RE merchant banks lure new sources of capital.

We have all the read about the real estate obituaries of the 80s. Yesterday's quarterbacks today sit on the sidelines.

The new starting line-up is headed by real estate merchant banks, firms who not only assemble investors to do deals, but also use their own funds to take position in those deals.

These merchant banks buy properties directly and act as the managing partner. Instead of taking high fees, they secure equity positions and aggressive pursue high returns, not only for themselves, but for their investment partners.

A key to the success of the merchant banks has been their ability to invest their own capital. Unlike other owners and developers, a small financial position in the deal will not do. A large financial stake by the merchant bank is one of the key attractions to their investors, and also to the sellers of the properties.

Where the merchant banks have been even more successful, has been in their ability to lure huge sums of capital into the market. Since the merchant banks are putting their own money into the deals, they have earned the respect of high-net-worth investors and non-real estate corporations, creating a new pool of several billion dollars that has flowed into the U.S. real estate market over the past few years.

Some of largest sources of funds remain Asia, with Chinese, Japanese and Korean investors spending aggressively. Europeans, particularly from Germany, are a close second. Newer to the U.S. scene are Middle Eastern investors, who see a brighter climate for investment in U.S. real estate.

I recently spent some time with a Saudi Arabian investor who confided that the treaty of understanding signed with Israel and the Palestine Liberation Organization was a prime motivator for many Arab financiers now taking a closer look at investing in U.S. real estate.

These high-net-worth investors and corporations not only like the fact that the merchant bank takes its own position, but they also like the returns.

In the 80s, the IRR was the number that mattered. It assumed inflation and over inflated returns.

Today, investors in merchant bank deals are realizing returns in excess of 100-percent in 12-18 month periods of time.

But I am repeatedly asked how real estate merchant banks differ from Real Estate Investment Trusts (REITs). There are significant differences, namely that merchant banks only tap their investors for funds when they have an attractive deal that fits that particular investor's goals.

The merchant bank is more than a deal negotiator and money manager. It is also a real estate manager. By employing experts in asset management, marketing, sales and real estate law, a merchant bank has the expertise to maximize profit.

An example of the broad range of merchant banking services we used recently was in the acquisition of the 36 remaining units at The Westage, a luxury high-rise in White Plains.

Essex itself took a "re-course" loan, nearly unheard of today. We are using an aggressive team of marketers who within 60 days of our taking possession, have sold 20-percent of those units.

Unlike a REIT, merchant banks are not "forced" to buy because they are sitting on a pool of money. In addition, while REITs can have thousands of investors, merchant banks assemble much smaller pools of investors. As such, there is a greater communication and reporting between the merchant bank and the investor. And, we can also provide this service at much less expense than REITs, who must spend a significant portion of their investment pool on overhead to satisfy federal reporting requirements and the servicing of thousands of investors.

In 1994 we will see a significant rise in the amount of foreign capital that flows through real estate merchant banks. As such, we are forecasting renewed activity in the marketplace, particularly for deals in the $2 million to $25 million range.