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Lawyers wrangle as market slides

If brokers are on the front lines dealing with the dearth of buyers and sellers, lawyers are just a few yards back. In this month's Q & A, real estate attorneys in the city told The Real Deal that the slowdown in transactions has left a void in their portfolios of legal work.

And, not surprisingly, the work they are being called on to do has changed. No longer are they being asked to complete apartment or building trades at lightning speed. Instead, they are being asked to go back into already sealed contracts to add new clauses for price protections. Or, in some cases, they are being asked to negotiate contingencies for residential buyers that hinge on the buyer not being laid off.

Meanwhile, some residential attorneys are unsure until the day of the closing whether the deal will get final bank clearance, leaving their already cautious clients confused. One attorney who works with building boards said she is dealing with questions about whether owners can defer maintenance obligations. She also is hearing legal questions from co-op boards about shareholders raising the possibility of taking equity out of their apartments.

Like residential lawyers, commercial lawyers said that while there has been a large drop-off in work since the credit crisis hit, they are seeing slightly more work than they were a few months ago. But the work is not revolving around sales and leasing transactions. Now it's restructuring and joint ventures and complicated legal dealings between borrowers and lenders.

For more on how the legal real estate landscape is being affected by the recession, we turn to our panel of experts.


Lisa Breier Urban, managing partner, Breier Deutschmeister Urban & Fromme

How is the changing market impacting your business as a residential real estate attorney in New York?

It's definitely a slower market. November and December were very quiet. There were a lot of deals that fell through in those two months. January and February have been much better, so I do see some activity, [though] not quite at the same level that it has been in years past. People that have been waiting to buy are starting to buy now.

Are you seeing buyers backing out of deals or looking to change the terms of deals?

I had people backing out of deals last November and December. Some of it was because of job losses. Some of it was because of financing issues. And some were freaked out by the stock market falling. Now, the [contracts] that I find people try to renegotiate are existing contracts, mostly in new construction. A lot of that has to do with the fact that appraisals are coming in lower because the market values have come down. The problem with that, though, is once you've signed a contract to buy at a certain price point, you're locked in. And once you're locked into a contract, unless you are completely willing to walk away from your deposit, the seller doesn't really need to renegotiate. But people are trying.

What are the biggest challenges you're dealing with these days?

The biggest issue is the banks and the different levels of audit and clearance they're requiring. We often don't get final bank clearance on an approved loan until maybe a day or two before closing and even sometimes the day of the closing. I've had [situations] where we don't know 100 percent if the loan is able to close that day. [In that case] the closing will be adjourned. It actually has gotten marginally better than it was a few months ago, but it's still the same issue. It's stressful and frustrating to me because I can't confirm the closing until I know for sure the loan is going through. I had a client moving to New York from England. He was trying to buy his plane tickets so he could be back here for the closing. I couldn't confirm the date with him … because the bank file wasn't clear.

How does being a real estate attorney today differ from what it was like when the market was doing well?

Sellers get more antsy if it takes longer for a contract to be signed because they don't necessarily have five buyers waiting in the wings like they did in the past. The level of interaction I now have with the bank and the bank's attorneys has increased.

What are the most surprising things buyers and sellers are asking you for these days?

I've been asked for price protections from buyers. If the price decreases after they sign the contract or if the value decreases on the appraisal, they ask for something in the contract that provides if the price goes down, that they have a right either to rescind the contract or get a different price. I have not seen many sellers agreeing to that, frankly. I'm also seeing buyers who lose their jobs between now and closing [ask for the right] to terminate the contract because of loss of employment. In terms of sellers, they ask for the opposite. If the buyer loses a job and they don't get their loan, the seller asks if there is a way to guarantee it will close.

How do your new construction cases differ from your resales?

In new construction, you've been sitting on the contract for eight months to a year and the price was definitely different from what it is now. I have a situation with a [new] building where we're just not closing and nobody is being forthcoming about whether it's going to finish. There is some question as to whether they'll close on the units or if they've run out of money and whether the sponsor is going to be able to complete it.

How is business now compared to three months ago, six months ago, a year ago? Is there more business because the market is more complicated?

It's better than three months ago, probably the same as six months ago and definitely less than a year ago. It's much better if the market isn't complicated. There is more to do on a particular deal than in the past because the contract and all of the issues involved with the contracts [have] more red flags to watch out for.

Is now a good time to be a real estate lawyer in New York City?

It's a living. It's OK as long as you're able to do other things. I do transactional work involving commercial business leases. A lot of people are looking to do other things to supplement their practice. In a way, I'm lucky because we do a lot of landlord-tenant litigation. I have always done some of that so I can make a living doing that, too.

Eva Talel, partner, Stroock & Stroock & Lavan

How is the changing market impacting your business as a residential real estate attorney?

Our clients are, for the most part, boards of co-ops and condos in New York, so the market's impact is somewhat different from the impact on lawyers who represent individual clients. From a board perspective, we are seeing fewer requests to sell apartments, although the ones we are seeing seem to be holding their price levels. [We are also seeing] non-essential capital improvements or decorative projects such as lobbies, fitness centers, community rooms and gyms being postponed. We continue to see activity in residential refinancing for co-op buildings, where there appears to be a healthy market and good rates for refinancing.

How frequently are you seeing buyers back out of deals or try to change the terms of a deal?

The extent is difficult to quantify. In new construction, there appears to be increasing delays for developers in obtaining temporary certificates of occupancy, without which title companies will not issue title insurance and therefore buyers don't want to close.

Can you give us any examples of recent deals you've worked on that illuminate what's going on in the market?

Boards are being approached by shareholders to defer their maintenance obligations either because they've lost so much money in the market or a Madoff-related investment that they simply can't afford to pay the maintenance. So, the board has to balance the building's need for the dollars with the needs of the person asking for the dispensation.

What are the most surprising things clients are asking you for these days?

For co-op boards, there is an increasing desire on the part of shareholders to allow apartment financing. There is increasing discussion as to whether to allow shareholders who already own apartments to finance and take equity out of their apartments.

What kinds of legal protections for co-op boards are you working on today?

Co-op boards now scrutinize the board package in a very different way. They're looking for more liquidity, asset diversification and greater care in terms of evaluating a purchaser. Also, guarantees are becoming more important, as well as requiring maintenance escrow deposits, particularly from purchasers whose assets and funds are located outside the United States, so that the board is protected in the event the purchaser does not make timely maintenance payments.

Luigi Rosabianca, managing member, Rosabianca & Associates

How is the changing market impacting your business as a residential attorney?

Nearly every transaction involving financing has become an ordeal. Lenders have not only raised the barriers of entry, they have also been inconsistent in interpreting new federal standards as well as their internal standards. The net effect is purchaser confusion.

How do your new construction cases differ from your resales?

New construction contracts [and prices] were once offered on a take-it-or-leave-it basis. Now, sponsors have grown 'reasonable' and negotiating terms is the norm.

How does business compare to three months ago, six months ago, a year ago?

There is much more litigiousness and aggressive behavior, which takes into account both market forces as well as psychological effects of a downturn.

Adam Leitman Bailey, owner, Adam Leitman Bailey

How is the changing market impacting your business as a real estate attorney?

We've hired two new attorneys to handle the increased litigation. Although the amount of litigation has increased, many clients have been agreeing to settlements that they would not even have entertained a year ago. The reason is the cost-benefit analysis. Clients are more likely to litigate if the litigation's cost is much less than the anticipated reward. As property values have decreased and credit dries up, new numbers come into play, which changes the settlement landscape.

How frequently are you seeing buyers back out of deals or try to change the terms of a deal?

Almost every buyer who enters into a contract purchased even seven months ago wishes they could renegotiate. We currently represent more than 40 boards/ homeowner associations in newly constructed buildings in disputes with developers, although many of them have settled.

What are the biggest challenges you're dealing with as a real estate attorney these days?

With many of our cases, we have to act like prosecutors without the ability to obtain a warrant or carry a gun. Mortgage and property fraud as well as property dispute cases have increased tremendously. Some developers who paid too much for a property and/or have run out of money need to cut corners and have failed to provide the building promised in the marketing materials and offering plan. For our building-owner clients, besides the financial perils, we have to guide them through potentially crippling new laws such as the state legislature's proposed new rent regulation laws or the Home Equity Theft Prevention Act. We are comparing our new real estate lives to fighting a war.

How does being a real estate attorney today differ from what it was like when the market was doing well?

Many of the transactional deals being completed are a result of a seller being in financial distress. Many of our building-owner clients have had an incredible amount of commercial tenants exercising their 'good guy' guarantees (which require one or more of the principals to personally guarantee the lease) and turning in the keys. Tenants are spending less time in landlord tenant court using loopholes to beat up a landlord and stay in possession as more personal and 'good guy' guarantees were signed in the new millennium. No one has ever seen a crisis like this. Most of the prior recessions were based on a single event, an oil crisis or a dot-com bust. This crisis is a systematic disease that has leveled the market. And those of us who live and breathe real estate know that the crisis is only getting started unless the government can inject a steroid into the market.

How do your new construction cases differ from your resales?

The key is the timeline. Resales usually close within 90 days so these buyers did not have an opportunity to watch the sky fall in the real estate market before closing. For newly constructed buildings, many contracts were signed over two years ago when the market was reaching heaven.

What kind of advice are you giving clients to get through this down market?

Never waste a good real estate crisis. The savviest real estate people know that many treasures can be found in a down market. Fortunes will be made based on good and sound decision making.

Paul Korngold, partner, Tuchman, Korngold, Weiss, Lippman & Gelles

What's going on with your business right now?

We do primarily real estate tax ... The transaction portion of the package has disappeared. Clients selling or buying multi-family apartment buildings seem to have slowed down tremendously. Also, there are a series of bills which have been passed by the state assembly that are going to cripple multi-family housing. They are going to prevent owners from getting out of rent stabilization. They are going to prevent owners from getting major capital improvement rent increases and the effect of this is going to depress property values.

What is the most surprising thing about working in commercial real estate these days?

There is absolute stillness in the market. There was a story in the New York Law Journal about law firms laying off lawyers who are predominantly real estate lawyers because there is no work for them.

Will the second half of the TARP money that's coming change that?

I hope so. Ask me next year.

What advice are you giving your clients to get through this down market?

Pray.

Jonathan Mechanic, chairman of real estate department, Fried, Frank, Harris, Shriver & Jacobson

How is the changing market impacting your business as a commercial real estate attorney?

It's just changing the nature of what we're doing. There are less sale transactions, less financing, more restructurings, some leasing and some joint ventures.

What's making up the biggest portion of your business right now?

There are a fair amount of restructurings of existing transactions as well as opportunity investing. We just represented the owners of 650 Madison who just signed a major lease with Polo for [around] 200,000 square feet. That's kind of a more traditional real estate transaction.

How is business now compared to three months ago, six months ago, a year ago?

There is more business today than three months ago just because there was a period where there was just paralysis in the market. I think that paralysis is easing. I think there are things that are happening and getting done, it's just difficult and complicated to do.

What are clients asking for these days that they weren't asking you for before?

There are more concerns about what happens if a lender doesn't fund, what happens if a partner doesn't fund. [Before the downturn], there were issues but everybody was in a much stronger financial condition so they [weren't as big of a deal]. They don't want to be in situations where they're funding their portion and the other party isn't showing up with their money.

Doug Heller, partner, Herrick Feinstein

What's making up the biggest portion of your business right now?

We are working with lenders and special servicers of loans to examine how they should handle honest, competent developers and sponsors who have hit rough patches through no fault of their own. We are largely coming down on the side of advising that those developers be left in place so that, if possible, they can complete the projects they have begun.

How much of your business involves working with clients who can't pay and have lenders coming after them?

We work both sides of the street. We represent borrowers and lenders. We try to take a solution-based approached to troubled loans. Successfully enforcing rights does not always mean there has been a successful conclusion. Our approach works for all parties. All that said, we're at the moment [where we are] probably doing more work for lenders and special servicers than for borrowers.

What advice are you giving your clients to get through this down market?

We are reminding them that market slowdowns are usually a good time to examine and reposition their portfolios to make sure they're of maximum value when the markets regain their strength.

What are the biggest challenges you're dealing with as a commercial real estate lawyer right now?

Transactions have grown increasingly complex. It used to be that there was a borrower and a first mortgage lender and, maybe, a second lender involved in negotiations. Now, more players are involved, requiring analysis and legal advice regarding relative positions in the capital stack. We've always been in the trenches with our clients; now, we're in the tranches.