Interview with James O’ Brien, New York
Please describe your commercial real estate practice.
We advise our clients on a variety of different transactions: buying and selling real estate, leasing real estate, and financing real estate. We also advise on the real estate aspects of our clients’ M&A and capital markets transactions. A company’s real estate interests can be of significant value to an M&A transaction. We conduct a due diligence investigation and ensure that the real estate interests are transferred properly. When a REIT or other real estate company undertakes a public offering, we will assist in the due diligence investigation and the preparation of disclosure documentation.
I frequently work with real estate opportunity funds. These funds typically buy underutilized parcels of real estate to develop and resell them. Sometimes these parcels are vacant. Often they are already developed, but are not being put to their highest and best use. Our clients are expert at identifying these parcels and redeveloping them for a more desirable use – whether that be as commercial, residential or mixed use property.
I advise on these transactions from start to finish – from the acquisition and its financing, to the construction financing to the eventual sale of the improved property.
I also work with corporate clients who have real estate needs. We represent a rail transportation company and I have assisted them in acquiring and developing distribution hubs for their rail network.
The real estate group at Davis Polk also does a considerable amount of pro bono work. Typically we advise non-profits with regard to their leases, but recently we helped a pro bono client acquire a building in the Bronx for use as a headquarters facility. We received a Cornerstone Award for outstanding pro bono service from the Lawyers Alliance for New York for our work on that project.
How has the residential mortgage crisis affected the commercial real estate practice and the growth and development of commercial real estate?
The residential mortgage crisis has affected commercial real estate by making credit much more difficult to obtain. Real estate investment is driven by leverage. One of the great things about real estate investment is that you don’t need all cash to do it. Potential investors are either reluctant, or simply unable, to acquire and develop real estate without the aid of debt. As a result, the demand for real estate has slowed and prices have fallen.
Many banks and other real estate lenders have taken large losses on their portfolios of mortgage backed securities and associated derivative obligations. These losses have affected their capital reserves and have limited their ability to make loans. Falling real estate prices have made lenders nervous about lending against real property and have led to tighter credit standards.
Even commercial projects that have little to do with residential real estate are having trouble finding financing. As leverage dries up, the pace of deals dries up because there is less financing available to support them.
Real estate developers usually acquire real estate with short-term financing expecting to take out the initial loan with construction financing or longer term permanent financing. Construction financing is now difficult to obtain, so development timetables have slowed. Many developers are also faced with loans coming due that they are unable to repay. In the usual case, a developer could sell the property to repay the loan or the developer could refinance. Now the markets for real estate sales and financing are constrained, so developers are attempting to extend their existing loans.
There are, of course, companies that are in the business of developing real estate for residential use. Those companies are feeling the pinch because there is just not as much demand for their product and because prices are coming down.
What has been the effect of the downturn on your practice in particular?
We have remained active, but the mix of work has shifted. We are seeing more restructuring projects than acquisitions, for example. We have strong clients with substantial equity and good projects in the pipeline, but the liquidity crunch has hampered their plans.
The market for construction financing is not very good right now, so instead of helping a client secure construction financing for a development project, we might restructure an existing loan on the property. I have assisted clients in extending the terms of short-term acquisition loans in the hopes of securing construction financing down the road. Lenders have generally been willing to restructure loans. Banks are not in the business of managing property and would prefer not to put properties into foreclosure. They would like to have their loans repaid and have been amenable to reasonable restructuring proposals that provide relief to the borrower and a plan for repayment.
That being said, it is not impossible to get financing right now. We recently helped a client secure financing for horizontal infrastructure improvements for a mixed-used development in New Jersey. The project will include retail, commercial, office and industrial space.
We have also seen some joint venture restructuring. We have a client that formed a joint venture with a residential real estate developer. Because of the downturn in the residential real estate market, this developer experienced economic distress that put the joint venture’s investment in jeopardy. We assisted our client in buying the residential developer’s share of the joint venture so that it could take over the project on its own.
Source: Business Law Journal