Real Estate Restructuring Work Proving a Boon to Firms by Robert Carr

Real estate restructuring work, a bandwagon that many firms jumped on in the past year, shows no signs of slowing. More than $1.4 trillion in commercial loans are coming to term in the next four years, according to the Congressional Oversight Panel studying financial reform, and will likely keep the distressed-property business booming.

That trend is paying off for many firms and their workout practice groups. Katharine Bachman, vice-chair of the real estate practice group at Wilmer Cutler Pickering Hale and Dorr, says her group has seen a real spike in restructuring work. When the firm first organized its Distressed Real Estate Solutions Group at the end of 2008, only a small percentage of the real estate practice concentrated on loan collections and distressed asset investments.

"Today, approximately 30 percent of our real estate work is in the distressed arena. We project that this percentage will increase as investment markets loosen ... particularly given the fact that so much commercial real estate debt -- financed at higher valuations than the current market -- is coming due over the next few years," she says.

Last week Jenner & Block announced the formation of their Real Estate Finance Litigation and Workout Task Force, bringing together attorneys from the real estate, complex commercial litigation, bankruptcy, corporate and environmental practices. Don Resnick, chairman of the firm's real estate practice, says creating a cross-functional team made sense.

"We just kept running into each other working these cases. We realized that [various practice areas] needed our help, and we needed theirs, to tackle this feeding frenzy of work," Resnick says. "With this team we're also able to use our expertise from 1990 to train the younger attorneys, many of whom had no idea a property deal could go bad." Resnick is one of many leaders of real estate divisions who worked on distressed deals in the 1990-91 recession.

Many real estate attorneys say they saw the writing on the wall in 2008 as securitization and splitting up debt became popular in the past decade, and the risk implications of trying to deal with unraveling each piece was ignored. Rick Jones, co-chair of Dechert's finance and real estate group, says he likes to call it the "Glass Race Car" theory.

"A glass race car, you would imagine, can be created with multiple chemicals and layers into all one piece with intricate details and structure. It's great, until it hits the wall. Then it shatters in a thousand sharp pieces," he says.

The restructuring business for Dechert has also grown significantly, he says, both in representing lenders and borrowers. "I would say the workout business throughout the legal community is up several hundred percent," Jones says. "I think we'll see the volume of troubled loan restructures increase another 100 percent between now and 2011. It won't be until 2013, at least, that we see a market start to be free of dealing with restructures."

However, Jones says though there's a great deal of restructuring nuances to wade through, the number of cases is still much, much lower than was expected. "We all saw this movie in 1990. We all went from originating loans to working them out for a number of years, and this was the paradigm that we thought would be followed. It just didn't happen," Jones says.

In hindsight, he says the bid-ask spread, the difference between the asking price of a property and what someone would be willing to pay, just got too wide too fast. "Banks have been enabled by regulators not to mark assets to real trading values and sell them, and we're still seeing a reluctance from holders to engage in wholesale sales. It's just causing a drag on the credit markets for all deals," Jones says. He adds, "things are starting to pick up. We're cranking up lateral hiring for the first time in three years."

Brett Miller, a partner with Morrison & Foerster, says his firm's Distressed Real Estate group was formed about 18 months ago; and similar to other firms with these teams, the core group is about 30 attorneys. His practice group, led by Chair Mark Edelstein, has been involved in the Chapter 11 filing of Stations Casinos (representing bidder Boyd Gaming Group), as well as representing the largest creditor group in the General Growth Properties bankruptcy case, and the largest creditor in the Extended Stay Hotels bankruptcy case.
"Workouts are just a tremendous growth area, and it's going to continue. You're going to see a lot of case law being developed from these issues, such as the decisions in the General Growth case that showed bankruptcy can be filed for the greater good," Miller says.

Richard Fries, a partner who leads the commercial real estate and distressed loan restructuring team at Bingham McCutchen, says that a specialized distressed property practice at many firms is here to stay, in contrast to the end of the last down cycle, when restructuring work seemed to fade away as bigger deals came in.

"The work in our distressed real estate group has increased significantly since its inception a year and a half ago," Fries says. "Our volume has probably increased close to 50 percent. We expect that, subject to changes in the marketplace, we shall be involved in distressed real estate workouts for the next two to three years at a level greater than today. It is hard to fix a percentage, but a steady increase each year is likely."

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