Key Commercial Real Estate evolves into full-line lending company. Three years ago, Key Commercial Real Estate saw its solid background in construction and interim lending as an opportunity to evolve into a full-line lending company.

Key's new objective offers construction loan clients permanent loans, securitization, refinancing and any other after-market alternative financing that post-construction projects might require. Now instead of handing off construction loan clients to competitors for permanent financing, Key can provide its customers with a full range of financial services.

The growth strategy has propelled Key's annual loan originations from $4 billion in 1997 to $6 billion last year. The group contributes nearly 15% of last year's $1.1 billion net income of its parent company, Cleveland-based KeyCorp, one of the nation's largest multilane financial services firms.

The path to becoming a full-line financial services lender didn't come easily, however. Key's evolution required an organized plan that included two acquisitions, the reorganization of its financing delivery system, plus the reinforcement of its employee and business infrastructure.

George Emmons, Key's executive vice president and national manager who helped spearhead the expansion, based the implementation strategy on feedback from Key clients during a grass roots tour in 1997.

The need for permanent financing and other after-market products of construction and interim lending was a common request Emmons heard from coast to coast. "We began to see our business goal form into a triangle," explained Emmons. "Our successful construction lending business was one corner of the triangle, but the other two corners - permanent financing and equity lending - needed to be filled out."

The acquisition in 1998 of Cleveland-based McDonald Investments Inc., a full-service investment banking and brokerage firm with assets of approximately $78 billion at the time, was a major step into the equity and mezzanine financing arena.

"McDonald gave us equity at the entity level for our REIT clients, and equity at the project level for our large regional and national developers," added Em-mons.

One of the final missing pieces, permanent lending, was developed by forming Key Commercial Mortgage, which is a division of Key Commercial Real Estate. Permanent lending was also bolstered with the acquisition last January of Kansas City, Mo.-based National Realty Funding, a commercial lending firm with expertise in servicing CMBS and securitization. NRF has since been integrated into Key Commercial Mortgage.

The NRF and McDonald acquisitions give Key the tools to now securitize its commercial mortgage loans, thus enhancing its fee-based revenues as opposed to generating only interest based revenues. Last June, Key completed its first securitization deal, an $816 million effort it participated in with Bridger Commercial Realty Finance, Mill Valley, Calif., and the Salomon Brothers Realty Corp. division of Salomon Smith Barney, New York. Key pooled and sold $481 million worth of permanent mortgage loans as securities ranging from Class AAA to BBB minus. NRF's expertise in permanent mortgage financing, loan securitization and loan servicing was integral to Key's participation in the large business deal.

"This deal reflects our enhanced capabilities to originate and sell commercial mortgage loans from our developer and franchise customer base," said John Case, senior vice president and managing director of Key Commercial Mortgage. "For our clients, this means Key can be the one place to address all of their commercial real estate financing needs."

In August, the company made another move to improve its lending capabilities by reaching an agreement to acquire Dallas-based Newport Mortgage Co., which has a servicing portfolio of more than $1 billion. Terms of the transaction were not disclosed. Emmons notes the acquisition will dramatically expand Key's ability to provide multifamily financing through Fannie Mae, Freddie Mac and other federally-insured programs.

Until it founded its commercial mortgage division three years ago, Key previously had brokered or placed its construction loans elsewhere with life insurance companies or some other type of conduit. Today, Key functions as the conduit. "Now we not only take a position and a fee in the loan process, but we also sell the loan and generate another gain on it," said Case.

Most importantly after a securitization, however, Key also continues to service the loans. This allows the company to maintain quality control and retain the personal relationship it has developed with the client. After market servicing generates additional income revenue especially in the event of refinancing. "The real hurdle on the conduit side today is who takes care of the loan after it's completed," added Case. "Instead of the loan going in a black hole somewhere, we oversee it and fulfill our mission of being all things to a client."

Now with its first securitization a 100% sell-out, Key plans two additional securitizations by year's end using much of this year's $1.4 billion in conduit loan originations. Next year, Key's goal is to complete three more securitizations that will most likely surpass $1 billion.

The fact that Key ranks third in the country among U.S.-based bank lenders in new construction loan originations is one reason the first securitization was successful. "Bond buyers want to know about the quality of the construction loan originations and they can see our decades worth of experience in that area," says Case.

Quality projects emerge Gunbarrel Pointe Shopping Center, Chattanooga, Tenn., a 281,000 sq. ft. open-air community center, is an example of a quality construction loan Key originated and hopes to roll-over into a permanent mortgage. Key provided a two-year, $13.8 million construction loan with two 12-month extensions for the developer, CBL & Associates, a self-managed, Chattanooga-based REIT specializing in the development, acquisition and management of regional malls and community centers.

CBL, which owns 137 shopping centers in 25 states that total more than 359 million sq. ft., is the type of client that securitization investors like to see on loan originations, according to Emmons. Once permanent financing is needed for Gunbarrel, Key hopes to finance the permanent mortgage and ultimately securitize the loan.

For Picerne Real Estate Group, a national, privately-held multifamily developer based in Phoenix, Key provided a $21.6 million, two-year term loan last year followed by two six-month extension options pending achievement of the project's lease-up and debt service coverage tests. The loan was made for The Equestrian, a 376-unit luxury apartment complex Picerne developed in the Las Vegas suburb of Henderson, Nev. Although it's not yet finalized, Key is expected to be the permanent loan provider through its Fannie Mae unit.

Another Key construction loan that someday will need a permanent mortgage is a 150,000 sq. ft., office building at Allendale Business Park, King of Prussia, Pa., developed by Brandywine Realty Trust, a Newton Square, Pa.-based REIT engaged in owning, managing, leasing, acquiring and developing suburban office and industrial properties in the Mid-Atlantic states. To be occupied by the IBAH Inc., division of Omnicare Inc., the four-story building's construction loan is $20 million for three years with two one-year extension options.

Rapid responses on loan applications While the development of a full line of lending products was essential to Key's evolution, another revelation Emmons discovered during his grass roots tour was the request for easier and faster loan application processes. Consequently, Key has sped its process up to 48-hour approval where the developer receives a "proceed" or "stop" order.

"One thing a developer hates is waiting 45 to 60 days for a real estate lender's response and then getting a declination based on the first paragraph of the application," says Emmons.

Another factor that helps implement loans quickly and more conveniently is Key's Web site, www.key.com/cre, one of the country's first apply online and pre-qualification sites. "E-commerce has been important, but it will never replace personal relationships," says Emmons.

In addition to speeding up the loan process, Key also wanted to establish single source accountability where one employee, called a Renaissance Relationship Manager, facilitates loans. This supplements Emmons' goal of Key becoming "national in perspective, but local in practice." Attaining this goal required the establishment of additional offices mainly in the fast-growing Sun Belt markets, a region where Key was previously under represented. Today, Key has 550 professionals in 25 offices nationwide. Such an even spread of personnel nationally leads to single source accountability where professional managers live and work in the communities where Key is investing debt and equity money.

Because time zone differences can delay loan approval, Key has grouped the offices under four regions with territories covering each respective time zone. Each region autonomously has its own sales force, credit administration, loan approval area, construction loan management, and other tool that expedite loans.

Knowing that offices spread evenly throughout the country are meaningless without the personnel to staff them, Key embarked on a staffing and training mission that cost upwards of $750,000 to implement. The McDonald acquisition helped bolster Key with additional experienced loan product specialists, but it also had to recruit from outside. With the addition of so many managers and new products, Key's training program assured that each newly-added and existing sales employee became a knowledgeable, trusted advisor in every client relationship. "Developers are entrepreneurs and they detest bureaucracies," explains Emmons, "so if a financial institution can knock down the layers where a client only needs to call one person, they'll have success."

The culmination of this infrastructure work was last July's realignment of Key Housing Capital, Key Global Capital, KeyCorp Housing Management Inc., and Key Real Estate Equity from McDonald Investments into Key Commercial Real Estate. "Now we have Fannie Mae, CMBS, and equity managers as well as our construction loan managers all reporting into the same management structure," Emmons adds.

Key's evolution has made a significant difference to its bottom line. Even though 80% of its business is still conducted with 7-year-old or older development firms that seek financing for projects in the $3 million to $30 million range, Key's revenues are increasing from selling additional products after construction loan originations.

Clients have noticed the evolution, but many developers - especially newer clients in the South - ask Emmons if the financing opportunities will remain after the current boom economy slows down. Emmons' response is simple: "KeyCorp didn't invest all this capital to acquire companies, open more offices, hire and train all these people just so we could be a fair weather lender."