When commercial real estate deals are made, everyone from broker to buyer plays an important role in the deal's success. But in coping with issues such as liability and entitlements, usually there is only one person whose approval matters: the attorney.
While some may see an attorney as a necessary evil, the expertise of that one person is extremely valuable when long-term leases and contracts get signed, and when large amounts of money change hands. Whether it is a real estate company's in-house attorney or a contracted firm that provides the necessary legal counsel, those services, in the end, are always regarded as money well spent. Companies that think they can close deals without consulting an attorney may create problems that could have been easily avoided through legal counsel.
Getting the law on your side
Personal referrals and word-of-mouth references are most law firms' No. 1 method for attracting business. In fact, 95% of Shopping Center Law Associates' business comes from referrals, according to founder Ben Viloski. The Pittsburgh-based firm of four attorneys services approximately 25 clients, all in retail real estate. In addition to retail leasing, the firm assists clients with site selection, acquisition and loan securement.
“We're kind of in-between an outside counsel and an in-house attorney,” Viloski says. “We work both sides of the fence.”
Cox, Castle & Nicholson, with offices in San Francisco, Los Angeles and Irvine, Calif., attracted business through its involvement with ICSC — from its lawyers speaking at and attending conferences, according to attorney Gary Glick. “We're very well known in California and the western United States,” he says. “Many of our existing clients refer other companies to our firm.”
Businesses can also contact the local Bar Association to find firms with a strong real estate practice or they can search online, says Paul Robeznieks, an attorney with Davis Wright Tremaine's real estate group in Portland, Ore. “A referral is the best advertisement,” he says.
The Internet provides a means for people to learn more about law firms, but it should not serve as the sole resource for locating an attorney, according to Erica English, a real estate attorney with Katz, Barron, Squitero & Faust in Miami. “I do not recommend using the Internet, directories or other impersonal sources alone,” she says. “But you can use those as secondary sources.”
Attorneys who may be general litigators or have specialties can usually recommend other attorneys with real estate specialties. Additionally, title insurance companies may serve as good sources for locating experienced lawyers, says English.
Once a real estate company develops a list of potential attorneys, reviewing those lawyers' qualifications in real estate is equally important. “You really want someone who can demonstrate specific expertise and experience relevant to the industry, whether it's retail or office,” says Al Adams, a partner with Atlanta-based Sutherland Asbill & Brennan and head of the firm's real estate group. “You also want a lawyer who can turn things around quickly and look out for your interests.”
In fact, real estate law has become so involved in recent years that many firms with real estate groups will further divide those groups by retail, office or hospitality specialty. “Nobody can be a generalist anymore,” Adams says.
Speed is an important quality in an attorney, particularly for retailers opening a center. “For retailers, it's all about sales. You must get deals done quickly so that retailers can get their stores open and make money,” says Jeffrey Owen, an equity partner with Piper Marbury Rudnick & Wolfe, Chicago. Each day a store sits empty is money lost, and the faster a deal is completed the more business for the retailer.
Retaining a large firm with multiple specialties can be advantageous for a real estate company because it can enjoy “one-stop shopping” regardless of the arising needs. The one firm can carry the company through all aspects of a transaction, from research to contract to finance, and even litigation if necessary, Robeznieks says. “In a $2 million deal, you want to make sure you have someone to adequately assess the deal, from liabilities to rights.”
Inside vs. outside counsel
When a company has a good relationship with its counsel, there is complete trust and understanding. Sometimes the two become so close the attorney is hired to serve as its full-time in-house counsel.
An attorney was lured from Sutherland Asbill & Brennan to work for a client full-time, but the firm did retain the client for additional services, Adams says. Real estate companies that complete a large number of transactions and leases may benefit from having both an inside and outside counsel. Most law firms are accustomed to working with a client's in-house attorney, so it may not present any problems.
“In-house counsel certainly play a very valuable role in how they function,” Adams says. “It makes a lot of sense in the industry, particularly for a retail shopping center developer. It can be very cost-efficient.”
Companies can save money by hiring a full-time, salaried attorney to avoid paying high hourly fees. When legal bills exceed the cost of a salary, it is a good indicator it's time to hire some in-house help. Most large real estate companies will have both in-house and outside counsel. In busy times they may handle as many as 60 transactions per month.
Frequently, the in-house attorney will serve as manager of an outside firm. The in-house attorney's legal knowledge will probably exceed that of his employer, and that will ensure all needs are covered and all services delivered.
For some companies, however, it may not pay to have a full-time attorney on staff. “There are too many ups and downs in the industry to have in-house attorneys full-time,” Viloski says. “It's better to contract them as you need them because then you only pay for what you need.”
“Some times of the year, they would be very busy and sometimes they would be sitting around with very little to do,” Adams explains. “It really depends on the volume.”
Because some attorneys' fees can reach $400 per hour or higher in large cities such as New York or Chicago, hiring an in-house attorney can save companies a great deal. But most law firms work with their clients and negotiate fees.
Sutherland Asbill & Brennan typically bills on an hourly basis, but the firm will also set the fee based on the specific task and the time involved through a system called “caps and collars.” The firm reviews the work to be done, draws up an estimate and calculates a set amount the client will pay. Built in is a margin of error resulting in either a refund or additional payment.
For example, if Adams set the fee at $10,000 with a 20% margin, and performed only $8,000 worth of work, the additional money would not be refunded. If he performed $12,000 worth of work, he would not charge an additional fee. But if he performed only $5,000 worth of work, he would refund the difference.
“It works better with clients that you really get to know and have experience with. It helps to get away from the hourly rates,” Adams says.
Attorneys are rarely placed on monthly retainers because it is too expensive. However, this doesn't mean the attorney is “on the clock” every time the client calls. Clients of Cox, Castle & Nicholson may, for example, receive the preferred billing rate (8% lower than the standard rate) if they were a client for many years or if the volume of work is large, Glick says. Most attorneys will take a five- or 10-minute phone call from a client without billing.
Because legal fees represent one of the least enjoyable aspects of closing a deal, many clients try to complete certain tasks themselves. Doing so may create problems that could have been prevented if they called their lawyer for a quick consultation.
“The most fundamental mistake clients make is proceeding with business discussions before having an outline of legal and tax considerations,” English says. She recently had a client who was selling his company and started negotiations with a buyer without involving her. There were several big issues he had not considered. English scrambled to deal with them.
Another common mistake clients, particularly developers, make is “thinking that engineering and construction field issues don't have a legal impact,” she says. “When I'm working on a development deal, I need to know what's going on in the field.”
“You always want to be involved at the earliest possible point but that is not a reality,” Owen says. “Clients may not involve us because they don't want to incur costs or because they may be embarrassed by the situation and want to resolve it themselves.”
Many companies do feel capable of handling certain problems without consulting an attorney, and, in reality, many may be capable, especially if the same problem occurs frequently. But it is never a bad idea to have a lawyer review the work, Glick says.
“One of the most typical things a client will do is negotiate a letter of intent to lease space to a client without the lawyer,” Glick says. “They may have negotiated the provisions without us and they are too far gone to make a change. It's good to get us involved early and distinguish what is a business issue vs. a legal issue.”
There are issues with varied ramifications that real estate attorneys are required to know; these include government regulations, zoning, entitlements, easements, site assemblies and utilities. The state of Florida, for example, requires each real estate lease to have a radon disclosure statement. A California-based real estate developer might not be aware of that statute, but his attorney working to negotiate a lease in Florida would know and hence make sure the proper steps were taken.
“The hallmark of a good attorney-client relationship is communication, trust and confidence. Good clients know that we are a resource and they can call us for our judgment and advice,” Owen says. “I encourage my clients to view me as a resource. I want them to call me and have no fear that they will be inappropriately billed.”
The power of the attorney
When an attorney becomes involved in a real estate deal, his presence can elevate the deal to a new level of earnestness. On the other hand, the presence of an attorney can stall the deal if the other party involved feels the need to have its counsel at the table as well. According to Glick. “We need to work together as a team. The client needs to trust us with their business strategy and know that we can protect them with respect to their legal needs.”
Real estate firms should build legal services into the project's budget, just as they would for architectural services, according to Adams. “Lawyers need to be part of the budgeting process,” he says.
The fees do not have to bleed a client dry, English says. “The client who gets the smallest fee out of a deal is one who thinks through their business issues, is responsive in providing information, makes prompt decisions and helps to move the deal ahead quickly.”
Christina Couret is an Atlanta-based writer.