How can a conservative, niche financial services company compete in a market where capital is flowing freer than the Chattahoochee River after a week of thunderstorms? It acquires one of the country's fastest-growing national mortgage banking groups, that's how.

To be more specific, the October 1997 marriage of Irvine, Calif.-based Belgravia Capital Corp. and the two existing real estate units of Finova Capital Corp. - a subsidiary of Phoenix-based Finova Group Inc. (NYSE: FNV) - seems to be creating the best of both worlds for Finova and its clients, alike, while developing substantial synergies.

"The Belgravia acquisition further complements our ongoing efforts to develop fee-based, capital market products to enhance our growth and profitability, broaden our product line and improve our ability to serve our clients," said Finova Chairman and CEO Sam Eichenfield at the time the deal closed.

But exactly what does this mean in practical terms? Seeing as Finova's three real estate groups, combined, have about $2 billion of assets tied up in hospitality properties, control about $1 billion worth of real estate through equity investments in credit sale/leaseback deals and did about $1.7 billion in other real estate lending volume in 1997, that's a knot worth untying.

See if you can follow this: What used to be known as Finova's Commercial Real Estate Finance group really focused on hotel and resort financing, although it does some investing in credit sale/leasebacks, and it has changed its name to Specialty Real Estate Finance; Finova's Resort Finance group continues to specialize in timeshares; and the former Belgravia Capital has become Finova Realty Capital, the company's real estate "generalist" with broad-based product capabilities.

After the Belgravia acquisition, as Randy Heller, division vice president of Finova's Specialty Real Estate group, explains it: "We decided that the things my group should focus on is what it's best known for, and what their group should focus on is just really a lot of the general real estate product. So my group would no longer fool around with stuff like office buildings and retail centers and apartments - things that everybody else did and it was hard to distinguish yourself - and we should focus on a couple of things that we are known for in the market."

The result is that Heller's group now sticks to hotel/resort lending ("cash flowing resorts" that is, timeshares are another group, remember?) as well as making equity investments in credit sale/leaseback transactions.

With a staff of about 16 and annual volume, previously, of $100 million to $150 million, Heller explains: "There are only so many deals we can do as a finance company, at our cost of money, that we can do to compete in the market today. So we never got to be very big, and we selectively do the deals that make sense to us. But we never force volume in any given year."

"Over the years that served us well when the business cycled down," he continues. "We've not had the disasters in real estate the way many other lenders did in the late-'80s and early- '90s. We were very much an active player and actually did more business then than we can do now, because we didn't screw up our balance sheet and have a bunch of non-earning assets by going crazy in the late-'80s."

"So as capital gets kind of crazy right now, it's a little tougher for us to make deals the way we believe they should be done, which may not necessarily reflect the way the market's doing them today," Heller says.

Enter Finova Realty Capital: the yin to Specialty Real Estate's yang.

Whereas Heller describes Specialty Real Estate as a "conservative, balance sheet lending group that specializes in a couple of niches," he calls Finova Realty Capital a "wide net."

As the generalist in the family, Realty Capital's activity is spread among retail, office, multifamily, industrial, seniors projects, manufactured housing, self-storage and even some hospitality (if it doesn't go on the company's books). In terms of capital structures, the group does CMBS fixed-rate business, floating-rate business, equity placement, joint ventures, construction loans, pre-sale and credit enhancement.

In 1997, the Belgravia-turned-Finova Realty Capital entity did $1.7 billion in volume with 35 originators. It started 1998 with about 75 originators in 27 offices around the country and plans to end the year with close to 100 originators in 30 offices - a distribution network that thrills Heller.

The acquisition by a finance company with a single-A credit rating has had its benefits for the former Belgravia group, too.

"With the Finova involvement we are really differentiating ourselves by creating a hybrid brand of service in the marketplace," says Robert Brunswick, managing director of Finova Realty Capital. "A majority of people in the industry are financial intermediaries. Either they're mortgage brokers or mortgage bankers. They don't have a proprietary or discretionary position in the marketplace, in terms of making loan decisions."

"So when we sit down with a borrower," he continues, "we first and foremost talk to them about our on-book lending ability - be it fixed-rate debt, equity or bridge debt. Simultaneously we evaluate their transaction [to see if it is] an appropriate transaction to maybe fund with one of our capital partners. Thirdly, we look to see if there is a placement opportunity with an alternative capital provider, which you might refer to as brokerage activity."

"For our originator as well as our client, it really is the best of both worlds," Brunswick says.

The synergies among the groups have already started emerging.

Heller says that his Specialty group has done eight deals with the Resort Finance group, and it also closed in February on the first deal fed to it by Realty Capital.

"We'll make a loan that is safe for us, but once some improvements in cashflow happen, we can send it back to Finova Realty Capital to securitize in two or three years," Heller says.

He also says that the Specialty group and Realty Capital are talking about finding the debt that accompanies each of his group's sale/leaseback deals. "We'll do the equity in a sale/leaseback," Heller says, "and we can get them to place the debt for us with one of their Wall Street capital sources."

Meanwhile, Brunswick points out that, not only is Realty Capital on the receiving end of deals from the two other real estate groups, but it has been the beneficiary of referrals from a number of Finova's 11 other non-real estate-related finance groups.

"Finova has a lot of banking and finance contacts, which gives us a lot more leverage because of our balance sheet," Brunswick says. "When you go to a borrower and tell them, 'We're going to fund the deal directly,' it gives you a lot more leverage."