By Paul Rosta, Senior Editor
This year Ed Padilla marks his 10th anniversary as CEO of NorthMarq Capital, the Minneapolis-based real estate investment bank that has climbed to the elite ranks of real estate mortgage banking on his watch. During that time, he has steadily built the company’s geographic footprint and portfolio through organic growth and a decade-long series of carefully vetted acquisitions. But on an early summer afternoon in Minneapolis, Padilla was just as pleased to discuss another kind of milestone. Earlier this year, the veteran executive, who enjoys an occasional touch of adventure and novelty while off duty, acquired his first motorcycle. If he could have managed to leave work early that day, Padilla joked, “I’d ride my Harley-Davidson.”
To be sure, Padilla has ridden the highs and lows of the market during his long tenure. When he started in 2000, NorthMarq’s annual loan production was $3.5 billion. By mid-decade, loan origination had grown to $13 billion annually (and the company’s loan servicing portfolio had increased in value to $37 billion). The recession cut production from that peak to $6.5 billion in 2008 and $3.4 billion last year. Based on trends from the first half of the year, however, Padilla estimates that loan production for 2010 will reach $4.2 billion.
The company has been particularly active in the multi-family sector, which has outperformed most other categories as an investment class of late. In January, its San Diego office arranged $100 million in loans from Fannie Mae and the Federal Housing Administration. The San Diego Housing Commission will draw on the funds to expand the city’s affordable housing stock by acquiring apartment properties.
Multi-family properties also figured in another major NorthMarq financing deal. In March, the company teamed with Freddie Mac to arrange a $150 million line of credit for Behringer Harvard’s Multifamily REIT I. The fund is using the financing for various multi-family acquisitions and projects, ranging from high-end assets to student housing and transit-focused development. Besides Fannie Mae and Freddie Mac, life companies are repeated sources of funding for company clients, as institutional lenders ease back into the market. For instance, the firm’s Houston office recently secured acquisition financing from New York Life Insurance Co. for a two-building, 320,000-square-foot office complex in San Antonio.
Meanwhile, although the recession has slowed the pace of outright acquisitions, NorthMarq Capital continues to expand its geographic footprint. Last year, Martin Meagher and Gardiner Champlin came over from Citigroup to open an office in San Diego. During the recession, NorthMarq Capital has also opened offices in San Antonio and in Seattle. The staff is continuing to grow, as well: Padilla reported recently that he had signed off on two new hires and was reviewing a third candidate. In the next several years, he is expecting big things from NorthMarq Capital’s nascent investment sales advisory unit, which he launched in the fall of 2007, before the recession crippled the capital markets. Although improvement in the investment market is still spotty, Padilla believes that NorthMarq Capital’s national presence will provide a strong foundation for the new investment advisory business as transaction volume rebounds over the next few years.
Independence and autonomy may be the most characteristic qualities of NorthMarq Capital’s flat corporate structure. “Ed runs the company as a conglomeration of 30 small companies,” explained Larry Stephenson, a 34-year NorthMarq veteran and executive vice president who oversees 13 offices as one of NorthMarq’s three regional managers. “He thinks of the regional offices as being run by the managing director of that office.”
Padilla’s management style and the company’s prolific loan production both win plaudits from NorthMarq’s clients. “I think he’s one of the better commercial (mortgage) banking company leaders that we have out there,” said Wendell Kurtz, managing director for commercial properties at Allianz of America Inc., who counts NorthMarq as Allianz’s largest correspondent and praised it for providing services after loan closing and maintaining relationships with borrowers. “As a lender, we get the financial statements of all our correspondents,” Kurtz said. “NorthMarq is one I don’t have to worry about.”
Padilla set the stage for NorthMarq’s growth through a series of geographically diverse acquisitions spanning a decade. The marquee acquisition of Padilla’s tenure, and a turning point for NorthMarq Capital, was the 2003 purchase of Legg Mason Real Estate Services. That deal significantly expanded NorthMarq Capital’s portfolio, adding loan servicing valued at about $10 billion. The addition of Legg Mason’s real estate unit also expanded NorthMarq’s footprint through 17 offices on the East Coast.
Other acquisitions Padilla has overseen include that of Dallas-based Askew/Reese Investment Co. in 2000, which added upwards of $600 million to NorthMarq’s annual loan volume, as well as San Francisco-based Trowbridge, Kieselhorst & Co. in 2000; James R. Poole & Co. in 2004; a 40 percent stake in AmeriSphere Multifamily Finance L.L.C., an Omahabased Fannie Mae DUS lender, in 2004; First Monroe of Rochester, N.Y., in 2006; and a pair of 2007 additions, Chicago-based Baird & Warner Real Estate Finance and Raleigh, N.C.-based Crouse & Associates.
Art of the Deal
The litany suggests a bold pursuit of opportunity, yet Padilla insists that the key to the strategy’s success was an underlying conservatism. He estimates that the company seriously considered 50 companies before completing those nine acquisitions. Furthermore, he added, of the nine, “we didn’t leverage any of them.” Prospective acquisitions must meet high standards. First, they have to mesh culturally and operationally with NorthMarq’s existing platform. New additions must also demonstrate the ability to help NorthMarq grow. The third principle is often hardest to gauge at the time of the acquisition: The price must be justified. Moreover, Padilla made the lion’s share of the acquisitions before the commercial real estate market hit its mid-decade peak. Among other things, that has softened the impact of the downturn.
Padilla received a first-class education in the art of the deal from the late Carl Pohlad, founder of Marquette Financial Cos., NorthMarq’s holding company. He regards Pohlad as a consummate negotiator and dealmaker—the one business leader to whom he has paid the closest attention. Pohlad’s approach to making those deals also deeply impressed Padilla. Pohlad, he said, balanced the ability to spot and seize a business opportunity with a prudent financial approach. It is telling that Padilla orchestrated NorthMarq Capital’s long string of acquisitions without resorting to leverage. Although Pohlad was in his mid-80s by the time Padilla became CEO, the older man took a keen interest in NorthMarq Capital’s run of acquisitions. “He was very astute at making a deal, very astute at negotiating a deal,” Padilla recalled. “Any acquisitions we had on the table, he wanted to hear about. … He loved deals, regardless of the size.”
NorthMarq Capital’s growth may also benefit during the next several years from a recent acquisition completed last year by NorthMarq Real Estate Services, an independently operated company owned by Marquette Financial. In 2009, NorthMarq Real Estate Services bought Opus Property Services L.L.C., the property management division of Opus Corp. The acquisition expanded the NorthMarq business’s portfolio to approximately 60 million square feet. While the division operates separately from NorthMarq Capital, Padilla expects the addition of the legacy Opus portfolio to create opportunities for his business, and NorthMarq’s newly expanded pool of property management clients will be exposed to the financial services group. For an executive who wins consistently high marks for his stewardship, Padilla professes to take a dim view of management. “I don’t like managers,” he said. “What I like are professionals.” Padilla said he has no interest in dictating methods to the company’s loan producers; as he sees it, his job is to recruit the best professionals in the business, give them the resources they need to succeed and get out of the way. “No one in Dallas, Texas, is waiting for someone from Minnesota to say, ‘I’m here from the home office to solve your problems,’ ” he explained. The hands-off management style shows another influence of Pohlad, who, Padilla said, was “the furthest thing from a micromanager.”
Much as he downplays the importance of management, Padilla is an adroit handler of people as well as a skilled dealmaker. “I think the thing about Ed is that he’s a nice guy and he’s very tuned into understanding that people like to work at places where they have fun,” offered David Zachar, executive vice president for PPM America Inc., an investment management company and a U.S. affiliate of Prudential PLC. Zachar met Padilla almost 25 years ago while working for a major life insurance company and has since become a friend as well as a business associate. Padilla brings to the job people smarts and genuine warmth that make people enjoy working for him, Zachar said. Moreover, he understands human foibles and has a gift for helping people make the most of their talents while also minimizing the effects of their shortcomings, Zachar added. At the same time, Padilla does not hesitate to speak directly when the situation calls for frankness. “He’s going to be a straight shooter and tell you (what the situation is). He’s not going to sugar-coat it,” Zachar said.
Though he gives NorthMarq Capital’s loan producers a wide berth, Padilla sets high standards for professionalism. “If I have to build up a management team of 20 individuals running all over the country making sure that you’re doing what you need to do tomorrow morning, you’re with the wrong company,” he said. “We’ve let people go who are milliondollar producers who don’t pass that No. 1 (standard).”
To Padilla, that view of professional self-reliance is inseparable from high ethical standards. Asked to describe NorthMarq Capital’s code of conduct, Padilla explains with an example: If the conduct of a NorthMarq team member prompts a client to call Padilla with a legitimate complaint, that is a sign that the NorthMarq person has stepped out of line. Padilla offers this simple rule to guide professional behavior: “Act as if everything you’re doing is public knowledge.”
Although recruiting professionals to existing locations and adding new offices is an unending process, Padilla emphasized that the company feels no pressure to add pins to a national map for their own sake. And bringing new people into the fold is as painstaking in its way as acquiring companies. It is not uncommon for NorthMarq to take six months to hire a managing director. The Seattle office took a decade to become reality. The challenge was recruiting a team that was a good fit for the company. About four years ago, Stephenson identified a team, but they were not ready to make a move. NorthMarq finally opened its Seattle office in early 2009.
It is a testament to the exacting vetting process, and to the climate of autonomy fostered by Padilla, that many professionals tend to stay at NorthMarq for a long time. Tenures of 15 or 20 years are not uncommon, and at least two analysts have been with NorthMarq and its predecessor since the ’70s. The continuity and institutional memory this represents are not lost on NorthMarq’s clients. “Over the years, we look at the turnover in Ed’s organization, and it’s practically nil,” said Allianz’s Kurtz.
Padilla’s approach to the challenges of the recession illustrates the point. Unlike many other companies hit by declining revenues over the past several years, Padilla did not order across-the-board job reductions. Instead, he continued the decades-long practice at NorthMarq and its predecessors of making job cuts region by region and office by office. In some cases, employees chose to reduce their work schedules from five days to four days in order to avoid layoffs.
Padilla’s route to a leadership position in real estate finance is decidedly unconventional. To begin with, his personal journey is an only-in- America success story. Born in Havana, he was only five years old when his family fled the Castro regime, landing in Miami in 1961. His father, who had been a lawyer in Cuba, initially found work as a dishwasher. Young Eduardo himself spoke no English until he was about nine years old. Two years later, Catholic Charities helped the family of five move from Miami to St. Paul, Minn., where they shared a cramped basement apartment in a poor section of the city.
Padilla’s father managed to gain entrée into the general counsel’s office at 3M Corp. (then Minnesota Mining and Manufacturing Co.), where, Padilla claims, a chance remark may have turned the tide. The general counsel asked the Cuban émigré for his opinion of President John F. Kennedy. Padilla’s father did not hesitate to display his disappointment in the president’s failure to dislodge Castro, responding, “I think JFK is a(n) S.O.B.” 3M’s general counsel, who would later serve as Minnesota campaign manager for Sen. Barry Goldwater’s 1964 presidential bid, was amused and impressed by the frank assessment, and invited his visitor to join 3M’s legal department (the comment later appeared in a profile of the elder Padilla in Fortune magazine). Padilla’s father spent almost a decade at the company; as a native Spanish speaker with legal expertise, he proved to be a particularly valuable resource for 3M’s Latin American operations. Along the way, the senior Padilla earned the distinction of becoming the first Cuban-born person to pass the Minnesota bar exam. The younger Padilla initially followed his father into the law, earning his J.D. from William Mitchell School of Law three years after graduating from the Unversity of Minnesota in 1979. Assigned by Banco Northwestern National Bank’s legal department to work with its small commercial real estate group, he took a liking to the business. In 1986, he switched to real estate finance and joined GMAC Commercial Mortgage as a loan producer.
In 1991, he moved on to Northland Capital, NorthMarq’s predecessor firm, serving as managing director of the bank’s Minneapolis regional office. Five years later, he was promoted to executive vice president, adding Northland’s St. Louis and Chicago regions to his responsibilities. The Pohlad-owned Marquette Financial Cos. acquired Northland in 1998, eventually rebranding it NorthMarq Capital. Two years later. Padilla stepped into the CEO position.
Off duty, Padilla finds time to pursue a variety of interests. Friends describe him as an accomplished golfer. Yet curiosity and a taste for adventure often take Padilla in more offbeat directions. He and his wife of 28 years, Sue, are veteran travelers who particularly like to seek out the world’s less common destinations: Northern Spain, China, Japan and Vietnam are on the list of recent favorites. Padilla is also an enthusiastic deep-sea fisherman who has ventured as far as Panama, Cabo San Lucas in Mexico and Cape Hatteras, N.C., for the sake of a good catch. And, of course, he continues to hop on his beloved Harley at every opportunity.
It seems clear that in the years to come, Padilla will continue to seek ways to keep both his company and himself in motion.
This article first appeared in the August issue of Commercial Property Executive.