Covering all the bases in commercial real estate: PNC's secret weapon is no longer a secret: an interview with Hugh Frater, Doug Danforth, and Andy Siwulec

RMA Journal, The, June, 2004 by Jim Nelson

Good things come in threes--at least in commercial real estate. Last June readers of The RMA Journal met three gentlemen from Wachovia. This year we hear from three at an acknowledged competitor--Pittsburgh-based PNC. PNC Real Estate Finance specializes in providing financial solutions for the acquisition, development and operation of commercial and multifamily real estate nationally. PNC Real Estate Finance offers construction and permanent financing, loan servicing, and treasury and investment management. The unit also originates and distributes debt and equity financing for affordable multifamily housing.

So far this may not sound too different from services offered by PNC's competitors. But PNC believes its competitive edge has been honed by something quite different--Midland Loan Services, operating on the Enterprise![R] loan management system. Hugh Frater, Doug Danforth, and Andy Siwulec talked with Jim Nelson, RMA's director of Credit Risk, about what makes PNC unique, bringing combined decades of experience to an assessment of commercial real estate today.

RMA: Hugh, you oversee the entire real estate operation for PNC, so let me begin by asking about the businesses you now are pulling to together. Then perhaps Andy and Doug will talk about their responsibilities.

HF: We have one of the broadest real estate platforms in the market today. We do everything from portfolio lending in the construction markets to securitized lending in the CMBS and agency markets. We're an active participant in lending to real estate investment trusts (REITs), providing a variety of products, including both construction and permanent financing.

We are one of the largest investors in the mezzanine market through our colleagues at BlackRock.

We are a large agency lender, sourcing products for FHA and Freddie Mac. We're an affordable-housing lender and investor, and an originator and syndicator of low-income housing tax credits.

We're one of the largest servicers of commercial mortgage loans in the U.S., both for the CMBS market and, increasingly, for other lenders on an outsourced basis. Doug and his team at Midland Loan Services have built what is probably the strongest technology platform today in the commercial mortgage business for gathering loan information and reporting it to investors.

We provide the premier integrated customer experience for borrowers and investors. My role is to pull all these businesses together in a way that enables us to grow them as we go forward and to capture an increasing share of the commercial real estate market. Although we consider ourselves one of the best in class in almost all these businesses, there's no reason we can't be even better through integration. A very intense effort has thus been under way in the past couple years to convert our data to the new platform. For a time during that process, the Midland team worked closely with PNC's head of technology and thus had a different reporting line. Now that the conversion process is largely complete, it makes sense to once again align the lending and servicing businesses under one reporting structure so we can exploit all the benefits of an integrated lending-and-servicing platform--the principal benefit being to mobilize an experienced team for the borrowing customer.

AS: I am responsible for the finance activities of four businesses:

1. Our national lending business (public companies, the institutions, the funds, and large-project finance).

2. Our regional business of private clients--developers within our footprint to whom we provide such traditional banking; services as construction lines of credit, term lending, and in some cases placement and deposit-taking.

3. Conduit, which securitizes commercial mortgages, pooling with other large issuers.

4. Through PNC Multifamily Capital, our affordable-housing group, we are a large agency lender for both Freddie Mac and FHA. This group provides debt and equity to investors and developers of low-income housing, tax-credit-enhanced properties, including predevelopment advances, construction/permanent loans, equity bridge loans, and equity investments.

DD: As president and CEO of Midland, I'm responsible for our servicing and technology operation. Midland is the leading third-party provider of servicing and technology solutions for the commercial real estate finance industry. Our objective is to provide these services to the industry at large.

Key to our success is our customer service and continued investment in technology, both of which are substantiated by being the only servicer to have earned S&P's and Fitch's highest ratings--as master servicer, primary servicer, and special servicer. (1)

We currently have it servicing portfolio of $85 billion, $60 billion of which is CMBS. Certainly, servicing commercial mortgage-backed securities is our core product, and at least up until now, Midland's growth has directly correlated with the growth of CMBS, an industry that has grown substantially over the past half-dozen years.