Law Times

LAW TIMES / JULY 14/21, 2008 Professional Appraisal Opinions - Trusted Values Find a professional real estate appraiser www.oaaic.on.ca 416-695-9333 Estate Planning Focus On LEGAL SPECIALISTS & BOUTIQUES nents. But they've evolved significantly in the last 15 years. The career of Paul Kennedy, until re- Kennedy reflects new wave of real estate lawyers C BY JULIUS MELNITZER For Law Times ommercial real estate practice, by definition, has always had im- portant commercial law compo- cently 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 fi- nancing and the infrastructure transac- tions 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 Ca- dillac 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 inves- tors as clients to law firms. Their needs radi- cally changed how real estate lawyers thought about and approached transactions. "There wasn't as much new devel- opment 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 'Real estate transactions have become an amalgam of real estate, project finance, securities law, private equity and M&A,' says Paul Kennedy. 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 increas- ingly sophisticated to take advantage of the tax, partnering and public markets opportunities that are available." Kennedy himself is an excellent reflec- tion of the new wave of real estate lawyers. "When I listen to Paul talk, he sounds like a commercial lawyer who does big fi- nancing 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 fi- what we would now call M&A, corpo- rate 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 Teach- ers' 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 Gold- man Sachs, Whitehall Funds, bought $600 million in distressed mortgage debt in 1996 and sold the entire portfolio be- fore 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, pen- sion funds took a long-term view of their real estate investments. Because they were tax-exempt, they didn't capitalize any appre- ciation 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. Pen- sion 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 in- frastructure. "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 pur- pose — 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 be- come an amalgam of real estate, project finance, securities law, private equity and M&A," Kennedy adds. "Everything nance/securities lawyer, is well known in the real estate industry for her pioneer- ing 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 RE- ITs 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 of- ferings 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 law- yer is someone who can do more than acquisitions or sales or financing, some- one who has broad enough industry- based knowledge and experience to play a major role on an IPO or a reorganiza- tion or a REIT where the asset class in question is real estate." The upshot seems to be that the law- yers 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 es- tate industry if they're not. "The pure dirt lawyer is almost extinct if you're talking about commercial real estate practice," Koval says. LT PAGE 9 Generate, search and submit documents for registration, then manage the transfer of closing funds — all from your desktop. 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