The Unique Legal Complexities of CRE

SAN DIEGO—Understanding clients' objectives and knowing what's sacred and what can be sacrificed is an important step in legal counseling within commercial real estate, Dana Schiffman, a partner with Crosbie Gliner Schiffman Southard & Swanson LLP, tells GlobeSt.com. We sat down with the 31-year veteran recently to discuss some of the legal issues that are common with mixed-use and transit-oriented projects, as well as commercial real estate as a whole.

GlobeSt.com: What is your approach to complex legal issues dealing with real estate?

Schiffman: They're all different. If you're working on a lease, there are unique issues there vs. a sale, financing or development. Particularly when it comes to leasing, we've established compromises and avenues after doing this for a number of years and working with opposing counsel—there are so many ways to express compromises and solve problems. With development, there's even more creativity involved, usually dealing with more unique fact patterns and issues, but again you draw upon experience to guide you. Every deal is different, but it's evolutionary because you're constantly working off your prior experience and you recognize the thought process going on behind the scenes.

You have to start with understanding the clients' objectives. You have to look beyond the legal technology issues and look at the business issues. You need to understand the client's business and what they're trying to do—put yourself in their shoes to see what the tradeoffs can be and make helpful suggestions. Determine what really has to be solved and what other things are at risk but not that material. Apply your focus to the client's objectives.

Of course, you do need to have some method for approaching complex problems. You need to start with a foundation like a building and establish a critical path, and then prioritize what needs to be solved and how it can be solved. That's the process that goes into solving big problems. You'll never get past square one if you don't narrow things down and focus on the critical path elements.

GlobeSt.com: What are some of the more common legal issues you've seen with mixed-use projects?

Schiffman: Mixed-use projects are becoming more common—it's the trend. The reality is there are more infill and urban-oriented projects being built today, and the density that often comes with developing mixed-use projects presents a challenge for everyone in the process—design, development, legal, finance. From a legal perspective, often the challenge is really how to look at the project and create CC&Rs because of the vertical and horizontal components and different uses. You look at the project from an operational perspective and deal with the issues of property management and operation and determine how costs should be allocated. You need to determine how the various elements of the project should be maintained, and that can be very challenging, especially with vertical components.

When you have different ownership of the different components of the mixed-use project, the legal issues can get complex. The best way to realize the value of a project is when, say, the hotel is separate from the retail and office. One of the biggest ongoing challenges is coming up with what should be done if there's a casualty, making sure it doesn't impose unfair financial responsibility on any one component.

In a commercial setting, the set of CC&Rs is not nearly as form driven as it might be in a horizontal or even a vertical retail setting. There are all kinds of unique issues. I'm working on one now involving three hotels, each with a different ownership, and a restaurant. You have public amenities and coastal access, and you need to approach things very creatively. Also, with mixed use, people are being put together in more creative ways: three different hotels in one structure or different residences in the hotel. You're combining mixed uses and they're very much integrated relative to the building structure and systems. There are a lot more new designs that are responding to the marketplace.

You're basically tweaking what was done in the last deal or before, so it's very much evolutionary, but it's not one size fits all. I like what we do in this type of commercial real estate. It requires you to think about the best way to approach each project and draw upon your experience, but you're never in a position to totally duplicate what you did yesterday.

GlobeSt.com: What has been interesting to you about transit-oriented development?

Schiffman: I've worked on a good number of those, and they almost always involve a public-private interface of some sort. There are challenges because of that. It's a very desirable location for a developer, but the public needs to access that transit point. It's a marketing point for the development, but the challenge is how to integrate that access with the overall development. There are design and legal challenges. Inevitably you're dealing with a public entity that's part of the development process, so you need a collaborative approach that will work for all parties. It adds another layer of complexity because there's another ownership and you have all the specific issues of providing access. The access may be through or under the private development, or even over it. For example, I worked on the One Santa Fe apartment project in Los Angeles where the transit stop was adjacent to the project and everybody exited through the project. It was a unique design, and it took many years for the developer to complete it.

GlobeSt.com: What types of legal issues are you seeing more of with regard to commercial real estate as a whole?

Schiffman: It started about a year and a half ago, when the economy was on an upswing. There has been a real broadening of activity—a lot more leasing, sales and financing than even three years ago, and even a lot more development work. In many ways, it's reminiscent for me of the way the market felt in the early 2000s, but it feels like it's recovered and gone beyond that.

Another trend is that institutional investors used to be mostly looking to invest in core assets in prime markets, and now we're seeing a lot more of those investment dollars chasing deals in secondary markets and going up the risk curve.

Locally, in San Diego County, we find ourselves really busy, even though half of our work is outside the county. There's a lot of activity downtown, but there's a lot happening all over the city, including projects that were put on hold when the economy went sour. One Paseo in Carmel Valley and Millennia in Chula Vista are both long-range development, which is coming back and has lots of sales activity. It seems every market within San Diego is a lot more active. In general, it seems like San Diego is a much healthier market than it has been for years and years.

We're working on four or five hotel financings or developments, and we do a lot of work with Westfield, assisting with the development of Horton Urban Park, which is nearing completion. There are a lot of changes planned for Horton Plaza and there are a lot of projects in the East Village—some mixed use and others predominantly residential. There's a real renaissance going on there, but also in the Gaslamp with the Pendry Hotel development and the Embarcadero where Lankford & Associates' new waterfront hotel is coming out of the ground. Even with the Convention Center put on hold and questions about where the Chargers will end up, there are creative things happening and a lot of momentum in the marketplace. People feel they have to strike while the iron is hot, especially within the hotel sector. People realize that CRE does move in cycles, and there's a lot of art and science involved in the timing.