ve put you through my software, and my software vets your transaction against today’s common commercial banking guidelines and tells me if you’re likely a stop or a go to commercial bank application.”
Now I’m looking at him, Joe, and I’m saying “Wait… What?!” Now it’s getting beyond me and what I have for a transaction need, and I’m more interested in what he has on the other side of that screen. So I said “What do you mean your software vets against commercial bank guidelines and tells me if I’m a stop or a go?” He goes “Yeah, if you’re a stop, it will recommend corrective action before you apply. It saves the bank a lot of time and money. This way here, when you go into the bank you are communicating in bank language crystal clear, and they like that.”
I said, “Okay… I’m a go – what does that mean?” He goes “Oh, what that means is I’m going to take your one sheet (which is my one-page print-out), I’m gonna download, print and share it with my lenders, and in a couple days you’re gonna have a proposal to do your loan” which is exactly what happened.
But in the meantime, I’m looking at him saying “Hang on a second… This is your software? How do I get this?” How do me and everybody else, and the Best Ever listeners get this, right? He goes, “Well, it’s mine. I have had it in my consultancy for over 25 years. I wrote the code, and I vetted over billions of dollars of commercial real estate and business credit line transactions with this.” I said, “I’m still stomped here… What do you mean it’s your code?” and he goes “Yeah, I wrote it.” I said, “Well, I want it.” He goes, “You can’t have it.” [laughs] I said “What do you mean I can’t have it?” He goes, “No, it’s mine.”
I said to him “Do you realize the angst you just took off of me?” He goes, “Yeah, it happens all the time. People hug me.” I’m like, “Oh, my goodness.” I said “So you just solved a critical issue for me, and this is how easy it is for you?” He says, “Yeah, I do it all the time.”
I said “Do you realize how many people out in the world of commercial real estate investment property and in commercial lines of credit for businesses could be helped with this?” He goes, “Yeah, and also commercial realtors, anybody who’s in the service sector for a property, realtors, CPAs…” and he’s got a whole list. I said “So you’ve thought about this…” He goes “Yeah.”
I said, “Well, have you decided to distribute this anywhere?” He goes, “No, I’m so busy in my banking consultancy I’ve not gotten to it.” I’m looking at him and I said, “Well, would you like some help with this?” He says, “Yeah, sure. Why not? The timing is right.” So we became partners now in this software, and from that day, since then, our collective goal with the CLS software has been to take the mystery out of the commercial bank process and to empower every real estate investor and entrepreneur with the knowledge and the likelihood of their transaction and loan request being deemed a stop or a go by a commercial bank before they ever speak to the lender. So think about that fun for a second.
Joe Fairless: How detailed does it get?
John Matheson: The software he’s built in — as a commercial banker, he wrote the code; he built in the carve-outs, he built in the standard DSCR computations of 1.2 or better, and it’s basically viewed by the bankers on the other side of it as such a preparatory tool for the borrower coming in that the bankers love the thing. It prints out a one-sheet – we call it the CLS one-sheet – that is a complete analytical profile of your transaction that’s written in banker language. You download, print and share it with your banker and it’s become for our users the ultimate conversation starter.
You can imagine the empowerment that people have when they walk into the bank and they say “Hey, I’ve got a goal result from a software transaction that I now wanna show you to determine if this is something you’d like to go forward with me on.” It changes the entire way that we now can speak to the banker about our transaction versus the way that I always had to do it, and probably everybody has to do it – it’s still you walk in with all of your stuff prepared, and you hand it to the banker and you wait for them to answer you… And how long do you wait?
Joe Fairless: It depends.
John Matheson: Now you walk in with CLS, with the one-sheet and your goal validated condition on your loan request, and you put it on the desk and you say “Let me know now. Look at it.” The bankers look at it and they go “Okay, let’s do it.” They view it as you’ve just saved them a lot of time and money in that initial process of getting to know the transaction numbers, providing of course that you’ve actually given real numbers for what you’ve just submitted to them. So no more wasting time and money on the deal for all of us that can’t get fair financing.
Joe Fairless: You the scenario I was gonna mention – I was thinking, what’s the difference between this print-out and submitting financials to one lender, and then keeping that in a folder or a jump drive or something, and then the next lender, they ask and you say “Here. Here’s the information.” The difference that you mentioned is that it’s a one-sheet written in their language, so it has all the pertinent information on a one-page document. Is that right?
John Matheson: Right, and it becomes the ultimate conversation started now in that NOI capitalized value space and DSCR space, where we’re starting off the conversation giving the banker the metrics that they wanna see going in. So now what happens, like any transaction you do – think about if you’re doing it with a seller of property and you’re making an offer and you’re making a fair offer; you’re expecting that seller to be receptive to you because you’ve just made a fair offer. It’s the same way with a banker. You just gave them transaction terms on a computerized print-out, right up front, for them to look at, for their appetite to now be enticed to say “Wow, this is a transaction that we would do at the bank.” So now begins the rest of the dialogue. Now you’re in a lot more control of the discussion, and you’re empowered.
I don’t know if you’ve seen that credit score commercial where the girl goes in and puts her feet on the banker’s desk and says “Hey, I know I’ve got a 780 credit score.” So you’re more empowered than the traditional mystery of walking into the commercial bank until you have a relationship, let’s say, and being able to say “Hey, can you take a look at my transaction and see if this is something you can do?” and if you’re anything like me, I am a big due diligence guy and I like to eliminate as many problems in a transaction in the front-end as I can, and being able to eliminate the banker as a boogeyman in the transaction on the numbers is key.
Joe Fairless: Well, they still can be the boogeyman after they get that paper and then retrade on interest rate, or proceeds, or something like that.
John Matheson: Yeah, they sure can… The real world out there. But at least you have a document now where you can argue and defend, because a commercial banker gave you a portion of their code that you can now use to be able to say “Wait a minute… In your own terms, this works.”
Joe Fairless: Yeah, it sounds really useful. What’s the cost for t?
John Matheson: We wanted to price it down to where it was affordable for everybody. When we started to run it by the bankers, the bankers were saying “It’s software. It’s like $1,500 for a particular piece.” So what we did is we said “No, we carved it into seven different applications” which we call screeners; they’re loan screeners. We have one for apartment properties, one for mixed use commercial, and one for commercial property. Then we have a compatible refinance addition for everyone who already owns property who wants to refi for each one. Then we have a business loan screener. Our baseline pricing starts for $147 for an annual subscription to one screener.
Joe Fairless: So you are a principal or joint venture partner on – when the dust settles – 70 million dollars of development right now, correct?
John Matheson: Yes.
Joe Fairless: And the cost that you’ve just mentioned is $147 for an annual subscription…
John Matheson: Yeah.
Joe Fairless: So why are you focusing any amount of time at all on a $147 product when you’re on 70 million dollar developments?
John Matheson: You know, I’ve heard you say it a lot — some of it you get to where you wanna give back… And you’re sitting there — and I know the pain I was in trying to place that loan, and I know there are a lot of people out there who go through that every day with either private lenders… Our software has a space in it for the private lender to show where they fit in, even if you have a bank loan.
It’s the type of thing where “How do you get it to the 3-6 million property investors that are out there, that are running around on a fair price? How do you get it to the 17 million small business owners for the business credit side?” You know, a lot of us who are property investors, we also own other businesses and we try to apply for credit lines for our business, and we don’t know what the regulations are. We just have a simple business loan screener that starts that conversation.
So when you start to say “Well, how do we price it for the masses?”, you just put it down to a number where you just want as many people to get this in their hands as they can, and influence a different behavior where instead of all of us having trepidation as young investors or even as people in mature business, thinking about the commercial bank, or going for that financing on a deal, now let’s know we qualify before we apply on a DIY basis. We do it ourselves, right out of our desktop. Then when we call the banker, we’re empowered. It’s no longer “Oh, I’ve gotta call the banker…” and dread the process.
Joe Fairless: Based on your experience as a real estate developer and entrepreneur, what is your best real estate investing advice ever?
John Matheson: Well, for me, after going through, like I said, three different recessions, as far as real estate goes, if a real estate transaction doesn’t work on the back of an envelope, it doesn’t work.
Joe Fairless: What numbers do you write down on the back of the napkin?
John Matheson: Say we’re just gonna purchase a property that we’re going to build out. So we’ve got the acquisition price, we’ve got our construction numbers, and then we’ve got what we can sell it for. If we can’t make enough margin in that as at the ultimate exit, then we can’t do it. If we’re buying a cash-flowing property, and as you know and you do, you’re looking at the numbers and then you’re gonna figure out what’s the rent, the expenses, you’ve got your expectation of cap rate or your valuation, and if you can’t do it on the back of a napkin and make it work, for me it’s usually something I pass on.
Joe Fairless: And as you what the numbers that make it work, what type of profit do you look for?
John Matheson: I grew up in a world where as the builder or developer, you were always trying to get 25%. It was just a classic, old-school formula that I don’t know if it came — my grandfather was in construction, my father was a builder… It’s just things you learn as you come along. So you’ve got your land that you wanna keep at 25% of the deal, you’ve got your construction costs and you wanna have a gross margin of 25% in the deal for yourself. Now, how many of us ever hit 25% is another story… [laughs]
Joe Fairless: Out of the deals you’ve done, over 50 million in transaction, what percent of those would you say have you hit 25% or more?
John Matheson: Oh, probably 25%. The running joke on any of it is even when you’re building houses and you get into a development, sometimes the minute you go to build a development is the minute you can lose money. You can actually make more money sometimes off your land and selling your lots than you can when you decide to build. But the running joke for some of us (I remember) in the ’90s would be “Well, we’ve just built this 300k house (let’s say in 2000) and we only made 30k on it.” If we went into any restaurant or bar in America and sat on the bar stool and said that with lament in our voice, somebody would knock us right off the stool.”
Joe Fairless: Yup. Yes, they would. I don’t know why I just pictured a bar in Boston, like an Irish pub… For sure, you’d get punched.
John Matheson: Yup. But you know what goes into all of that, so you say “Gee, we really should have made more on it”, but sometimes you don’t. Sometimes, as you know, in this business you end up with a cup of coffee, sometimes you end up with all the coffee beans to make enough.
Joe Fairless: 25% of the deals you’ve made at least 25%. What percent have you lost money?
John Matheson: I’m very lucky, because I think my due diligence coming in has me real prepared. I will sit here and say to people all the time “I’ll go 20 and 3 in a season.” So if I was in major league baseball [unintelligible [00:24:22].17] and I’m gonna sit at the podium and I’ve won 20 games and nobody is gonna ask me about those 3 losses. I could have given up ten runs in each one of those games, but no one will ask. So most of the time we’re lucky.
We’ve been fortunate – our balance sheet has actually grown every year, so we’re lucky; we just continue to win in that space, so that’s the good news.
Joe Fairless: The difference in your analogy is that in baseball every game is considered equal, whereas in real estate if you have one of those three losses, they can be more than any of the 20 ones combined, too.
John Matheson: Sure, sure.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
John Matheson: I’m ready.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve read?
John Matheson: Think and Grow Rich. I’m an old guy.
Joe Fairless: Best ever deal you’ve done that we haven’t discussed already?
John Matheson: Let me just talk to software for one second, because I know how much you love to influence people too, and affect lives. Just real quick, this will take 10 seconds tops. I had a friend who was in the health services business who I helped with our Business Loan Screener, and he’s now a property investor, which is how he connects… But I helped him get the origination capital to start his health services business. This was 4-5 years ago.
And I get a text from him… I hadn’t heard from him for months, and he sends a text in – “My fat pants are loose” is all it says. I call him, I’m like “What do you mean your fat pants are loose?” This guy is in a rock solid shape, I’m like “What do you mean your fat pants are loose?” He goes “That’s from a client.” He goes “Because of you and helping me with your software, I was able to get the loan to start my business, and now I’m affecting people’s lives at the core.”
Joe Fairless: I love it.
John Matheson: Ain’t that fun?
Joe Fairless: Yup, that is fun. That has a very positive ripple effect. What’s a mistake you’ve made on a transaction?
John Matheson: Oh, you’ve heard this before – getting under-funded. This is one of the things I love about the software – it doesn’t allow me anymore to get under-funded, because we’ve been able to use the software in our private consultancies as a private developer, as a client [unintelligible [00:27:05].13] for years. Now it’s available this year for everybody… But getting under-funded in a transaction, as you know, can be just terrible to deal with, and the bank makes you put in more money, or you’ve gotta cover cost overruns, and that’s how you start to lose when you’re under-funded. You either haven’t raised enough equity or you haven’t taken enough bank money and you just said “Oh, I’ll make it work” and then it doesn’t. That’s never a good day.
Joe Fairless: Best ever way you like to give back?
John Matheson: I love to mentor, and I know I’ve heard other people say this on your show before, but it’s great. I have the high school kids; once a year I take one of them out of the civics class… They come around with their little project, I let them shadow me, I take them around, and then they call back a few years later “Hey, I’m in this…” Some of them will get into real estate, some of them don’t, and it’s really good stuff.
Joe Fairless: How can the Best Ever listeners learn more about the software and get in touch with you?
John Matheson: Sure, so for the Best Ever listeners, CommercialLoanSuccess.com is our URL. CommercialLoanSuccess.com/best is where we’re giving away some of our best ever advice, chapter 2 of our new book… Commercial Loan Success is out, and I’ve given chapter 2 to your listeners for free, which is everything you need to do to prepare for a commercial loan, before you speak to the banker. It’s got a nice link to our software in it for them, and we did especially for the group today, the Best Ever listeners.
Joe Fairless: Excellent. Well, John, thank you so much for being on the show, for telling your story about how you got into the software business as a full-time developer, and the problem that it solved for, and why you’re so passionate about it, as well as touching on some of the development learnings you’ve had over the last three decades of being in the business.
I’m really grateful you were on the show, so thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
John Matheson: Joe, thank you.