Some Green Shoots In The Real Estate Market

Monday, March 26, 2012 - 11:30

The Editor interviews Philip Rosen, Partner, Weil, Gotshal & Manges LLP.

Editor: Mr. Rosen, please tell our readers about your career at Weil Gotshal and your role as co-chair of the firm’s real estate practice, the global infrastructure practice and the hospitality and gaming practice.

Rosen: I have been at Weil Gotshal 29 years after graduating from law school and serving a clerkship for the chief judge in the Southern District of New York. I’ve had a terrific career at Weil. In addition to the practices you mention, I am also co-chair of the Middle East and Israel practice. Each of the real estate, infrastructure and hospitality and gaming practices had come about as different clients and assignments came to the firm at different periods of time, and each of those practices has grown exponentially. Our real estate practice has 36 attorneys in the United States and in many of our 23 offices around the world. (Since I am in charge of the firm’s leases of real estate, I am well briefed on our far-flung footprint.)

Being a cyclical industry, real estate has always remained the same or grown depending upon the real estate cycle. I’ve practiced through literally three up cycles and two down cycles, the most recent being a tough down cycle from which we are just emerging. Our practice is a balanced practice. During the down cycles our expertise in real estate restructurings – an area in which we excel – serves to balance the finance, development and acquisition practices that thrive during the up cycles. The real estate market in the past few years has been a boom market for the firm, but for the people who buy and sell buildings and their financiers, it’s been a tough market. We have participated in restructurings of hundreds of properties and some very large companies both in bankruptcy and outside, General Growth Properties being among the most notable. General Growth Properties was one of the most successful bankruptcies in history, with both equity and debt holders made whole. There were many other bankruptcies during the time period of 2007-2009 in which we were involved.

Editor: Tell us about your work in the Middle East and in Israel.

Rosen: I’ve been involved in separate practices in both Israel and several Middle East countries; I represent companies in the United Arab Emirates in their activities outside of the UAE, and I represent Israeli companies in the United States, as well as investors in Israel. These are two different practices, but both give me enormous opportunities to help my clients in the U.S. and overseas.

Editor: Have you seen a slackening of activity in the Middle East and in Israel as a result of the Arab Spring and the troubles in the Middle East?

Rosen: Not at all. In fact the practice has grown exponentially. Israel is one of the few economies in the world that did not experience a recession. The interesting thing about Israel is that the economic climate continues to be extremely robust. The government of Israel has put into play a lot of measures that allow the country and Israeli companies to thrive, notwithstanding the fact that there is tension all around. One interesting fact about Israel is that it has a draft of all young people, so almost everybody in the country serves in the military. Young people are required to serve in the reserves from two to four weeks each year until they are 40 years old. They might be in the throes of doing a merger or IPO, and suddenly they bid goodbye to serve their military duty.

Editor: How would you describe the current state of the real estate market for commercial properties both in the New York area and elsewhere in the U.S.?

Rosen: Let’s divide up the country geographically into what I call the super strong areas – which I would limit to New York, Washington and Boston – and the weaker cities around the country, which haven’t yet recovered from the real estate recession (really almost a depression). The country is divided along geographic lines and in some respects property types. You will find in some cities multifamily residential properties will be very strong while in other parts of the country they are not there yet. The hotel industry, one of our four practice areas, is also divided along geographic lines but is also divided by the type of hotel property. The ultra-cheap hotel property may be strong in some cities while the ultra-luxurious hotel properties may be strong in other cities. In New York there are many hospitality properties on the market for which very high prices are being asked. One hotel on Central Park South is asking a $1 million per hotel room per key, the same prices that were seen during the height of the economic upturn in 2006-2007.

Editor: What about the West Coast? Do you see any bright spots?

Rosen: I actually think that Los Angeles has made a nice recovery, and there are signs of recovery in San Francisco as well, but they’re not as strong as the three East Coast cities that I mentioned. Texas is always an outlier. Houston and Dallas didn’t have the deepest downturns, and while they aren’t coming back as strongly as the East Coast cities, they are coming back. The cities that worry me are some Midwest cities that haven’t yet recovered. Interestingly, I view Miami as being a city that will have a strong comeback in the next two to five years, owing to its location close to Latin America and also to the fact that it has become a very popular vacation destination for Europeans and Russians. When I travel there, I hear so many foreign languages spoken that I forget I’m in the United States.

Editor: You described earlier the downturn in the real estate market in the early 1990s. Have you seen similarities in the downturn of 2007-2009, or are there marked differences?

Rosen: There are definitely similarities, but there are also differences. The similarities are that you clearly had people with very strong debt problems that needed to be worked out; the differences mostly lie in the nature of how the government has stepped in or not stepped in to try to help the market recover. During the ’90s the government appointed the FDIC (the Federal Deposit Insurance Corporation) and the RTC (Resolution Trust Corporation), which were tasked with taking over some of the banks and lending institutions that were in trouble to dispose of the assets or the institutions themselves. During the recent downturn, the government took none of those steps and, in fact, in some respects has kept the downturn going much longer than it normally would have by not appointing a caretaker institution to take over the problem loans and other problem areas. The result has been that this crisis continues, so we have many restructurings going on now – in fact probably more than we saw in 2009. Although some cities around the country are experiencing a recovery, other cities are in trouble with loans that are coming due and no financing sources to take them out where lenders no longer exist.

Some insurance companies are stepping in to replace the lenders. The structured finance market is moving extremely slowly. My belief is that we will have workouts and restructurings straight into 2014. There was no cure that has been given to the economy. One of the complaints made at the appointing of the RTC or FDIC was that this caused real estate values to hit rock bottom. But unless they hit rock bottom, they don’t come back. Without this bottoming out, you’re constantly faced with restructurings that prevent the market from making a full comeback.

Editor: You have recently consummated the spin-off of Rouse properties, with its 30 retail centers from General Growth Properties. What instruments were put in place to assure that Rouse would continue as an independent, viable entity?

Rosen: Rouse is a separate independent publicly traded corporation listed on the NYSE with a separate board and its own corporate governance. All sorts of mechanisms, including a $483.5 million credit facility, a $100 million revolver and a rights offering, were put into place to make Rouse a separate independent, viable company. After coming out of bankruptcy, General Growth Properties and Rouse have done quite well since the spin-off. The spin-off was a smart move because the market wasn’t giving appropriate credit to the two different varieties of shopping center properties.

Editor: What other practice groups in the firm played a role in this restructuring? Describe the collaboration on deals that is fundamental at Weil in terms of covering all the bases.

Rosen: One thing that we hold very precious to us as a law firm is the one firm approach, in that no matter what department has brought the deal into the firm, the most appropriate and talented people are picked from all different groups to handle the matter so that the clients get the best coverage possible. In this particular deal we had a large contingent of corporate lawyers, but fewer bankruptcy or business, finance and restructuring lawyers because the companies were already out of bankruptcy for a period of time prior to the spin-off. Some terrific tax lawyers worked on this deal, and the clients were extremely happy with the talent that we brought to bear on its transaction.

Editor: Another major deal involving shopping centers in which you were involved was the sale of a $9.4 billion U.S. portfolio of shopping centers owned by Centro Retail Trust to Blackstone Group. How long did it take to consummate this deal in light of the due diligence required? Were there any complications (such as tax or other) that you might discuss?

Rosen: That deal was fascinating. It involved an Australian company with properties in the U.S., almost every one of which was owned in different vehicles with different ownership, so very few of them were owned 100 percent by Centro or its parent Centro Properties. It was an extremely complicated structure that required an enormous amount of due diligence prior to the bidding, but once we started negotiating with Blackstone, it went very quickly. I give much credit to both clients, as well as both sets of advisors, for having made that happen.

Editor: Please describe your practice involving REITs and other special purpose vehicles for holding real estate. What advantages do these structures provide?

Rosen: We have a very robust REIT practice involving a whole range of activities that we do for real estate investment trusts. Originally, there was the debt real estate investment trust in the 1970s, but the equity real estate investment trust practice began in 1992. I was sitting in the offices of Merrill Lynch that day when Merrill was taking the first equity real estate investment trust offering public, and from that point until now, equity-based REITs have become extremely common. We’ve done deals from taking companies public to merging or restructuring REITs to public and private financings. REITs are a big part of our practice, and we’re very proud of what we do in that area.

Editor: Is there anything further you would like to add?

Rosen: One other point regarding the infrastructure practice: one of the boom (or possible boom) areas in the coming years could be the presence of PPPs – private public partnerships – in the infrastructure space. Our country needs an enormous amount of infrastructure rebuilding. Roads, bridges, tunnels, airports – they all need help, and the sad part is that the states and municipalities don’t have the resources to provide it. One of the vehicles that was used in Canada, Australia and Europe was the infrastructure PPP,  where equity puts in dollars to make infrastructure improvements happen. This rebuilding structure is now called for in the United States.


Please email the interviewee at with questions about this interview.