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The credit crunch may have made the real estate game a little harder, but there are still plenty of moves to be made, keeping many lawyers in the practice area quite busy. While the market seems to be collectively holding its breath before rolling the dice on big deals again, practice heads at leading law firms say they’re seeing work, just without the backlog they’d had prior to the market’s dip. A lot of that work is coming from investors and lenders less reliant on credit. Though the ugly turn isn’t welcome, it comes as no surprise to veteran players. “This has to happen every 10 years or so, it kind of cleans things out,” said Fred Pillon, the San Francisco-based co-chairman of Gibson, Dunn & Crutcher’s real estate practice. The commercial market is suffering less than the residential market, which was crippled by the subprime crisis. But the economic anxiety knows no bounds. “[The commercial market is] frozen because of fear from the residential market,” said William Murray Jr., the San Francisco-based chairman of Orrick, Herrington & Sutcliffe’s firmwide real estate practice. Thanks to more liquidity, this recession is certainly different from and may not be as bad as that of the late 1980s and early ’90s, but the longer the market remains nervous, the more painful the downturn will be. Practice chiefs say the soonest the real estate market might make its comeback is the last quarter of this year, but all estimates are tentative. “The smart money says that in six to nine months we’ll be able to tell whether there’s another six to nine months to go,” said Stephen Cowan, head of DLA Piper’s global real estate practice and a San Francisco partner. In the meantime, there’s still work coming in from a variety of sources. WORKOUTS As with any downturn, workout and restructuring work abounds as investors, lenders and developers already behind the eight ball look to make the best of their situations. Working out a situation in which default or other threats are imminent are made all the more difficult by the complicated debt arrangements and large number of parties involved. “I think the workouts are going to ramp up over the next couple of quarters,” Pillon said. “It’ll probably get us over the hump.” MEZZANINE DEBT The debt that is making workouts so complicated is becoming increasingly attractive to investors. A growing number both inside and outside the industry are looking to profit from obtaining distressed debt. That mezzanine debt � for which a failure to pay would result not in a loss of the property, but a loss in the ownership of the property � can provide either a high yield or can be used as a path to ownership of the property (as well as all associated liabilities). Unpeeling the complicated layers of debt that have piled up on properties can produce a significant amount of work. It wasn’t unheard of for lawyers to close deals involving as many as seven layers of mezzanine debt. With so many parties involved, and such a teetering market, transactions involving that type of debt can be dangerous. “Buying up distressed debt is a risky business,” Murray said. “It’s like catching a falling knife.” PENSION FUNDS AND PRIVATE EQUITY Well-heeled investors and pension funds in Asia and the Middle East are increasingly seeing opportunity in the U.S. real estate market, Cowan said. The weakened dollar and falling home values are creating opportunities for the funds to buy low and, despite recent economic turmoil, the U.S. real estate market is relatively stable for long-term investments. “It’s a pretty safe place to put your money,” Pillon said. “You’re not going to have a coup, you’re not going to have the government come and nationalize all the property and kick you out.” For big firms, foreign money is helping domestic practices. DLA’s domestic practice is getting work from Asia and the Middle East, Cowan said. Tokyo and China are buoying local lawyers at Orrick, Murray said. Less-conservative private equity funds may take investment a step further, buying up lots of finished properties or homebuilders � along with their lots � with the hope of turning a profit when the market rebounds. All of that investment is providing work for fund formation lawyers. TRADITIONAL PLAYERS Traditional lenders are also making their return to the market. Banks and life insurance companies took a backseat to the high-stakes and super-competitive deals of recent years. Having been less affected by the market’s woes and not reliant on credit, those institutions, also known as balance-sheet lenders, are able now to re-enter the market and buy low. “Money is always king in a time where credit is tough,” Cowan said. But still, traditional lenders making their way back may not have a huge impact. “There’s not that many of them and there’s not that many of them left,” Pillon said. LAND USE ENTITLEMENT Land use entitlement, sheltered from the impact of the downturn thanks to its long-term lifecycle, is turning out to be a good source of work for some practices. “We still have a significant amount of land use work,” Cowan said. Because preparing land for development requires various levels of government testing and approval, developers are less reluctant to proceed with that work. “The lead time on land use work is so long that � by the time they actually go to build � the project will become available at a reasonable cost,” Cowan said. FORECAST Ultimately, practice heads say, the market will recover and the flow of work will begin anew, but questions remain. When will the market make its comeback? Will the current work last until then? “Right now, we are really busy,” Murray said. “� [But] what you don’t see is a backlog.” As in any cycle, big firm practice heads are encouraging their lawyers to do what they can. And while the outlook isn’t necessarily sunny, they said, there’s certainly reason to be hopeful. Regardless, they’re up to the challenge of a few rough rounds. “It’ll be fun,” Pillon said. “We’ll have a go at it.” Niraj Chokshi is a reporter at The Recorder, which is affiliated with Real Estate.

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