Banking into the Teeth of the Storm

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The tech boom has drawn capital galore.

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JANUARY 2013

By Sharon Simonson

[dropcap]T[/dropcap]hat local developers track lending markets is axiomatic. Without debt, typically there is no project to start, and without more debt, no way to exit, a Palo Alto apartment landlord told an Urban Land Institute forum in Palo Alto in late 2012. As the energy and technology industries lead the nation out of recession including the Bay Area, that lenders track real estate and regional developers and are as eager as anyone to cash in on the good times is axiomatic, too.

Balancing entrepreneurial enthusiasm with pragmatism is the essence of smart banking, said Charlie McGann, who has watched Bay Area property markets since 2001. In 2013, McGann will put his skills to the test as the new Northern California regional manager for real estate lending for City National Bank. He has been charged with increasing the bank’s commercial real estate loan portfolio in the Bay Area to a level that matches City National’s Southern California real estate presence.

[pullquote_right]“We tend to focus on markets that will attract capital on a sustained basis.” Al Pace, Pacific Urban Residential[/pullquote_right]McGann moved to Los Angeles-based City National Corp. from Union Bank in June. Recruited by a headhunter, he said he would not have considered the new job if the call had come from one of the other big players in town. “All of the other banks have large books of business, are well established in terms of their teams. I wouldn’t move the needle. But a bank without a big book of business and already operating on a sophisticated platform, that is unusual. I will be very visible whether I succeed or fail,” he said.

With $26.3 billion in assets, City National is about a third the size of rival Union Bank with $85 billion in assets. From McGann’s perspective, that makes City National more nimble and “entrepreneurial.” Bank executives clearly want to increase its exposure to real estate. In the third quarter, the bank’s average balances for commercial real estate loans were up 27 percent from the year before. “We are seeing much opportunity in many sectors of the real estate market, and the Bay Area is clearly leading the industry’s recovery in California,” said Mark Forbes, a City National executive vice president and manager of its real estate division—and McGann’s boss.

City National’s focus will be on private, regional developers seeking to finance Bay Area property redevelopment or construction. Loans will range from $5 million to $25 million with terms from two years to seven. “This is not a volume shop. Each deal is different and generally requires a lot of time and effort, which means we need to be smart about the types of loans we quote. We won’t do 45 deals a year. That is the CMBS model,” he said. Lending is sponsor-driven: the strength of a borrower’s financial history and his or her ability to execute not only on construction but also leasing.

Banks are already fighting hard for Bay Area business. Borrowers are now able to get non-recourse debt on vacant buildings, TMG Partner’s Managing Director David Cropper told the ULI audience: “There is a tremendous amount of first-time capital in San Francisco and Silicon Valley as well.” McGann noted that Bay Area job growth has revived real estate markets and led to strong competition on every deal.

Repayment recourse to borrowers and re-margin demands, which mean developers could face the need to pony up new equity if project performance does not match the plan, are today’s stickiest issues, McGann said. But competitive pressures will continue. Cropper wants banks to loosen up more. The current loan ratios of 55 percent to 60 percent for “good assets” mean “returns are tough to make,” he told the ULI gathering. “You have to get debt back up into the 60s and 70s to make it work.”

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Photo by Chad Ziemendorf