Anna-Liza Harris has been hanging out in the Washington, D.C., area for a while now. After receiving both her undergraduate degree and juris doctorate from Georgetown University, she went on to work as a tax lawyer at Dewey Ballantine. She spoke with Commercial Observer about how (and why) her entire nearly 20-attorney practice picked up and moved over to Katten Muchin Rosenman and how the firm’s structured financing and securitization group has expanded its work in the commercial financing space. Harris also provided some perspective on the tax side of the CRE world’s latest happenings, like risk retention and foreign investment in the U.S.
Commercial Observer: How did you know you wanted to be a lawyer?
Harris: I went to Georgetown University for undergrad. After I graduated, I stayed in D.C. and was working as a lobbyist for a public interest group. It was during that time period that the Tax Reform Act of 1986 was enacted. I found that really fascinating especially as this was the first time in a generation that tax reform was being done. It really struck home with me how something that was very kind of dry—the internal revenue code—could be so potent and touch every aspect of business and impact how people live. I started thinking I should go to law school, so I applied to go to Georgetown Law. And that’s what led me from a normal life to the life of a lawyer.
What’s your area of expertise?
Within a structured finance deal of any sort, including one with commercial mortgages, there are two types of lawyers—corporate lawyers that cover the securities and regulatory issues, and tax lawyers. Tax aspects of a deal are very important, and my area of focus is as a tax lawyer. Our practice group at Katten is different in that we have as co-heads of the group: a tax lawyer [myself] and Howard Schickler, a corporate lawyer.
What was your first job in the legal world?
I started off at Dewey Ballantine right out of law school. The very first project that I ever worked on was a REMIC [real estate mortgage investment conduit] deal for Fannie Mae. As a tax lawyer I started learning the REMIC rules early in my career. I was at Dewey from 1989 until the fall of 2010, when our entire practice group picked up and moved to Katten.
How many people came over in the move?
At that time, the group had five partners and 12 associates, and we brought legal assistants and paralegals with us. It was a very large move of a lateral practice group. Dewey Ballantine had merged about three years before that with another law firm, LeBoeuf, Lamb, Greene & MacRae, and we were concerned about the direction that the merged firm was taking. It went into bankruptcy in 2012, so we left about 18 months before that.
Did you become the co-head of the group after the move to Katten?
Yes. Katten didn’t really have a structured finance practice before we came, and the firm was looking for that. The management at Katten was very supportive of building out the structured finance group, and was also very interested in encouraging members of our group to become involved in firm management.
What does your client base look like?
Our structured finance group is most well known for auto representations and residential mortgage representations. On the auto side we represent Ford, General Motors Financial and a number of smaller noncaptive auto issuers. We are really looked to as a leading firm in the auto space. With respect to residential mortgages, we do Fannie Mae’s MBS [or mortgage-backed securities] work and all of their REMIC deals, as well as their credit risk transfer transactions. We also represent them in their multifamily REMIC program, which started back in the mid-1990s.
As an associate then, I vividly recall working on Fannie Mae’s very first multifamily REMIC. The entire working group, the in-house business people, we all recognized how groundbreaking and important it was for Fannie Mae to start doing multifamily REMICs. We were committed to doing it perfectly and wanted to launch the program with not a wrinkle. It was my first time getting my arms around the different way you had to look at multifamily collateral in a deal versus residential mortgages.
What are some of the differences?
In a residential deal, you’re used to having thousands and thousands of mortgages in a single deal. In a multifamily deal, which is basically a commercial mortgage deal, there would be maybe 10 loans. Having never done one, this was a real eye-opener for me. The tax structure is the same, but the entire outlook of how to evaluate a collateral pool is different.
What is your practice group focusing on now?
One thing we really wanted to do was expand into doing more commercial mortgage securitization work. Katten has a great real estate department—it’s a fairly large department with people in Los Angeles, Chicago, Charlotte, New York and D.C.
A lot of our real estate lawyers who are representing lenders or even large commercial borrowers would negotiate and put together the mortgage loan on a shopping mall or an office building. But when it came time to do the follow-on financing—a securitization transaction—the work would migrate and go to another law firm.
When our securitization group joined Katten, we weren’t really known for doing CMBS work. We needed to figure out how to hang on to these deals and figure out how to represent clients all the way from when they decide they are going to do financing on a property to the term securitization.
There are three or four law firms known for doing the vast majority of CMBS and REMIC work, so we felt that to really get into this segment of the market we were going to have to bring in some laterals from one of those firms to give us that kind of credibility. About six months ago, we brought in a new partner into our Charlotte, N.C., office, Joshua Yablonski from Cadwalader, Wickersham & Taft, and we brought in a senior associate, Mike Shaffer.
We have really jumped in with both feet into doing CMBS deals. We’re doing a lot of hard work to continue building this client base, and it’s happening exactly like we thought. We are doing single borrower securitizations from client relationships that have existed at Katten for decades through the real estate department. We have already done some transactions for big bank clients like Bank of America Merrill Lynch, which is a bank relationship the firm has had, but until Josh came, we hadn’t done any CMBS work for them.
With the different risk retention structures that have been discussed—vertical, horizontal and L-shaped—how will that change the work you do?
Taking a step back, most securitizations of commercial mortgages are done in a structure that is referred to as a REMIC, which is a tax election that allows you to treat multiple classes of certificates that you’re going to issue as debt for tax purposes. You can create classes of debt all the way down through the capital structure from the most senior to the most subordinated, and all of them will be treated as debt. You can also have what is called a noneconomic residual at the bottom, the equity piece. This structure is very attractive because for a lot of investors they like to have certainty about what they’re purchasing; they want to know they’re buying debt.
When we’re talking about a risk retention structure, we’re talking about retaining 5 percent of the risk vertically, horizontally or L-shaped. For a sponsor who is going to be required to retain this risk, they will keep a percentage of a vertical strip from the senior down to the most subordinated or they will a create subordinate class or classes that are equal to that 5 percent number. From a tax perspective, the analysis is all going to stay the same.
Where I think we’ll see impact on structure is whether or not we actually go forward in creating a more subordinated class that directly equals that 5 percent number or if there’s some desire to create multiple tranches that add up to 5 percent.
For example, in the case of a horizontal risk or an L-shaped risk retention piece, the B-buyer may retain the risk retention piece, or a portion thereof, instead of a sponsor and such risk retention piece may include classes rated BBB or lower or even unrated classes.
Depending on what type of entity you have as the sponsor, the companies or banks will have different capital requirements against how much capital they’ll have to hold against the structured assets they’re retaining.
Are you seeing more global investment here? And how does that affect the work you do?
I think in times where there’s a lot of volatility in the marketplace, you see what is referred to as flight to quality. What we’re seeing is a lot of U.K.- and Europe-based investment funds, typically private equity funds, looking for ways to invest in U.S. real estate. From the tax perspective, we try to be very careful here. Most of these non-U.S. funds don’t want to embark on an investment program that will end up having them treated as engaged in a U.S. trade or business. If they’re treated as engaged or U.S. trade or business, they become subject to U.S. taxes, which takes a lot of the efficiency out of their transaction. We help them devise structures where they can invest as a senior or mezzanine debt investor, into the property directly through a [real investment trust] structure, or into a securitization. REMICs are great because all classes are treated as debt, so you can invest in a more subordinate class where you’ll get a higher yield and still avoid U.S. taxpayer classification.