Minneapolis-based U.S. Bank and Principal Real Estate venture taps

(This article originally appeared in Finance and Commerce, Minneapolis, MN., another Dolan Media publication).

U.S. Bank is a longtime heavyweight lender in the construction and development industry.

Now, it's going to compete for a piece of the long-term commercial mortgage market, too.

The Minneapolis-based U.S. Bank and Principal Real Estate Investors announced a joint venture in late October that will pair the two giants in a nonrecourse permanent mortgage business.

The new venture, called Principal Commercial Funding II, will fund its loans through Principal's existing commercial mortgage- backed securities unit, which pools loans to resell in the securities markets.

Principal issued $2.3 billion in CMBS in 2004, and that volume will grow significantly behind the combined forces of the partners, said Kyle Hansen, a U.S. Bank senior vice president who will lead his company's half of the venture.

Both companies will market the product from their existing offices, creating a sales force that starts with 175 originators nationwide, including U.S. Bank's 25 real estate offices around the country.

We think there's a very large opportunity because of U.S. Bank's presence in the industry and the size of the market, Hansen said. We've wanted to offer a product like this for a long time.

The commercial mortgage industry has grown more competitive over the years, as new funding sources - from Wall Street's CMBS conduits to expanded investments by insurers and international lenders - have lowered the margins available to lenders.

A wave of consolidation and technology innovations also contributed to more aggressive pricing and creative loan structures.

Hansen acknowledged that competition is brisk locally. There are a lot of credible mortgage bankers in this market. But we're going to be able to drive a lot of business by marketing to existing real estate clients.

Wells Fargo Bank preceded U.S. Bank into the market four years ago, when it established a presence in the permanent mortgage business by acquiring Minneapolis-based Towle Commercial Mortgage, now Towle Financial Services.

U.S. Bank has $27 billion in real estate assets under management in its 24-state franchise. Principal, which is a unit of Des Moines, Iowa-based Principal Financial Group, manages or subadvises $30 billion in commercial real estate assets.

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