FEATURE ARTICLE, MARCH 2009

A GOOD TIME FOR GOOD COUNSEL
Real estate attorneys are shifting the focus of their practices to better serve clients in these tough economic times.
Kevin Jeselnik

Real estate attorneys in the Midwest have their hands full these days. The rapidly changing commercial real estate sector has created myriad new challenges and opportunities for industry players, and real estate attorneys must adapt in order to best serve their clients. Heartland Real Estate Business has spoken with two Midwest-based attorneys for a look at how the legal field is preparing for the new realities that face the real estate market in the near term.

“The credit crunch is numbers 1, 2 and 3 on the list of the biggest issues we are facing,” says Brian Kozminski, a partner in the real estate practice of Chicago-based law firm Levenfeld Pearlstein. “Clients in the industry still want to make deals, but the loan terms have become more onerous and the pool of lenders has shrunk.”

Because the stalled financial market has significantly decreased the velocity of investment sales and development activity, a large facet of the services that attorneys provide has slowed down. That doesn’t mean that there is no work for lawyers in the real estate industry; instead, work is picking up in other areas, and firms are having to move fast to provide clients with the services they need.

The rising rate of loan defaults, coupled with the billions of dollars of commercial real estate loans set to mature this year and next, has created significant demand for expertise in loan restructuring. Many developers and owners of real estate will have to refinance existing mortgages to avoid prohibitively high payments scheduled to occur when these loans come due.

“Because there is less credit out there to be had, loans coming due are another big issue people are dealing with,” Kozminski notes.

Levenfeld Pearlstein is internally restructuring its practice to better answer the needs of its clients, including teaming attorneys from the real estate group with the firm’s bankruptcy team to gain skills in the restructuring and creditors’ rights areas, as well as concentrating resources in construction litigation, which Kozminski feels  will be a growth area in the near future.

In St. Louis, Don Kennedy, officer in the real estate group of law firm Greensfelder, Hemker & Gale, P.C., is on the medical sector of real estate practice, which Greensfelder has specialized in for some time.

“While all areas of real estate have been affected by the economy, there is still work to be done in the healthcare sector,” Kennedy says. The firm is also allocating resources to loan restructurings. “We have never tried to have anyone in our group so specialized that if one area of the industry goes away, they are marginalized, and that has served us well.”

Kozminski believes that loan workouts will continue throughout the year, echoing a sentiment heard throughout the industry that it is in the best interest of the property owners and the banks to come to an agreement, as banks don’t want massive amounts of real estate on their hands.

“We are seeing a lot of short-term extensions, in the hope that it may be better in a few months,” he explains. “It will most likely shake out that the lenders provide new financing, because they would rather take a performing loan than take property back. Of course, lenders want to make a fee for this, and they are being aggressive with the fees, and they really only want to talk if a project is performing.”

“It is just part of the business cycle in real estate,” Kennedy says. “Lenders know what the refinance market is like and they are working hard to get borrowers to a point in time when liquidity is a little easier. You have two parties that are motivated, so everyone is going to look for a deal that makes sense for both sides. Greensfelder’s real estate team has begun working closely with the creditors’ rights team to work on that sort of restructuring.”

Both attorneys agree that, even in the midst of the current troubles, there are great opportunities in the Midwest.

“There are some deals that make sense now that aren’t getting done because investors are waiting to see, not the curve become completely flat, but for the curve to flatten out a little bit,” Kennedy explains. “Investors are waiting for vacancy rates to stabilize, because they might not trust NOI right now. Once the surprises slow down and cap rates stabilize, they will have a little more confidence in NOI and investors are going to step in, because they need something to do with their money.”

“If you look at the macro picture, I
am sure activity is down in Chicago because of the economy and the new office space that is coming online, but  I am actually seeing a lot of leasing activity, even though the terms are more tenant-friendly,” Kozminski says. “Landlords are more aggressive in making deals, and if a tenant is credit worthy they may be able to lock down the deal of a lifetime by virtue of market conditions.”

In the short term, the focus is on serving the most pressing needs of a client, but the long-term goals remain the same, according to Kennedy.

“One thing that we always do is try to connect people that have matching wants and needs; frankly, that is a big part of what we do,” he says.
“Lawyers need to be cognizant of how the market has changed, so that they do not unduly interfere with deals getting done. If you cannot adapt your negotiating style to what the realities of the market are, you are not going to make deals.”

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