Capital One Grows, Minus Pains

Rick Lyon.
Rick Lyon.

Capital One Bank has grown steadily since it was founded by current chairman, CEO and president Richard Fairbank in 1993. Along the way it grew from a mono-line credit card company funded through the capital markets into a more diversified entity with commercial and consumer banking. It managed to make Visigoths funny and capitalize on Alec Baldwin’s Words With Friends meltdown, while simultaneously deepening its reach into lines of business like commercial real estate.

The bank as a whole had $294.5 billion in loans outstanding and $216.5 billion in deposits as of March 31, 2012, according to its first quarter 2012 results. The commercial and multifamily real estate portion of this increased when comparing year-end results recently as well—rising to $15.4 billion for the period ended Dec. 31, 2011 from $13.4 billion the previous year.

For Rick Lyon, executive vice president and head of commercial real estate at the bank, the growth, the Visigoths and the diversification all make sense. Mr. Lyon told The Mortgage Observer that he’s focused on continuing to provide the types of financings that the bank has become known for, particularly in the New York area. A big concentration of this is multifamily—specifically workforce housing, he said.

Mr. Lyon has been with Capital One since January 2008, having joined after 27 years with Wachovia. “I was running the real estate business for Wachovia—which was one of the largest real estate banks before they became Wells Fargo—for the northeast,” Mr. Lyon said. “Boston to D.C. was the market that I was responsible for.” Then, in 2008, “a fascinating opportunity,” as he described it.

The term fascinating is used time and time again by Mr. Lyon to describe the rise of Capital One and the development of its commercial real estate operations—and rightfully so.

Significant milestones in its history include its 1995 spinoff, as a credit card company, from Richmond, Va.’s Signet Bank. When Signet was having trouble it spun off the credit business into Capital One. Signet had become overly bulky during the last real estate crisis, prompting the move.

“Our chairman, who is a very strategic thinker, basically said, ‘There are a couple of things we’re missing. One, we are a mono-line credit card company and we don’t have inherent funding of branches and banking businesses so we fund ourselves in the capital markets. That works very well when it’s all good, but in the tougher times it’s good to have dependable deposits for funding and diversification.”

Three other acquisitions that would significantly affect the company’s direction and, subsequently, its commercial real estate lending philosophy, took place a decade later. In a strange twist, Capital One agreed to buy New Orleans-based Hibernia Bank in March 2005 for $5.4 billion. Then, that August, Hurricane Katrina devastated the Gulf Coast area.

“We were supposed to close a day or two after Katrina,” Mr. Lyon remembered. “That got delayed a little bit but we still did what we said we were going to do—we still bought the bank a couple of months after Katrina. That was the first foray for Capital One into banking.” In the end, a renegotiated price of $4.9 billion was settled on to reflect the fact that hundreds of Hibernia branches had been damaged during Katrina, and the deal went through.

The following year, Capital One acquired North Fork Bank, a New York-area lender, for $13.2 billion, which created the third largest retail-depository institution in the New York tri-state area, with deposits exceeding $84 billion and a managed loan portfolio over $143 billion. Then, in 2009, Capital One made another acquisition—Washington, D.C.’s Chevy Chase Bank, which it picked up for $520 million in cash and stock.

As all of the acquisitions were being put together and a commercial banking business built, Mr. Lyon arrived from Wachovia.

“One of the hallmarks of Capital One is that we tend to be a very conservative institution,” he said. “While we take credit risks on credit cards, obviously, we have a very good model as to how to do that and manage that risk and the appropriate returns. But as a company we tend to keep more capital than most other banks have historically kept.” Capital One, he said, is not trying to eke out an extra 25 basis points by taking unnecessary risks.

When the subprime mortgage crisis and credit crunch hit—those aforementioned “tougher times”—having capital on hand became a real asset.

“The first thing that happened in the Great Recession was a liquidity crunch,” Mr. Lyon said. “We were able to stay strong through that part of the cycle, and then the next thing was capital requirements. We had good capital and so it allowed us to continue to grow through the recession.” That recession-time growth included some of the bank’s acquisitions—like Chevy Chase.

Some recent deals Mr. Lyon and his team have put together include the refinancing of Jeffrey Gural’s 40 Worth Street in Tribeca. The 702,815-square-foot Newmark Holdings building got a $101 million first mortgage from Capital One in May.

Reached by phone, Mr. Gural, chairman of Newmark Grubb Knight Frank, said that Mr. Lyon had over the years become a good friend. In addition to business deals they’re also involved in some of the same charities. Mr. Gural is president of the New York, New Jersey and Connecticut chapter of the Starlight Children’s Foundation, which is dedicated to helping seriously ill children. Mr. Lyon is on the board as well.

“When Capital One acquired North Fork we had a large relationship with North Fork and as a result of them buying North Fork we made a decision to stay with Capital One rather than move the accounts to another bank,” Mr. Gural explained. “It’s been a terrific decision—Capital One has been a great bank to work with.”

“There are a lot of folks that are more philanthropic than I am in the real estate business—talk to Jeff Gural,” Mr. Lyon said for his part. “Jeff is the definition of a mensch—if you know what a mensch is—and I just got to know him, like him and he got me involved in that organization.”

He’s also on the board of the Real Estate Councils for both Lincoln Center and the Metropolitan Museum of Art.

A Villanova University graduate, where he got his degree in accounting, Mr. Lyon and his wife still live outside Philadelphia, though they have an apartment in New York as well. It’s a convenient jumping off point, considering his geographic area of responsibility spans Boston to D.C. and down through parts of the Gulf Coast. It makes visiting the couple’s three sons, all in various stages of their 20s, easier as well.

“It’s perfect,” Mr. Lyon said. “One lives in New York, one lives in Philly and one lives in D.C. I can go up and down and connect with each one of my kids—my wife sometimes travels with me. So we are an Acela family.”

In the New York area, in addition to 40 Worth Street, Capital One has provided financing for Jamestown Properties’ $81.4 million purchase of 31-00 47th Avenue in Long Island City, known as the Falchi Building, and the $12.2 million sale of 141 apartment units at 3576-3578 Dekalb Avenue in the Bronx.

Multifamily units in the boroughs like those on Dekalb Avenue are a big focus.

“We think of it as workforce housing,” he said. “We’re not doing it and packaging it up and selling it to Fannie or Freddie, we’re doing it on our balance sheet. The multifamily portfolio is about $6 billion in the New York tri-state area and it’s predominately in the boroughs of New York—in Brooklyn, the Bronx, Queens—some of it in New Jersey and Long Island, but predominately in the boroughs.”

With construction coming back in the city, Mr. Lyon pointed out that Capital One is very selective where these loans are concerned.

“We are very selective in our construction loans,” he said, “but we do construction. We did 33 construction loans last year, and that would have been double what we did the year before and we will continue to see good construction loans.” Requirements include a good history that demonstrates an ability to get the project done. “Their ability to execute is critically important,” he said of requirements. “So how you can build a building, how you execute and your resources is a critical thing.”

He went on to say that Capital One isn’t here to provide high-octane, high-risk loans. There is no mezz group, for instance. “Our culture is really to be more the tortoise than the hare,” he said. “Our clients appreciated that we were still breathing at the other end of the phone in December of 2008 and in to 2009. We were doing things—we were talking to clients.”

As for what keeps him excited about the industry after over 30 years, he said the people. “Probably the most exciting thing about real estate is the unique people I meet,” he said. “If you’re a large corporate banker you tend not to be sitting with the owner of the company all the time. Here I am sitting with folks who are owners, who are making their decisions… They’re fascinating people.”

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