During last year’s Mortgage Bankers Association commercial real estate finance (CREF) conference, Grace Huebscher, president of the leading multifamily lender Beech Street Capital, found clarity on a topic she had been considering for some time—that staying ahead of the competition would require the support of a larger institutional partner. Capital One, Beech Street’s primary bank since 2010, had been on her radar, along with other top players in the finance arena. But prior to the annual event, Ms. Huebscher had felt that time was on her side.
A deeper sense of urgency set in as she listened to her peers speak about the challenges and changes ahead, from agency reductions to the return of the banking industry. That solidified a thought she and her partners had been entertaining for more than a year.
“When I went to CREF, I realized that the market was going to be dramatically different very quickly,” the 54-year-old Fannie Mae veteran said in a recent interview in her Bethesda, Md., office. “Even before that, we had tried to create joint ventures and create our own products like bridge. We were even talking about a J.V. on CMBS. But either the partners weren’t right or the economics weren’t right. We just couldn’t get anything to work that made sense economically and strategically.”
After the conference in San Diego ended, Ms. Huebscher returned to Bethesda with a more concrete plan. “That’s when we started in earnest and hired an adviser and went through this whole process,” she told Mortgage Observer in Beech Street’s agency lending office, previously the company’s headquarters before the Capital One acquisition.
That acquisition, which closed in November 2013, made local and national headlines when it was first announced last August. With Capital One as Beech Street’s parent company, Ms. Huebscher and her nearly 140 employees—42 percent of them women—would have access to new clients, territories and lending products, including bridge loans and longer-term permanent financing.
“I wanted it to be Capital One,” she said. “A lot of it has to do with the fact that we share the same approach to clients and the same philosophy when it comes to hiring people.”
Capital One, in turn, gained access to agency lending with a further national reach due to Beech Street’s nine offices around the country, said Rick Lyon, the bank’s head of commercial real estate.
“We realized if we really wanted to be a significant participant in this marketplace, we needed a Freddie, Fannie and FHA license,” Mr. Lyon said, noting that Beech Street had vetted between 60 and 70 potential buyers before settling on Capital One.
A ‘Bigger Partner’
Within the first 30 days of the acquisition, Beech Street and Capital One closed their first collaborative deal to refinance a 242-unit apartment building near Philadelphia owned by the Galman Group. The companies provided a $34 million, 10-year loan on Valley Forge Towers North in King of Prussia, Pa., in late November 2013.
“The transaction didn’t quite fit with agency guidelines, so working together with Capital One’s balance sheet allowed us to satisfy a very important Beech Street client, a client which Capital One was eager to build a relationship with,” Ms. Huebscher explained.
The plan going forward is to further combine Beech Street’s agency lending capabilities with Capital One’s balance-sheet capabilities to become a more appealing option for new and long-term borrowers, said Mr. Lyon, who has been with the growing financial services company since January 2008. “We love their process and love the way they run their business,” he said of Beech Street. “We’re not doing anything to limit what they do today.”
Capital One, which started in Tysons Corner, Va., as a credit card company in 1994, boasts $297 billion in total assets, following several other acquisitions in recent years. Beech Street, co-founded by Ms. Huebscher in December 2009, manages a total portfolio of more than $11 billion and has grown its multifamily mortgage business from $1 billion in its first year to $4.4 billion in 2013. The acquisition has obvious benefits for both parties, according to several industry insiders.
Beech Street and Capital One declined to comment on the acquisition’s price tag for a second time in March. But two analysts told Mortgage Observer in August 2013 that they believe Capital One paid between $200 million and $250 million for Beech Street. Those analysts, who spoke on the condition of anonymity, said their estimates were based on Beech Street’s volume of business, including the company’s servicing fees and new origination fees, times a multiple of 10 to 15.
“With the GSEs post-crisis, we always knew that we had to be very vigilant,” said Alan Fishman, the chairman of Ladder Capital’s board of directors and the former chairman of Beech Street who was directly involved in the sale to Capital One. “It was that increased competition from the regional banks and the threat of rising interest rates, among other factors,” that spurred the decision to sell, he said. “It became clear that Beech Street needed a bigger partner that could do more things.”
Still, giving up ownership of the company was not an easy decision for him, Ms. Huebscher and the other partners, Mr. Fishman explained. “They were a better buyer than we were a seller,” he said. “We were emotionally conflicted about selling the company, because we really liked the business, and all of us got along so well. But we knew it was the right thing to do.”
Ms. Huebscher, who was raised as one of nine children in North Haven, Conn., graduated from Kenyon College with a double major in economics and Spanish literature. Her first job out of college in 1982 was at Chase Manhattan Bank, where she worked in independent oil and gas lending, providing loans to wildcatters and family-owned oil companies, she said.
“It was a great trial by fire, partly because the oil crisis was starting to hit and a lot of the more seasoned personnel were leaving the bank,” she said of the role. “So I was thrust into a much larger role than I should have been for the age I was.”
From there, Ms. Huebscher moved onto a position at Security Pacific National Bank working in loan production. In 1987, she accepted a job offer at National Cooperative Bank, a former client of hers at Security Pacific that she had brought to the medium-term debt markets. The bank was looking for someone to run its real estate subsidiary, National Cooperative Bank Mortgage Company, and approached Ms. Huebscher to take over as the company’s president.
“I was 27 at the time, and I said, ‘Are you guys crazy? I’ve never done a real estate deal. I don’t know anything about real estate. I’d love to work with you, but I don’t have any experience in this field,’” she remembered. “They said, ‘You know what? We think you’ll do great; you’ll learn.’”
The green executive and her team launched a conduit business at National Cooperative Bank in 1989, when Fannie Mae and Freddie Mac still dominated the space. At the time, she “didn’t even know what a conduit was,” she admitted. “I just started doing private placements to life insurance companies, and the life insurance companies said, ‘You know, if you could get these rated, I could buy more.’”
That conduit has become the flagship operation of National Cooperative Bank, which is a “major competitor of Capital One in New York on co-ops,” Ms. Huebscher pointed out. Her experience running that business taught her more than the nuts and bolts of originating. “It was also a realization that you can’t always meet your clients’ needs with what you have, so we had to create something [that did],” she said.
Working under Thomas Condit, the bank’s president and CEO at the time, also taught Ms. Huebscher how she wanted to lead, she said. “He had an environment where he hired people that he trusted—people who were smart, entrepreneurial, who cared about clients and who would do the right thing,” she explained. “He really let me run with the business.”
Friends on Her Side
In her longest stay at one organization, Ms. Huebscher spent 13 years working for Fannie Mae in nearly every division tied to multifamily between 1996 and 2008.
In the late 1990s, Fannie Mae’s top executives asked Ms. Huebscher to “jump-start” the company’s small loan business. She grew that business from about $400 million per year when she took it over to nearly $3 billion per year in the mid-2000s, she said. Ms. Huebscher achieved that growth through an agency program called MFlex, which services small loans similar to the Delegated Underwriting and Servicing (DUS) program with lower principal balances. Some of the biggest participants at the outset included Brooklyn-based Independence Community Bank, overseen by Mr. Fishman at the time, and Washington Mutual. Ralph Herzka of Meridian Capital Group was the origination source for that program, she said.
Then, the market collapsed in 2008 and changes came quickly. After the first wave of the financial crisis hit and Fannie Mae went into conservatorship, Ms. Huebscher lost most of her retirement savings, due to the company’s plummeting stock, she said. That year, she, Messrs. Fishman and Herzka and Meridian’s J. Jay Lobell began talks about creating an independent multifamily DUS shop. Two other Fannie Mae employees, Jeff Lee and Elie Tannous, came over to help form Beech Street’s management team when the company opened its doors in 2009.
“Grace is someone we always admired,” said Mr. Herzka. “Before we launched Beech Street, myself and Alan sat down with a full list. Grace was at the top of that list, and we recruited her.”
In December 2009, Beech Street received Fannie Mae approval, allowing it to do business with the GSE and opening up a huge segment of the market. That approval came through just 90 days after Ms. Huebscher and Messrs. Lee and Tannous left the organization.
“I think it’s probably a record in terms of the fastest approval Fannie Mae has given to a DUS lender,” Ms. Huebscher said. “Freddie followed very quickly thereafter.” Beech Street went on to become one of the nation’s largest government-insured multifamily lenders in its first few years of business.
Jeffery Hayward, Fannie Mae’s senior vice president and head of multifamily, said that while Ms. Huebscher had been an asset to the organization during her 13 years there, she has remained just as vital as an outside partner. “Grace, in her core DNA, wants double happiness,” he told Mortgage Observer, emphasizing his view of her as an “incredibly decisive” businesswoman. “She wants to know that she is making a difference and at the same time making a profit,” he said.
In December 2010, Beech Street’s first full year, the company won a deal with Starrett Corporation to refinance its 490-unit Two Bridges apartment complex along the F.D.R. Drive in lower Manhattan with a 10-year Fannie Mae DUS loan. That deal, brokered by Meridian, was for $175 million. “It was the largest deal we had ever done at that point,” said Ms. Huebscher, who declined to name the borrower and property. “The capital markets for selling the Fannie Mae MBS were a little bit weak in terms of liquidity when we went to price, so we ended up divvying up the one loan into two MBS, which had never been done before.”
Hilary Provinse, Fannie Mae’s vice president for multifamily customer engagement, who Ms. Huebscher hired into the multifamily business in 2005, said the Two Bridges deal was a huge win for Fannie Mae, Beech Street and those in need of affordable housing in New York City. “It was a very competitive transaction,” she said. “I normally don’t hop on a plane and do a site inspection, but we wanted to be as fast and efficient and aggressive as possible.”
In August 2012, Beech Street topped its Two Bridges deal with $371 million in Freddie Mac Capital Markets Execution loans to recapitalize 10 multifamily properties in Baltimore County and Prince George’s County, Md., totaling 5,517 units. Meridian also brokered that deal, the largest Beech Street has closed to date. Under the recapitalization, Kushner Companies acquired about 25 percent interest in the ownership group from a Rockpoint Group partnership, which held onto the remaining interest. (Kushner Companies’ principal, Jared Kushner, owns Observer Media Group, the parent company of Mortgage Observer.)
Going forward, Ms. Huebscher, her team at Beech Street and Mr. Lyon’s team of more than 400 at Capital One are planning to expand their footprint in various regions across the U.S., with an initial focus on the West Coast. Ms. Huebscher, now Capital One’s president of agency multifamily lending as well as Beech Street’s president, declined to name specific developers and operators of interest there.
California, the largest U.S. multifamily market in terms of property sales, according to global real estate services firm JLL, is at the top of their list. “We think that can be a very significant market for us,” Mr. Lyon said. “Within six months of the acquisition, we will be delivering our balance sheet to California.” He named the Bay Area, Los Angeles County and Orange County, where Beech Street has one of its nine offices, as three attractive regions.
The deeper push into California will require a relationship-focused approach, Ms. Huebscher said. Apart from the company’s business with Meridian and a few other select brokerage firms, Beech Street has worked directly with borrowers and will continue to do so in the years to come, she noted. “Early on, we realized that we couldn’t rely solely on Meridian, which was so New York City metro-based,” she said. “And from the beginning, I wanted to go after people who dealt with their clients directly instead of through brokerage networks. I think the bond is stronger, I think the profitability is stronger, and I actually think the credit quality is better.”
For Ms. Huebscher on a personal level, the biggest challenge that came with the early stages of the acquisition “was needing to grow back my corporate sea legs,” she said with a laugh. But the benefits of open doors at Capital One and the synergies of their partnership have made the transition worthwhile, she added.
Likewise, the wife and mother of two has been able to retain what Mr. Lyon calls her “entrepreneurial spirit.”
“I always tell people, ‘If you want to know what I’m all about, you just need to know that I grew up the middle child of nine children,’” Ms. Huebscher told Mortgage Observer in a conference room overlooking her son’s high school, less than a mile away. “Five of those were brothers, and I had to fight for my food. As a result, I’m a little scrappy and a little competitive.”
Additional reporting by Gus Delaporte