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 Sullivan & Cromwell chairman Joseph Shenker, 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.”
- 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 Dechert partner Laura Ciabarra.
- A transaction is truly a team-oriented affair; there will always be more than one attorney working on the deal. As such, having the ability to collaborate well with others is a must, in addition to coping with the stress 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," Ciabarra explains. "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 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 relevant tax goals and limitations is particularly useful.
- Unlike corporate lawyers, who may have no more than a compute file to mark the end of a deal, real estate lawyers have a physical result that can be seen, touched, visited, lived 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 market. According to a 2017 study by the Federal Reserve Bank of Richmond, lending to commercial real estate projects has passed pre-recession levels.
- The housing market has stayed buoyant, but growth is slowing down over time. In 2015 6.3% more homes were sold compared to the previous year; there was a further 3.8% increase in 2016, then 2.7% in 2017. The National Association of Realtors expects this growth to plateau and prices to remain flat or even fall in 2018.
- “There's been 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 – and Boston, which has become the third most popular US city for foreign investors after New York and Los Angeles.
- Recent disasters like Hurricane Harvey 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, real estate department chairman at 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.”
- 'Secondary' cities are hot property in the current climate. Investors and developers are beginning to turn away from so called primary markets like NYC and San Francisco, which are highly competitive, and are snapping up deals in alternative markets like Seattle, Austin and Salt Lake City.
- The sweeping changes to the US tax code introduced in the Tax Cuts and Jobs Act of 2017 will likely have major implications for the real estate sector. This is particularly true of REITs (real estate investment trusts), for which 20% of dividends can now be exempted from tax under certain circumstances.
- Our online shopping habits and impatient desire for speedy deliveries may well 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.
- Back in 2016 there was widespread fear that stricter lending requirements would deter banks from issuing commercial mortgage-backed securities (CMBS), an industry staple. The peak of uncertainty has now passed, however, and the number of such loans issued jumped from zero in January 2017 to 335 that August.
- One real estate sub-sector that's not been faring so well is retail. Major retailers including Toys R Us, Aerosoles, Alfred Angelo, and Vitamin World have declared bankruptcies while Sears, Kmart, J.C. Penney and others closed stores across the country. According to Cushman & Wakefield this trend is unlikely to stop, with the number of US stores closing to rise 33% in 2018.
- The Federal Reserve raised interest rates at both the start and end of 2017, and forecasts three additional additional rate increases over 2018 and 2019. If the hikes are small, or if inflation accelerates and there's no hike at all, the cost of borrowing and value of properties should remain stable. If interest rates grow significantly then borrowing will become a lot more expensive and real estate firms will find it more difficult to finance their projects.