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Attorneys busy with distressed real estate work

The housing market might be struggling still, but local real estate attorneys are finding themselves plenty busy these days.

A lot of their work now, however, comes in the form of distressed real estate or, to be more politically correct, asset resolution.

Julie Mebane, a partner in the San Diego office of Duane Morris, said the current crisis is unique in the people it's affected.

"I've now been through three or four of these (downturns) in my career, and each one seems worse than the one before," she said. "It always seems to impact a different group.

"This is the first one I can remember impacting pretty much everybody across the board. It's impacting big, huge owners and developers; huge institutional lenders; individual families; and small companies."

The slowdown has been dramatic enough to cause San Diego-based law firm Luce, Forward, Hamilton & Scripps to form a special practice group -- the distressed real estate asset group -- to handle the problem. It teams attorneys from the firm's real estate, bankruptcy and corporate practices.

Attorneys have been working hard to find alternative restructuring deals for lenders, who don't want to incur the costs of a foreclosure proceeding.

"Some lenders don't want to foreclose and take the title and assume the complexities (of a property)," said Marjorie Burchett, a member of Luce Forward's distressed real estate asset group.

Mebane agreed.

"I see banks trying to work with borrowers more than in the past because they don't want to be property owners," Mebane said. "They don't have any interest or desire to own real estate."

One option is a "deed in lieu of foreclosure," in which a commercial borrower gives back the property to the lender by negotiating a release. It's similar to a "short sale" on the residential side.

There also are more lease modifications and loan modifications. Lenders are more willing to extend the maturity of a loan or extend the rebalancing date of a loan now, according to Dana Schiffman, a partner in the San Diego office of Allen, Matkins, Leck, Gamble, Mallory & Natsis LLP.

The thought is that instead of foreclosing on a commercial property, it might be better to wait until things turn around and the business is valuable again.

"It reflects a sense that the economy might be improving and that extending the loan or critical dates is the first stage," Schiffman said. "It's not prudent to strictly enforce the loan in today's environment."

Schiffman also said he sees note rates being reduced, to give the borrower temporary relief.

Shopping centers are among Schiffman's clients. They are more willing to be creative in keeping stores open now because once one closes, it can have a domino effect.

"Shopping centers are particularly hard hit because of their direct exposure to consumers' discretionary spending," he said. "A lot of clients have tried to be proactive by setting up systems to deal with rent relief requests."

It's common for retail tenants in a mall to have a co-tenancy clause, in which a condition of their obligation to pay full rent it tied to a key group of retailers being open (eg. anchor stores) or a certain percentage of floor area that is operational.

If those percentages aren't met, then the retailers can request a rent decreases.

"If (co-tenancy clauses) weren't drafted carefully in this environment, they can really create a disastrous scenario where one or more key tenants go out and it gives others the right to go out."

The economic climate also has led to an increase in preemptive litigation, according to Mebane of Duane Morris, as parties seek to gain negotiating leverage they wouldn't otherwise have.

"I think communication is extremely important for borrowers and lenders in distressed financial deals right now," Mebane said. "Borrowers have probably not had as much ability to negotiate the terms of restructuring of their financials as they do now."

Schiffman said the restructuring work likely will continue to increase in the next year or two, even as the market gets better.

It's not all gloomy work for real estate attorneys these days.

"I also have a good number of transactions that are just like the ones you'd find in any other economic time," Mebane said. "There are new leases and sales. That's encouraging that it hasn't totally dried up."

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