Standing out in the crowded multifamily lending market is tough. The business of financing multifamily properties has boomed as the property type has delivered strong and stable returns. Every source of capital has been active in recent years, and Reilly Mortgage Group's efforts to differentiate itself appear to be paying off.

"We have become known and respected for our reliability, capital soundness, fast service and creativity - in our products and in our deals," says Terry Havens, president and CEO of McLean, Va.-based Reilly Mortgage Group.

Reilly has put a broad offering of financing products and programs to work to become one of the largest originators and servicers of multifamily loans in the industry. This year the company expects to originate more than $1.5 billion of multifamily financing, bringing the company's servicing portfolio to $9 billion.

Increased competition and shifting business dynamics - such as a decrease in demand for multifamily financing and higher interest rates - will likely push lenders such as Reilly in some new directions to maintain the lending volume to which they are accustomed.

Reilly has already done some slightly different business. The company arranged more than $750 million in structured financing for the privatization of Boston-based Berkshire Realty Holdings and has extended a $64 million conversion loan for a high-profile rehabilitation project in Texas.

Reilly takes off Reilly has come a long way in a short amount of time. When the current owners purchased the company in 1992 from the Resolution Trust Corp. (RTC), Reilly was limited to the loan-servicing business. New management saw an opportunity for growth in the production of multifamily loans and began the process of restructuring the company.

"Reilly Mortgage has been around for 23 years," explains Havens. "Investors really like the service that they provided. When we bought the company from the RTC six years ago, we felt that we could take the strong servicing platform and use it to produce loans."

The company moved quickly to rebuild. "We moved aggressively to set up strong capital lines, and we hired bright and energetic people," says Havens. "Our timing was very good; the multifamily market was strengthening. The rebuilding effort really swung into gear when we hired a strong Fannie Mae DUS originator. After that, our growth really mushroomed."

>From 1992, Reilly has grown its servicing portfolio from $4 billion to $9 >billion, and has originated $1.5 billion in new loans each year. Reilly >also employs an assortment of financing programs and products in order to >grow its business. "We have really been creative over the years," explains >Havens. "We run lending programs with three government-sponsored agencies >- Fannie Mae, Freddie Mac and FHA. We have expanded into conduit lending, >and we have the ability to offer mezzanine debt with our own capital.

"We have been pretty active on all fronts," he continues. "We service about $4 billion of FHA housing, we have done 80/20 tax-exempt bond deals, fixed rate, low floaters and LIHTC credits. We have also been active in working with HUD in its mark-to-market program."

Havens is enthusiastic about the company's Mortgage Conversion Program, a two-phase loan program that provides borrowers with a non-recourse bridge loan, followed by a non-recourse permanent loan. It is designed to facilitate conversions of FHA and insured sections 236 and 221(d)3 properties to market-rate rentals."These loans will be from $1 million to $15 m illion, for up to 18 months before converting to a 7- to 30-year term," says Havens. "They are an important component for converting 236(s) properties."

The new buzzword: rehabilitation Reilly is also reacting to some new opportunities created by rehabilitation - an emerging trend in the multifamily market. "There is a growing need for rehab financing," says Havens. "There is aging stock out there, especially in the northeast, and these properties need rehabilitation to maintain quality. We see some very good opportunities there to finance a larger portion of the borrower's rehab dollars.

"Before, these rehab deals were relatively low leverage," he continues. "We want to help bridge the gap between this low leverage and what makes economic sense for the investor. The agencies are moving into this market too."

In October, Reilly seized a high-profile rehab opportunity when it closed a $64 million loan on an historic national landmark - the Sears, Roebuck and Co. Center in Dallas. The loan was a HUD/FHA Section 221(d)4 Major Rehab loan. This program is designed for new construction or substantial rehabilitation and typically provides long-term, fixed-rate, fully assumable non-recourse financing.

"The Sears deal was a fun transaction," says Havens. "It was a challenge to get all of the participants moving in the right direction. We feel very confident with this rehabilitation lending."

The financing for the rehab and development of the prominent property was the largest insured loan by HUD/FHA in the southwest region. The developer, Matthews Southwest, will convert the 1.4 million sq. ft. property into 455 loft apartments with an additional 100,000 sq. ft. of commercial space. The non-recourse loan provides for a 3-year construction/rehabilitation period before converting to a 40-year permanent loan with a 7.75% fixed interest rate.

With the REIT market on the wane, Reilly is also eyeing the market for financing the privatization of apartment REITs. Putting aside the debate of whether there will be widespread de-REITing, these privatization deals - when they arise - are big opportunities.

There were also additional extension options and enhancements including rights of defeasance, substitution of properties as collateral, transfers and loan assumptions for third-party buyers of Berkshire properties. The transaction was structured into three investment tranches: a $500 million fixed-rate pool which Reilly placed with an institutional investor, a $200 million LIBOR floating-rate pool and a $50 million fixed-rate loan.

"REITs are a growing market in the long term, and some will be reverting back to private ownership along the way," says Havens. "We want to be on the leading edge of this business."

The conduit advantage Reilly offers a conduit loan program, though Havens admits the conduit business has dropped off since the capital markets turmoil of last year. Last year the company originated and securitized the $235 million Multifamily Gold PC pool. The Freddie Mac mortgage-backed pass-through security was backed by 25 mortgages secured by 38 multifamily properties totaling more than 9,000 units in the southeast.

Havens believes that Reilly has an advantage over many conduits. "On their own, conduits cannot deliver the same type of product that we do," he says.. "When conduits put these deals together, they usually want to sell off the servicing to other parties. The borrowers involved with the securitized loans usually do not receive the same level of service after the close when servicing is done by a third party. Servicing the loans we originate is the basic plank of our strategic business plan."

According to Havens, Reilly's servicing business acts as a foundation for the company's loan production business. "Our structured finance deals can include all sorts of bells and whistles. Since we service the loans, we are able to add defeasance and the right to substitute loans," he says. "We can also work very quickly for the borrower since we know the details of the loan."

Competition, consolidation and opportunity Competitive pressure has thrust technology to the fore for most lenders. Systems that improve underwriting capabilities and customer service have become necessary for those wishing to stay in the game. "Technology is the tool that will enable Reilly to deliver knowledge and service," says Havens. "We will be in the position to provide electronic commerce soon."

With all of the talk about technology and the information age, it is still not crystal clear what is useful and what is investment-worthy. "Deciding which initiatives to foot the bill for and what initiatives to get together with others on has been an important process," says Havens. "Technology costs are so high. We are really sifting through this now - what is worth developing and what is not."

The amount of information being warehoused in financial institutions across the nation is growing, and many lending institutions hope to leverage this information as soon as possible. "Right now we have so much information flowing through systems," says Havens. "The challenge of having all of this information is divining what is relevant at the end of the day."

Some believe technology - especially the Internet - will provide more challenges for companies like Reilly. The disintermediation threat - when capital flows directly from the source to the borrower and intermediary firms become obsolete - does not hold much validity to Havens. "As the market becomes more dynamic with online companies and more players, the more important we are to the borrower," he says. "We will be a provider of knowledge and experience. We will become more relevant, not less."

Consider also the fact that fast chips and fancy software can only go so far. "You can be as high-tech as you want but at the end of the day, there is no substitute for strong business experience," says Havens. "Reilly has a strong capital base, good judgment, loads of experience and customer loyalty. That provides a lot of value."

Reilly Mortgage Group, like many other lenders, has prospered in the real estate run-up of recent years, but Havens sees some changes on the horizon. "Many firms are finding themselves at a crossroads," he says. "Multifamily rents have been growing and that has naturally fostered new construction, but right now there is so much capital in the market. Profits will be lower, and there is intense competition for business.

"Falling profits, better technology and competition will likely cause some consolidation," he continues. "This consolidation will provide opportunities for us, but there will certainly be perils and risks for other newer entrants into the market. Our goal is prudent and sound growth."

Reilly has already experienced substantial growth in recent years. Facing rising interest rates and a largely satiated demand for refinancing, the company must rely on its experience and creativity to maintain its rapid growth. "To maintain that type of growth, we are considering an expansion into commercial lending," says Havens.

This expansion would accomplish two of Reilly's most important goals. "An expansion into commercial markets would satisfy the growth expectations of our shareholders, as well as provide a valuable service to our customers," says Havens. "The two go hand in hand."