Speaking from his office on the 28th floor of the Wells Fargo Tower in downtown Los Angeles, Derek Smith says “it’s not a bad time” to be a real estate lawyer. “Real estate activity clearly got crunched in 2007 and 2008,” says Smith, a managing director in Oaktree Capital Management’s real estate opportunities team. Now, however, “there’s more real estate activity and more investments.”
In the case of Oaktree, the firm has been investing in real estate since its founding 18 years ago, but “it’s a much bigger, growing class than it was before,” Smith says. “We’ve always had real estate funds, but clearly we’re expanding now and we’re quite active.”
As it takes on greater deal volume, Oaktree – whose legal advisors include Paul Hastings; Gibson Dunn; Debevoise & Plimpton; and Paul, Weiss, Rifkind, Wharton & Garrison – is working with law firms that have “very deep benches” and the capability of each handling 10 to 12 deals simultaneously.
Indeed, the challenge for law firms is that “clients and the world that we live in now is a lot more demanding, and things happen quicker,” says Smith, who himself was an attorney at Paul Hastings for 19 years – most recently as vice chair of global real estate – before joining Oaktree in 2010.
When working on deals, “there are certain issues that are more lawyer-intensive,” Smith says. “There are new regulations that keep creeping in.” The Foreign Corrupt Practices Act, for example, was not a factor to consider when executing transactions 10 years ago, he notes.
“Especially in fund formation, the involvement of our lawyers is much more than it used to be,” Smith adds. “All the diligence and different pieces of information that investors ask for, it’s involved.”
This greater degree of involvement has led a number of law firms to increase or reconfigure staff in order to better service their clients. Indeed, some are bulking up existing teams as private equity real estate firms become more active investing in certain sectors.
Paul Hastings, for example, has plans to expand its securitization practice. After hiring a new practice head, Christine Spletzer, last year, it now intends to recruit another partner and potentially other staff for the group. “Where I see a small but growing market is in the representation of private equity funds as the issuers in securitized products,” says Philip Feder, chair of Paul Hastings’ global real estate practice. In such situations, fund managers issue securitized products as an exit strategy for their distressed debt portfolio acquisitions.
Paul Hastings’ deals so far include the representation of Oaktree last fall in its first securitization of a group of nonperforming loan (NPL) portfolios. The securitization consisted of loans that had been acquired from banks by Oaktree’s real estate and corporate opportunity funds since early 2011, with proceeds from the sale of the notes used to help repay investors in its funds.
In addition, Paul Hastings is adding more attorneys in the hospitality area of its real estate practice, hiring at least two mid-level associates in the past few months and seeking a third at its Los Angeles headquarters. Furthermore, it relocated one of the leaders of its hospitality practice, Jeffrey Diener, from Los Angeles to London about six months ago, with plans to expand the practice substantially in Europe.
“Our clients have told us they’re going to be buying both individual hotels and hotel companies in Europe,” says Feder, whose firm represents such managers such as Oaktree, Starwood Capital Group and Rockwood Capital on hotel deals. “They think that the area is ripe for investment.”
In anticipation of this increased activity, Paul Hastings intends to bring on a new partner as well as a couple of associates in the region. “We foresee that as major growth area,” Feder adds. “It’s got at least a five-year run because things have been so depressed there.”
Paul Hastings isn’t alone in ramping up in Europe. Fellow US law firm Goodwin Procter opened its London office in 2008, but it didn’t start aggressively building operations there until less than two years ago, when it hired two new partners in its real estate capital markets practice, former Ashurst attorneys David Evans and Samantha Lake Coghlan, in late 2011.
Evans became the new chair of the office and since then has led the firm’s expansion in the UK and Europe, where Goodwin Procter advises private equity real estate clients such as Brookfield Asset Management and AREA Property Partners, both of which are expanding in the region. The firm’s recent real estate hires in London include former Linklaters co-global real estate head Joe Conder, who joined as a partner in the real estate capital markets practice last year, and ex-Travers Smith attorney Paul Lyons, who is the firm’s newest real estate partner, focusing on real estate debt finance.
“As the world’s gotten smaller and investment managers have looked for additional markets in which to expand, firms that primarily were focused on the US have expanded into other attractive regions, and that’s included Europe and the UK,” says Robert Insolia, managing partner and a member of Goodwin Procter’s real estate and real estate capital markets practice. “We had the choice whether we wanted to represent folks just in the US or globally, and we opted for the latter.”
Meanwhile, other law firms are adding to their ranks in London. For example, Amsterdam-based Boekel De Nerée has been increasing its headcount in the UK capital in order to work more closely with local clients interested in investing in Dutch real estate. In April, the firm relocated one of its attorneys, Dirk-Jan Gondrie, from Amsterdam to London for this very purpose.
Other law firms are taking an even more aggressive approach and reorganizing their teams in response to shifts in the regulatory landscape and changes in product offerings. “We have three partners that are sitting in groups that they were not sitting in a year ago,” says Roger Singer, partner at London-based law firm
Clifford Chance and head of its US private funds group.
About one year ago, Clifford Chance created a new financial regulatory practice to better assist real estate and other private fund sponsors in complying with regulations such as the US Dodd-Frank Act and the European Union’s proposed Alternative Investment Fund Managers directive. Such rules will subject fund sponsors – particularly those that are raising capital on a cross-border basis – to greater supervision and scrutiny by government agencies and regulatory bodies.
Clifford Chance previously had a regulatory subgroup that cut across various practices and included 13 partners and 32 associates concentrated primarily in the firm’s London, New York, Frankfurt and Hong Kong offices. The challenge, however, was that no one lawyer was well-versed on every piece of regulation affecting private fund managers.
For this reason, Clifford Chance decided to move the lawyers into the same group to allow them to work together more effectively. Nick O’Neill, a partner who was a member of the firm’s finance practice, relocated from London to New York last year to head up the new group. Meanwhile, two New York-based partners, Clifford Cone and Jeff Berman, moved from the capital markets and corporate groups, respectively, to join the new regulatory practice.
“It used to be that you had a lot of general regulatory lawyers,” says Singer. “Now that we have a group focused on it, it’s easier to find someone with the right experience and expertise to give a client advice.”
Urge to merge
Clifford Chance also has regrouped in other areas of the firm over the past two years. With the downturn in the collateralized loan obligation (CLO) market and drop-off in bank lending, the firm saw a corresponding rise in real estate debt funds, which led its structured finance group to work on products that more closely resembled such vehicles rather than CLOs.
“The distance from non-traded REIT to fund to CLO in terms of investors and investments has decreased,” Singer says. “In the downturn, participants began to become more similar – clients became more similar and products became more similar.”
In response, Clifford Chance merged its structured finance and private funds group, adding three more partners – including the group’s former head, Steve Kolyer – and eight associates to the latter practice. The reorganization has facilitated increased interaction between the two groups.
“We’re better able to serve clients that need both services,” says Singer. “It helps us collaborate and make sure that we’re sharing knowledge, both about the form of the vehicle and also about the underlying asset and how to best finance it.”
Of course, the reorientation of people within a firm has its challenges. “There’s always a cost to moving people, whether it’s geographically or from one part of the business to another,” Singer says. “In an organization of semi-autonomous professionals, you have to make sure that everyone is rowing in the same direction.”
That said, Clifford Chance considers the reconfiguration to be worth the cost, both in terms of serving its clients and generating revenue. “The regulatory pendulum has swung pretty hard toward increased regulation,” notes Singer. “Clients are going to need a lot more advice in that area, so we see ourselves devoting more resources to [the regulatory] group.”
The birth of a mega-firm
Other law firms, meanwhile, are taking the merger concept even further. “When you’re in the middle, it’s a very difficult position to be in this economic cycle,” says Eric Rosedale, co-chair of the European real estate practice at newly formed global law firm Dentons. “So either we’re going to get smaller and niche or we’re going to get bigger, and we got bigger.”
In March, the law firms of Salans, Fraser Milner Casgrain and SNR Denton combined to create Dentons. The new entity now has more 2,500 lawyers and professionals – including 600 in real estate – in 79 locations in 52 countries.
“Clients, generally speaking, want to consolidate their legal services with as few firms as possible,” says Rosedale. “If we can now say that we have 600 real estate professionals that practice across the globe, this now might allow you to consolidate a little bit further on your list of preferred counsel.”
The combination already has resulted in the relocation of the firm’s Europe-based private equity real estate attorney, Steven Nagy, to its Chicago office. The purpose is “not only to further integrate the real estate practice, but also to further integrate client relationships on the private equity real estate side,” adds Robert Fernandez, Dentons’ US real estate practice group head. “There are many relationships we have shared between the existing regions.”
The consolidation isn’t the only change to Dentons’ real estate practice that has been client-driven. The firm also wants more cross-over between its real estate and private equity practices, with private equity specialists working within the real estate group and vice versa.
“What I envision is a more integrated approach,” says Rosedale. “So, not drawing lines between the private equity and real estate teams at our firm but actually breaking down those walls and breaking down the division.” While there already was cross-over between private equity and real estate in the legacy firms, Dentons now will be formalizing that effort.
The first step in the new initiative was the addition of former SJ Berwin attorney Nicholas Plant to head up Dentons’ private equity practice across the UK, Middle East and Africa region in April. Plant was jointly hired by the firm’s private equity and real estate teams, one of the first such recruitment efforts since the combination.
The new emphasis on integration reflects the blurring of the lines between the two asset classes, as private equity firms such as Kohlberg Kravis Roberts (KKR) and TPG Capital have moved into real estate over the past couple of years and still are building their teams, particularly in Europe. KKR, for example, just appointed its European head of real estate, Guillaume Cassou, last year, while Starwood Capital Group hired a new European head of acquisitions, Zsolt Kohalmi, earlier this year.
“For our private equity colleagues who didn’t have experience in the real estate sector before, it’s a very interesting cross-selling opportunity for us,” says Rosedale. He explains that the idea behind the integration is to view the two groups from a client standpoint rather than an internal organization standpoint. “Sometimes we focus too much on labels,” he adds. “We’re all working with a similar universe of clients.”