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Real estate lawyers remain busy with distressed assets

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Real estate attorneys have been handling more positive transactions in recent months, but the majority of activity remains focused on distressed assets, according to some local attorneys.

As late as 2006-07, Procopio, Cory, Hargreaves & Savitch’s real estate practice group, much like others in the area, was still busy with development, acquisitions and loan originations. Not so today.

“There’s definitely been a shift to where we’re focused (now) on workouts and enforcement actions, like foreclosures, as well as the purchase and sale of properties and loans at a discount,” said Procopio partner Michael Lyon, leader of the firm’s real estate and environmental team.

And while the economy has made modest improvements this year, the effect really hasn’t been felt in the real estate market.

“I’m not seeing much of a change through the first six months of 2010,” Lyon said.

The one thing that’s different, however, is the creativity of investors.

“Investors are becoming more adept at identifying, negotiating and closing deals on distressed assets,” Lyon said. “Investors are figuring out how to navigate this market, and what they’re finding is they’ve developed a skill and ability to identify distressed assets. That has been the focus.”

The consensus is that the market seems to be hitting bottom on the residential side, but not necessarily on the commercial side.

Robert Bell, a real estate partner for Luce, Forward, Hamilton & Scripps, agreed.

“There’s still a little bit of the distressed (work) and that will be there for a while,” he said.

A lot of residential homeowners still can’t make their mortgage payments, and they face the prospect of foreclosure.

In response to this problem, Peter Solecki, a partner with Winton Larson & Solecki, offers a distressed property program, in which he walks clients through their options at a fixed cost.

He reviews their notes and trustee deeds, offering the various solutions available during an hour-and-a-half-long program. He conducts daily sessions and has even done the program over the phone for clients in Europe and Japan who own American properties.

“I can’t stop it from hurting,” Solecki said, “but the problem is the uncertainty, and there is no real clear place where you can get this type of information.

“There’s the relief of at least knowing what’s going to happen to them, what their alternatives are and how to approach it.”

Common questions clients ask Solecki are, what will happen to my credit, how much will I have to pay in taxes, and will the bank come after me for the balance.

“The unfortunate thing is the law in California is not crystal clear,” he said, adding the problem is exacerbated because the practice of lenders is changing over time.

“Lenders are more than happy to get whatever money they can,” he continued. “I’ve told clients they will come after you even when they have zero right to do so.”

Meanwhile, Luce Forward’s Bell said in the last several months, public homebuilders have been buying finished lots and looking for finished lots in prime locations that they can get for below replacement costs.

“Big public homebuilders are sitting on lots of cash and looking at the low cost of properties they can make money on,” he said.

In some cases, this has caused them to start bidding against each other.

The Irvine Co. quickly sold 300-plus homes, averaging $900,000, in its Woodbury masterplan community recently.

“It shows if you’re in the right location, you can still make money,” Bell said.

“I’m more optimistic about the market than a lot of people. Builders have a ton money, and they want to keep the machines going. I think we’ll start to see a recovery in 2011. If not, it gives small entrepreneurial builders a chance to fill that gap as well.”

Lyon of Procopio said public agencies, such as cities, school districts and hospitals, are still active in the development process. And government financing for multi-family projects, like “for rent” apartments, has kept those projects coming.

Alternately, some companies are buying distressed properties and reselling them. Solecki said businesses are simply adapting to a new marketplace by expanding and growing in a new different way.

“It’s not all doom and gloom,” he said. “Entrepreneurs are still out there. Those that are buying, fixing and flipping (properties). People out there are doing well in the downturn.”

According to Bell, there’s also money on the sidelines in commercial market. Investors are looking for a product to buy because no one’s building, but there’s not a lot of good product out there to purchase.

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