For Some Lawyers, A Remodeled Practice
Brian Katkin10-27-2008
Arent Fox partner Kimberly Wachen sounds practically giddy. She’s a real estate lawyer, and she sees the next year as a particularly bright one for her practice: “Come January of 2009, it’s going to be incredible.”
That’s right—real estate. The housing and commercial markets may be in the tank, and deal volume has sputtered, but some real estate lawyers say they are poised for a boom. No, housing prices aren’t coming back. If anything, the new optimism is about the bad times getting even worse.
Venture capitalists looking for bargains have poured billions into investment funds designed to capitalize on bargain real estate prices. When commercial real estate bottoms out, they intend to strike. And they’ll need lawyers to help them do deals to snap up distressed properties. That’s why Wachen and lawyers like her don’t sound like they’ve just ingested hemlock, in spite of the rain of ruin in the real estate market.
“January is going to be so busy with clients who have raised all this money,” Wachen says. “They’re going to be saying to us, ‘I have all this money, now help us with the due diligence,’ and we’re going to have to do a lot of that for a lot of clients in very little time.”
She says she and her firm have worked extensively with investment banks, such as Goldman Sachs, and savings and loan associations that have opportunity funds.
At the moment, of course, real estate practices are experiencing tough sledding.
Holland & Knight’s Janis Schiff says, “Usually you could see the pipeline of work as far out as three months. Now, that pipeline is less secure, with only a week to two weeks.” And Daniel Hodin, a partner with Bethesda, Md.’s Paley Rothman, says, “It was like the spigot just turned off in September.”
But several Washington real estate lawyers said they see work ahead in insolvency and restructuring, opportunity funds, and for larger private and government institutions, particularly colleges and universities.
Will it be enough to sustain entire practice groups? That’s another story.
William Brennan, a legal consultant with Altman Weil, says overall law firm revenue is expected to drop by 10 to 15 percent this year and says, “The countercyclical work for real estate practices isn’t enough and certainly not preferable to the normal handling of real estate matters.” That said, “I can’t think of any other alternatives,” Brennan says. “I mean law firms just don’t have a lot of good choices. These are tough times.”
OPPORTUNITY KNOCKS
C. Daniel Clemente, the chairman and chief executive officer of the Clemente Development Co., has created a $1 billion opportunity fund to snap up commercial properties.
Clemente, who is based in Vienna, Va., predicts commercial building owners may default on debt that comes due between 2009 and 2012. When that happens, prices will plummet. And he’ll be ready.
“Buildings were grossly overpaid for,” Clemente says. “There’s going to be a major collapse and it’s already started. I’m looking to take advantage of distressed banks and the owners. I’m trying to wipe out the equity of the current owners and buy the real estate for a discount.”
Clemente formed his fund in 2008, and has hired Edward Schiff, a real estate lawyer and managing partner of Sheppard Mullin Richter & Hampton’s D.C. office. He says he’s paid Schiff and Sheppard Mullin about $500,000 in legal fees to date. Schiff (no relation to Janis) has helped draft legal documents, structure the fund, outline the partnership agreement, complete disclosure statements, and advise and negotiate changes to the terms of the fund. Clemente says so far Sheppard Mullin has helped with seven different documents involved with setting up the real estate opportunity fund.
“There’s been enormous growth in these funds,” says Schiff. “The market is there.”
Helping form an opportunity fund, however, isn’t exactly the kind of work that real estate lawyers have been accustomed to in recent years. They’ve just come off a string of jaw-dropping deals in the real estate industry. In 2006, The Blackstone Group agreed to acquire Equity Office Properties Trust for $38.1 billion in the largest real estate investment trust (REIT) deal in history. A year later, the second biggest REIT deal ever was completed when Tishman Speyer Properties, along with Lehman Brothers, acquired Archstone-Smith Trust for $21.7 billion.
Firms have seen deal volume decline dramatically in the last year. Venable, which for two years running has been the top issuer’s counsel on REIT equity deals in The American Lawyer’s Corporate Scorecard, saw deal volume drop from $4.483 billion on the 2007 scorecard to $775 million in 2008.
And it’s not entirely clear that opportunity funds are going to jump into the market right away.
Carol Honigberg, a real estate partner with Reed Smith, says many of the opportunity funds are still “sitting on the sidelines” waiting for property prices to hit bottom, the credit markets to loosen, and more investors to make bets. “Will these funds account for an increased deal flow? Undoubtedly,” Honigberg says. “And I don’t think we’re too far away from that activity.”
According to the Pension Consulting Alliance, an investment consulting firm, real estate opportunity funds began appearing in the early 1990s. In 1993, less than $5 billion was invested in these funds. Ten years later, $100 billion was invested. Today, Clemente estimates about $1 trillion is invested globally in opportunity funds.
London-based Private Equity Intelligence reports that opportunity funds have accounted for almost 60 percent of all real estate capital raised in 2008 compared with 43 percent in 2007.
In the meantime, several firms are gearing up. Cynthia Hajost, a real estate partner with Ballard Spahr Andrews & Ingersoll, says the firm has at least one person in each of its 12 offices monitoring what potential investors are doing. She adds that the firm has ratcheted up a distressed real estate initiative over the last three months to coordinate work with opportunity funds. “This came on our radar about a year ago, and there’s not a lot of it happening right now, but everyone’s really getting ready,” says Hajost.
COLLEGE CONSTRUCTION
Not everyone is waiting for venture capital to find a new home. Maureen Dwyer, a real estate lawyer and D.C. managing partner of Pillsbury Winthrop Shaw Pittman, is working with a list of higher education clients from George Washington University to Stanford. Dwyer says the way the schools are funded—through tax-exempt bonds, endowments, and individual donors—has helped shield them from some of the volatility of the markets.
That means they can keep on building. “Schools have to maintain their competitive edge,” Dwyer says. “They have to provide the most up-to-date housing; develop new science centers; build new athletic facilities. They have to always look to improve their campus plan to attract the best students.”
The message from some lawyers is to simply stay creative. Paley Rothman’s Hodin draws parallels between the housing slump in 1991 and the current crisis. In 1991, he says, firms’ real estate practices were facing a similar downturn in work. Hodin saw an opportunity. He formed Presidential Title, which handles real estate settlements in the D.C. area. The company is now a wholly owned subsidiary of Paley—and serves as a profit center during down times because it primarily handles commercial and residential settlements, foreclosures, and bad loans.
“The one constant is that the market is tough right now and transactional business is down,” Hodin says. “I saw a similar thing in ‘91 and took an opportunity.”
Brian Katkin can be contacted at brian.katkin@incisivemedia.com