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The documents were signed on the more than $100 million deal for a large East Coast office building complex. The courier was hurrying them to the escrow agent. And then the lender got cold feet. “They called the courier and made him turn around and return the documents,” said Stephen Cowan, the DLA Piper real estate partner who was advising the buyer on the deal last month. “That was a sobering thing,” said the San Francisco real estate law veteran. The sudden queasiness of lenders has cast a pall over the once-robust real estate market in the last six weeks, Cowan and other lawyers report. Deals have been interrupted mid-stride. Some have been re-jiggered and others have just died. With the pop of the housing bubble and the implosion of the subprime mortgage market, lawyers representing homebuilders had already seen a slowdown in transactions. But with the credit crunch that followed, high-end commercial real estate deals � the cash cow for big-firm real estate groups � aren’t going forward. Although the dead deals haven’t come close to killing the practice, they have taken some life out of the legal fees. Some clients demand discounts from 5 to 15 percent if a deal doesn’t go through, lawyers report. But even if deal lawyers are losing a few billable hours’ worth of fees, something they’re not losing is clients. In past down cycles, lenders or borrowers would often turn to a new outside counsel for a fresh opinion on how to restructure loans. But that’s not happening this time, said P. Peter Benudiz, co-chairman of Heller Ehrman’s real estate practice group. Instead, the lawyer-intensive “workouts” are falling to the firms that did the original deals, he said. “It happened so quickly that I think the natural lawyer to go back to is the person that did the deal,” said Benudiz, who practices in the firm’s Los Angeles office. “If this becomes a more protracted cycle it could go back the other way.” Right now, big-firm real estate lawyers are working on an increasing number of workouts, shepherding along deals that were already close to completion and hoping that the instability will blow over soon. “Word of mouth is that this won’t be improving for 45 to 60 days,” said Erin Rothfuss, a real estate finance lawyer in Gibson Dunn & Crutcher’s San Francisco office. A QUICK HIT The up-and-down nature of the real estate practice is nothing new. What is new, lawyers say, is the quickness with which this dip descended. “I’ve been through cycles in the ’70s, ’80s and ’90s � this was a very sudden change,” said DLA’s Cowan. “It caught everyone off guard; even though everyone was saying, ‘It’s coming, it’s coming.’ It was like an earthquake.” The tremors were felt in Silicon Valley, where a private equity fund’s plans to buy Mission West Properties, owner of commercial real estate in the Valley, for a reported $1.8 billion fell apart last month when lenders backed out. Alan Kalin, a Bingham McCutchen corporate partner who represents Mission West, called it a “function of what’s going on in the credit markets.” Kalin said he doubted “that particular deal would be revived,” but wouldn’t rule out the possibility of another. Representing mainly tech companies, he has few other real estate clients and said his practice hasn’t been greatly injured by the credit crunch. The quick hit also affected deals that Heller was advising on, Benudiz said. “At the beginning of August, a lot of deals that were in the initial stages were put on hold,” Benudiz said. “I actually had a couple credit clients that said they were taking August off just to get their arms around what was happening.” Luckily for Heller, those clients called after Labor Day to say they were ready to go ahead. One $451 million agreement for two hotels in Mexico and one in the Caribbean just closed, and a few previously stalled deals are set to be completed in the coming months, said Benudiz. Even though these deals may be back on track, their nature has already changed. As lenders hold out for better terms, financing has been less plentiful. Heller’s clients had to go overseas to find banks willing to help the deals go forward. “It’s becoming a lender’s market, where before it was a borrower’s market,” Cowan said. PRACTICE IMPACT Even with the choppiness in the deal flow, lawyers say their real estate practice revenue shouldn’t be hit too hard. “My business and Gibson, Dunn’s business hasn’t slowed down,” said Rothfuss, who is part of the firm’s 60-lawyer real estate group. “I’m just seeing more people scrambling for financing and more workouts coming our way.” It also helps that most big firms’ real estate practices now reach across the globe. DLA Piper has 600 real estate lawyers around the world, while Orrick, Herrington & Sutcliffe has about 100. “It doesn’t always hit the same place the same way,” said William Murray Jr., who heads the practice in San Francisco. But regardless of global positioning, Murray and other veteran real estate lawyers know they’re at the mercy of forces beyond their power. “Lawyers are kind of a function of the market � if the client says, ‘Hey, we’re not going to do this deal,’ that’s not good for us,” Murray said. In an interview last week, Murray said he was a little nervous about the quiet that was pervading the real estate deal market. After a few phone calls from clients on Monday, he was more upbeat. “The ice jam is starting to crack and break, and deals are starting to get moving again,” Murray said. “I’m more optimistic than last week.”

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