Is the party over? As rising interest rates and high vacancies increase financial tensions in the commercial real estate market, today’s bleak news could be just the tip of the iceberg, says Leo Jacobs, founder of Jacobs P.C.
The firm, which specializes in complex situations such as defaults and restructuring, has been expanding its resources and bringing on seasoned attorneys in anticipation of the pain they see around the corner.
“Gotham deserves a new class of counsel as the tide turns,” Jacobs said. “In today’s climate, people aren’t chasing opportunities, they’re seeking to unwind them, and that’s where we excel. We’re helping clients experiencing financial struggles make the best decisions they can before it’s too late.”
Investors often have a siloed view of their position and lack context of the broader view. That can lead to dangerous missteps—from being resistant to bankruptcy to filing too early.
“Leo and his team are tenacious and jump in with two feet to make sure their clients get the best results,” says David Goldwasser, CEO of FIA Capital Partners.
Every day brings blaring headlines of big players who are mired in treacherous conditions, unsure of which direction to go. Already, Jacobs P.C. has been dominating this sector of the market, assisting clients facing precarious challenges with a focus on business and bankruptcy workouts and litigation.
“New York real estate is the toughest in the world and when the vultures start circling, you need an aggressive and smart line of defense to protect you and give you time to navigate out of certain situations. No one does that better than Leo and his team,” says Meir Babaev, Principal of AB Capstone.
The Real Deal sat down with Leo to tap his expertise in the field and help provide direction to the myriad of investors facing this untenable market.
TRD: What’s different about today’s market?
Leo Jacobs: For most of the recent past, the market has been all about expansion, but now we’re dealing with contraction.
We see the difficulties owners, lenders and associated parties have in anticipating and working through the challenges ahead. It’s a frightening time and one that encourages knee-jerk reactions to these difficulties. Clients need a steady hand and a class of counsel that has the tools and acumen to traverse these terrains.
The clients I’m working with know they can’t go to the person who’s doing their lease to begin helping them resolve their new concerns; they are not equipped to. Today, we’re working on redefining the debtor. landlords, tenants, shareholders, sponsors, developers, guarantors and their businesses, all those parties are becoming the new debtors, and that’s why restructuring is currently our main focus.
Furthermore, we currently work with ANAX Partners, which tapped us to help them navigate the legal frameworks of recapitalizing distressed assets, allowing their clients to gain a better understanding of the legal nuances and structural considerations that are critical to the restructuring process.
ANAX Managing Partner Eric Brody said, “With over $8 billion in commercial mortgage-backed securities (CMBS) tied to multifamily properties coming due this year, real estate owners and developers are encountering a pressing need to explore alternative financing options. We realized the significant need to be well-versed in the intricate legal considerations that make or break a project’s success, especially when it comes to restructuring capital.”
TRD: Where are companies (and their legal counsel) making missteps as they confront the challenges in today’s real estate environment?
Leo Jacobs: Most firms are mired in the past, which means they’re looking at tired solutions that don’t apply today or they’re aiming for quick fixes that don’t entirely evaluate future risk.
Another big issue is that they’re taking siloed views of specific matters, rather than assessing the full business context. There’s no way they can achieve the best possible outcome with this perspective.
Finally, it’s a typical business practice for large firms to assign complex matters to junior attorneys, who just don’t have the breadth and depth of experience that comes from our experience. When restructuring hundreds of millions or billions of dollars clients and their attorneys fail to recognize that legal considerations need to dovetail with accounting and financial controls; my team and I have seen and worked in similar market conditions in the past and know how to handle them, to help our clients negotiate these challenging circumstances and come out on top.
Stake Property Group CEO Michael Jacobs said, “Investors need to decide whether it is wiser to become REO gravestones or to partner with the smart and strategic partners to get these assets for the right price and make them investable again. Right now we see common and preferred equity evaporating and there is no slowdown coming in this down-market.”
TRD: What key components should clients look for in strong legal counsel in the upcoming marketplace?
Leo Jacobs: First, find someone who knows how to read people. What I seek to help my clients understand is that a lot of what will eventually lead to success comes down to personality. Frankly, lenders and borrowers both need to dial it back.
The lender is often very aggressive, and my firm’s job is to move the aggressor, the lender, further away from the prey, the borrower. Our clients recognize that we offer counsel which helps them work with lenders with respect as advocates, not enemies.
But there’s a lot of psychology involved. These are billionaires who have never been in this situation before. I sometimes tell them to swallow their ego because they might be living on borrowed time, and their egos aren’t allowing them to move forward. There are of course other times when aggressively pursuing your client’s rights to gain control back of your client’s assets is the necessary thing to do; we do that well as well. Our goal is to work with the lender as long as we can to make sure the borrower can sell, develop and plan another day. When we can see something is ultimately going to fail, we caution them not to keep investing in a dead body. Let this one go, save your money, and we’ll put it into a new venture after we’ve preserved you as a going concern.
The asset is separate from the entrepreneur; if we can save the entrepreneur, who is often the guarantor or the ultimate responsible party, we can guarantee the entrepreneur’s eventual rise to success again. Nevertheless, it is tough for the entrepreneur to encounter a future where their asset does not exist; we help them with those considerations.
We should all be aiming for a practical way out, and you have to understand when fast is better, counter to many firms who take a long time to make progress because it’s in their best interest to bill hours.
I tell clients that sometimes for every dollar they spend on litigation, they might get ten cents back, whereas, with every dollar you spend on mediation or alternative resolution methods, you get a $5 return that will allow you to fight another day.
And, it goes without saying that they need someone who has extensive experience in real estate and bankruptcy and a deep understanding of the differences between in-court and out-of-court litigation and restructuring. That’s what we excel in.
TRD: What should companies think about as they assess opportunities?
Leo Jacobs: The time is now to get a grasp on the impending weakening in the real estate market and be thoughtful about the infrastructure of your real estate holdings.
Companies need to align with a firm that will give them confidence and help them understand when bold moves are the only path to resolution – when it’s the right time to do something you haven’t thought of or might even feel uncertain about but what ultimately may become a useful step in the right direction. Look for a firm that’s adept in these maneuvers and can help you understand the risks in the steps they recommend.
And then listen to them. We approach all our clients with honesty, empathy and don’t shy away from tough conversations. Some lawyers will tell the client what they want to hear. We tell them what they need to hear to make them deal with the reality of their position so they can make better decisions. At the end of the day, they appreciate that they aligned with truth tellers who got the job done.
And that’s why they come back to us: For a boutique law firm, relationships are everything, and we’re in the business of building and nurturing these relationships. We’re not a churn-and-burn shop and that is reflected in every aspect of our service.
Could you use a firm like Jacobs P.C. in your corner? Find out more here.