Real Estate Downturn Causes Lawyers to Adapt

Impact on Real Estate Attorneys

To understand fully the true impact on practicing real estate attorneys, we only have to look back a couple of years to remember how good it was to be one. “Five or more years into the real estate boom, real estate lawyers are still a hot commodity in Chicago law firms, maybe the hottest,” said an article from the South Florida Business Journal dated Jan. 21, 2005, a typical theme of the boom times. This article reported that as a direct result of the region's robust real estate markets, South Florida law firms with strong land use and real estate practices were ramping up staffs and expanding offices. This phenomenon, ironically described in the article as a “new trickle-down economic twist” by a partner at a large Miami-based firm, prompted that firm to expand its offices in downtown Miami by an additional 11,000 square feet to adjust to its double-digit annual growth in attorneys. This growth of primarily real estate attorneys led to an “increased demand for real estate service first and litigation second,” the article said. This was typical of most law firms with a concentration in real estate across high growth areas in the country, where billable hours, fee receipts, profits per equity partner, and associates were all on the rise.

Just two years later, in a February 2008 article on JD Journal.com, it was reported that the same firm would be laying off an undisclosed number of attorneys and staff in its corporate and real estate areas. That firm's 10.5-year, $58 million lease to occupy about 15% of Brickell Financial, one of several new office buildings underway in Miami, was also recently cancelled.

The real estate downturn has also affected lateral moves by partners between firms. Most real estate partners experienced a diminution of their books of business in 2008 and even if considering a move, may have decided to remain if their firms are financially healthy. The risk of taking a chance that the new firm will have financial troubles or that their own performance will not be up to expectations is too great at this time.

Now faced with such a dramatic and sudden change, real estate attorneys are left wondering what to do. The transactional practice that was so good to so many for so long is no longer there.

What to Do

Real estate attorneys now have to redirect the focus of their practices to adapt to the changing times. The decrease in traditional transactional and development work for real estate departments within law firms has provided an opportunity for firms to think creatively about client generation and to look at other areas in which to provide services to clients. For example, in my firm's Orlando, FL, office, a majority of our real estate work over the last year has been concentrated on resolving contract disputes, helping developers dispose of assets, working out bad loans for both developers and lenders, representing receivers appointed to oversee real estate liquidation, and amending and extending development obligations. Many firms see the economic downturn as an opportunity to help entrepreneurs looking for distressed assets.

Real estate lawyers are looking for other ways to expand their markets. For 2009 and most likely the next several years, one of the largest growth areas for law firms will be in the representation of lenders in workouts, foreclosures and bankruptcies. While most of the foreclosures started with the residential market in 2006 and increased in 2007, we now see that the overall recession is hitting the commercial, retail, office and even industrial property markets throughout the country. As such, developers who traditionally have been very solid now face situations where they have to provide additional security and otherwise creatively restructure their loans in order to keep them in performance. Real estate attorneys are taking key roles to help their developer and lender clients reach agreements to avoid litigation.

Added Value

When workouts fail, foreclosures are the next step. Lenders are, by necessity, hiring aggressively to build up their special assets divisions, either by converting loan officers or hiring outside experts to fill these roles. Commercial lenders are going to be faced with the largest number of REO (Real Estate Owned) assets since the early 1990s. Lenders anticipate a large influx of property in their portfolios, and with the credit markets stuck in deep freeze, some lenders will find themselves owning real estate assets for years to come. This presents great opportunities for experienced real estate lawyers to add value. A significant number of these loans will involve some title problem or other issue and an experienced real estate attorney's specialized knowledge will be invaluable. Moreover, as lenders take back projects from defunct borrowers, they will need assistance from attorneys experienced in land use and development to evaluate the status of a project and provide recommendations on how to manage and hold the property. Many of these projects will require ongoing development activities to maintain entitlements, address ongoing mitigation for contamination, compliance with permit conditions and a host of other issues to be resolved. Most lenders are not equipped to handle these complex issues directly. Real estate attorneys who represented developers can now provide the same legal services to lenders because they can understand the entitlement process and can work on extensions of governmental approvals, address development needs and help maximize the value of
a property while minimizing any additional out-of-pocket expenditures the bank may need.

Lenders will need to sell these assets, and as a result, larger firms are aggressively targeting the special asset teams of large banks because they will be the source of future transactional work in coming years.

Another area where real estate attorneys have expanded their reach is in the representation of homeowner's and condominium associations, and even community development districts. With increasing home foreclosures, the budgets of homeowner associations and condominium associations are being adversely impacted. Defaults on assessments have risen greatly over the last year or two, and associations need competent real estate attorneys to prosecute foreclosures of these assessment liens. Often, there are specialized issues relating to priority of liens with mortgage lenders and qualified real estate counsel can provide valuable service.

New Fee Proposals

Attorneys are also approaching their existing clients with new fee proposals to help their clients better weather the storm. Corporate clients are trying to rein in spending on law firms. Now that firms are increasingly desperate for business, some corporate general counsels say, the firms are more willing to accept less profitable payment arrangements that do not reward the firms for simply assigning more lawyers to spend more time on a project.

A survey of about 600 corporate executives by Acritas, a London-based research firm, found that 32% expected billing practices to change over the next two years.

“Rather than having hourly rates, we are increasingly negotiating flat fees or fixed fees, or success fees,” which include a premium based on predetermined conditions, said Ivan K. Fong, chief legal officer and secretary at Cardinal Health in Dublin, OH, and chairman of the Association of Corporate Counsel. Some law firms have resisted those changes, he continued in a New York Times article published on Nov. 11, 2008, but may find they have to accept clients' wishes.

Firms are starting to consider the elimination of billable hours altogether in favor of alternative billing practices, according to a NYTimes.com article on Jan. 30, 2009. Most common accommodations are discounts on standard billing rates. It is an easy choice for an attorney to trade a full rate discount for some certainty of work over the short term. Other attorneys have gone to fixed-fee billing on projects that were traditionally billed on an hourly basis. Some projects, like preparation of HOA (Home Owners' Association) documents, loan closings or lot or condominium sales, have become more standardized over time and lend themselves easily to fixed fees. Now, however, in an attempt to capture more business, transaction attorneys are looking to fixed-fee arrangements on loan workouts, negotiation of purchase contracts, resolution of contract disputes, construction liens and similar areas where traditionally the billable hour was used.

Some firms have reintroduced the concept of retainer agreements, wherein the firm agrees to provide all legal work requested by a client, and the client will pay a set monthly fee. This arrangement allows attorneys to address staffing issues better, and creates a steady revenue stream. Clients appreciate the cap on fees.

Back to Court

Several real estate attorneys have even done the unthinkable: They have dusted off their suit jackets, bought new ties and have ventured into the courtroom. For foreclosure matters and real estate contract disputes, their knowledge of the law can prove invaluable.

Conclusion

What is most important for real estate lawyers to remember is that this area of practice is always going to be cyclical. They call it a “real estate market” because it is just that ' a market with many ups and downs over one's legal career. Real estate attorneys need to seize the opportunity when times are good and make adjustments to their practice areas as the market downturns. The most successful real estate attorneys will be the ones most willing to adapt to ever changing times.

David P. Barker is a partner in the Orlando, FL, office of Roetzel & Andress, LPA and is a board certified real estate attorney, who focuses his practice on residential and commercial development.

Our country's prolonged financial crisis and relentless recession that began in 2006, became acute in late 2007, and continues to the present day, has hit real estate in unprecedented ways. The housing market continues to sag, as national home prices hit levels last seen in 2003, and the fourth quarter of 2008 saw a record low decline of 18.2%, according to the Feb. 24, 2009 edition of Standard & Poor's Case-Shiller Home Price Indices.

There are two strong forces working against a real estate recovery right now: Banks are not making new loans, and opportunistic buyers are not convinced we have hit the bottom yet. With a dramatic fall in the real estate market, the freeze of the credit markets, and now the deepening broad-based recession, law firms that relied heavily on transactional practices are being severely impacted. The transaction practice for most real estate lawyers started slowing down in the second half of 2007, but took a plunge in the fall of 2008. When the credit markets froze, commerce stopped the lifeblood of real estate attorneys: purchase and sale transactions, development and activities, and financing of real estate.

Daily headlines speak of law firms laying off attorneys and staff members, not to mention cutting back on new hires. Firms are even starting to trim salaries, according to an article by Law.com in May 2008. This trend does not bode well for real estate attorneys who were already struggling with diminishing practices.

Impact on Real Estate Attorneys

To understand fully the true impact on practicing real estate attorneys, we only have to look back a couple of years to remember how good it was to be one. “Five or more years into the real estate boom, real estate lawyers are still a hot commodity in Chicago law firms, maybe the hottest,” said an article from the South Florida Business Journal dated Jan. 21, 2005, a typical theme of the boom times. This article reported that as a direct result of the region's robust real estate markets, South Florida law firms with strong land use and real estate practices were ramping up staffs and expanding offices. This phenomenon, ironically described in the article as a “new trickle-down economic twist” by a partner at a large Miami-based firm, prompted that firm to expand its offices in downtown Miami by an additional 11,000 square feet to adjust to its double-digit annual growth in attorneys. This growth of primarily real estate attorneys led to an “increased demand for real estate service first and litigation second,” the article said. This was typical of most law firms with a concentration in real estate across high growth areas in the country, where billable hours, fee receipts, profits per equity partner, and associates were all on the rise.

Just two years later, in a February 2008 article on JD Journal.com, it was reported that the same firm would be laying off an undisclosed number of attorneys and staff in its corporate and real estate areas. That firm's 10.5-year, $58 million lease to occupy about 15% of Brickell Financial, one of several new office buildings underway in Miami, was also recently cancelled.

The real estate downturn has also affected lateral moves by partners between firms. Most real estate partners experienced a diminution of their books of business in 2008 and even if considering a move, may have decided to remain if their firms are financially healthy. The risk of taking a chance that the new firm will have financial troubles or that their own performance will not be up to expectations is too great at this time.

Now faced with such a dramatic and sudden change, real estate attorneys are left wondering what to do. The transactional practice that was so good to so many for so long is no longer there.

What to Do

Real estate attorneys now have to redirect the focus of their practices to adapt to the changing times. The decrease in traditional transactional and development work for real estate departments within law firms has provided an opportunity for firms to think creatively about client generation and to look at other areas in which to provide services to clients. For example, in my firm's Orlando, FL, office, a majority of our real estate work over the last year has been concentrated on resolving contract disputes, helping developers dispose of assets, working out bad loans for both developers and lenders, representing receivers appointed to oversee real estate liquidation, and amending and extending development obligations. Many firms see the economic downturn as an opportunity to help entrepreneurs looking for distressed assets.

Real estate lawyers are looking for other ways to expand their markets. For 2009 and most likely the next several years, one of the largest growth areas for law firms will be in the representation of lenders in workouts, foreclosures and bankruptcies. While most of the foreclosures started with the residential market in 2006 and increased in 2007, we now see that the overall recession is hitting the commercial, retail, office and even industrial property markets throughout the country. As such, developers who traditionally have been very solid now face situations where they have to provide additional security and otherwise creatively restructure their loans in order to keep them in performance. Real estate attorneys are taking key roles to help their developer and lender clients reach agreements to avoid litigation.

Added Value

When workouts fail, foreclosures are the next step. Lenders are, by necessity, hiring aggressively to build up their special assets divisions, either by converting loan officers or hiring outside experts to fill these roles. Commercial lenders are going to be faced with the largest number of REO (Real Estate Owned) assets since the early 1990s. Lenders anticipate a large influx of property in their portfolios, and with the credit markets stuck in deep freeze, some lenders will find themselves owning real estate assets for years to come. This presents great opportunities for experienced real estate lawyers to add value. A significant number of these loans will involve some title problem or other issue and an experienced real estate attorney's specialized knowledge will be invaluable. Moreover, as lenders take back projects from defunct borrowers, they will need assistance from attorneys experienced in land use and development to evaluate the status of a project and provide recommendations on how to manage and hold the property. Many of these projects will require ongoing development activities to maintain entitlements, address ongoing mitigation for contamination, compliance with permit conditions and a host of other issues to be resolved. Most lenders are not equipped to handle these complex issues directly. Real estate attorneys who represented developers can now provide the same legal services to lenders because they can understand the entitlement process and can work on extensions of governmental approvals, address development needs and help maximize the value of
a property while minimizing any additional out-of-pocket expenditures the bank may need.

Lenders will need to sell these assets, and as a result, larger firms are aggressively targeting the special asset teams of large banks because they will be the source of future transactional work in coming years.

Another area where real estate attorneys have expanded their reach is in the representation of homeowner's and condominium associations, and even community development districts. With increasing home foreclosures, the budgets of homeowner associations and condominium associations are being adversely impacted. Defaults on assessments have risen greatly over the last year or two, and associations need competent real estate attorneys to prosecute foreclosures of these assessment liens. Often, there are specialized issues relating to priority of liens with mortgage lenders and qualified real estate counsel can provide valuable service.

New Fee Proposals

Attorneys are also approaching their existing clients with new fee proposals to help their clients better weather the storm. Corporate clients are trying to rein in spending on law firms. Now that firms are increasingly desperate for business, some corporate general counsels say, the firms are more willing to accept less profitable payment arrangements that do not reward the firms for simply assigning more lawyers to spend more time on a project.

A survey of about 600 corporate executives by Acritas, a London-based research firm, found that 32% expected billing practices to change over the next two years.

“Rather than having hourly rates, we are increasingly negotiating flat fees or fixed fees, or success fees,” which include a premium based on predetermined conditions, said Ivan K. Fong, chief legal officer and secretary at Cardinal Health in Dublin, OH, and chairman of the Association of Corporate Counsel. Some law firms have resisted those changes, he continued in a New York Times article published on Nov. 11, 2008, but may find they have to accept clients' wishes.

Firms are starting to consider the elimination of billable hours altogether in favor of alternative billing practices, according to a NYTimes.com article on Jan. 30, 2009. Most common accommodations are discounts on standard billing rates. It is an easy choice for an attorney to trade a full rate discount for some certainty of work over the short term. Other attorneys have gone to fixed-fee billing on projects that were traditionally billed on an hourly basis. Some projects, like preparation of HOA (Home Owners' Association) documents, loan closings or lot or condominium sales, have become more standardized over time and lend themselves easily to fixed fees. Now, however, in an attempt to capture more business, transaction attorneys are looking to fixed-fee arrangements on loan workouts, negotiation of purchase contracts, resolution of contract disputes, construction liens and similar areas where traditionally the billable hour was used.

Some firms have reintroduced the concept of retainer agreements, wherein the firm agrees to provide all legal work requested by a client, and the client will pay a set monthly fee. This arrangement allows attorneys to address staffing issues better, and creates a steady revenue stream. Clients appreciate the cap on fees.

Back to Court

Several real estate attorneys have even done the unthinkable: They have dusted off their suit jackets, bought new ties and have ventured into the courtroom. For foreclosure matters and real estate contract disputes, their knowledge of the law can prove invaluable.

Conclusion

What is most important for real estate lawyers to remember is that this area of practice is always going to be cyclical. They call it a “real estate market” because it is just that ' a market with many ups and downs over one's legal career. Real estate attorneys need to seize the opportunity when times are good and make adjustments to their practice areas as the market downturns. The most successful real estate attorneys will be the ones most willing to adapt to ever changing times.

David P. Barker is a partner in the Orlando, FL, office of Roetzel & Andress, LPA and is a board certified real estate attorney, who focuses his practice on residential and commercial development.