Meridian’s market

With a dominant share of NYC's commercial mortgage business, the brokerage firm has quietly built itself into a force

May.May 01, 2011 03:24 AM

Ralph Herzka, Meridian’s president
In a mortgage market that has been harder hit than the real estate industry as a whole, it’s rare for a company to emerge intact. However, in the world of commercial mortgage finance, Meridian Capital has managed to redefine itself and survive where others may have fallen by the wayside.

The under-the-radar firm has quietly built itself up over two decades into the nation’s third-largest mortgage broker, arranging more than 26,000 loans worth $130 billion during that time.

In the competitive New York landscape, Meridian has carved out a dominant position as a specialist in multifamily capital, the most active segment of the commercial arena since the 2008 financial collapse.

“We’re doing more commercial business in New York, New Jersey and Pennsylvania than any of our competitors,” said Ralph Herzka, cofounder and president of Meridian.

Grace Huebscher, chief executive of Meridian’s affiliate Beech Street Capital and a former Fannie Mae executive, called the firm “the largest originator of multifamily loans in New York City.”

While Meridian is widely considered one of the biggest players in New York’s commercial brokerage market, it is more under-the-radar than some of its rivals, including Ackman Ziff, Cooper-Horowitz, Holliday Fenoglio Fowler and Singer & Bassuk.

The company — which was founded by Herzka and three other executives, Aaron Birnbaum, Jeff Weinberg and Howard Zuckerman — came onto the scene in 1991 in the thick of a downturn stemming from the 1987 stock market crash.

That experience is coming in handy today for the firm, which industry sources estimate has a 20 percent share of the city’s $45 billion commercial mortgage market. (Meridian claims that its multifamily share in New York is much larger.)

The company, which is based in New York, has grown into a national powerhouse, with offices in Iselin, N.J.; Chicago; Los Angeles; Baltimore; and Boca Raton, Fla.

However, it’s dealing with a more competitive environment as other firms look to grab a larger share of the commercial mortgage business in the city. To do that, these firms, like Meridian, help real estate investors find sources of financing, ranging from traditional banks to pension funds, hedge funds, insurance firms or wealthy individuals, and are generally paid a small percentage of the total loan amount.

Massey Knakal, for example, recently announced plans to enter the commercial finance business, citing those $45 billion worth of deals a year that happen in New York.

“What’s interesting to us is that 55 percent of those [deals] are not handled by someone you would consider a top-10 in the market,” said Paul Massey, chief executive at Massey Knakal. “It’s a market where there’s room for more people to work, and plenty of opportunity in the space.”

A network of lenders

Ben Ashkenazy, chairman and CEO of Ashkenazy Acquisition Corp., has worked with Meridian for about 15 years on a wide range of deals nationwide.

“They have a tremendous network of lenders,” Ashkenazy said. “It doesn’t matter where the property is; they seem to have enough of a web to access the lender in that particular market or category type to be effective.”

In July 2010, Meridian worked with Ashkenazy on the $100 million refinancing of the Barneys flagship store at 660 Madison Avenue. Ashkenazy had bought the property from Japanese department store Isetan for $180 million in 2001. The refinancing was notable not just because of the size of the loan, but because it was refinanced through the commercial mortgage-backed securities (CMBS) market. It was one of the largest such transactions since the 2008 crash of Lehman Brothers, which pretty much destroyed the appetite for CMBS deals.

Ronnie Levine, managing director at Meridian, negotiated the 10-year fixed-rate loan through Citi Global Markets. The loan was part of a U.S. conduit loan that was priced later in 2010. Citigroup officials declined to comment.

Just last month, Meridian pulled off another, much smaller CMBS deal in Manhattan, when it negotiated a $6.5 million permanent loan for Manhasset-based Chatham Development to refinance its retail condo at 604-610 10th Avenue.

In that deal, Citi again provided the funds — the five-year, fixed-rate loan was used to refinance the 10,800-square-foot retail space at Chatham 44, a residential condo on 10th Avenue.

Meanwhile, Meridian’s Levine and Birnbaum also recently brokered a deal involving Tessler Development’s 55 John Street, a 223-room dorm that’s leased to Educational Housing Services. CIBC World Markets provided $53 million in senior financing, and $9.5 million in mezzanine financing came from the Pembrook Group.

And, just last month, Meridian pulled off a couple of major deals in the commercial office market, including a $220 million financing for a New York investment group’s purchase of the U.S. Steel Tower in Pittsburgh and a $250 million financing of an office tower in Manhattan. Meridian officials declined to give the address on the latter deal.

A controversial relationship

660 Madison Avenue
The Barneys flagship store at 660 Madison Avenue, where Meridian worked on the $100 million refinancing last year.
It hasn’t always been smooth sailing for Meridian’s executives.

Prior to founding Meridian, Herzka was a principal of a controversial mortgage broker called Gelt Funding (now GFI Capital), which was sued by First Nationwide Bank for allegedly misrepresenting property values to secure nonrecourse loans.

Herzka and a few of his fellow Gelt executives left that firm to form Meridian in 1991, but his former firm remained entangled in a civil racketeering suit related to the scandal. By 1994 the suit was dismissed because First Nationwide failed to prove its case.

Herzka, meanwhile, was quietly expanding Meridian’s business as a multifamily lender in the New York area.

Over time, the company developed a strong relationship with Brooklyn-based Independence Community Bank, which acquired a minority stake in Meridian Capital in 1999. In 2002, it increased its investment, raising its stake in the firm to 35 percent.

That deal helped change the landscape of New York banking, particularly after Independence entered a deal with Fannie Mae to become one of only two local lenders to originate multifamily loans in the New York market.

For the 2002 calendar year, 17.8 percent of the loans originated by Independence were referrals from Meridian, primarily for multifamily and commercial properties. But the relationship between Independence and Meridian has always been a source of controversy, with rival brokers questioning whether they were getting a fair shake when doing business with the lender.

Alan Fishman, who was president and CEO of Independence at the time, acknowledged as much during a 2004 banking symposium.

“Other brokers look at us, I would say, a little more skeptically than they look at our competitors,” Fishman said, according to a transcript filed with the Securities and Exchange Commission. “And then that leads to the question of what’s Meridian’s share of the business. And it’s a very, very high share of the business.”

A long-running concern by rival brokers that represent real estate investors has been whether Meridian was given an unfair advantage when it came to getting financing from Independence. In the past, some brokers have accused Independence of tipping off Meridian on new business leads from rival brokers, or argued that Meridian tried to steer its borrowers to Independence.

“We’re the complete opposite,” said Ackman Ziff principal Patrick Hanlon. “Our belief is we represent the borrower, we’re aligned with them and we make the entire market compete for them.”

Herzka defended Meridian’s past relationships with Independence (which has since been acquired by Sovereign Bank), saying it’s only helped Meridian’s clients. And he noted that the firm also arranged deals through more than 60 different lenders in 2010.

“We also don’t take out deals to 30 institutions,” said Herzka. “We focus on making [the deal] happen at a quicker pace.”

Sovereign steps in

Controversial or not, Meridian’s relationships have only helped increase its influence.

In 2006, when Sovereign Bancorp Inc., the parent firm of Sovereign Bank, acquired Independence for $3.6 billion, that further solidified Meridian’s presence as a national source of financing.

The deal made Sovereign the ninth-largest bank in the metro New York market, with $19 billion in assets. And as part of the deal, Sovereign further invested in Meridian.

In 2007, Meridian named Fishman, who was then serving as Sovereign’s president, its new chairman.

When Fishman took the helm, he launched an ambitious plan to expand the company and enter new lines of business, with the goal of leading the firm to an initial public offering. (He left in 2008 for a short and controversial stint as chairman of Washington Mutual, which was seized by federal regulators a month after he arrived.)

In November 2008, Meridian, London-based TowerBrook Capital Partners and California-based GI Partners launched a firm called Ladder Capital Finance to provide $1 billion in debt and equity for the commercial market, at a time when much of the market had dried up. Since June, Ladder, which Fishman came back to run, has participated in three of the first CMBS deals since the downturn.

Meanwhile, in 2009, Meridian and Sovereign spun off one of their specialized underwriting units to create the Bethesda, Md.-based Beech Street Capital, a 16-month-old, Fannie Mae-approved lender. The new firm made more than $1 billion in multifamily loans in 2010, its first full year of operation.

Beech Street also obtained approval as a Freddie Mac Program Plus lender, which allows it to lend to affordable and market-rate multifamily housing in the New York area. And it recently closed several high-profile loans in New York, including $80.2 million in Freddie Mac Program Plus loans in 30 days at Trump Village I and Trump Village II in the Brighton Beach section of Brooklyn. Also, in January, Beech Street provided a $5.25 million Fannie Mae DUS loan to refinance Goodhue House, a 17-story co-op building in Murray Hill.

Fending off competitors

As Meridian jumps headfirst back into the CMBS market and expands into new businesses, the company is looking over its shoulder at competitors looking to take it down.

Certainly, despite its relatively low-key New York profile, it is not taking its success for granted.

“We’re keenly aware that every day and on every deal, we’re only as good as our current performance,” said Herzka.

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