Commercial Mortgage Alert
August 13, 2001
Deutsche Bank is moving to step up its presence in the rapidly growing market for mezzanine loans. Deutsche is setting up a second mezzanine-loan fund, which will be capitalized with $350 million of equity. It would be the second largest venture of its kind in the U.S. – and almost twice as big as the $180 million vehicle that Deutsche formed in 1999.
Market players said the bank plans to inject $75 million to $100 million of its won capital into the vehicle, to be called DB Realty Mezzanine Fund II. It will raise the rest from institutional investors.
The mezzanine loan sector, traditionally the purview of a handful of players, is suddenly bustling with activity. Other players looking to raise capital for funds include NorthStar Capital Partners, Spectrum Group, Prudential Real Estate Investors and T-Rex Capital. Long-time player Heller Financial was recently raising money, although that effort appears to have been halted by the firm’s impending purchase by GE Capital.
New York-based NorthStar is raising $100 million to $150 million of additional capital for its fund, NorthStar Funding, which recently closed on its first $100 million of equity. The vehicle, managed by David King, is working on its first round of investments.
Spectrum Group of New York is raising up to $100 million of equity for a fund that will make high-yield investments, including bridge and mezzanine loans and distressed assets. The fund, which will be managed by principle Jeffrey Shaffer, will have up to $200 million of buying power.
Prudential, under managing director Shekar Nasarimhan, is raising up unspecified amount of money for a fund that will be managed in conjunction with Prudential Mortgage Capital.
T-Rex, a New York-based investment firm headed by former Starwood Capital executive Thomas Mulroy, is looking to raise $150 million for an opportunity fund that will mix mezzanine debt with equity investments.
Additionally, several players have brand new allocations that are looking for place. So far this year, New York-based Capital Trust has raised more than $800 million for what is by far the biggest such vehicle. Capital Trust’s fund has more than $2 billion of buying power. In addition, BlackRock las month closed on $153 million of funding for its Carbon Capital unit. And the team of Lend Lease Real Estate Investments and Fleet Boston recently closed on a joint fund with more that $100 million of equity.
Hugh Hall, a vice president in charge of high-yield financing at Credit Suisse First Boston, estimated that real estate funds and specialty finance companies currently have capacity to fund at least $4 billion to $5 billion of mezzanine debt. Some opportunity funds have been turning to mezzanine debt because they are finding it is getting harder to achieve high yields through direct property investments.
Another $4 billion or so in additional mezzanine financing capacity exits in commercial banks, insurance companies and other institutions, according to Hall. Active members in this category include Hypoverinsbank, Fleet, Massachusetts Mutual, Cigna, Wells Fargo, and Principal Life.
Will there be enough demand from borrowers to match the new supply? That’s an open question. Demand has been spurred by the softening market, because owners are often opting to refinance rather than sell at what they consider low prices. What’s more, because of the weakening economy, securitization programs are now under greater pressure from gages. That also is creating demand for mezzanine loans, which bridge the gap between first mortgages and the equity interests of owners. But some long-time lenders are concerned that the new players will be too aggressive and push down yields.
Deutsche is already the most-active originator of large highly leveraged loans in the U.S. The mezzanine-loan fund will help it maintain that role. Deutsche routinely wins financing assignments because it is willing to write bigger loans than most of its rivals. It can do so because it has been able to line up buyers for the junior portions of loans. The new fund presumably will be an active buyer.
Deutsche’s first fund, which is fully invested, is run by managing director Paul Turovsky, who is also believed to be in charge of the new vehicle.
The fund will focus on North American properties. No timetable has been set for its first batch of investments. Deutsche is targeting 15% annual returns. Market sources said the first fund exceeded that amount. The new fund will use little leverage, so it is unlikely to originate more that $500 million of loans.