By Sherry Karabin

Once thought to be immune to the ups and downs of the economy, law firms have not been able to escape the latest and perhaps worst downturn to hit in years.

Taking hold in the third quarter of 2007, the drastic shift in fortunes caused some firms to lay off both attorneys and non-legal staff, and some to close up shop altogether.

Individual practice areas are also being affected; in some cases it has simply reduced the volume of work; in others it’s changing the types of transactions getting done or blurring the lines between practice areas. Chicago Lawyer spoke to local attorneys in three groups — real estate, bankruptcy and corporate restructuring, and M&A — to see how the economy has impacted their business.

Real estate

Perhaps no single practice area has been hit harder or undergone more changes as a result of the economic crisis than real estate.

“A large percentage of real estate development loans made in the last five years are now in default,” said Brian Meltzer, managing partner of Meltzer, Purtill & Stelle, which focuses on real estate development and construction lending.

“Just about every transaction we are working on involves a troubled loan and that means there are bankruptcy issues.”

Meltzer said he first noticed a slowdown in the Chicago home-building market in late 2006. Since then, the firm has become increasingly more involved in handling bankruptcy-related issues for developer and lender clients, which often requires real estate and bankruptcy attorneys to work hand-in-hand.

He said the firm anticipated the changes, and, although many lawyers are experienced in handling workouts, foreclosures, and loan restructurings, over the last couple of years the firm added two bankruptcy attorneys.

“When this first happened, we were representing banks on the lender side,” Meltzer said. “More recently, we are getting involved with developer/borrowers going into bankruptcy. It started with home builders, but now it is quickly spreading to our industrial, commercial, and retail real estate clients.”

Things aren’t much different at Mayer Brown, where Robert Gordon and Jeff Usow also find themselves busier helping clients with troubled real estate transactions.

“For example,” said Gordon, a partner in the real estate group, “loan extensions have become more difficult to consummate and clients are relying on counsel to assist them. Clients are also concerned about avoiding personal liability on their non-recourse carve-out guaranties and so, are more careful in their dealings with lenders.”

Gordon works closely with the bankruptcy department to better advise clients on how to avoid liability.

While there have been a few layoffs in the firm’s real estate practice, other groups like litigation and bankruptcy are hiring attorneys.

“Most of my clients are institutional equity investors that were either buying properties or supplying capital to operators and developers through joint ventures,” said Usow, Mayer Brown’s real estate practice group leader. “Some clients have switched from a large number of acquisitions to dispositions to reduce debt and meet redemption demands.”

Usow pointed out that the firm’s international diversification has helped to provide work during the downturn. “We do some work in Mexico and Latin America out of our Chicago office, and our institutional clients continue to see some opportunities in those markets.”

Over at Levenfeld Pearlstein, real estate partner Thomas Jaros said transaction volume is down by about 60 percent from the heyday of 2003 to 2007.

The deals that are getting done are different in nature and scope.

“Right now we are seeing smaller deals that can get bank financing, as opposed to the large portfolio deals that were fueled by Wall Street mortgage financing. Wall Street-generated funding has dried up, and is being replaced by local and regional bank financing,” Jaros said.

The terms of the loans that are available have changed as well. “You are not able to borrow as much against a piece of real estate as before,” he said. “Several years ago you could borrow up to 85 percent of a property’s value, but now, depending on the type of deal, you are looking at between 50 and 65 percent leverage.”

Perhaps most notably, Jaros said, is that the non-recourse financing that was widely available in the past has disappeared.

“Real estate borrowers are now seeing some level of personal recourse as a required loan term,” he said.

Real estate groups are also witnessing the revival of the secondary mortgage market. Meltzer said access to this market had become a “non-issue” in the early 2000s when the demand for securitized loans exploded.

“When the subprime mess hit,” Meltzer said, “the loans dried up and my home-builder clients looking to sell houses were forced to look to the Federal Housing Authority for insurance or sell to Fannie Mae or Freddie Mac.

“Now we spend a lot of time helping builders, mortgage bankers, and lenders revise or modify documents to help them qualify for FHA insurance so the properties can be packaged into Ginnie Mae securities or sold to Fannie Mae or Freddie Mac,” he said.

Since the rules governing the secondary mortgage market are now changing almost daily, Meltzer said it can be a challenge to keep up with developments or plan for the future.

With a number of large high-rise condominium buildings nearing completion, he expects to be busy in the coming months helping builders or their lenders qualify for secondary mortgage market approvals and creating ways to attract and hold onto sales until presale requirements are met and buyers can qualify for loans.