In 1997, after Cleveland-based KeyBank opened new real estate lending offices in six major metropolitan areas, haunting questions came back to George E. Emmons Jr., who was orchestrating the national expansion of the bank's commercial real estate division.

In Dallas, Las Vegas and San Francisco, prospective clients looked at the company's logo, a big red key, and asked Emmons, Keybank's executive vice president and national manager, "What are you, a lock maker?" Or, "Do you make keys?"

Today, real estate developers in these cities know the "key" signifies a real estate lender. Last year alone, KeyBank loaned $290 million in Dallas, $200 million in Las Vegas and $400 million in San Francisco.

KeyBank can back up its claims of being a big-time commercial real estate lender. Last year, the company ranked No. 9 on Shopping Center World's annual "Top 25 Retail Lenders" survey, with $840 million committed to retail during 1997. Lending for shopping centers and other retail-oriented development accounts for 30% of KeyBank's loans, Emmons notes.

A closer look at the numbers shows that in 1997, KeyBank financed more than 12 million sq. ft. of new retail space nationally. That included the largest mall under construction in the United States, the 1.85 million sq. ft. Palisades Center that the Pyramid Cos. built in West Nyack, N.Y., where it served as syndicating agent for the project.

KeyBank also served as a co-agent for construction financing of Glimcher Realty Trust's Great Mall of the Great Plains, a 1.3 million sq. ft. mall in Olathe, Kan.

Additionally, the company served as a syndicating agent for Simon Property Group's $115 million Shops at Sunset Place in South Miami, Fla., a 526,000 sq. ft. retail and entertainment center.

Key loan programs The national strategy appears to be working. In 1998, KeyBank's real estate loan originations soared to $6.67 billion, up from $5.6 billion in 1997 and $3.5 billion in 1996, the first year of its national program.

It's an especially large jump in loan originations compared with 1995, when its commercial real estate loan originations totalled just $2.8 billion.

In addition to financing regional malls, power and community centers and freestanding retail properties, KeyBank provides loans for apartments, office warehouse and single-family residential projects. It doesn't focus on hotels, resorts or restaurants.

KeyBank operates 21 commercial real estate offices with 350 associates in seven of the nation's 10 major real estate markets. "The whole thesis is that 85% to 90% of loan activity has to be at the local level," Emmons emphasizes. KeyBank plans to add two more offices this year, one in Washington, D.C., and another in the Los Angeles area.

KeyBank's lenders in the field serve as an integrated sales force offering an array of products, ranging from construction and interim financing for developers to permanent financing for nearly all property types. The company also is involved in equity programs.

In 1997, KeyBank provided $429 million in permanent financing, compared with none the prior year. The company estimates that in 1998, it provided $520 million in permanent financing, including both CMBS and Fannie Mae loans for apartments.

And despite the highly publicized troubles of the CMBS market in 1998 caused by the Asian crisis and the corresponding flight to quality among investors, KeyBank insists that it will remain a player in this arena.

KeyBank provides conduit loans of $250,000 and above, which it holds for up to six months before securitizing them with Wall Street. KeyBank also places whole loans with insurers, Emmons says.

"The banks will be the big winners in CMBS," Emmons says, because some non-bank (conduit lenders) have shut their doors. With less competition from that source, he says, banks will benefit from their experience with financing projects at the construction stage.

Emmons projects KeyBank will provide $1.4 billion to the CMBS market in 1999, double the $750 million it provided in 1998. That was already a big addition to the $400 million it provided in 1997. In the future, KeyBank plans to pursue a more direct role in securitization to seek the higher profits from that end of the process, Emmons says.

One of KeyBank's core lending programs remains construction lending, generally $3 million and above for two to four years, and sometimes stretching to five, says Renee Rush Csuhran, senior vice president and Great Lakes regional manager for Key Commercial Real Estate.

KeyBank offers construction lines of credit specifically for the retail market. The program provides capital to developers erecting single-tenant retail buildings for creditworthy retail tenants such as Home Depot, Rite Aid and Walgreens.

Typically, the lines of credit are extended for one year, enough time to assemble and build a store. Loan amounts are generally $1 million but can reach $10 million or more, Csuhran says.

The reason for developing such a niche product specifically for retail properties was simple. "We saw a need for it," she says.

KeyBank provides a mezzanine loan product, a subordinate loan to junior debt, which helps minimize the developer's equity commitment. The amount of such a loan depends on the size of the developer, the project and the bank's familiarity with the developer, Csuhran says.

"The idea is to be a one-stop shop," she says. "That would go from short-term construction needs to equity needs to a permanent loan to providing developers with cash management and other bank services."

Equity component On the equity side, KeyBank also originates equity packages it takes to institutional sources for financing in the United States, Europe and Middle East, says James S. Bingay, chairman of Key Corporate Capital Group. KeyBank also provides equity for real estate transactions, such as stock offerings, a service it plans to expand in the future thanks to its merger in 1998 with the former McDonald & Co. securities firm of Cleveland, now McDonald Investments Inc.

A REIT unit formed in 1993 today lends to 38 different REITs and finances 12 other publicly traded real estate companies. A major line of business with REITs is acquisition lines of credit, typically in the $100 million range, depending on the size and strength of the firm.

Emmons says that because of REITs' publicly traded status and familiarity with Securities and Exchange Commission requirements, the bank has identified REITs as safe and secure investments. Its national REIT specialty unit has eight employees who are trained to work specifically with REITs, but they do not work alone. Client responsibility for REITs also is assigned to the locally based managers.

"There's a lot of wisdom in having the local managers call on the REITs," Csuhran says. "You lose some of the flavor working with a national unit."

Story of a strategy KeyBank's deep involvement in commercial real estate stems from a business strategy launched by the unit of KeyCorp. Like many banks, KeyCorp has grown rapidly in the past decade through acquisition, so that by Sept. 30, 1998, it had assets of about $78 billion and ranked as the nation's 14th largest bank. Developing a national line of business at KeyBank started in 1996 after two years of planning by Emmons and other Key executives.

Active in real estate lending since 1968 with several banks, the Atlantic City, N.J., native isn't one to roll the dice to gain business, since he understands the cycles of the real estate business. That presented him with a dilemma in planning a national strategy.

"I have a philosophy. I don't like to lend to a project I can't drive to," Emmons says. "Doing Dallas from Denver is a prescription for disaster in my book. In my mind, you really need people familiar with traffic and zoning patterns. If you're a day-tripper, there's a much greater chance of error."

However, the bank also had a natural base to build on. Its predecessor, Society Corp., had a long tradition as a Midwest-area real estate lender. When it consummated a "merger of equals" in 1994 with Albany, N.Y.-based KeyCorp with Cleveland as headquarters, it gained business in the Northeast, the Rocky Mountains and the Pacific Northwest.

Strong retail ties The Society portion of KeyCorp had an appetite for retail development, thanks in part to the large number of shopping center developers hailing from greater Cleveland and the Midwest, ranging from Forest City Enterprises Inc. and Richard E. Jacobs Group of Cleveland to Glimcher Realty Trust of Columbus to Simon Property Group of Indianapolis.

Bingay estimates that a dozen nationally ranked shopping center developers are located within 250 miles of Cleveland, and says, "We lend to most of them."

Those connections also gave the firm some national exposure. As Emmons recalls, "We had a lot of national retail developers who took us to markets where we didn't have a franchise."

KeyBank had a deep commitment to the area. Even during the real estate depression of the early 1990s when real estate financing dried up in many quarters, KeyBank's predecessor, Society, provided $250 million in loans in 1992, Emmons says.

Society and Key also had complementary but different lines of real estate loans. Society had a strength in construction lending while Key had comparable strength in long-term lending. "They were almost totally different product types," Bingay recalls. That varied experience provided the base of Emmons' triangle with both construction and long-term lending.

To plan the expansion, Emmons traveled the nation with other executives to orchestrate the plan by ascertaining what real estate developers wanted in their lenders.

He kicked off the expansion in 1997 with an unexpected step. KeyBank closed 10 offices in rural areas or areas with overlapping coverage. It replaced those offices with six new offices designed to cover major metropolitan areas, including Boston, Chicago, Dallas and San Francisco.

With the help of a headhunter, Emmons recruited real estate lenders with at least seven years of experience in specific regions to head offices in new cities. These managers, hand-picked in part because of their contact with premier developers, were assigned management associates from Key who knew the bank's culture.

Emmons calculates that he spends half his time recruiting, training, motivating and retaining employees. Thanks to the real estate depression in the first part of the decade, Emmons says, the pool of talent was limited because many qualified mortgage people left the industry never to return. "It's a war for talent out there," he says.

The repositioning has made commercial real estate a significant source of business for KeyBank. Bingay says the unit has performed beyond expectations for the past two years and ranks as one of KeyCorp's top three lines of business. It accounts for 12% of the bank's net income, trailing only profits from its branch system, Bingay says.

Loan approval philosophy Rather than having its managers schooled in narrow areas of lending such as traditional construction and short-term lending, KeyBank has provided incentives and training for them to learn long-term lending as well as permanent and securitized lending.

In 1996, KeyBank eliminated a loan committee within its commercial unit. "You can't have a committee operating nationally," Emmons says. "You can't meet at 8 a.m. in the East Coast for clients on the West Coast."

Instead, KeyBank assigns credit professionals to each office. However, loans with more than $15 million aggregate exposure also go to the national office for review. The company's credit officers have a sales background to know what the relationship managers encounter when chasing deals. Csuhran says the plan works for borrowers and is in the best interest of the bank.

"You need to have a good balance between the credit side and the sales side," she says. "You need a qualified sales force selling to developers, and an equally strong credit culture to do what's best for the bank and its shareholders and assure a profit."

That credit structure also enables the bank to provide something that Emmons learned in his travels that developers seek: a quick answer.

"If it's a very large loan, within 48 hours the client knows if things are proceeding or stopping, although it's not a loan commitment," he says.

If the answer is adverse, Emmons continues, "it begs the next question of what does it take to proceed - a little more equity, or pre-leasing? It forces focused discussions early on so the parties aren't wasting one another's time."