Counsel for the Recovery


Lenobel Jeffrey 5x7 214x300 Counsel for the Recovery Jeff Lenobel was hired at the 40-year-old law firm Schulte Roth & Zabel 14 years ago in a bid to give the practice’s Real Estate Group a much-needed shot in the arm. Since then, Mr. Lenobel, 59, has helped grow the group to more than 40 lawyers, almost equally divided between the debt and equity sides of real estate. He sat down last week to discuss the reemergence of CMBS, his clients’ surprisingly good fortunes and refinancing as a veritable crapshoot in the economic climate that’s brewing right now.


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The Commercial Observer: What areas of the Real Estate Group have been most active since the beginning of the so-called Great Recession?

Mr. Lenobel: In the last two years, certainly workouts, restructurings and bankruptcy-related transactions have sort of overtaken the new transactions. But it’s remarkable how in the past six or seven months, there has been an onslaught of new transactions and new money–not only opportunistic distressed investing, but also a lot of private-equity money sitting on the sidelines. They’re using their money on an unleveraged basis to acquire real estate assets.


Is that because you’re blessed with great clients, or is the market turning?

You always wonder whether you’re lucky that some of your clients are active in new acquisitions and new developments or is the fact that you’re active in these new acquisitions and new developments a barometer of the industry? I can never answer that question.

I feel lucky to be on the side where our clients are active. We’ve seen pension fund clients buy a New York City hotel, for example, basically using 100 percent cash, which years ago you would not have seen anyone do that. We’ve seen a pension fund client go into a big development deal and do Jersey, where they’re providing all of the equity. In the old days, it would have been that they provided some of the equity and we got debt to provide the rest of the financing, but people are using equity almost as they used debt five or six years ago.


How are people refinancing right now?

There are some lenders out there who are active, and if you read Commercial Mortgage Alert every week, you’ll find a plethora of new lending platforms that claim that they’re getting active again. Many of these are …


Commercial mortgage-backed securities, right?

Right. Mostly CMBS. And we’ll get to mezzanine in a second. Mostly on the CMBS side, you’ll see all of these offshoots are ex-Credit Suisse people, ex-UBS people, ex-Prudential people and ex-Lehman people. But they’re active and they’re making–excuse me–claim to be making loans.

We have always been very active in the CMBS market, representing the originators of loans. And we’re seeing that some of these platforms have already gone into the market and have started making loans, such as Ladder Capital, for example. And there isn’t a week that goes by that Friday morning you read Commercial Mortgage Alert and those people who you used to represent in their other identities are now claiming that they’re looking at loans, making deals and getting management approval to make loans.


A lot of people were shocked at how well, and over-subscribed, the earliest CMBS offerings performed this year. The Royal Bank of Scotland origination, for example.

RBS did a small one. They’re all … No one is doing deals by themselves. They’re all aggregating loans. There aren’t a lot of loans, but they’re doing well. One hopes that the mistakes we learned from the past are not going to be incorporated into the deals we do in the future.

However, even the market for mezzanine debt, which people thought was dead, is alive and kicking. There are many people out there doing mezzanine loans. We’re representing a group–the deals not signed up yet so we can’t give names–but we’re representing a group of ex-Bear Stearns guys who have formed a fund. I say ‘fund’ in a very loose way. They formed a group, and they’re doing revolving mezzanine loans on a portfolio of properties.

You wonder when interest rates kick up, which inevitably they will, what’s that going to do to the market. I think when you get a blended rate of mezzanine loans and a senior first loan it’s still really doable, financing-wise.


From people you’ve spoken to, is everyone’s strategy slightly different? Does anybody really know exactly how to make these loans work in the current economic climate?

That’s an interesting question. Everyone has their own business plan, but it’s amazing how similar the strategies are. The lack of liquidity is the only thing that’s holding this thing back.

We represent one client who’s looking to refinance a billion-and-a-half first mortgage, and first and second mezz loans, on a portfolio of six hotels. Although there’s plenty of financing going on in today’s market, there hasn’t been financing going on for the really large transactions. So this is sort of breaking new ground in the new world.

And we’re very anxious to see whether or not we’re going to find a lender in the CMBS world–because I think this is a CMBS-type of transaction–and are the CMBS lenders going to form a syndicate up front to really originate this loan until they can take it to market as a CMBS loan? One wonders just what the strategy is.

We don’t really know what the strategy is, but this is the beginning of the big mortgage maturities starting to kick in–and some of the first deals coming to market are really going to be a barometer of what’s to come.


Are you already seeing a lot of workouts, or will they flood your office next year?

We’ve been saying that the plethora of mortgage maturities resulting in workouts and bankruptcies and restructurings would start in 2009 and take us to 2015. Well, they were certainly slow to come by in 2009. We’re starting to see them in 2010. One of the reasons that I think it keeps getting pushed back is that so long as the borrowers can pay debt service on whatever debt exists on the real estate the lenders are still in a mind-set to extend the loan and get paid, hoping that the world will change and hoping that things will get better.

If interest rates would increase, I think this whole extend-and-pretend dilemma would end. However, one wonders if it really is extend-and-pretend. I wish I had a rhyme to tell you what it is. I think it’s extend-and-really-wait-for-things-to-get-better. And, in fact, things are getting better and maybe waiting is the right way to do this, and not foreclose. Most lenders don’t really want to foreclose.