Commercial real estate practice, by definition, has always had important commercial law components. But they’ve evolved significantly in the last 15 years.
The career of Paul Kennedy, until recently a partner at Torys LLP, and now executive vice president and chief legal counsel at Oxford Properties Group Inc., mirrors the evolution. He started out in the ‘80s doing development financing at Smith Lyons in Toronto (now absorbed in Gowling Lafleur Henderson LLP).
“That was as close as I came to being what most people consider a traditional real estate lawyer,” Kennedy explains. “I helped acquire the land, checked out the title, put the property into the land titles regime and did the development work.”
But, even then, there were different species of real estate lawyers.
“In the ‘80s and early 90s, there was a category of lawyers who called themselves dirt lawyers because they did hands-on real estate work with a title orientation,” says Kennedy’s former partner at Torys, Patricia Koval.
“But there was another cast that dealt with the commercial financing and the infrastructure transactions without getting into depth on the classic real estate issues.”
In any event, the recession of the early ‘90s turned a lot of real estate lawyers (and others) into insolvency lawyers as giants like Bramalea, Olympia & York, Trizec, and Cadillac Fairview collapsed or reorganized.
“Real estate operating companies as we knew them disappeared and we ended up with a lot of real estate owners like private equity groups, vulture funds and pension funds who weren’t traditional owners of real estate,” Kennedy says. “At the same time the first true REIT, RioCan, emerged.”
These events brought new kinds of investors as clients to law firms. Their needs radically changed how real estate lawyers thought about and approached transactions.
“There wasn’t as much new development going on and credit was still tight,” Kennedy says. “The skills sets of the ‘80s became less important and what emerged were skills that are closer to what we would now call M&A, corporate and private equity skills sets - with a real estate component.”
The new investors bought at distressed prices with a short timeline exit strategy. Goldman Sachs, for example, quickly sold its interest in Cadillac to Ontario Teachers’ Pension Plan.
The investment bank also bought Journey’s End, a motel chain, in 1997, and took the company public within five years. Another arm of Goldman Sachs, Whitehall Funds, bought $600 million in distressed mortgage debt in 1996 and sold the entire portfolio before the turn of the century.
“These kinds of transactions unlocked some value, but it was opportunity-driven value as opposed to natural market-driven value,” Kennedy says.
At the other end of the spectrum, pension funds took a long-term view of their real estate investments. Because they were tax-exempt, they didn’t capitalize any appreciation in value by refinancing (since they didn’t need the interest deductibility).
“What you ended up with by around 2000 was a bottleneck in value that had been building up over time,” Kennedy says.
In the wake of the dot-com bust, real estate became even more attractive. Pension funds increased their stakes even as the REIT market boomed. The real estate operating company sector consolidated, leaving giants like Brookfield as the main players for the most part.
“What all this meant was that real estate lawyers were now doing private equity deals,” Kennedy explains. “M&A and corporate considerations became progressively more significant when dealing with real estate assets.”
Many of the conventional deals that remained took on a new form called infrastructure.
“What we called complicated deals in the ‘80’s and project finance in the ‘90’s, we are now calling infrastructure, which are situations where a public purpose - like a road, airport, and hospital - is outsourced to the private sector,” Kennedy says. “And infrastructure deals are at their core real estate transactions in various forms.”
The complexity of deals ratcheted up.
“Real estate transactions have become an amalgam of real estate, project finance, securities law, private equity and M&A,” Kennedy adds. “Everything overlaps because people have realized that there are different ways to invest in real estate. And clients who want to participate have had to become increasingly sophisticated to take advantage of the tax, partnering and public markets opportunities that are available.”
Kennedy himself is an excellent reflection of the new wave of real estate lawyers.
“When I listen to Paul talk, he sounds like a commercial lawyer who does big financing transactions that have real estate issues in them,” says another of Kennedy’s former partners at Torys, Jamie Scarlett, a corporate finance type. “Actually, he sounds like a banking lawyer more than he does like a traditional real estate lawyer involved in development work that’s tied to building properties.”
Conversely, Koval, a corporate finance/securities lawyer, is well known in the real estate industry for her pioneering work with REITs.
“I got involved with what was then a desperately ill real estate enterprise and ended up using my skills to help create a new industry.
In the beginning, there was some confusion about whether REITs were corporate finance or real estate deals, but to my mind they are very much in the realm of securities and corporate finance because they involve public offerings and reorganizations. Certainly I work with the real estate industry, but I always have a dirt lawyer beside me for the real estate issues.”
Koval, however, says the classic real estate lawyer of this decade is not a dirt lawyer.
“Today the archetypal real estate lawyer is someone who can do more than acquisitions or sales or financing, someone who has broad enough industry-based knowledge and experience to play a major role on an IPO or a reorganization or a REIT where the asset class in question is real estate.”
The upshot seems to be that the lawyers working in the capital markets are “real estate lawyers” if they have a dirt background - and some other kind of lawyer offering their skills to the real estate industry if they’re not.
“The pure dirt lawyer is almost extinct if you’re talking about commercial real
estate practice,” Koval says.