What a Week to be in San Francisco

This week is one of my favorites. The Blue Angels are coming to town, and the weather is looking nice. The Blue Angels fly starting on Thursday through Sunday. We will be on the boat later this week and will post some cool pics as we get them.

Speaking of cool pics, the Maltese Falcon arrived in San Francisco last week. Owned by Tom Perkins, the Maltese Falcon is the largest private sailing vessel in the world, and it is impressive to say the least: www.symaltesefalcon.com. From what I understand, it can be yours for $190 million (anyone have that left?).

Back to business. We are spending a lot of time with clients integrating CMBS IRP data into Backshop so they can tie the property level underwritings out to the bonds. DBRS has been leading the charge — and it is very cool to see this coming together and others taking notice. The “Holy Grail” as it has been called.

We are also jamming with existing clients and working on launching the new “Public” site. I’ll make a prediction next week on at least the launch month. …

What a Week to be in New York

I had four days at the Tribeca Grand this week, and it has felt a little bit like September 11, 2001. Except this time the crisis is in the economy.

The TV set (at least mine) has been glued to CNN and WSJ Online to see the latest on the bailout. The UN is in town, and the police presence is huge with boats, helicopters and sirens blaring. That certainly contributes to the “siege” or “crisis” atmosphere.

President Bush gave the Nation a definition of mortgaged backed securities. In primetime. Wow.

But when I ventured out to spend time with my clients, there did not seem to be a sense of panic. While all lenders are sitting on the fence right now, the core teams to run the infrastructure are generally in place, albeit “Right Sized.” Good real estate people can make money in all markets, and I see firms keeping long term commitments to the space.

But make no mistake, lenders that survive need either Asset Management/Servicing revenue or a big balance sheet. The markets are broken and need fixing. If the US finance system breaks and we have a George Bailey run on the banks, this business plan might suffer the same fate as the original September 11 LoopLender fiasco (See The history of Backshop and CMBS.com).

So, I had a “recovery” day where I spent the afternoon at the 10th Street Baths (1st Avenue and 10th Street), a functional place to cure whatever ails you. As long as you are OK with 120 degree saunas, 50 degree cold plunges, and getting beaten with oak branches. Try it next time you’re in New York. www.russianturkishbaths.com

Speaking of George Bailey, here’s a timely scene from “It’s a Wonderful Life”

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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.



From foreclosures to recurring revenue: Jim’s early career

When I graduated from Boston College in 1989, I had no idea I was beginning an adventure that would position me right where I am today: Developing technology and leading the charge to re-invent the CMBS market.

I started my career in 1989 working for Fleet Bank in Providence, RI. I completed the bank’s “loan officer development program” where I learned the 5 Cs of credit.

At the end of 1989, the markets froze and they put me and two other “graduates” in the commercial and industrial loan workout group. I spent the next two years “collecting” on C&I loans including foreclosing on mortgages (commercial and residential) and UCC foreclosures on assets such as inventory, receivables, etc.

The coolest seizure I was part of was a jewelry foreclosing on gold that had been lent to a jewelry shop on 46th street in Manhattan. We went in the Wednesday before Thanksgiving and packed up all the gold in an armored car at midnight, and the place announced the liquidation the Monday after. The worst was foreclosing on a borrower’s house who had put up his home as a guarantee for spec industrial buildings that went bust.

In those first few years out of college, I saw Fleet buy Bank of New England, which failed, and saw the “once in a lifetime” event of the RTC crisis that ended up costing something like $450 billion.


Life in Providence was fine and I was able to summer in Newport, which was a blast. But my college love was from San Francisco (still married to her with two kids), and my spirit was being pulled west. So, in 1992, I packed up my Ford T-Bird and moved to San Francisco. I ended up getting a job (out of an ad in the newspaper) with Hanford/Healy, the largest SAMDA contractor on the west coast. SAMDA stood for “Standard Asset Management and Disposition Agreement” and it was literally the name of the contract RTC service providers signed to liquidate assets of the seized S&Ls.

I was assigned a portfolio of commercial real estate loans to foreclose on, and I worked the portfolio for about a year. However, in 1993 and 1994, before we could conduct a full liquidation, the RTC shifted from a work-out-each-loan strategy to a sell-the-loans-in-bulk-to-the-private-sector (Wall Street) strategy, which basically put a sunset on the SAMDA contracts.

Working for Wall Street

Hanford/Healy transitioned to working for Wall Street, and so I became a senior member of the asset management team dealing with Wall Street bankers in bidding and collecting on real estate loans.

The best deal I ever saw was called Kearny Street and was pulled off by Morgan Stanley Real Estate Funds in 1993 (MSREF). MSREF bought a portfolio of mortgages secured by Class A real estate that were made by Security Pacific (which was being acquired by Bank of America — sound familiar?!). Anyway, the simple math was, they paid $400 million for loans that had a face value of $1.2 billion (less than $.40 on the dollar), they financed the entire purchase with privately placed CMBS debt, and ended up collecting $1 billion over the course of the next few years. So, a $600 million profit on basically zero equity. I’ll take one of those. …

GateCapital is born

In 1996 Hanford/Healy was sold to GMAC-CM to become the B Piece buying platform for the “car company.” The Hanford/Healy alumni scattered, with my colleagues landing in B Piece/distressed positions in the U.S. and Japan.

I was able to leverage a H/H client, Conti Financial, to back me on starting a due diligence company. Conti put up $350,000 of initial equity for a 35% stake and became an instant client. I joined forces with another H/H senior person, Jim Kehoe, and formed GateCapital, LLC in June 1997.

Conti was riding the initial CMBS wave and had positioned itself as a “subprime” conduit lender that made loans on less desirable real estate assets but charged wider spreads. They sourced the loans through mortgage brokers, who underwrote the loans for origination in an Excel/Word template environment, then securitized them and made great profits.

The low end of the credit curve is a lonely place

Conti was an innovator is securitizing mortgages backed by self storage and mobile home properties. Our job was to take the closed loans and manually take the data out of the Word documents and put them in a Microsoft Access Database we developed so we could organize the data for presentation to the rating agencies and to the investors. Volume peaked at 100 loans a month in the summer of 1998 when disaster struck and the bond market froze in August of that year. While that “event” only lasted about 12 months, it lasted long enough to wipe out Conti Financial. When things turn conservative, the low end of the credit curve is a lonely place.

Fortunately my partner’s business was booming. He ended up bringing over a Lehman Brother’s servicing book that grew to about $4 billion, and I realized how necessary long-term recurring revenue is for any undercapitalized company.

Servicing may not be sexy, but when transactions grind to zero, the recurring revenue is like gold. We ended up doing some loan sales, and I spent 1999 in Tokyo setting up the Lehman special servicing operation known as Capital Servicing. I came back and started putting business plans together to try and ride the .COM wave.

In July 2000, we sold our Lehman servicing contract to Hatfield/Philips (although the price and terms were set by Lehman). We ended the LLC with Kehoe, forming an Asset Management company called Belrad (www.belrad.com). And I found the angel money to form this company.

The moral of the story

Looking back on my career so far, I’d say the common theme has been my ability to organize information in a way that helps determine the values of assets.

Early on, I was writing business plans to determine asset values to justify the acceptance of discounted pay-offs. As I was trained in real estate and loan valuations, I learned the underlying math and built a Web-based way (Backshop loan origination software) to do the valuation.

The power of the Web allows us to push this capability to investors and the entire CMBS community. That’s where www.cmbs.com comes in.

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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.