Friday, April 10, 2009

Litigation & Corporate Law

Business First of Columbus - by Kevin Kemper

Recessionary economies call for recessionary practice groups, and that's just what local and national law firms are creating.

This great recession, caused in large part by a grossly inflated real estate bubble that burst spectacularly, has, as expected, led to a decline in work for real estate attorneys. To combat the downturn, firms are finding it prudent to create practice groups that keep their attorneys busy and serve the recession-related needs of clients.

Columbus-based Schottenstein Zox & Dunn Co. LPA is one of at least four law firms with a local presence that have created a distressed real estate practice group. Schottenstein's group is composed of 12 attorneys with specializations in litigation, real estate, environmental and bankruptcy law.

"The idea is to have experts in multiple disciplines that are used to working together and can immediately respond," said Randall Arndt, a partner at the firm who, along with partners M. Colette Gibbons and Victoria Powers, head the group.

"We put it together last fall," Arndt said. "We saw the economy turning and by early fall realized we're in for a period of prolonged inactivity."

Schottenstein's strengths have always been its real estate and bankruptcy practices, Arndt said, so it made sense to create the new group.

The initiative also includes attorneys who focus on environmental law.

Real estate that's "distressed" mostly involves a property that isn't producing income, whether through loan payments or rental or lease income. Real estate where property taxes are significantly in arrears also can be considered distressed.

Along with Schottenstein, Baker & Hostetler LLP, Jones Day and Thompson Hine LLP have similar groups. Baker & Hostetler built its distressed real estate group because its clients needed it, said Harlan Robins, a partner and real estate lawyer.

"Clients are responsive and like the fact that we put together a team to address their issues," he said.

While bankruptcy attorneys are swamped with work because of the recession, lawyers in Schottenstein's real estate practice are seeing only 10 to 20 percent of the volume of work they normally do, Arndt said.

The credit crunch that began in the fall and persisted through this spring has put a damper on real estate deals, and law firms across the country are taking similar steps as Schottenstein, said Susan Talley, a partner at Stone Pigman Walther Wittmann LLC in New Orleans.

"This is the third time in my career I've been through this, including the (savings and loan) crisis (in the 1980s and 1990s)," said Talley, who is secretary of the American Bar Association Real Property, Trust and Estate Law Section. "This is probably the worst I've seen."

Steve Intihar, a Bricker & Eckler LLP partner and chairman of the real estate group, said for years the firm has had a cross-disciplinary group that includes bankruptcy lawyers, litigators and tax attorneys. They've been working together on matters involving distressed real estate since before the S&L crisis.

"We represent banks and other lenders in connection with loan work-outs, foreclosures deed-in-lieu transactions and loan sales," Intihar said. "We've also represented buyers and sellers of distressed properties and buyers and sellers of equity interests in distressed properties. While we are certainly in a new recession, the problems and solutions associated with distressed real estate, for the most part, have been around for years. Our real estate industry group has been dealing with these problems and solutions for a long time.

Few options

Beyond the tight credit markets, national retailing clients that planned to expand have decided to cut back because of the recession, Arndt said.

Richmond, Va.-based Circuit City Stores Inc. is a good example of what's happening in this tough market. The retailer shut down last month, leaving vacant seven sites in Central Ohio. In a situation like that, where Circuit City was most likely an anchor tenant for the shopping centers it occupied, the store closings throw the centers into disarray, Arndt said.

Lease contracts between retailers and shopping center owners typically require owners to have an anchor tenant in place. If the owner doesn't, Arndt said contracts usually require owners to reduce rental rates or give tenants the right to break their leases.

That's where the new practice comes in.

"The whole idea of going into these shopping centers and paying these higher rents is that there is a critical mass," Arndt said.

But once a few tenants leave, the negative impact can snowball until an owner is left with a property like Columbus City Center mall.

A 1.2 million-square-foot downtown shopping center, City Center opened in 1989 to great acclaim. Over the past decade, however, the mall died a slow death as anchor tenants and boutique stores left one after another, after another. The mall closed permanently in February.

An increasing number of commercial properties appear to be coming under distress as the recession deepens, says Rich Kruse, president of distressed business and real estate management firm Gryphon USA.

"Commercial properties and larger properties are failing," Kruse said. "I think these owners had deeper pockets and could just hold on longer ... and now they are just out of money and (refinancing) options are few."

In March, for example, a six-building office campus in northeast Columbus ended up in receivership after lender Bank of America foreclosed on the 200,000-square-foot complex.

Franklin County Common Pleas Court Judge Michael Holbrook appointed Gryphon as receiver for the Northeast Business Center properties. In its lawsuit, Bank of America accused an affiliate of Chicago-based Rushmore Properties LLC of failing to pay $37,835 in interest payments due Jan. 1 on two loans with an outstanding balance of $9.42 million.

The landlord bought the Corporate Drive portfolio in June 2006 for $9.7 million, according to public records.

Opportunity amid disruption

While Kruse said some in his field believe current real estate troubles will continue for three to five more years, he's more optimistic it will all be over in 24 months.

"I think we are going to see a lot more projects go under before this is all over, however," Kruse said. "Low-end residential default seems to be slowing a little while the larger commercial project defaults are on the rise."

As work slows in traditional real estate transaction work, real estate attorneys are migrating to help other practices.

"We've found that using real estate lawyers in bankruptcy and foreclosure cases is good because they bring an added expertise," Talley said.

The lawyers at Schottenstein see opportunity in these disruptions, and bill the new practice as being able to help owners negotiate new deals with tenants.

The definition of a distressed property is very fluid, Arndt said, so his firm's practice group is looking for opportunity in other areas as well.

One sector where he sees increased activity is in brownfield properties, or abandoned industrial sites that could be reused.

The firm has 12 such properties it's working with. One is the Columbus Coated Fabrics Corp. site in the Weinland Park area of Columbus, just south of the Ohio State Fairgrounds, said Joseph Reidy, an environmental law attorney and Schottenstein partner.

Schottenstein was hired by Campus Partners for Community Urban Redevelopment, a development group affiliated with Ohio State University that has been working to redevelop the 21-acre site for years.

Schottenstein convinced the U.S. Environmental Protection Agency to grant a waiver from a $1 million lien it placed on the property, negotiated for a $900,000 cleanup contribution from a company affiliated with the site and secured a $3 million Clean Ohio Revitalization Fund grant for demolition and environmental cleanup, Reidy said.

Over the next 18 months, Arndt said it's this type of work that will keep real estate lawyers at Schottenstein going.

"I think we'll be working on distressed real estate for the next several years," he said.