It could be the full-sized keyboard synthesizer under his desk. Or maybe it's the "open office" arrangement which allows him to see his financiers at work through a wall of windows, a la a trading floor. Or maybe it's the famous annual shindig (reportedly costing millions) that he and his staff orchestrate for the firm's clients.

Whatever it is,people either admire what Ethan Penner has done for the real estate financing marketplace (especially borrowers) or they despise him (mostly competitors). And some, secretly, want to be just like him.

Such is the dichotomy that surrounds one of real estate financing's highest flying stars over the last three years. In that short timespan, the 34-year-old Penner has created a whole new, and quite profitable, department (Nomura Asset Capital Corp.) within one of the largest financial institutions in the world (Nomura Securities International Inc., New York), along the way making Wall Street a major player in the real estate industry and transforming the way lenders and borrowers access the capital markets.

You see, Penner is the epitome of the Wall Street hotshot. Starting with some fresh ideas and a couple of colleagues, Penner has built the department into the leading lender to the nation's real estate community for the last three years. And the business continues to grow 40% to 50% a year (in lending volume and profits). Penner also has become a rather rich individual even by lofty Wall Street standards. But he got that way by exploring new ways of changing some time-honored tradition about how commercial real estate is financed.

"It's all about taking what was an antiquated capital structure and bringing it into the late 20th Century,," says Penner. "Real estate is the last asset class of any size that has avoided the technological changes that the rest of the world of finance has already incorporated into their everyday routine. The foundation and the reason for our being is that we represent the introduction of the 20th Century brand of financial structure and capital structure to real estate."

So what accounts for the tremendous volume of Nomura's business? Penner says it all started when he looked at how entrepreneurial real estate people were dealing with the traditional financing markets. In other words, he saw a niche.

"Real estate operators are amongst the most entrepreneurial people in the world. Uniformly they are all entrepreneurs. Now the characteristics of an entrepreneur are people who (a), want to move quickly, and (b), want to move quickly. That's what being an entrepreneur is all about. Up until we came along, in the whole history of real estate, the partnership between the operator, who was the ultimate entrepreneur, and the lender, who is the ultimate bureaucrat, was like a forced arranged marriage that couldn't possibly be a good one. It's an institutional bias. You can take the greatest entrepreneur in the world and he won't have a long career at a commercial bank or insurance company. They drive out entrepreneurs. They breed non-entrepreneurs," says Penner.

"It made no sense. Nobody was happy. The lenders were never happy dealing with these crazy entrepreneurs, and the entrepreneurs were never happy dealing with the lenders. By the way, that's why there is a big real estate brokerage community. There is a need for the intermediary. It's like having a marriage counselor.

"I saw that very clearly, as clearly as I saw the change in the need for a change in the capital structure. We could have business here that in just dealing with he real estate borrower made his life so much more pleasant and responded to his entrepreneurial needs in such a superior way to that which the traditional, historical lender could ever do. Just because the quality of service we will provide them, and because we're like-minded, we'll get an inordinate amount of business quickly for those two reasons.

Penner is quick to point out that NSI is not a Wall Street firm, nor is it a Japanese bank. What it is, he says, is a source of capital for lenders of all sizes. He designed it that way from the start, with a clean slate. "It's easier to build from scratch than to tear down and modify," he says.

"What we've done is eliminate most of the barriers to entry. So now, if you wanted to invest in real estate, and you wanted to be a senior secured debt investor and take the most limited amount of risk,didn't have to lend the whole 75% or 80% loan to value. You could buy a AAA bond with a million dollars."

"All of a sudden, all of the barriers to entry to investing in real estate on the debt side were torn down. And similar on the equity side. Now as an equity guy, if you're a great operator but you have limited financial means and you really don't have time, patience or skill at selling, but you have a great track record as an operator and you're a good operator, you can have 10% of the capital structure and find mezzanine equity investors who will absorb the 75th or 80th or 90th percentile and you don't have to have the full 20% or 25%."

To convince the real estate community of its intentions, and outright commitment, Penner has spent most of the last three years putting himself and the Nomura name out in the marketplace through high-profile marketing programs. So far it's worked on the business side, but the reputation-building part will take more time and cultivation.

"We've had to deal with all of the standard disparaging, envy type things that a successful venture always has to in the world. But ultimately the truth's on our side, and the truth will prevail. Our growth trend is spectacular, and underscores the fact that we're on the right track.

"We're getting the word out and getting people to understand that we're not a Japanese company, we're not here today and gone tomorrow. That we're not a Wall Street firm trying to do best efforts or brokerage business. That we're really an integral part of the real estate community. As that becomes more accepted, we're going to just grow and grow. That's the real reason we've grown, not because we're doing that much different today than we were three years ago, but it takes time."

You get the feeling this is a guy who understands where he's trying to take this tiger by the tail.

"Credibility is the most important thing, and credibility can only be gained by time and consistency over time. We now have three years of that under our belts and with each passing year we're just going to become more of a factor. Pru (Prudential) wasn't Pru when they started, ok? In our business we'll be Pru, there's no doubt in our mind. I've just got to get a little bit older."

When you remember he's only 34, you think he doesn't know anything about real estate cycles, right? Wrong. Penner's are new eyes grounded in Finance 101, peering into what makes real estate tick.

"The industry has always had the opinion that there is everything else in the world, and then there's real estate," says Penner. "I can only speak with certainty that with regards to finance and evaluation of cashflows, that belief will lead to bankruptcy. And it did."

"With the introduction of the capital markets and a more intelligent and accessible capital structure and a lot more sophisticated investors who understand the relative investment value across investment sectors, the discipline of finance is finally being imposed on real estate."

The course Nomura has charted is decidedly up, as it is among those trying to take the securitization market to the next level in the total financing arena, which most observers generally peg at about $100 billion.

"The CMBS (commercial mortgage-backed securities) business is basically a $20 billion a year business, which is miniscule in the capital markets," says Penner. "It's working very well and if nothing ever changed no one here would complain. We'd all be very very happy."

But Penner does see growth ahead. "What's going to change, because nothing in real estate stays the same, is that this business will grow steadily and significantly. "What is now a $20 billion business will become $40 billion, then $60 billion, then $100 billion a year. Right now we have roughly 100 people supporting our business and we'll have 200 people when it's a $50 billion a year business."

Why the growth? "The growth is going to be fueled by the fact that the insurance companies, which had been the most prolific lender, are slowly but surely transforming themselves into the most prolific buyer of securities. So as they continue to shift their involvement from lender to buyer of securities, then direct lending won't."

But believe it or not (especially for a perceived Wall Streeter), Penner says he's not interested in rushing things. He'd rather stick to his core business of generating loans large and small and growing it. He's already done three huge MegaDeals[R] worth some $2 billion, and the new Direct program is taking off (see sidebar on page 34).

"Growth will come from being a dominant player in a business which promises tremendous growth, and we'll grow with it.

"A big mistake that American companies have historically made, and I'm going to do my best to make sure we don't do that, is to have a low institutional threshold for boredom. People like you and me always say, `So what are we going to do for an encore?' The answer is, if you look at a company like Coca-Cola, the one or two times they tried to do something, like get into the movie business, it's not a good thing. What they do best is sell sugar water. What we do best is what we do, and what I'd like to do is to maintain this. It's a very big challenge, after year in and year out of success, to fight institutional and individual complacency, to overcome individual and institutional boredom, and be able to bring the same commitment to excellence that you displayed in your growth period but be happy and excited to bring that commitment to that day to day."

Like a lot of managers, Penner worries about maintaining service, quality and underwriting standards over the long term in such a people-oriented business. And what about the role of creativity? After all, there's that keyboard and the against-the-grain mantra to uphold. What's the next big thing?

"Creativity gets you to a certain point and then it's blocking and tackling. There's still some room left for creativity. The development of the mezzanine sector of the investor base, guys who are going to buy mezzanine equity and what we call the B-pieces, that market is still in its infancy and will ultimately be a much bigger, more liquid market. Even the investor community that absorbs the senior AAA, AA and A classes, that will grow, all along with the business. The challenge that we face is not necessarily to continue to try to be cutting edge and be cute. The Pru was never cute. McDonald's is never cute. We don't necessarily want to be cute. We just want to be dominant, consistent and excellent.

At only 34, Penner isn't too old to remember what it's like on the front lines.

"One of the advantages of being young and being a manager is it has not been that long ago that I was a worker and not a manager. My recollection is that one of the most gratifying aspects of your job is having your boss recognize that you care at least as much as he does about your own success. By hiring you he is empowering you to come to work and act on your creativity within your sphere of expertise. I manage that way because that's how I like to be managed."

Nomura "Directs" business to small loan customers

It's no secret that Nomura does things a bit differently. In February 1995, it created a new Direct program to more efficiently work with small-loan borrowers (in other words, speed up the traditional time-consuming process). We asked Kathleen Corton, head of the Direct program, and Frank Scavone, chief underwriter, about how it works.

Q: What was thegenesis for creating the Nomura Direct program?

Corton: We got somewhat frustrated with the existing system. Borrowers' expectations weren't being met. We'd find things out at the last minute and so would the borrower. Also, our volume requirements weren't being met at all. So we said, `Why do we have to work within the system? It doesn't apply in the same fashion as it does to the single-family business because these loans are very different. It was like putting a square peg in a round hole' it just didn't work.

Our Direct business is really an effort to get borrowers' expectations properly realized and our volume requirements met. We are marketing direct to both borrowers and brokers. We do an enormous amount of our small-loan business through intermediaries. The correlary is that we actually have narrowed down our conduit relationships. We have two that are very good.

Q: How successful has it been?

Corton: Beyond our expectations. We've gone from $166 million at fiscal year-end 1995 (Nomura's fiscal ends March 31) to about $1.1 billion this year (fiscal 1996). We've been going gangbusters.

Scavone: The Direct business exceeded even our own expectations of what the total volume would be.

Corton: We don't want to overemphasize our involvement. The Direct program was much more appealing to borrowers. They'd ask,`Am I talking to the people who are going to lend me the money?' And we're not going to fool ourselves, rates helped as well. And we opened the program to mid-sized transactions. Our small loan is basically up to $40 million loan sizes. Our average loan size is still around $4.5 million. We like those deals. A lot of times people have the impression that we don't want to deal with $1 million loans, which is our minimum loan size, but we love that.

Q: What types of properties are getting the loans?

Corton: The bell curve is pretty flat. Our largest loan in our small loan program on a stand-alone basis is $21 million, and we have small pools where we go up to $40 million. Our portfolio is basically 20% to 25% multifamily, 25% hotels, 25% senior housing and the balance in mobile homes, retail, office and industrial.

Scavone: We've been very conservative in the way we've underwritten less-accepted asset classes. Because we've done so much of it, the knowledge has translated into the ability to really perfect the underwriting process. That translates to benefits to borrowers and more palatable transactions that can go toward the standardized loan concept that we're trying to achieve.

Q: What is the future of the Direct program?

Corton: Our competitors range from insurance companies and the Street. We're doing long-term, fixed-rate debt, so we're not competing against banks because they're doing recourse loans. We hope to continue to stay above the fray. Right now, as people do more transactions and learn about the execution both from the rating agency's and the bond buyer's perspective they'll learn about it and feel comfortable with it. We're finding our business is geared on the service more than it ever has been before. It allows us to take deals away from insurance companies and it allows us to tell people, `It's our capital, it's our decision. There are no layers you have to go through here. So we're going to deliver on what we tell you.' Our competition is being able to deliver on what's becoming more of a commodity business. That's the onlyway to get repeat business. The pricing is not all that different.

If we make a mistake, it's our mistake. We make the decisions here. We take the risk here.

Scavone: People are coming back. That's really gratifying. Our culture here is a little different, right from the top down. It's `Let's get out there, be honest and nice guys, have a little fun and do a lot of business together.' The real estate community is not that much different.

We're not a temporary phenomenon. We're evaluated much more than traditional lenders. We go to the rating agencies every six months. And we're constantly being asked by the market to reevaluate our process.