In a nutshell
Real estate has multiple branches. Certainly, the practice no longer simply involves the sale of property by A to B; it now encompasses acquisitions and disposals, financing, leasing, development, joint ventures and funds.
Financing is a significant component of most transactions, and can involve sophisticated structuring, capital markets transactions, mortgage and mezzanine loans, debt restructurings, private placements, sale and leaseback financings, governmental incentives and tax aspects.
Another branch of real estate is land use, which requires attorneys to advise on state and local laws, such as zoning regulations, which affect the behavior and development of the real estate market. There are also aspects of real estate work that sometimes require advice on tax, litigation, restructuring and bankruptcy, and environmental law.
What lawyers do
- Draft a letter of intent, which sets forth the basic parameters of a transaction.
- Conduct due diligence. Make sure what the client is purchasing or underwriting holds no unwelcome surprises.
- Obtain municipal and/or state approval, where needed. Negotiate the contract, which allocates responsibilities among the parties.
- Negotiate financing documentation.
- Close the contract, joint venture and/or financing.
Realities of the job
- According to Joseph Shenker of Sullivan & Cromwell, there are three aspects to every deal: “Of course you have the legal element, but on top of that there are the business and psychological elements to take into account.”
- These are also integral to the practice as a whole. “The practice of real estate law involves the confluence of legal and business strategy,” he adds. “It's ideal for someone who is interested in both business and law, as well as in meeting entrepreneurial people and understanding their mindset.”
- Typical clients include developers, owners, institutional investors, lenders, tenants, underwriters, pension funds, insurance companies, private equity and hedge funds.
- Working in real estate requires sensitivity to each client’s needs and expectations. While private clients are motivated by profit margins, the public ones are driven by policy and politics. Lenders tend to be cautious in their approach, while developers are bold and visionary. Harmonizing parties’ competing goals can be tricky.
- Real estate is cyclical by nature. When the economy is bad, the real estate sector is often adversely affected. This means that “if you have skills to put a deal together, you should also have the skills to take it apart – if and when it gets into trouble,” says Laura Ciabarra, partner at Dechert. “Prior to the financial crisis you didn't need to know both sides, but now there's a wonderful opportunity for young attorneys to acquire both sets of skills and they should definitely take advantage of that.”
- A transaction is truly a team-oriented affair; there will always be more than one attorney working on the deal. Therefore, having the ability to collaborate well with others is a must, in addition to coping with the stressful nature of deadlines.
- “In the week or so leading up to the completion of a deal, you'll probably find yourself in the office every day working until midnight,” explains Ciabarra. “I don't think I've ever worked on a transaction without there being that final week or two of craziness.” However, she describes real estate lawyers as “deal junkies” who thrive on the hectic nature of the closing stages, with everyone pulling together to reach a successful conclusion.
- Real estate lawyers tend to have a variety of projects in hand at any one time, which requires exceptional organizational skills.
- The work is often highly tax-driven. When it comes to the more complex transactions, understanding the tax goals and limitations that exist is particularly useful.
- Unlike corporate lawyers, who may have no more than a CD-ROM to mark the end of a deal, real estate lawyers have a physical result that can be seen, touched, visited, lived in and worked in.
- “We're seeing a volatile market at the moment,” says Shenker. “The debt markets have not fully recovered from the global financial crisis and we are still dealing with over-leveraged properties which need to be refinanced.”
- Despite this, there has arguably been more of a recovery than many expected – especially in the commercial real estate market. In 2012, for example, the number of home sales rose to 4.65 million, which is a 9.2% increase from the previous year and the highest figure since 2007. Experts say this improvement is likely to carry on, as the market continues to recover from the recession.
- “There is an unusually large inflow of non-US capital into US real estate – particularly from Asia – so we're beginning to witness again the investment thesis that the US is a sanctuary for foreign capital,” Shenker tells us. This is particularly true in Manhattan, where foreign buyers have been snapping up iconic buildings at an above-market value: in the past such transactions would have commonly taken on the form of joint ventures, but these buyers have been stumping up the cash to own these buildings outright.
- Recent disasters like Hurricane Sandy have made people focus a lot more on their leases. “There are a number of clauses, such as casualty and interruption of services provisions, that some may not have paid sufficient attention to before – both in terms of the language used and what the insurance provides,” explains Jon Mechanic of Fried Frank.
- “The financing world is bifurcated right now,” Ciabarra says. “You have these high-end, well-maintained assets and the market continues to be very good for them. Then you have these secondary and tertiary assets that are struggling quite a bit – and will continue to do so for the next few years – so the gulf between the stronger and weaker assets has really grown.”
- The number of banks involved in construction loans has lessened recently, paving the way for other investment options. Mechanic confirms: “A lot of opportunity funds in particular have been created, which highlights the fact that we're seeing many other forms of capital coming in to fill this void.”
- Large institutional investors have taken advantage of the dip in real estate prices and the demand for rentals by moving into the 'single occupancy family homes' segment of the market: Simpson Thacher recently represented the world's largest alternative asset manager, Blackstone, during its creation of Invitation Homes, a national platform that has purchased over 39,000 distressed single family homes – it's now the largest owner of homes in the country.
- According to PwC and the Urban Land Institute (ULI), changing demographics in the US are likely to impact all real estate sectors. The growth of 'generation Y' (those born between 1979 and 1995) will continue to dictate how space is developed and used. Generation Yers don't use their cars so much, prefer urban spaces and at the same time very much treasure their mobility. Expect an uptick in collaborative office spaces and intown rental housing. Developers are also looking at where this generation is literally moving to, and popular cities include Austin, Seattle, Portland and the Twin Cities in Minneapolis.
- Retiring baby-boomers will also play their part in shaping change: it is predicted that many will leave their suburban homes behind, in favor of urban locations which can offer better amenities and convenient healthcare. This trend, paired with generation Y's habits, means that interest in developing suburban areas has dropped.
- DC is no longer so hot for real estate. The federal government sector made the market more resilient during the economic downturn, but in light of government shutdowns and hesitancy over the future of government spending, confidence in the market has waned. According to the ULI report, in 2011 only New York and DC had decent prospects for investors and developers – this year DC didn't even make the ULI's list.
- Second-tier cities are hot, and are fuelling recovery in 2014. Investors and developers are beginning to turn away from major cities like NYC and San Francisco, as there are more housing deals to be snapped up in places like Dallas and Portland.
- The multifamily sector is flagging. In short, too many multifamily apartment blocks were built to cater for the demand which sprung from the recession. However, in 2014, that demand has dipped, so development in this sector will cool off.
- Our online shopping habits and impatient desire for speedy deliveries will influence how industrial spaces are both designed and situated: ideally as close to densely populated urban areas as possible, to guarantee that promise of a swift same-day delivery.