Interview

Coronavirus Q&A: RSP's Real Estate Leader

By Andrew McIntyre
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Law360 (July 24, 2020, 9:39 AM EDT) -- In this edition of Coronavirus Q&A, Robbins Salomon & Patt Ltd.'s real estate leader discusses the hurdles to reopening in Chicago and the challenges borrowers will face as 90-day forbearance periods expire.

R. Kymn Harp

R. Kymn Harp, chair of the RSP's business and real estate transactions group, handles a wide range of real estate transactional and financing matters and has particular expertise in the retail, restaurant and entertainment spaces as well as the multifamily sector.

Harp, a shareholder in RSP's Chicago office, shared his views as part of a series of interviews Law360 is doing with lawyers to discuss the ways the COVID-19 pandemic has impacted businesses and created a new set of legal questions.

This interview has been edited for length and clarity.

What's the situation like right now in Chicago in terms of attempts to reopen, or maybe the reversal, some reverse on the re-opening policy?

It's not too bad right now. Cook County had over 90,000 — 97,000 — confirmed COVID cases and over 4,700 deaths. Chicago makes up most of Cook County. But we've moved forward. Some restaurants are opening with some, I think it's up to 25%, capacity. Retail stores are starting to open and, of course, the businesses that attract a lot of customers are not really opening, like entertainment venues, theaters and those sort of things.

What are some of the biggest concerns and questions you're getting from clients right now?

Well, of course, the biggest challenge is how long is this going to go on? I represent commercial real estate developers and commercial real estate owners to a very large extent. In the beginning, we spent a lot of time negotiating lease amendments to do rent deferrals or rent abatements. And most of those were fairly short-term, you know, three months, four months long. And in relation to that, most of the time, the lenders for the property owners were also willing to give forbearance agreements that kind of push it out. In ideal circumstances, you take the deferred amount and capitalize it and just add it to the end of the loan. But others just said okay, we'll defer but when the deferral's up, we're expecting to get paid. I'm not sure how that's going to happen. And so their big concern is, what's going to happen when things start to improve? But there's no way to catch up on the money that's been lost over the deferral period.

Yeah, it's an interesting time as a lot of these 90-day deferral periods are ending now. How do you see the next couple months playing out as a lot of these 90-day deferral periods expire?

Well, it sort of depends on the product type. The businesses that are in properties, and what they're able to do [regarding future business and discussions with lenders]. For some, the 90 days was a breather. But it didn't really solve anything. It just kind of postponed the problem. There's not going be any sudden rebound of business. So either lenders and landlords and tenants are all going to have to figure out a way to continue to accommodate each other, or we're likely to see both defaults and lease litigation. Just a mess. If you go back to like the Great Recession, it might be more like 2011 rather than 2009. Because 2009's kind of like this past three or four months where you might have forbearance but nobody's doing anything.

I'm interested in the comparison between the Great Recession and the current period. What are some similarities or differences that you're seeing?

Probably the biggest difference is that most people have a sense that this isn't going to last so long. I mean I think people deluded themselves in the beginning to think it's going to last one, two or three months. But I think most business owners and investors are kind of looking at the first or second quarter of next year, that a vaccine will likely be in place and things will start to turn around and improve. In the Great Recession, after Lehman Brothers went down on Sept. 15 of 2008, everything just came to a screeching halt, and pretty much stayed that way through 2009 and most of 2010. And then started gradually getting better, but took several years to get better. But what happened then was as people started to sense that it was getting a little bit better, lenders lost their patience and just started foreclosing, because they figured they'd be able to flip and sell to somebody else. It's kind of a compressed version of that. But if things turn around I don't think it's going be anywhere nearly as severe as it was during the Great Recession. Assuming things recover.

I'm interested in hearing your thoughts on the transactional market and also the construction market in Chicago. What's happening right now? What types of deals are getting done and what types of deals are off limits?

From a transactional standpoint, multifamily housing is still pretty hot. Industrial properties are pretty hot. There are big construction projects that were started before COVID-19 that are continuing on because their completion horizon is two years, three years from now. And I think most are anticipating that this will be behind them by then and they'll just move forward. The new projects have been a little bit more of a challenge, especially smaller new projects. And I have one that's kind of been postponed. The lender is saying, we want you to sign up for leases. One's a restaurant use and one's a hotel use. Of course those are the two hardest-impacted industries right now. So, that project is moving very, very slowly. As far as transactions like purchase or sale of retail properties, it's pretty slow right now. A lot of them are deferred. It depends on the type of tenants. If you have restaurant tenants it's a problem. If you have tenants that are travel-industry related, it's a problem. Because no one knows if these kind of businesses are going to survive. So it just depends. I mean, if you are doing a distribution center, those are doing pretty well, because everybody's buying everything online, and they need to figure out a way to logistically move that product. So it's pretty uneven but it depends on the property type, and the user type and the property.

You mentioned hotels, and it looks like delinquencies on hotel loans are approaching where they were during the Great Recession, if not already there. How do you see the hotel sector playing out this summer in terms of borrowers having difficulty making their mortgage payments?

They're going to have a tough time. These are industries that have, you know, looked to the government to give them some help and haven't always gotten the kind of help they need. You know, even with the PPP loan program, it worked well for people who had employees, and payroll and could get into those loans. I mean, I think that's a program that actually worked. But for real estate owners [some] rely on retail tenants to pay their rent. Or, if you have hotels, they need people. They need people to be there, and there's government orders that restrict their ability to be open. And even to the extent that the government stay-at-home orders or non-social gathering orders are gradually lifted, or lifted or just modified to allow more people, you also have the problem of consumers who are afraid to go.

You mentioned the government response and I'm curious, do you think there will be additional government relief for property owners and for borrowers? There's talk about it on Capitol Hill right now.

I don't know if there will be or not because it's such a political mess. It's become so politicized in so many respects. But I think there probably needs to be, especially if we start seeing state governments start to backtrack a little bit, and move things backwards and start closing some businesses again and reversing course. I'm not a big fan of government intervention in the general sense, but there are choices to be made here, and that is either try to prop up business to get through this period that everyone hopes is relatively short-lived, or go back to 2009 and just have a financial breakdown.

What's your take on how the City of Chicago and the State of Illinois have responded to the pandemic?

I think they've done pretty well. I know Gov. [J.B.] Pritzker [recently said he's] going to realign or reassign districts in the State of Illinois to 11 separate districts. Instead originally I think it was four. There's a world of difference between what's going on in the City of Chicago, the Chicagoland area, and what's going on down state. There are counties down state that have two or three confirmed cases. From the beginning, they were under the same lockdown orders or stay-at-home workers as the City of Chicago was. Understandably, people in more rural areas, less densely populated areas were watching their businesses be destroyed, whether they be hair salon salons or restaurants or anything else. But they weren't really seeing the evidence in front of them that there's a real problem, because in their area, there really wasn't a big problem. Here in Chicago it's been a lot different. We've actually gone slower than what Gov. Pritzker has provided statewide. Mayor [Lori] Lightfoot has been pretty strong in her sense that she wants to really suppress the spread of COVID-19, and I think most people here seem to accept what she's done. They've started opening up the streets to allow restaurants to do more outdoor dining since indoor dining is limited so much. Well, that's all well and good now. I don't know what we're going to do in November. It gets cold here. These businesses are going to have serious, serious problems.

How do you expect the legal questions for your clients to change over the coming months as we get further into the pandemic, as we learn more about the pandemic and as we try to move more toward reopening. How do you think the legal questions will change?

I don't know that there's going to be too much of a change, relative to just the legal issues, other than people worried about liability for opening up their businesses and having people in. Someone contracts COVID-19 and do they sue? I don't know how you're going to prove on a causal basis that the particular business did something wrong. But, obviously, people are going to be looking in leases at their force majeure provisions to see how they can better protect themselves. And of course that's going to depend on who's got the bargaining power at the negotiating table when the lease is entered into. I have partners who represent tenants who, of course, want to put in, you know, in the event of a government shutdown or pandemic, rent gets abated. Well, okay, if you represent the landlord, unless you have a corresponding provision that goes with your lender, it's going be tough to get that in the document. But I think probably dealing with lenders, for real estate owners, is going to be their big challenge. And as with the during the Great Recession, it's not really a legal question as much as it's a financial business question. Does the lender want to take over the property and be stuck with the problem themselves, or do they want to work with the owner to try to find a solution?

And if force majeure were to cover payment of rent that would be a game changer, right? Because it historically has not.

Yeah, if it did. But the problem that we have is everything's interrelated. So, if you could say that if the tenant didn't have to pay rent, that's one thing. But what about the landlord? You know? I have a client who's a widow with two children who has triple-net property that she was living off. Making the mortgage payments and living off the spread, and the tenant has stopped paying. Okay, so she has gone to her lender and gotten some temporary relief. But she still doesn't have money to live on on a monthly basis. So while a force majeure provision that says tenant's rent is abated during a period like this, it's certainly helpful to the tenant, not all landlords are REIT's with private equity backing that can theoretically weather the storm. A lot are just individual owners, especially [with] triple-net properties that they purchase largely as annuities to live off of. And I don't really know the solution in that case.

--Editing by Rebecca Flanagan.

Check out Law360's previous installments of Coronavirus Q&A.

Correction: An earlier version of this article misstated the year Lehman Brothers filed for bankruptcy. The error has been corrected.

For a reprint of this article, please contact reprints@law360.com.

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