As part of a drive to expand its real estate activities outside its territory, PNC Bank Corp. last week made a $115 million construction loan for a high-end office project in Santa Monica, Calif.

The deal also signals the rejuvenation of the Southern California real estate market, one of the last markets to recover from the most recent downturn.

The project, known as Water Garden II, is a pair of opulent office buildings with 600,000 square feet of space.

The financing was broken down into two parts: an $80 million senior loan, which PNC plans to syndicate to two or three other banks this year; and a $35 million mezzanine piece, which will be bought by Anthracite Capital, a real estate investment trust managed by a PNC subsidiary.

Both loans have a term of three years, with two one-year extension options. The senior loan has partial recourse for repayment; the mezzanine loan is nonrecourse.

PNC financed the building even though it is not pre-leased. "That's not the norm for us at all," said Michael J. Hannon, co-head of real estate banking at PNC. "We felt the amount of equity and subordinated debt coupled with the condition of the market gave us the comfort we needed."

The developers, J.H. Snyder Co. and Colony Capital Inc., poured a combined $40 million of equity into the project. This contrasts to the 1980s, when many commercial real estate projects were financed with zero equity and 100% debt, PNC officials said.

According to CB Richard Ellis, suburban office rents in the Los Angeles area have been rising steadily, to $23.63 per square foot in the first quarter from $22.03 a year earlier. Meanwhile, vacancy rates fell to 14.2% in June from 18.1% in June 1996, the commercial real estate broker added.

"L.A.'s office sector experienced robust absorption in the first half," said Daniel O'Connor, a managing director at CB Richard Ellis. The market absorbed nearly 2.4 million square feet of office space in the first half, more than two-thirds of it outside downtown.

The Water Garden II financing is "reflective of our strategy to be a national player as opposed to a regional player," said Doug Danforth, co- head of PNC's real estate division.

Though the bank has dabbled in real estate outside its main territory - Pennsylvania, New Jersey, Delaware, Ohio, and Kentucky - for more than a decade, only recently has it made a concerted effort to expand its activities outside those states, Mr. Hannon said.

The bank's ultimate objective, Mr. Danforth said, is "to finance a greater portion of a client's capital structure."

For example, he said, while PNC has a long history of making construction loans, the creation of Anthracite in March lets it make mezzanine loans as well.

The REIT is an independent, publicly traded company managed by BlackRock Financial Management, a subsidiary of PNC. PNC has agreed to offer Anthracite the riskiest portions of its deals.

With a less risk-averse party willing to purchase mezzanine loans "we can go to a client like Snyder and Colony and offer one-stop financing," Mr. Danforth said.

The bank has taken other steps this year to build a one-stop shop for real estate finance. In April it purchased Midland Loan Services, a leading servicer of commercial mortgages, and an originator of long-term, nonrecourse real estate loans.

"The mantra in banking is to increase quality of earnings through a balanced revenue mix," Mr. Danforth said. With Midland under its umbrella, noninterest fee-based income increased to nearly 50% of the real estate group's revenues in the second quarter, from 20% a year earlier.

In July, PNC sold its first commercial-mortgage-backed securities offering, totaling $1.2 billion. The bank and Midlands contributed to the underlying loan pool, as did lead underwriter Morgan Stanley, Dean Witter & Co. Midland will service the loans, and Anthracite bought $60 million of the riskier subordinated bonds from the offering.

Also in July, PNC bought Arcand Co., which invests in low-income multifamily housing, and renamed it Columbia Housing Corp. "The vision there is to create a single source for the entire capital structure of these developments," Mr. Danforth said.

A developer of low-income housing can come to PNC and obtain the equity from Columbia, the construction loan from PNC, and the permanent financing from Midland. This process also lets PNC earn credits under the Community Reinvestment Act.

As with the mezzanine loans and the subordinated commercial-mortgage- backed securities, the riskiest part of the deal does not stay on PNC's balance sheet; Columbia pools the equity from several projects and sells them to private investors.

"The bank's risk-return parameters won't enable us to provide all the financing," Mr. Danforth said.

In New York, PNC has been financing the conversion of downtown office buildings for residential use. It has already lent $125 million for three conversions and expects to close soon on a fourth loan, bringing its total financings in this category to $200 million.

Mr. Hannon said many employees of New York's booming financial sector have a desire to live near their offices, but there is a limited supply of "state-of-the-art multifamily residences."

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