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FORT WORTH-North Texas powerhouses, Crescent Real Estate Equities Co. and Capstead Mortgage Corp., have formed a first-time partnership to break into mezzanine lending for commercial properties. The marriage puts $200 million into a pool that can be leveraged to $600 million.

The Fort Worth-based REIT got its start with a similar tact. “I don’t think we’ll end up owning the assets,” John C. Goff, Crescent’s vice chairman and CEO, tells GlobeSt.com about the rebirth of a strategy targeting select commercial real estate. “The objective is not to own the business.”

Goff says the mezz deal will, in many cases, be offered to buyers who’ve beat the REIT in a real estate chase, allowing Crescent to make use of its underwriting legwork. “The risk-adjusted return, in my opinion, on all of the mezz loans we’re doing is better than the equity,” he says, citing returns of 12% or more by wearing the lender’s hat. The Dallas-based Capstead REIT is kicking in $150 million to Crescent’s $50 million.

Goff says the first deal in the pipeline should be ready to fund in three months. The criteria is much like Crescent’s requirements for investments. “It’s predominately assets and markets that we know and understand,” he says, adding the properties of choice will be office buildings, resorts and hotels. “I seriously doubt that we’d extend it to industrial, retail or multifamily.” And, he says, it’s not likely any of Crescent’s owned assets will be mortgaged from the pool although some are eligible.

Goff and Phillip A. Reinsch, Capstead’s senior vice president and CFO, say talks began about five months ago. Goff says Crescent’s been asked in the past to set up a similar program, but didn’t make the move because the team was too busy putting its own capital to work. The newly formed partnership puts Crescent in the driver’s seat to find investment opportunities and get paid to manage the mezz portfolio plus reap a bonus for performance. Reinsch won’t say how much Crescent is collecting, but did say it’s market rate and “a fairly typical setup.”

Reinsch says Capstead’s been looking for years to find a way to diversify capital accrued from its bread-and-butter business, single-family mortgages. “We’re trying to move some of our capital into a much less interest-rate sensitive arena,” he says. Capstead’s core business will remain fixed on managing an ARM portfolio that now totals $3.4 billion.

The upshot is Capstead can diversify without shouldering the day-to-day burden, Reinsch says. “We can use Crescent’s intellectual capital. They win by getting additional fee income,” he says, “and we win by having that intellectual capital put to work for us.”

According to Reinsch, the mezz pool will offer three- to five-year loans with a Libor-priced, floating rate. He anticipates the loan-to-value cap will be 80% or 85%. The agreement calls for two partnerships with leveraged equity returns projected to exceed 15%.

Reinsch predicts it will take about four years to place the capital. The partnership contract isn’t structured for an expansion, but he says that “if the marriage is good we will contemplate adding to it.”

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