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FEATURE ARTICLE, DECEMBER 2005
DEAL MAKERS
Eurohypo, known for underwriting large deal transactions, is expanding its business geographically and through its small loan program.
Randall Shearin
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James Howard, managing director, CMBS originations.
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The volume of capital chasing deals right now is incredible. Nearly every player in the financial markets views retail as a positive sector. In addition, many are bullish on office, multifamily and hospitality properties. So it may seem like an easy time for a relatively new player to enter the market. But when the market is this competitive, it's hard to garner great deals. Eurohypo has set a course over the last few years to become one of the top commercial real estate lenders in America. And, in a relatively short time, Eurohypo has made huge strides. In the next year, the company is plotting its next step: to become one of the top five lenders in the country.
Shopping Center Business recently met with James Howard, managing director, CMBS originations; James Reichek, managing director, head of CMBS; Ben Marciano, managing director, head of structured finance; Johannes Boeckmann, general manager of Eurohypo; and Peter Tzelios, managing director, transaction operations.
Eurohypo was formed in August 2002 when three German institutions, Dresdner Bank, Deutsche Bank and Commerzbank, grouped together their real estate finance businesses. Together, the banks formed a lending institution with €230 billion (US$271.4 billion) in assets that is focused exclusively on the real estate industry. Needing a platform in the U.S., the companies selected Dresdner Bank's real estate group to operate Eurohypo in the U.S.
“The driver behind the three-way merger was the German banking laws,” says Boeckmann. “The three-way merger was so that no one partner had more than a 50 percent share in the business.”
In the U.S., Eurohypo has focused only on the property finance sector, allowing it to be concentrated just on the property level. It has had to build its entire practice around that focus, creating lending programs for land acquisition, ground-up construction, bridge financings, property repositioning and long-term financing. The company has a significant syndication business where it holds on its balance sheet about 20 percent of its deals.
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James Reichek, managing director, head of CMBS.
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In its pre-Eurohypo years operating as Dresdner Bank Real Estate, Eurohypo concentrated on large property deals. As a result, its clients became large REITs like General Growth Properties, The Mills Corporation and Taubman. The company concentrated so much on large deals, in fact, that the bank's officers soon discovered that's all prospective smaller clients thought it did. In fact, Eurohypo is very active in the small loan market. Even in its conduit, Eurohypo will underwrite deals less than $5 million. Eurohypo has also now created other loan programs for smaller projects as well. This year, the company will have $10 billion in volume. While the core group of Eurohypo's operations stemmed from Dresdner Bank's real estate lending operations, its staff has grown to almost 150 people over the past 3 years. The company currently operates three offices: New York, Chicago and Los Angeles, to service its clients and originate loans. While a large percentage of the company's business comes from mortgage intermediaries, as clients do repeat business with Eurohypo, more is becoming direct. “The part about growing, which is challenging right now, is that we face a very competitive market,” says Marciano. “We have to stay focused on providing real estate specialty products, creative structuring solutions and efficient execution. We now have the capability to take a deal from beginning to end and to deliver top-notch service along the way.”
Repeat business from clients has proved that the service is a positive aspect of the dealing with Eurohypo.
“If you look at our overall platform, we have successfully married the real estate expertise of traditional dirt banking with the capital markets,” adds Reichek. “We offer a full line of lending products, and we have the technical expertise. We have the depth at each product level to really work with a client to configure a deal for them.”
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Ben Marciano, managing director, head of structured finance.
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An example of a smaller deal that Eurohypo recently performed is the $5.73 million financing of a community center in Lenoir, South Carolina. On the flip side of the coin, the company recently financed the $106 million floating rate loan for Regency Square Mall in Jacksonville, Florida, and the $97.4 million construction loan for the recently opened Shops at Tanforan in San Bruno, California. Eurohypo also underwrote the $175 million construction loan for Pittsburgh Mills in Pittsburgh. The $100 million construction loan for The Pier at Caesars in Atlantic City, New Jersey, was another recent loan.
“We have the ability to address the full spectrum of borrowers out there today,” says Reichek. “We are also dealing with national, regional and local mortgage brokers to find deals. Having that ability and those resources to focus on the different aspects of the market is a great feature of our business model.”
“Our existing clients know that because of their relationship with us, that they might be able to go to the market and find something better,” says Marciano. “But that next deal they have that is complex and requires certainty of execution and closing will go through if they go with us.”
Retail composes about 30 percent of the company's loan portfolio, about a third of its portfolio is residential, and the remainder is divided between office and industrial. Because of the competitive nature of the market today, Eurohypo turns down some deals because of the nature of their composition.
“We walk from deals if we can't get good structural fundamentals,” says Marciano. “As a result, we need to be creative to stay competitive. We won't compromise our structure and pricing in order to win business on straightforward or commoditized transactions that have been forced by the market. Instead, we like to focus on deals that require more creative execution so that we can bring the expertise that we have built together to win business.”
Such creativity is what won Eurohypo the nearly $1 billion financing for a five-mall portfolio for the Pyramid Companies. The complex transaction involved five large properties and required a short time frame to close. It was also a multi-transactional deal that involved most of the products that the company offered in one deal, from construction through securitization with mezzanine financing.
“The ability to provide a number of different lending products and price them competitively added a lot of value for this client ,” says Marciano.
When a deal goes from being a quote to a deal, the company's transactions operations division steps in to work with the originations team to close the deal. The transactions operations division covers both the syndicated loan business and the CMBS business.
“Transactions operations works with the originations team to help manage the closing process and make sure that the deal is structured in a way that is sellable and in accordance with the approval we've gotten from the risk management group,” says Tzelios.
The reasoning behind closing deals fast is client service. When a deal becomes a reality, Eurohypo assembles members from different departments to form a deal team. That team carries the loan through to closing.
“Creating that integrated approach is how we get things done quickly,” says Tzelios. “You have a team that works together and you leverage off the skill sets that everyone has. Likewise, because everyone on the team works so closely together, they have knowledge of what the other people's roles are. The team members understand the whole transaction, not just their part. They understand what it takes to get it done.”
One product type that Eurohypo is seeking more of is hospitality. The company is also looking at more convention center financing adjacent to hospitality properties. The company is also actively pursuing more office properties for its portfolio. Eurohypo is doing business all over the United States, and wants to increase its portfolio is some geographical areas.
“For our conduit, we are actively pursuing more business on the west coast,” says Howard. “A fair amount of our business is done on the east coast, and to balance it further, we'd like to garner more business in the west.”
“We want our business to reflect the U.S. geographically in a relatively balanced fashion,” says Boeckmann. “If you look at the capitalization of the corresponding real estate markets across the nation, certainly there will be some weighting on the coasts because of the value of the properties there. We are looking for more exposure in the Midwest, Southeast and Southwest as well.
Since the company is concentrated on expanding its business geographically during 2006, Eurohypo expects business volume to increase. The company has plans to aggressively go after business and wants to be ranked among the top five real estate lenders next year.
“We want to do as much as we can, but be smart about it,” says Howard. “We are more profit-and-loss [statement] focused than we are volume focused.”
“We are a large lender, we are balance-sheet oriented, and we have nothing but real estate expertise,” says Boeckmann. “We have a flat organization and we can make decisions very quickly. We also have bench strength, which is critical in this market. We can make the right decisions fast.”
©2005 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
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