Legal lessons

NYC real estate lawyers are still untangling distressed deals, but are also seeing a pickup in “complex” transactional cases

Just as the law is a living and breathing entity, as the saying goes, the lawyers who deal with it are alive and well in New York City these days. While New York’s top real estate attorneys saw a major slowdown in work during the recession, their caseloads (and billable hours for that matter) have picked up steadily in the last year.

This month, The Real Deal talked to prominent lawyers, who described a legal environment that’s more akin to the steady-and-stable pre-boom days than to the frenzied boom itself.

Sources did report dealing with a hangover of distressed deals — especially as underwater loans come to maturity and need to be dealt with by banks that have already extended them in the past. And they say there are still plenty of disputes among partners who’ve gone into real estate deals with each other, along with recapitalizations on buildings that need financial restructuring. But they also say their work has now broadened into other areas, including building trades, joint ventures, air rights purchases, development site acquisitions and more.

The new environment has also led to more sophisticated deals, which, of course, require more sophisticated lawyering. However, sources also said that clients have become more cost-conscious and are reluctant to pay exorbitant legal fees.

Meanwhile, one attorney said that today’s hiring is “slow, careful, controlled growth based on demonstrable client needs and demands.” In contrast, during the boom, he said, “it was analogous to being on a treadmill where the speed was turned up too quickly and we were trying to keep up with client demands [through] rapid hiring.”

For more on what our top lawyers think about the collapse of the once-prestigious firm Dewey & LeBoeuf (see “Life after Dewey & LeBoeuf”), which new laws they are watching and the most common types of lawsuits they’re seeing, we turn to our panel of experts.

Robert  Ivanhoe
Robert Ivanhoe
global real estate practice chair, Greenberg Traurig

How is the climate for real estate lawyers in NYC today compared to a year ago, two years ago and during the boom? 

The industry’s very deep slowdown in 2009–2010 affected real estate lawyers in most law firms significantly. Today, things are much improved, with continued recovery of distressed real estate assets as well as the return of acquisitions, refinancings and recapitalizations. … We are not in a boom period, as we were in 2004–2008, but things are much improved from where we were two years ago.

There was a lot of legal work related to distress after the financial crisis. Are you still dealing with work related to stalled projects, foreclosures, restructurings and other forms of distress?  

Yes, there is still a steady stream of resolution of distress caused by the overleveraging of assets during the boom, though perhaps it’s slowed a bit and the pickup in other areas has made it a smaller portion [of our work]. Remember, historically low interest rates and the attitudes of banks and special servicers allowed overleveraged assets that had cash flow, as most do in New York, to get through the recessionary cycle better than most expected. This “kicking the can down the road” environment is ending as more loans reach maturity and require resolution. Values have recovered from their lows and banks have repaired their balance sheets sufficiently [so] they can now take the losses resulting from loan resolutions or loan sales.

What are the most common real estate–related lawsuits you’re seeing today, and how is that different from a year ago, two years ago and during the boom?

While some of [the default and bankruptcy] cases and issues remain ongoing … new cases [tend to involve] disputes between partners in real estate transactions. Those cases often involve issues such as decision-making within the partnership, one partner’s failure to contribute capital, a desire to exit the investment, a new party’s desire to enter the partnership and the duty a partner has to its partners in carrying out its responsibilities versus doing what is in that partner’s own best interest.

There was a big consolidation of the legal industry after the downturn. How is the hiring situation now?  

It’s most like it was prior to the boom. Slow, careful, controlled growth based on demonstrable client needs and demand. During the boom, it was analogous to being on a treadmill where the speed was turned up and we were trying to keep up with client demands, and rapid lateral hiring was the principal way to do that. During the 2009–2010 period, the work fell off significantly, as did our hiring.

We’ve heard that some NYC developers are farming out legal work to lawyers in Westchester and other suburbs to avoid paying the higher rates that top Manhattan firms charge. Have you seen that? 

I have seen some of this. I think real estate, as in other areas of practice, is bifurcating economically somewhat into high-stakes, high-value matters and what clients view as commodity matters. On the latter, they’re looking for strategies to save costs.

What are the most positive and worrisome trends you’re seeing in the real estate legal world?

The positive trend is that the work is a bit more steady, predictable and manageable than it was during the boom of the 2004–2008 period or the ensuing downturn. … [On the other hand] I’m most troubled by RFPs where clients just seek the lowest cost provider, often without an existing relationship and without the parties fully understanding how each other operates or what’s involved in the matter for which the bid is being made.

Are there any new or pending laws that are impacting — or are expected to impact — NYC real estate?

The implementation of Dodd-Frank and its impact on the real estate industry. This can range from how banks conduct their lending and securitization activities to how real estate investment managers, banks and investment banks run their businesses in the real estate area to how various derivatives that are used in real estate will be regulated or otherwise affected. [Because] the Dodd-Frank regulations are still in discussion, many of these questions remain unanswered. We are also looking at how possible changes in the tax law — such as the change in the taxation of carried interests in real estate or repeal of the [Foreign Investment in Real Property Tax Act] — will impact real estate investment.

What are the biggest real estate cases you’ve been watching in NYC?

There are several legal developments I’ve been paying particular attention to. One is the series of cases which are trying to reconcile the interplay between the J-51 tax benefits and the status of rent-regulated apartments. The reconciliation of these cases will ultimately affect the future implementation of our rent regulatory system.

Jay Neveloff
Jay Neveloff
partner, Kramer Levin Naftalis & Frankel

Dewey & LeBoeuf has been going through a public meltdown. Aside from that, how is the climate for real estate lawyers in NYC?

What happened with Dewey really had very little to do with the real estate market. Dewey had its own issues. I’m particularly bullish on New York real estate. I have been for a while, and that’s based upon the deal-flow I’m seeing. I’m seeing existing buildings trading, I’m seeing development sites being purchased and owners proceeding full speed to develop the sites. I’m seeing lenders lend. On top of that I’m seeing the existing deals being restructured and recapitalized, and I think that’s a very good sign. I’m also seeing development air rights being bought and sold, meaning they’re going to be used for development of towers. We haven’t seen that in a while.

What are the most active areas of your real estate practice these days?

A lot of deals that we’ve seen during the past year have been recapitalizations of existing deals. There were [many distressed deals where] the bank restructured its loan; maybe the owner or borrower gave up a portion of equity. I believe we’ll continue to see a number of those deals as CMBS loans are maturing next year. … [But] now I’d say the clear majority of the work is new economic transactions, such as hotels being sold or development sites being developed. There are joint ventures or air-rights types of agreements.

The U.S. Supreme Court recently declined to hear a case brought by a NYC landlord challenging the city’s rent-stabilization laws. Was that a fatal blow to the movement to overturn the law?

The fact that the Supreme Court decided not to hear the case certainly didn’t help the cause of overturning rent stabilization and rent control. Whether it was a fatal blow or whether it was just a pipe dream, it’s hard to tell. I am not aware of anybody who had expected rent stabilization and rent control to go away in New York, so I haven’t seen any deals that were underwritten even with the glimpse of possibility that stabilization or control would go away.

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Evan Levy
Evan Levy
partner, real estate group, Skadden, Arps, Slate, Meagher & Flom

What are the most active areas of your practice now?

There is certainly more activity in the real estate private equity fund space. While the fund-raising environment is still difficult, there are more funds in the market raising money. We are also more active in the health-care real estate space. There are also significantly more development projects than there were two years ago.

What are the most surprising trends you’re seeing in the world of real estate law?

I’m surprised by the level of competition our clients are experiencing in securing transactions. Given the level of market activity — which is increasing, but is still not robust — it really reflects the limited number of real estate assets and investment opportunities hitting the market that meet the objectives shared by many investors. … On the flip side, non-favored asset classes and non-favored transactions are much harder to get done. There seems to be a great focus on a small spectrum of the real estate market.

What are the most positive and worrisome trends you’re seeing?

The most favorable trend is that there is more investor confidence — both among U.S. and offshore investors. We are seeing new real estate private equity funds being formed and equity capital being invested. We are [also] seeing alternative lenders providing financing for the non-core investment class. The most trouble we see continues to be in the availability of debt financing. While improved, the debt financing markets have not fully recovered, and there is a significant amount of real estate debt — known as the “wall of debt” — that will need to be refinanced in the next two years. It probably got pushed out a couple of years with loan extensions, but the availability of financing does not yet meet the level of that wall of debt.

Are there any new laws or pending laws that you’re watching?

There has been a recent change to the law as part of Dodd-Frank, which gives new regulatory authority to the Commodity Futures Trading Commission to much more closely regulate swaps transactions. Many investors and real estate funds hedge their interest rate risk through interest rate hedges or swaps, which will now be subject to some level of regulation by the CFTC. For a largely unregulated space in the industry, that represents a significant change. The other significant legal change, also a result of Dodd-Frank, is the types of entities that need to register as registered investment advisors under the Federal Investment Advisers Act. This has required a very significant number of fund sponsors and advisors, who previously were generally unregulated, to register as investment advisors with the SEC.

Jonathan Mechanic
partner, Fried, Frank, Harris, Shriver & Jacobson

What are the most common real estate-lawsuits you’re seeing in NYC today?

It varies. There are foreclosures and bankruptcies, although there are less of those since a lot of them have worked through the system. There were a lot of litigations arising out of the so-called “good-guy guarantees,” — signed guarantees that were supposed to be limited to [situations where] you filed for bankruptcy, committed fraud or stole money. I think lenders had more expansive readings of what those guarantees are supposed to say. There is a fair amount of litigation arising out of that.

What are the most positive and troubling trends you’re seeing in the legal industry?

The positive is the amount of activity and the sophistications of the transactions. The only concern is the availability of financing. It’s much more available than it was, but it’s not as flexible, particularly in terms of construction lending. I don’t think there is the availability or breadth of participants that we’d like to see in the lending market.

What are the most surprising trends you’re seeing right now?

I would say in [situations] where economic expectations [have] changed, people looked for other ways to recoup their investments when they had made bad investment decisions and they tried to stretch legal interpretations. We represented a borrower involving a case on Lexington Avenue where a tax payment hadn’t been made. They were waiting for a partner to make his contribution, [but] the lender took the position that put the whole loan — $150 million — in recourse because a $100,000 tax payment hadn’t been made [even though it] was made within the grace period. It went to court and the judge agreed that it made no sense — in fact, the loan wasn’t in recourse. The obligation had been met.

Ron Sernau
Ron Sernau
co-chair, real estate department,Proskauer Rose

How is the climate for real estate lawyers in NYC today?

In our practice, we basically have two flavors of lawyers: finance and “dirt” lawyers. The dirt lawyer typically represents real estate companies. We are on the side of people getting the money, building the buildings — that’s what I do all day. … Each year since 2008, the finance business has slowly come back, nowhere near where it was in 2007, and the dirt side has really been coming back. In the last year, we have seen a tremendous increase in the level of our work. There are still some reasons to worry, but there’s definitely been a substantial increase on the dirt side in the past year.

How is the hiring situation these days?

When the market goes into a downturn, we all stop hiring and allow our junior ranks to diminish. Then the market turns around — right where we are now — and all of a sudden we need to hire people and we can’t find any. That’s exactly the situation now. Proskauer is like other law firms in New York City in that we all reacted in the same way, so now there is really no such thing as a third-year real estate associate. We are now paying the price for that, because we have to basically train up some associates who were not in the pipeline during the downturn.

Sherwin Belkin
Sherwin Belkin
partner, Belkin Burden Wenig & Goldman

Was the Supreme Court’s decision to not hear a rent-stabilization case a fatal blow to overturning the law?

We filed an amicus brief for CHIP [the Community Housing Improvement Program] on the case in question — the Harmon case. We were very disappointed that the U.S. Supreme Court elected not to hear the case. But the Harmon case did spur a national dialogue on the inequality of rent regulation — for both owners and tenants. I do expect that the industry will continue to look for potential constitutional challenge.

Can you tell us about any real estate cases your firm has been dealing with?

An area that we’re increasingly involved in is quality of life disputes between residential tenants, with our client — the [building] owner — caught in the middle. … Tenants seem more willing to fight with one another [these days] over noise, smells, smoke, children running, etc. In addition, the tension between unit owners and renters in the same building is escalating. Finally, even in co-ops and condos, the tension between unit owners and boards has increased.

Ross Moskowitz
Ross Moskowitz
partner, Stroock & Stroock & Lavan

What are the biggest challenges to being a real estate lawyer in NYC today? 

The challenge, maybe, is understanding the business model better than you did before. At least for our clients you can’t look at deals as one-offs. Client A may be making a purchase of a midtown property, but I need to understand what their whole portfolio is. I need to know what this deal is in terms of the context of everything else they are working on. Has the client changed their business model? [Maybe] they are only going after Class B buildings now or they’re only going after new construction or that this is a purchase that they are going to flip. … So you have got to ask those questions. Everyone now realizes that moving too quickly is not the right strategy. Clients are more patient and therefore they are looking for lawyers to be part of the overall business strategy.

Are there any new laws or pending laws that you’re watching?

There seems to be a push within the city council to make landmarking laws more restrictive. I don’t know how much traction that is going to get, but that certainly will have an impact on development. It’s not just the big developer [impacted by that]; it impacts co-ops, too. … [There is also] a discussion within the administration to change the zoning within midtown to allow buildings to be built bigger than currently permitted. The reason for that is a lot of the buildings in midtown are overbuilt under today’s zoning. So if you were to knock a building down, you couldn’t necessarily build it as high as it was. The administration is undertaking this in conversation with REBNY and others that maybe they need to up-zone certain areas.