For most bankers these days, commercial real estate is once again a millstone, and for Modern Bank Partners LLC in New York, that means now is a perfect time to jump into the business.
Financing for the sector has seized up, property values are dropping and the leading lenders are coping with fallout from the bubble. The three-year-old Modern Bank, which is unburdened by commercial real estate loans made under the loose standards of recent years, aims to take advantage of today's chastened conditions to add conservatively underwritten loans. And it's getting help from some old hands.
The $646.5 million-asset private banking company will announce today that it has sold a 15.5% stake to Fisher Brothers, a prominent New York real estate development firm, for $15 million. Aside from the capital, Fisher Brothers is to share its real estate expertise with Modern.
"We're watching other banks fail due to their past commercial real estate," said Bippy Siegal, the founder and chairman of Modern Bank. His institution "is becoming comfortable with the new pricing in commercial real estate."
Lenders currently in the market are "all dealing with legacy portfolios that are in disastrous shape," Siegal said.
And given the reach and reputation of Fisher Brothers, which was founded in 1915 and owns more than 6 million square feet of office space in New York and Washington, "we figured we'd get great introductions for potential business opportunities."
For Fisher Brothers, Modern Bank offers access to leverage.
With its deposits and balance sheet, the bank will let the developer "do a much higher volume of loans than just using our own capital," said Winston Fisher, a partner at Fisher Brothers, who is to join the Modern Bank board.
Fisher said his firm was looking for "a banking platform where you could write very traditional first-mortgage loans on income-producing properties." It wanted to make such loans according to traditional standards. "I call it 'what lending used to be' where you had covenants, you had debt-service tests."
The developer wanted to do this through a bank because "the cost of capital is much cheaper."
Jeffrey Lenobel, a partner with Schulte Roth & Zabel LLP, said he is aware of many commercial real estate firms that are inquiring about bank acquisitions.
"The commercial real estate players are doing it because they think that with their experience and their expertise, they'll be able to make money as a banker" lending on real estate, he said.
Banks are of interest to investors generally, Lenobel said, because acquisition multiples have fallen and deals can be made with government support, among other reasons.
For commercial real estate lenders, he said, the thinking is: "This market's going to get better at some point. What better way than if I can make investments through a bank?"
Modern Bank was attractive to Fisher Brothers in part because of its "pristine" portfolio, Fisher said. According to data from the Federal Deposit Insurance Corp., on March 31 about two-thirds of Modern Bank's $187.4 million of real estate loans were secured by one- to four-family residences. None of its real estate loans were past due, and 1.7% of its total loans were.
Siegal said the second quarter was Modern Bank's first profitable one.
He described it as a "traditional old-fashioned private bank, a bank for wealthy people." Most of its loans have come from its "core relationships." Modern Bank provides financing for second and third homes, for example.
Tighter regulatory scrutiny provided an additional motivation to sell the stake, Siegal said.
"The regulatory environment has changed dramatically over the last three months," he said. "We could have stayed with our capital levels and grown a little bit more conservatively. But in order to increase our ability to lend more money, we needed to raise more capital."
Modern Bank's private bankers will manage the relationships that Fisher Brothers brings to it, and the bank will seek to cultivate additional business with clients garnered from the partnership, Siegal said.
For example, "the credibility of the Fisher family is also going to help us grow" Modern Bank's business of managing assets for wealthy people "quite aggressively," he said.
In addition to building a commercial real estate lending business, Siegal said Modern Bank approached the deal with Fisher Brothers as a way to, from "a defensive standpoint, have a group of people that could help us manage our current portfolio," should these loans sour.
Fisher and Siegal declined to offer a numeric target for loan growth under the partnership.
Kip A. Weissman, a partner with Luse Gorman Pomerenk & Schick PC, said regulators have raised objections to investments in banks by property firms because of the complexities of the real estate business. Realty firms can engage in hundreds of partnerships across numerous deals, making it difficult to monitor transactions with affiliates and avoid conflicts of interests.
But with the banking industry under strain, "capital is king" now, Weissman said, citing moves toward a more accommodative stance on private equity investments by regulators.
Siegal said he expects Fisher Brothers to increase its position in Modern Bank "in the next couple years." (Fisher said, "As more opportunities come up for the bank, we are very excited to make further investments if they are appropriate.")
Siegal also said Modern Bank expects to announce additional strategic investments from other investors outside the real estate arena during the next three months. He noted interest among private equity groups in the banking sector in general.