Fannie Taps RCG to Write Mezz “DUS” Loans

February 18, 2005

Fannie Mae has selected RCG Longview as the lender for a new program that will write mezzanine loans on middle-market apartment properties. While Fannie previously arranged mezzanine loans on a one-off basis, the new program marks the agency’s first formal effort at targeting such loans.

Fannie picked RCG over numerous other mezzanine investors that applied for the designation.  Drew Ades, Fannie’s director of product development, said that RCG, which will retain the mezzanine loans, has the financial wherewithal to absorb the inherent risk and has the expertise to take control of properties when loans default, RCG is a New York-based manager of opportunity funds that is affiliated with Ramius Capital Group, a hedge-fund operator. Ades said the program was developed to meet demands from borrowers for higher leverage without adding to the risk of the loans held in the agency’s portfolio.

Fannie as a rule funds up to 80% of a property’s value - which makes it hard to compete with conduit programs willing to lend 90% or more.  Under the new program, called ‘DUS Plus,” RCG will write a mezzanine loan that will add five percentage points to the total leverage, up to a maximum of 85% of property value.  Borrowers will pay a 12.5% rate for the mezzanine piece, which typically would add about 25-50 bp to the coupon of the entire loan.

The product will be offered on all loans of $3 million to $25 million that are originated via Fannie’s delegated under-writing and servicing program.  Under the DUS program, 27 lenders have the authority to originate loans under specified guidelines for sale to Fannie.  The lenders service the loans and agree to take a share of losses caused of defaults.

Any borrower that qualifies for a DUS loan can tap the program, provided that the total leverage does not exceed 85% and that the additional do not drop the loan’s debt-service-coverage ratio below bout 1.1:1.  That means the property’s cash flow has to be 110% or more of the loan payment.

RCG will fund the high-yield tranches via its third opportunity fund, called RCG Longview 2.  The fund closed in March 2004 with $292 million of equity, and it has much of that left to deploy.

Ades declined to provide volume projections for the program.  Fannie originated $12.9 billion of loans last year through the DUS program, although only 50-60% were within the mezzanine program’s size range.  The DUS program’s best year was 2003, when a record $15.4 billion was originated.

The program’s concept is similar to one developed by MezzCap, a Short Hills, N.J., firm that funds mezzanine loans in conjunction with conduit loans originated by designated securitization programs.  MezzCap’s model is different in two ways.  For one thing, MezzCap securitized its loans, something Fannie opposes because it wants to control who holds the risk on the mezz loans funded through its program.

Also, the two products have different structures.  MezzCap owns a subordinate interest in loans, while RCG will own a subordinate interest in the borrower’s equity stake in properties.  In the event of a default, RCG will own the property.  Some market players noted that under the arrangement, RCG will have an ongoing relationship with Fannie as a partner, but they could end up in some cases as counterparties when loans go bad.

RCG is co-managed by Ramius, a money manager founded in 1994 by former Shearson American Express chief executive Peter Cohen.  Ramius initially invested in real estate through a group headed by Michael Boxer.  In 1999, Bower and partners Jonathan Estreich, Jeffrey Feil, Jay Anderson and Morton Olshan formed the first of the RCG Longview funds, which are dedicated to mezzanine and opportunistic real estate lending.  RCG’s three real estate opportunity funds have invested $750 million of equity.

Feil and Anderson are principals in Feil Organization, which owns 7.5 million sq. ft. of office space, 11 million sq. ft. of retail/net-leased space and about 5,000 apartment units.  Olshan is a principal in Mall Properties, which owns 2.8 million sq. ft. of office space, 13.5 million sq. ft. of retail space, 10,800 apartment and 1,394 hotel units.  Estreich & Co. is a mortgage brokerage based in New York.