Divco West Properties LLC, a real estate acquisition, development and management firm, recently was seeking a loan to buy ashopping center. The San Jose, Calif.-based firm had heard that Credit Suisse First Boston understood the retail industry and was willing to tailor specific packages to fit client needs.
On this basis, Divco approached CSFB and wasn't disappointed when the lender quickly responded with a 90% loan-to-value package for the 300,000 sq. ft. Fig Garden Village Center in Fresno.
"Credit Suisse First Boston was smart enough to understand the intrinsic value of the center and take into account our plans for redevelopment," says Stuart Shiff, principal with Divco West, which has more than 8 million sq. ft. of space in five states. "They provided us with a competitive and comprehensive financing structure. They comprehended the fact that once we renovated and redeveloped the center, it was worth more. A lot of other companies don't factor that into the equation."
Such comments are music to the ears of Mark L. Finerman and Bill Adamski, who head the Real Estate Finance Division of the Principal Transactions Group at Credit Suisse First Boston, New York.
The duo estimates that over the past year, CSFB has handled about $4 billion in retail activity.have included recapitalizing retail developers, financing shopping centers, and approving credit leases for major retailers.
"We do flexible financing, and we do high leverage," says Adamski. "Some companies do one thing really well. Some banks may do bridge loans very well and another company may do mezzanine very well. We do it all."
CSFB recently handled the $200 million recapitalization of a large portfolio for Combined Properties, of which more than $160 million was first-mortgage financing.
"What makes us so good in retail financing is that we provide services across the board," Finerman says. "Maybe a company is not ready for a long-term mortgage; in that case we can provide interim financing and hold it on our books until they're ready. We provide first-mortgage debt, mezzanine debt and preferred equity - all as a principal investor."
A larger, longer balance sheet The Principal Transactions Group is a 130-member unit within CSFB's Fixed Income Division. It acts as principal and is a leading provider of financing services to clients that range from real estate owners and developers to corporations using real estate as a source to raise capital.
Operating some 50 offices in more than 30 countries, CSFB is a business unit of the Swiss bank of the same name. Its parent has more than $7.2 billion of equity capital and is wholly owned by the Zurich-based financial services organization, Credit Suisse Group.
Andy Stone, who founded the Principal Transactions Group three years ago, states: "I think what sets us apart is our ability to solve a client's financing problems creatively and to tolerate a high degree of prudent risk for reward."
Compared with most investment banks, CSFB has a larger and longer balance sheet - longer because most other lenders have to be in and out of a deal in six months. The company can provide mezzanine and first-mortgage funding as well as equity money all in one swoop.
"It's all very powerful, because a lot of businesses are dominated by people in one discipline, so our strength is putting the different disciplines together," says Adamski. "Real estate is very time-consuming. The ability to do a complicated transaction rapidly under one roof attracts a lot of clients."
Finerman points out that CSFB worked closely with Combined Properties, a Washington, D.C.-based shopping center developer, when it sought a $165 million first mortgage and $35 million in mezzanine financing.
As Finerman recalls, "Rather than have to go to several different financing sources to raise money, we said, 'Let's do one deal and have them make one easy payment. We will take the risk not only on the first mortgage but principal mezzanine and preferred equity as well - and we'll close in 30 days.' To get that complicated loan involving 15 or 16 shopping centers done in such a short period of time was unusual. Most borrowers in need of such financing would have to go to two or three capital providers, further complicating the transaction."
The Principal Transactions Group has completed several transactions in which it financed a shopping center in the lease-up stage. "We gave permanent financing today, even though it may take up to two years to lease out the center," Finerman notes. "That allows people to get fixed-rate financing today, and as the center matures, they can add onto the loan."
Prudent risk-taking CSFB combines its immense capital base with a well-seasoned team, enabling the company to become a one-stop, full-service firm.
"That means clients don't have to seek a senior mortgage lender, then a mezzanine lender and an equity partner," Adamski says. "CSFB can do all three. And we don't try to squeeze a project into a pre-existing program. And speed is essential. We try to give answers quickly and close fast."
The company is a value-oriented lender, taking prudent risks where the value warrants it. "That's why we're a lender in providing mid- to high-leverage lending, in some cases up to 95%," Finerman says. "The right project in a depressed area can have a profitable impact, and the right idea for an unusual or distressed project can increase its value."
CSFB does not exclude any property type, even if it is not leased up. "Every deal is looked at on its own merits," he says. "If a center is only 50% leased, it might be because the owner doesn't have any capital. If someone has a shopping center that is 50% occupied and bankrupt but is throwing off $1 million cash flow that should be $3 million, and wants a $20 million loan, we might do it.
"A lot of lenders are looking only for properties that have decent debt coverage," Finerman continues. "We underwrite the market and the property, not only the current debt service coverage. We're quite comfortable writing loans that aren't covering debt service, confident that they will when the market absorbs the vacancy, or when the property is renovated or retenanted. If the story is there and it's supportable, we'll do the deal."
One satisfied customer is Fortunoff Fine Jewelry and Silverware, a family-owned retailer based in Uniondale, N.Y. "We did some business with them, exchanging bank bridge financing for permanent financing, and the process was very efficient," says Leonard Tabs, executive vice president of finance and CFO of Fortunoff. "They got to the heartland issues right away. They understood the wrinkle of owner-occupied retail properties in order to satisfy coverage ratios."
Retail credit leases Always looking for new fields to conquer, CSFB has become a force to be reckoned with in retail credit leases. "It's a good market," says Adamski. "Corporate credit people don't understand it. It's a hybrid. Many developers don't know the market is there."
Dean E. Cederquist, the Principal Transactions Group vice president in charge of retail credit leases, notes that CSFB has worked with a variety of companies including Kmart, Rite Aid, Home Depot, Eckerd Drug Store, CVS, Wal-Mart, United Artists Theater and PetsMart.
"A lot of tenants want to tie up their sites for a long period of time, and our financing is geared to a long-term lease," he says. "A lease has to be long or it's not advantageous. Recently, Elder-Beerman (a Dayton, Ohio-based department store chain) selected some sites. We leased them back. They retain control of the real estate through a long-term lease. They have locked up a location strategic for the long term and don't have any debt associated with owning because it's off the balance sheet."
CSFB's financial strength enables it to handle large transactions, a big selling point. "Although there is increasing competition, very few firms have the flexibility to purchase or finance many credit leases," Cederquist continues. "Our balance sheet is large, so we can take down a lot of paper rather than go out to four or five places. We apply some fairly stringent criteria, but we are willing to accommodate additional risk if the return merits it."
As for the future, Finerman predicts that the market faces some changes ahead.
"Some of our competition is having tougher times now; spreads have widened on mortgage products," he says. "We feel good about the future. Our infrastructure is up and running smoothly. This business is going to consolidate, so we'll have a few competitors rather than 10."