On the Money!

Location: How’s the capital market doing?

Mr. Herzka: If you’re talking about the Wall Street type of funding, that’s pretty much nonexistent.

 

Where’s the financing coming from?

From a lot of the commercial banks, large savings banks, life insurance companies, a consortium of banks funding larger deals, and of course the agencies Freddie Mac and Fannie Mae.

 

And what kind of financing do you do?

Meridian actually specializes in all income-producing properties, whether it’s multi-family, retail, industrial or office. You’re sitting here with David Rosenberg, who heads up the capital markets group. And Ronnie Levine, who heads up the structured [financing] and construction group. So we’re very active in this market. For the first six months of this year, we have closed close to $6 billion worth of debt.

 

How much had you closed by this time last year?

Over $8 billion.

 

I see you’ve seen a slight decrease.

Definitely. It’s definitely a different market.

 

Have you found this new market disorienting, now that the Wall Street shops are no longer as active?

Well, that’s what’s unique about us, and that’s why we’re as active as we are. We have always maintained very strong relationships with the local and national banks that are still as vibrant as they were.

 

With balance-sheet lenders?

With balance-sheet lenders, that’s correct. And believe it or not, even with Wall Street. David’s background is Wall Street, and there’s still a certain amount of business getting done there. … But yes, we’re definitely dealing with a different set of lenders, though a lot of the same lenders that we’ve dealt with over the years have just filled up that space.

 

David, do you think the securitized mortgage market will return anytime soon?

Mr. Rosenberg: ‘Soon’ is a tricky word.

 

When do you foresee it returning?

If I had to guess, probably the second or third quarter of next year. I think there’s still a lot of pain that has to be felt. But it’s definitely a very important and viable piece of the finance market and it will be back. It will certainly come back differently than it went out. … When it does come back, I think it will be with real estate loans that look more like life-company products.

 

In what sense?

I think right before the bubble burst, people were just doing anything … things that a life company or savings bank never would have dreamed of. I think back in the early-to-late ’90s, the competition for the securitization product really was the life companies.

 

Why did things get so out of hand?

The Wall Street guys were putting out money as fast as they could because the bonds they were creating in these securitizations were being sold as fast as they were printed. More and more capital was being thrown into real estate, coming out of the stock market, coming from overseas. … Nobody was pushing back, so it got a little overheated.

 

When the market does come back, will it be more regulated?

Possibly. If it’s not regulated by the government or some sort of agency, it will certainly be more regulated by the bond buyers, because a lot of people got burnt, a lot of people lost their jobs and a lot of money was lost. … There will definitely be more discipline in the market.

 

On behalf of the ratings agencies as well?

The ratings agencies are definitely going to be more cautious. They run a business like everybody else, and they may also have gotten a bit aggressive.

 

Do you think we’ll see a lot more defaults before this is over?

To a certain extent, if the markets don’t correct themselves in the next 12 to 24 months, refinancings are going to get more challenging, and it’s definitely a possibility. Loans that are coming due now and for the next 12 to 24 months—we’re talking about ’98 vintage and 2001 vintage—there’s still been a lot of value appreciation over those years; but at some point that’s got to kinda hit an equilibrium, and people may start having to have to put more cash into deals to refinance them. Not everyone has that cash to put in.

 

It’s a good time for experienced brokers in general, no?

Mr. Levine: Back when the markets were extremely efficient, when you could get several Wall Street quotes just by picking up the phone, people probably needed services of brokers less. Now that the market is turbulent and there’s less certainty of execution, and people are in and out of the market all the time, we’re seeing clients call us now that typically never used brokers. … You’re really having to bring together the different pieces of the puzzle to get the leverage that people need to make their transactions happen.

 

And deals are taking longer to do?

Certainly on the balance-sheet side … we’re having to syndicate the deals
, bring lenders together and club deals upfront.

 

How does that work when you syndicate deals?

It used to be that a lender would take down a $200 million deal, and they would close that loan and then sell off pieces of it. In today’s market, nobody wants to take that syndication risk on a deal, so what they do is prior to closing, they’re out there clubbing the deal, finding two or three other lenders to close simultaneously with them. And really the borrower bears that syndication risk.

 

Ralph, how long have you been in this business?

Mr. Herzka: About 20 years.

 

Have you seen this sort of downturn before?

It’s very unique. In the last cycles, there was no equity out there. … Now, while values might have come down in some marketplaces, you still have a lot of capital for good deals. What’s happening in this market is the lenders are looking to see who they want to lend money to. Eighteen months ago, anyone could become a mortgage broker. You just had to know someone at some institution. … It was just getting a little bit ridiculous. … Now, I think there’s a lot of capital. I think the capital is getting allocated to good buyers with good assets that have good track records. The life companies, the banks, the agencies are very vibrant and very active. They really have not slowed down at all. In fact, they’re picking up a lot of business.

 

This market seems to be weeding out those who shouldn’t be in the brokerage business.

Yeah, that and buyers. And I think it will continue to weed them out over the next few months.

 

What sort of fee do you guys take?

The average fee on a traditional deal is 1 percent.

 

Who are your biggest clients right now?

We represent some of the largest families here in the city. I always personally have maintained a very strong relationship with them. We also represent a lot of the opportunity funds, a lot of the REITs. You know, we’re a national firm.

 

It’s mostly men who work as mortgage brokers—why is that?

We actually have some very successful women. We have Carol Shelby, who’s been with the firm since its inception. She’s terrific. We have Angela Mirizzi-Olsen, who was head of real estate financing at Lightstone Group. We’re actually well diversified and very proud of the women who work at this firm.

 

But in the industry as a whole, it seems like there are more women residential brokers, but that in commercial real estate, there are many more men. I’m just curious, because it seems funny to me.

It’s a good observation. I’m looking for good talent, so maybe I just found the answer.

 

You said the average age here was low-to-mid 30s—is it important to have young people?

Mr. Herzka: I think it’s important.

Mr. Rosenberg: It’s a high-energy business.

Mr. Herzka: A high-energy business.

drubinstein@observer.com On the Money!