The merger of BankAmerica Corp. and NationsBank Corp. has created a commercial real estate financing behemoth that is in a position to thrive even as the market softens.
At an Urban Land Institute conference here last week, the new Bank of America billed itself as a one-stop shop for real estate finance, offering construction and home-building loans in 22 states and long-term commercial mortgages, as well as securities underwriting and loan syndications.
The predecessor banks combined were the No. 1 syndicator of real estate investment trust loans and overall real estate loans, based on 1997 totals, according to Loan Pricing Corp.
NationsBank by itself had ranked behind J.P. Morgan & Co. and Chase Manhattan Corp. in both categories.
Many real estate developers operate nationally, which puts regional or even superregional banks at a disadvantage, said Dennis Yeskey, managing director in the real estate services group at Deloitte & Touche LLP, New York. "If you merge these two banks together and make them truly a national bank, they have a better picture of the market, and a better picture of the borrower."
According to Commercial Mortgage Alert, an industry newsletter, NationsBank was ranked 13th among loan contributors to commercial mortgage securitizations in the first half, with $1.02 billion. Add the $330.6 million that BankAmerica securitized during that period, and the merged bank enters the top 10.
Unfazed by the financial-market woes and uncertainty plaguing the real estate business, the new Bank of America is determined to dominate realty lending. The team of executives, led by senior managing director William A. Hodges, said they are undeterred by recent setbacks in the capital markets, which have led some top Wall Street houses to rein in credit.
"We are continuing to take applications. We're continuing to close loans," said Mr. Hodges, who comes from the NationsBank side of the marriage.
The newly created megabank will have originated $5 billion of loans this year just through its conduit, said Michael Malone, senior managing director for real estate investment banking. Conduits make long-term, fixed-rate nonrecourse loans, repackage them as securities, and sell them to institutional investors.
In late August the commercial mortgage-backed securities market soured. Lenders which had been making conduit loans found suddenly found themselves unable to resell them at a profit. The most high-profile casualty was Nomura's Capital America unit, which suffered $275 million in losses.
More recently, Criimi Mae, a real estate investment trust, filed for bankruptcy. Criimi Mae invested in the subordinated, lower-rated pieces of commercial mortgage-backed securities offerings, which were hit the hardest.
Even at Bank of America, originations of conduit loans "are probably off 50%" since Aug . 21, Mr. Hodges said. "But when you consider that most of the conduit operators have closed their books on originations," that performance looks good.
As a bank with a deposit base, Mr. Hodges said, Bank of America has the option to hold loans on its balance sheet and doesn't always have to securitize-unlike the boutiques and investment banks, who financed their inventory with lines of credit secured by the loans they originated.
"Because we are active as both an investor and an originator and conduit operator, it gives us a lot of flexibility," Mr. Hodges said.
Real estate will account for 8% of the new bank's $572 billion of assets, Mr. Hodges said. Those assets include $30 billion of real estate loans, and of those "a substantial portion" are the kind of long-term commercial mortgages that conduits make, he added.
Moreover, he said, "fundamentally we believe capital markets will correct," and investors will recognize the value of commercial mortgage- backeds. These bonds, he said, have "excellent call protection"-in sharp contrast to residential mortgage securities, where early redemption of principal is the greatest worry.
And despite the plummeting values and lack of liquidity in commercial mortgage bonds, "we've seen no deterioration in credit quality," Mr. Malone added.
In fact, the financial crisis could help firm up the market, Mr. Hodges said. "We've seen a lot of projects from major developers that have been put on the backburner or pulled altogether. At some point in time, that's going to put upward pressure on rents as vacancy rates continue to fall."
Only about 6% to 7% of the real estate business is securitized in the form of commercial mortgage bonds and REIT equity, Mr. Malone noted. "It's remarkable that 6% to 7% of the business has caused the whole business to basically shut down or reengineer or stop on a dime. That happening, we think, is a very good thing."
Addressing the risk Bank of America takes on if it holds long-term real estate loans on its books, Mr. Hodges said the bank's real estate assets as a percentage of Tier 1 capital total less than 85%, "one of the lowest of our peers."
Mr. Malone added that all the long-term loans the bank originates are tailored to the standards of the commercial mortgage-backed securities market, so "we can securitize it whenever we want to."