The Charlotte, N.C.-based bank's capital markets group takes on the world of investment banking and finds a formula for success.

In the hard charging world of First Union Corp., it is easy to overlook the fact that the nation's sixth largest banking institution has evolved into an important real estate capital company. Upon completion of its most recent acquisitions -- Signet Banking Corp. (closed Dec. 1), CoreStates Financial Corp. and Wheat First Butcher Singer Inc. -- the Charlotte, N.C.-based firm will be transformed into a financial services powerhouse with $204 billion in assets.

While Signet and CoreStates were essentially banking companies, the acquisition of Wheat First, a Richmond, Va.-based investment banking, brokerage and asset management company, was meant to bolster the company's capital markets. "Wheat First is the perfect partner for First Union," declares Edward E. Crutchfield, chairman and chief executive.

The deal enables First Union "to strengthen our capital markets, asset management and brokerage services immediately," he says. In particular, the acquisition will accelerate First Union's ability to provide equity underwriting to its growing corporate base, while also expanding its services to individual investors.

Equity underwriting should be very helpful to one of Capital Markets fastest growing divisions, the Real Estate Capital Markets Group.

Enter Greco In June 1994, Michael Greco was hired away from Donaldson, Lufkin & Jenrette to jump start Capital Markets' commercial real estate conduits. That program sprouted both the formation and consolidation of a number of First Union real estate programs. In spring 1997, the Real Estate Capital Markets Group was formed with Greco taking the reins as managing director. Today, the group has grown to 110 people and six of its own departments:

-- Commercial Real Estate Finance -- Product Delivery\Direct Origination -- Affordable Housing -- Corporate Real Estate Group -- Income Property, and -- Product Services.

"The Real Estate Capital Markets Group was created as a subset of the total Capital Markets program for the primary reason of serving real estate clients directly," says Greco.

While First Union does not release earnings for the Real Estate Capital Markets Group, Greco says it "is a definite, integral part of the Capital Markets revenue overall." Through the first three quarters of 1997, fee income for Capital Markets as a whole was $531 million, surpassing in nine months the fee income for the entire years of 1996 and 1995, which were $464 million and $265, respectively.

Expand loan programs First Union Capital Markets is becoming a "bigger player in real estate finance," reported The Wall Street Journal. Among its expansion efforts this year, Capital Markets launched a new program to source, underwrite and sell class "A" permanent commercial real estate loans. This program expands First Union's loan capabilities to allow for the underwriting of permanent, non-recourse real estate debt for shopping centers and other types of high quality commercial properties.

Near the end of 1997, First Union Capital Markets joined with Lehman Brothers on a $2.2 billion offering of securities backed by commercial mortgage loans. It was the industry's largest commercial mortgage securitization and a major development from the Real Estate Capital Markets' Commercial Real Estate Finance department.

First Union's original conduit program, Commercial Real Estate Finance, still does the lion's share of the company's real estate business. Now run by managing director Larry Brown, who joined First Union at the same time as Greco, it has become a very busy program. In 1995, First Union performed about $600 million in commercial mortgage securitization; in 1996, it did $1.1 billion; and the financial institution was projecting to end 1997 with about $2 billion. The company is ranked first nationally among commercial banks in securitization volume in 1996 and 1997.

"It's very easy to get lost in the volume of business being done in CMBS, but what we pay attention to is market share," says Brown. "And the key to maintaining market share is offering as many diversified products as possible."

He adds, "you try to do all the pieces of the pie -- the servicing, origination and securitization -- by yourself. Being vertically integrated is the key to surviving in this business."

About two years ago, Robin Sofio was hired away from Citicorp Securities to begin a Credit Tenant Lease program at First Union. The concept was to do the construction and permanent financing for retail box stores such as Wal-Mart and Home Depot.

These loans also are securitized, both at investment grade and below investment grade. "This is a new product for the bank," Sofio says. "Most of our competitors in the conduit world were not doing this, so we really set the market on this."

By November, First Union had securitized about $200 million of credit tenant leases and was expected to do $350 million by the end of 1997. Sofio says Daiwa, Nomura, First Boston and even cross-town rival NationsBank now have similar programs.

Courting REITs Greco expects growth in the Real Estate Capital Markets Group to come from the Corporate Real Estate and Income Property departments. Under the Corporate Real Estate banner, the company consolidated its REIT business. "In the past five to six years we have been making loans to REITs but under no centralized plan," says Greco.

"If we are truly going to remain a major player in the REIT business we must be thought of as having a very professional group with plenty of support for equity and research," adds Greco. "All that needs to be coming from a central location backed by a professional sales group that understands the product and sells it into the marketplace."

The services provided by Corporate Real Estate include the syndication of commercial real estate loans as well as a variety of debt and equity products tailored to REITs and other publicly owned real estate companies.

Among the retail REITs doing business with First Union are Federal Realty Investment Trust, Regency Realty Corp. and Vornado Realty Trust. The company maintains approximately $1.5 billion in outstanding commitments from 50 real estate investment trusts.

Greco also has retooled and reorganized the Income Property Group department. First Union decided to put product on its own balance sheet for a short period of time. "Instead of placing it with these insurance companies," Greco explains. "We are taking it on the balance sheet and then delivering it to the investors. That creates more profitability for the firm, and better execution for customers since it is quicker and more efficient."

The product has been so well received by First Union's customer base, it has become the Real Estate Capital Market's fastest growing business, growing a pipeline over $500 million since May 1997.

Finding a niche Although the Real Estate Capital Markets Group does not have an office on Wall Street, Greco knows that the investment banking houses there are big competition for his Charlotte-based outfit. "Wall Street cannot offer construction loans, they cannot offer equity on multifamily affordable housing loans, and they don't have the ability to do credit tenant leases or construction/permanent loans," he explains. "They do big deals. They don't like to do small deals, and that is a big advantage to us."

If a person wants to build a shopping center in Florida, Greco adds, and he wants construction loans plus a take-out, but was worried about interest rates, "he could go to First Union and say, 'I want a fixed-rate construction loan that has no interest rate risk. I want a permanent loan, non-recourse. And I want it now.'

"Well, I can respond by getting him a fixed-rate construction loan that rolls into a permanent loan with only one closing, one set of lawyers and I can do it in 45 days. No Wall Street firm can do that!"

First Union's Real Estate Capital Markets Group offers access and provides structuring expertise for:

* direct debt origination, placement and sales for class "A" commercial real estate. * direct debt origination, securitization and private placement for class "B" and "C" shopping centers and other commercial property types. * secured and unsecured lending for REITs and other real estate companies. * direct origination and placement of permanent debt, construction and equity for affordable housing. * loan syndication of secured and unsecured commercial real estate loans. * off-balance sheet real estate related products, including synthetic leases. * capital markets derivatives products from commercial and real estate industry.