Phil Rosen of Weil Gotshal & Manges in his office in the GM Building.
If you happen to take the Van Wyck Expressway to work, you might have seen it for yourself one morning during rush hour last year: In the breakdown lane a few miles past John F. Kennedy International Airport, an amiable-looking man with closely cropped curls, round glasses and a well-tailored suit sat in his black Lexus LS, gesticulating angrily and screaming into a cell phone.
That man was Phil Rosen, co-head of Weil Gotshal & Manges’ real estate practice; he was trying to save a client from probable ruin. On the other end of the line: A team of attorneys representing creditors.
In the wee hours of the morning, they had agreed to multiple restructurings after two days of around-the-clock negotiations. Now, just hours later, the attorneys on the other side wanted out.
“This is the deal,” Rosen, 53, yelled. “You can’t re-trade or you’ll end up with nothing.”
He continued: “This is the deal — it will not change.”
It was a high-stakes, emergency roadside rescue job. And, after an hour and a half, Rosen prevailed.
“There are very few times when I lose my calm and demeanor,” Rosen told The Real Deal last month, during an interview in his office on the 29th floor of the General Motors Building. “This was one of them.”
These are, of course, stressful times in the real estate industry.
Few know that better than the lawyers tasked with cleaning up the wreckage left in the aftermath of the credit crunch. For them, the recession means long hours negotiating loan extensions, working out lower debt payments or, if all else fails, going to court.
In a matter of months, many of the city’s top real estate attorneys, including Jonathan Mechanic at Fried Frank, Leonard Boxer at Stroock & Stroock & Lavan and others, have seen their job descriptions transformed from the facilitators of victorious “collaborative efforts” to mediators trying to prevent deals from imploding.
This month, The Real Deal looks inside the boardrooms where the rubber is hitting the road on these troubled deals, and talks to the lawyers who are going back and forth between struggling developers and lenders. They are on the front lines working out soured loans between developers trying to hang on to their property empires and banks trying to make themselves whole on the hundreds of millions or billions of dollars they have lent out.
Whatever the situation, one constant distinguishes them from the pre-crash salad days: high emotions.
Mutual pain has replaced the champagne, and getting clients to accept that reality takes an effort that could make Richard Holbrooke blanch.
“We used to have closing dinners, after deals got done,” said Anthony Colletta, a partner at Sullivan and Cromwell’s real estate practice, whose clients include Goldman Sachs, Aetos Capital and a number of sovereign wealth funds. “Nobody has a closing dinner at the end of a workout. It’s much more stressful.
“Somebody is losing money, maybe both sides. Nobody is happy.”
The situation is arguably more dire in this downturn than it was during the last recession. In the early 1990s, a number of S & Ls failed. But unlike today, there were still plenty of lenders around to grant new loans to borrowers with good track records.
Today, even the banks without red ink on their books are hoarding what capital they can. Many lenders are even letting developers who hold performing loans know months in advance that they want to be paid in full when the loan comes due, said Boxer, chairman of Stroock’s real estate practice.
In this market, the lender doesn’t have many options. The bank can “extend and pretend” in the hopes that the borrower’s financials will improve, or it can foreclose.
Center of the storm
Many of these lawyers have seen tough times before.
Rosen has been through three downturns, as have most of those leading the real estate practices at the city’s top law firms.
Now his firm is handling the bankruptcies of Lehman Brothers, Trump Entertainment and General Growth Properties, the megamall operator that owns South Street Seaport. General Growth is the largest real estate company in Chapter 11 in U.S. history.
On a recent afternoon, Rosen sat in his spacious, yet cluttered, corner office overlooking Central Park, and offered a rare glimpse into the center of the storm.
It’s a busy place, where the phone is always ringing and sleep is a luxury.
“I wake up worrying,” Rosen offered in a way that sounded more like a boast than a complaint.
Rosen estimates he’s working 80 hours a week, up about 25 percent from the pre-crash days. He sleeps about three hours a night, except on Friday nights, when he sleeps seven.
He’s got one client who e-mails him every morning at 4 a.m., and another overseas who recently started leaving him long voicemail messages between 1 a.m. and 3 a.m.
Though he’s got season tickets to the Knicks and Rangers, he hasn’t been to a Knicks’ game in a year, and a Rangers’ game in two.
It’s messy in Rosen’s world. Beneath his mammoth desk, heaps of Redweld folders bulge with documents. But there’s a gritty charm to the chaos that screams “war room” — an appropriate theme for a man directing a team of real estate associates that has grown over the last three years from 28 to 40. (Rosen’s team often strategizes with Weil Gothshal’s bankruptcy group, the largest in the world with 120 attorneys.)
Hanging from the wall is a map of Israel, and pictures of Rosen, who sits on the board of the Republican Jewish Coalition, with various commanders-in-chief — Bill Clinton, George Bush, Jordan’s King Hussein, and Israel’s Ariel Sharon and Benjamin Netanyahu.
There’s also a black-and-white photograph of “Pinchas Rozen” lying on his stomach and firing a Tommy gun. The man is Rosen’s uncle, for whom he was named. He escaped Poland during World War II and was killed in action in Israel during the 1948 War of Independence.
Phil Rosen’s father, Irving, also escaped Poland as the bombs rained down on Warsaw. In Vilna, Lithuania, he stood outside the house of the Japanese consul, General Chiune Sugihara, and was one of 3,000 people awarded a lifesaving visa to Japanese-occupied Shanghai.
Now Rosen himself is an ambassador of sorts to the beleaguered. Over the years, he’s played that role for hundreds of major clients.
In the last cycle, his firm represented companies including Chemical Bank and Manufacturers Hanover, which had merged, plus Citibank in workouts with shopping mall developer Simon Debartolo; Crown American, also a shopping center developer; and SL Green. That was in addition to representing Olympia & York in their restructuring in the early 1990s.
More recently, during the up cycle, Weil Gotshal did billions of dollars of debt and equity investments for Lehman, Citibank and many hedge funds and private equity firms, such as Fortress Investment Group.
Shuttle diplomacy
Handling the challenges of a severe downturn requires a unique skill set that goes far beyond citing relevant statutes in the law books and typing up contracts.
At times it requires an enforcer.
During the last downturn, Rosen was representing a lender who wanted a restructuring deal signed during the week between Christmas and New Year’s, and the borrower, who owed more than $2 billion on 10 shopping centers, refused to come back from his vacation.
When Rosen threatened to start foreclosure proceedings, the man began cursing at him. Seven hours later, the borrower showed up in Weil Gotshal’s lobby wearing green camouflage hunting pants and a jacket, and carrying a bag. Security called: Should they send him up?
“I asked them to please check and make sure there are no weapons in the bag,” Rosen recalled.
“He came up,” said Rosen. “He signed the documents, and he left.”
Often, said Mechanic, chairman of Fried Frank’s real estate practice, the job requires “a Henry Kissinger-type shuttle diplomacy,” where you keep multiple parties, many of whom are angry and disappointed with one another, on the same page.
Mechanic should know. Though he declined to disclose any current clients, he was known during the boom to have represented a number of big names and companies — who are now facing financial challenges, including Harry Macklowe, Joseph Moinian and Tishman Speyer.
Rosen’s said he’s been in a room “where utter chaos broke out, with yelling and screaming.”
“I got another conference room, took one side into that room, [placed] another lunch order and played shuttle diplomacy for 24 hours straight between the two rooms.”
The price of failure in these situations can be catastrophic.
“Emotions clearly run really high,” Mechanic said. “And if emotional responses are allowed to override what makes the most business sense, you end up with a worse result for everybody.”
During the boom, he said, it was all about getting things done quickly. “[But] now, there are too many deals that should get done, where if you don’t have the right chemistry and management, they don’t get done,” Mechanic said.
That’s especially true in bankruptcies and restructurings when individuals who know one another are involved, said Paul Aloe, a real estate lawyer and partner at Kudman Trachten Aloe.
Aloe represents a lot of smaller fish. For example, he’s worked with the owners of the food store Zabar’s when some of the tenants at properties they owned went bankrupt or failed to pay, and with Brunswick Hospital on Long Island when it went bankrupt in 2005. “Feelings get very, very raw,” Aloe said. “Many situations I deal with, people are very angry and now there’s a problem, and very often it produces not just disagreements, but begins to get personal. And things just deteriorate from there.”
Mechanic often uses jokes to “defuse situations that are highly charged, so that people can focus on the business situation, rather than why it went bad and whose fault it is.”
Back in the spring of 2008, he famously helped the Macklowes hash out the sale of the GM Building to Boston Properties, after Harry Macklowe’s record-breaking deal with Equity Office Properties went south. At the time, he publicly praised Billy Macklowe for using his sharp wit to help get the deal done.
Mechanic declined to discuss the Macklowes. But he did recall a tense negotiation over a building sale in San Francisco a few years back that helped convince him of the utility of humor. After a devastating earthquake hit the city, engineers determined that the building being sold was still structurally sound. But the deal hung in the balance.
“We’re going forward,” one of the sellers said on a particularly tense conference call. “But there’s just one thing we need to talk about.”
“What’s that?”
“The 20 percent increase in purchase price,” the seller responded. “Now that we have a decreased supply of office space in San Francisco, we need to hike the price.”
The line went silent. Then everybody burst into laughter.
“It was a joke and it lightened the mood,” Mechanic said. “It got us to a dialogue where some of the emotion was withdrawn. And it helped make the deal for both sides.”
High-stakes negotiations
In this downturn, Rosen said, his firm is representing a lot of borrowers, as well as lenders.
His partner in the real estate group, Mike Bond, is handling the disposition of Lehman’s assets. In addition to overseeing the real estate matters connected with the bankruptcies of both General Growth Properties and Trump Entertainment, Rosen has a slew of other major clients.
He is also overseeing real estate matters for Extended Stay of America Hotels, which has roughly 680 hotels; and 12 “mostly name brand” real estate restructurings in Manhattan, ranging from the owner of a single property worth a couple hundred million dollars to portfolios that are worth between $2 and $4 billion.
The job requires “a lot more hand-holding” nowadays.
“The clients have a lot more at stake,” he said. “They’ve hired me to help them through a distressed situation.
“Most people are the same whether they are moguls or not. When they’re about to lose their fortune, or possibly even a small portion of their fortune, they get very emotional. I spend two or three nights a week working through these issues.”
Rosen has had clients break down crying — though that hasn’t happened yet this downturn. (He claims, only half-joking, to be “really good at hugs.”)
Many of his clients, especially those in private equity firms, are in their 20s or young 30s, and have never been through a down cycle.
“Part of the job is supplying psychiatric services,” Rosen said. “It’s a social services job as well as a legal services job. Some workouts affect people’s entire lives.”
Rosen likes to say that he’s “worrying all the time.”
“I worry about making sure we’re covering all the bases, and I look ahead and worry.”
He claims his “greatest” compliment was when a client told his boss that while he’s sleeping, he knows that “Phil Rosen is worrying about my company.”
Sleepless nights
Yet for a man who claims to be operating on three hours sleep and spends all of his time worrying, Rosen appears remarkably energized.
Perhaps that’s because many banks have so far been willing to hammer out compromises.
But billions in loans are slated to come due in the coming months. And, Rosen predicts, there’s no way to know for sure that the market has bottomed until the banks make clear whether they intend to accommodate borrowers.
He’s not the only one who holds that opinion.
In addition to working on restructurings, Sullivan and Cromwell’s Colletta has been keeping busy raising and placing money from sovereign wealth and other sources into funds that will buy up distressed assets.
When the new wave of loans come due, and the banks make their intentions known, the buying may start again. Or, perhaps, the commercial market will crash further. If that happens, lawyers like Rosen, Mechanic, Boxer and Aloe will have more emotional clients on their hands.
Either way, said Rosen, “real estate restructuring experts will be very busy for the next 12 to 24 months.”