FEATURE ARTICLE, MAY 2006

GREYSTONE IN A GREY AREA
The financial services company expands its business through oft-neglected niche markets.
Kevin Jeselnik

A perennial top 10 Fannie Mae DUS (delegated underwriting services) lender throughout the past few years, Greystone has been seeking to expand its business operations of late. The Greystone DUS platform, which has recently relocated its headquarters from Bethesda, Maryland, to Memphis, Tennessee, is diversifying its current operations and introducing new lines of business in order to better serve the multifamily and senior housing industry through it’s multiple services, from lending and third-party financial services to acquisition and redevelopment. Southeast Real Estate Business recently sat down with three Greystone executives — William Posey, chief executive officer of the company’s Fannie Mae DUS platform; Joseph Mosley, managing director and of the Fannie Mae DUS platform; and Stephen Germano, director of the Greystone bridge loan platform — to discuss the company, its future and the outlook for multifamily financing in the Southeast and beyond.

Greystone Servicing Corporation, the company’s Fannie Mae DUS and FHA lending subsidiary, has grown its business by exploring and establishing dedicated opportunities in the niche markets of Fannie Mae lending. “One thing we have done in our DUS area is provide specialized groups for the niche areas within Fannie Mae,” Mosley says. “You have standard multifamily product that all DUS lenders do, and then there is the seniors, for which we have a specialized group, and the 3MaxExpress platform, which we also formed a specialty group to handle, so that small loans would get the attention they deserve. We also established a dedicated affordable housing group based in Tampa.”

“The multifamily market is extremely competitive; fees are getting compressed and it is just a very tough market for lenders,” Posey says. “A couple of years ago, we decided to strike where the other DUS lenders are not present to maximize our income and serve underserved borrowers.”

The 3MaxExpress product delivers Fannie Mae financing advantages for loans of $3 million or less, or up to $5 million in certain large MSAs. “We are a top 5 3Max lender,” Posey says. “It is an innovative program with some recent changes that increase its attraction to borrowers.”

Greystone also launched an interim bridge loan division early last year, bringing in Germano in February of that year to lead the efforts. “The reason that the bridge lending was important was that so many deals were out there that weren’t ready or didn’t qualify for permanent loans with Fannie Mae,” Mosley says. “But good real estate was involved, good operators, and they could be stabilized in a relatively short period of time.”

“What we were seeing in the marketplace with the big DUS platforms in the commercial banks was a fully integrated product line, including interim [financing],” Germano adds. “For a privately held company like ours, that was missing. In just part of a year in 2005, we closed approximately $75 million worth of product, and our expectation is to close between $100 million and $125 million this year, just in interim product.”

Some of Greystone’s most established business comes from its unique method of working closely with banks. “One thing that makes us different from other DUS lenders is something that we embarked on approximately 3 years ago, which is a strategy of working with a correspondent base in the wholesale area,” Posey says. “We started focusing on banks, because so many financial institutions don’t want to offer long-term, fixed-rate financing for multifamily.” Often, banks are willing to finance short-term multifamily deals, but do not want a long-term loan on their balance sheets. Greystone works with large and small banks that do not offer the Fannie Mae platform and provides them with the opportunity to complete Fannie Mae multifamily transactions. “We are trying to bridge the gap between the Fannie Mae products and the banks that want to offer them,” Posey adds. “With the yield curve like it is, it is actually cheaper to get a 10-year fixed-rate loan with a 30-year amortization, than it is to get a 2- or 3-year short-term loan, which is all the banks have typically offered; they don’t want to go out 10 years. This is where we are partnering up with the banks for their fixed-rate executions.” This strategy has greatly increased Greystone’s stake in the DUS industry.

While Greystone is a national lender, most of their services are based in the Southeast, including the servicing platform in Warrenton, Virginia.

“From a lending perspective, we see everything,” Posey says. And the company is looking everywhere in the region for deals. In New Orleans, certain areas that were not extensively damaged by flooding are in need of modest rehabilitation. The properties have maintained their occupancies at around 80 percent and will not require too much to complete the work.

“The issue is flood insurance,” Germano says. “And what the banking community envisions is that insurance companies are going to put very small limits on what you can get for flood insurance. There’s nobody to step up and cover the gap between that small limit and the full cost of replacement. But, I do think we’ll see a lot of product coming from New Orleans and the Gulf Coast.”

A trend in multifamily development Greystone is paying attention to is the increase in affordable construction across the Southeast in smaller towns in states like Alabama, Mississippi and Arkansas.

“These developers are effective in getting into the state process and procuring allocated tax credits to build and operate these properties efficiently,” Mosley says. “We’re willing to go into those markets.” The deals typically run from $1 million to $5 million in areas with populations between 15,000 to 25,000.

In larger markets like Atlanta, and to a lesser extent Columbia, South Carolina, the company was seeing some larger Class A and Class B properties outside of the core area having a hard time stabilizing and reaching more than 85 percent occupancy. But those type of properties are not as distressed anymore as the increasing interest rates are sending people back to apartments.

Overall, the Southeast is an attractive market for investors and Greystone feels that attitude will continue.

“Lots of people from other parts of the country come to buy properties in the Southeast, even some of the more distressed properties.” Mosley says. “This is probably one of the more fairly valued markets in the country.” And Greystone is well positioned to take advantage of that interest.

“Our first quarter of this year was by far the best we ever had,” Posey says. And that level of business should continue for the remainder of the year as Greystone expects to refinance the high level of deals rolling over from a decade ago.

“Nineteen Ninety-Six was a very strong year for real estate lending by conduits,” Mosley says. “Those deals are rolling now and the refinancing needs to be done based on the conduit terms of that period. This should be a real good year.”

With plans to launch a conduit lending program during the next year, and the establishment and expansion of its new and existing service lines, Greystone has carved out a niche of its own in the lending industry, that of a creative company doing big business.

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