Global real estate: Doing deals overseas

By Robert Yates

The Aussies are coming! The Aussies are coming!

Well, not exactly. They’re already here. The Australians have come to America, not loaded with shrimp for the barby, but with money, lots and lots of money. They have 99-year leases on the Chicago Skyway and the Indiana Toll Road. They own shopping malls. They own toll roads and tunnels in Europe.

According to the Association of Foreign ­Investors in Real Estate (AFIRE), in 2006, ­Australia was the most active foreign buyer of real estate in the United States (54 percent). Germany (27 percent) and The Netherlands
(8 percent) were a distant second and third.

Westfield, the largest investment bank in Australia owns 57 shopping centers and malls in the United States, including Old Orchard in Skokie, North Bridge on Michigan Avenue, Louis Joliet Mall in Joliet, and Hawthorn Center in Vernon Hills.

“Australia is young, wealthy, and indust­rious,” said Leonard Rosenberg, a real estate partner at Mayer Brown. “They have a lot of money to invest and they’re looking for places to go. Their commercial property market is highly securitized, so they have lots of money to invest but no place to invest in Australian real estate. It needs to go somewhere and a lot of it comes here.”

The emergence of Australia as a global ­financial power is just part of the picture in the world of global real estate. There has ­always been foreign investment in America, and Ameri­can investment in foreign real estate, but within the last decade, in particular, capital has been flowing back-and-forth across borders without regard to those borders.

“The world is flat,” Rosenberg said. “Global­ization has created all these opportunities and Australians have taken good advantage of that. The investment world has been moderately flat for decades, but in the last several years, tax treaties and other investment vehicles have allowed people to cross borders efficiently.”

The languages, the legal systems, the ­business cultures are different, but billions of dollars are looking for places to land, and more countries are providing landing places than ever before — China is exploding, India is growing, Dubai has 20 to 30 percent of all the tower cranes in the world, and, in those countries where political stability has taken root, Asian and Latin American countries are emerging as players.

“The movement of money across borders has only accelerated,” said Jeffrey Usow, also a real estate partner at Mayer Brown. “Our clients’ borders are breaking down, and ours, too.

“The world’s becoming smaller,” said Paul Meyer, a real estate partner at Mayer Brown who does work in Latin America. “There’s a lot of political instability in world — it’s too simplistic, but because of the economic ties that go so deep in all these different countries, hopefully at some point people will start to think that they can’t really hurt us without hurting China and Russia.

“Hopefully, people will start to realize that there are a lot of consequences to their actions. They might think they’re attacking some ­interest abroad, but they’re actually attacking a country nearer and dearer to them.”

We’re all connected now, connected by com­merce even more than political ties. Whether it’s American pension funds investing in ­resorts in Thailand and Costa Rica, Western Europeans investing in American office buildings, or the government of Singapore buying assets here, commercial interests are pushing aside a narrow view of what political interests are.

A lucrative international arena

Leaving aside the political implications of the erosion of borders, for real estate lawyers the international stage beckons — at times confusing, but lucrative and mind-expanding.

“At this point in time, lawyers and clients are citizens in a global economy,” said Jana Cohen Barbe, a partner at Sonnenschein Nath & Rosenthal, “so you can’t think domestically or provide purely domestic expertise. Clients are global, so your vision is global.”

“Thirty years ago, did you think as a real ­estate lawyer, you’d be doing what you’re doing today? No,” said Jay Epstien, chair of global real estate at DLA Piper’s Washington, D.C., office. “Real estate lawyers did business in their own backyard. REITs — the public ownership of real estate — transformed the real estate industry from local entrepreneurs to a highly concentrated group of owners with access to national capital.

“What made the world even flatter, to use Tom Friedman’s phrase, was the outflow of investment capital and knowledge capital from the states as traditionally strong U.S. real ­estate firms, like Zell, Vornado, and Tishman, sought out opportunities outside the U.S.,” Epstien said. “Investment advisers were ­raising funds in regions outside the U.S., and real estate companies extended their reach around the world.

“You had the Pacific Rim stuff in the mid-’80s,” he said. “It’s different today — you’ve got capital coming in from all over the world. There’s an abundance of capital in the Middle East. The Chinese want to invest here. We’ve always had money coming from Western ­Europe. It’s a very fluid market.”

And investment money is now looking south as well, as Latin America emerges — and that appears to be an accurate description — from decades of political and financial ­turmoil to become a growing market. The Latin American debt crisis of the late ’70s and ’80s took years to work out, but by the early ’90s, Latin America was in place for investors to return.

“You had political regimes that were pro-market and pro-investment and actively sought U.S. investors through the ’90s,” said Douglas Doetsch, a real estate partner at Mayer Brown. “Then there was a dip in Mexico in ‘95 with the devaluation of the peso — it took a year
or two to work out of that; in ‘98, Brazil ­devalued its currency. There was the Argentine crisis in 2001, but that was largely ­restricted to Argentina.

“All emerging markets are volatile,” he said. “But through most of the new millennium, growth has been fairly steady,” he said. “More than that, you have new investors and investments — a tremendous growth in U.S. and European investors and Australian investors in emerging market real estate.

“Country risk is a big factor in pricing deals,” said Meyer of Mayer Brown. “Mexico is a stable environment. It’s a stable country, also a very big country with tremendous growth for resort, retail, industrial. It’s a ­market that actually is maturing to the point that people feel comfortable investing there. The smaller Central American countries, ­because they’re smaller, are really more tourist-oriented. They don’t have the retail ­development or the residential development, aside from condos in resort areas.”

“Mexico, despite the turmoil in the last election, most of our clients and the business community view it as now being solid enough to make significant investments,” Usow said. “The policies of the country have been to ­encourage investment. There’s a constant push and pull because of domestic exigencies, but for the most part, they have encouraged investment.”

“As real estate investors, most of these ­invest in their home market first,” Doetsch said. “Institutional investors — pension plans like CalPERS — then look to neighboring markets that are like their home market, but yields are relatively low in mature markets. Institutional investors are long-term, they’re working with public money and looking for investments that would be favorable for
20 years, and a long-term investment that’s ­favorable at 10 percent is better than 5 to 6 percent.

“This is not to say they’re putting all
their eggs in the emerging market basket,”
he said, “but their portfolios have grown tremendously in the last 20 years. They have hundreds of billions to invest, so if they invest 10 percent in an emerging market, that’s still a large sum of money.”

Growing intellectual demands

And, to return Down Under: With a population of around 21 million, the Australians may not be the biggest players in the global real estate market, but a reform in Australian retirement income policies has created a vast supply of money to invest.

Since 1992, employers have been required to make contributions to superannuation funds, the Australian version of pension funds, on behalf of most of their employees.

Originally set at 3 percent, the minimum contribution was set at 9 percent in 2002. As a result, superannuation assets total $1 trillion today, according to AFIRE. And, according to the Sydney Morning Herald, Australia has more money in managed funds per capita than any other developed country.

“We’ve been doing work for Australian ­investors since 1999,” said Bruce Gelman, a
tax partner at Mayer Brown. “The super­annuation funds have driven it. The real ­estate and yield markets in Australia are relatively small, and about half-a-dozen years ago, Australia was tapped out for investment. Our markets are similar, the way we do business is similar, and it’s grown exponentially since then.

“They’ve been doing infrastructure before we knew what it meant,” Gelman said. “The Australians have been doing it for long time — they have been the leaders.

“We represented the city in the transaction lease of the Chicago skyway for 99 years — Macquarie [an Australian investment bank] and Cintra [a Spanish toll road company] won the bid — $1.8 billion for a seven-mile road,” Gelman said. “That was higher than anyone expected, but these infrastructure bankers spend a lot of time modeling income streams they can justify. The tolls just went up to $3 [from $2.50], and will continue to go up until 2017, then it’s based on the CPI.

“Macquarie and Cintra paid $3.8 billion for the concession for the Indiana Toll Road,” he said. “The Pennsylvania Turnpike is about to go to bid; it’s going to dwarf the Chicago Skyway deal, probably $20 to $30 billion. The reason these are such big numbers is that they’re sure-thing yields in this age of ­uncertainty — people aren’t going to stop driving on roads, and these toll roads are going to generate constant yields.”

Australia, Latin America, and Asia — this is no longer the real estate practice these lawyers signed up for, 20 or 30 years ago. The intellectual demands have grown (”I’m probably the only lawyer in Chicago with the Australian Securities Exchange regulations on his desk,” Rosenberg said) and cultural issues move to the foreground.

“It’s not your sort of local dirt law practice, anymore, it’s more real estate capital markets and private equity markets,” Usow said. “To a much greater degree, we’re at the intersection of real estate and real estate capital markets, private equity that has changed and been ­accelerated by globalization of practice.”

Mayer Brown, having merged with London-based Rowe & Maw several years ago, merged in January with the Hong Kong-based firm of Johnson, Stokes & Masters, one of the largest law firms in Asia.

“Our footprint now is trying to match the footprint of our institutional real estate ­investors,” Usow said. “That’s really why we’re there.”

“Real estate has always been a great ­practice area even if you’re doing domestic transaction — it involves finance, corporate, tax, ERISA — those elements are still there in inter­national market, though tax is critical,” Meyer said. “How your investment gets structured on a tax-efficient basis — paying attention to the type of entity that’s investing — whether you’re a tax-exempt investor, taxable investor, and what the different laws are in juris­dictions. How does the entity get taxed in that jurisdiction? How do you get money out as debt? How do you get money out as distribution?

“All those things apply in the domestic ­market, but not with the same level of critical importance that they have in the inter­national arena — the same elements are there, but they take on added importance.”

But doing business overseas, especially in the emerging countries, is not for timid souls.

There is, for starters, the language barrier — more a barrier for Americans, who tend
to have forgotten most of their high-school Spanish, than the people they are dealing with.

“Everything is negotiated in English,” Meyer said. “Maybe the documentation is in Spanish, but it’s negotiated in English. But we also want to be respectful — if you’re in the market you should know the language. It’s amazing — you go places and, from cab driver to bellboy to the maitre d’ of a restaurant, everyone speaks ­English.”

Level of sophistication

But more deeply, the practices are different, the customs are different, the level of sophistication may not be up to American standards, but the deals have to get done.

“The fundamentals still apply, whether you’re in Cook County or Brazil,” Barbe said. “Our Chicago office is doing significant real estate development in Latin America. The principles are exactly the same.

“You need to acquire contiguous parcels of land; you need zoning approval,” she said. “It’s not the same zoning code, but governments in Latin America have zoning codes; environmental issues cross every border — there’s an enormous desire to develop green, outside the U.S., and it’s a big deal in the U.S. The laws may be different as to how you perfect a lien, but you still have to perfect a lien.”

“You have to have sensitivity to other legal systems and business cultures and other ways of approaching the world,” Doetsch said. “A U.S. real estate lawyer assumes a certain kind of purchase agreement, the existence of title insurance, and that the zoning will follow a prescribed format. What you find is that a lot of those assumptions don’t hold, so you have to rethink.

“The fundamentals of good investing and key risks remain, but, with the details, you have to be open to new ways of doing things and sensitive to other ways of doing things,” he said. “There’s lots of room for creativity, because unexpected things happen all the time — you can assume that the unexpected will happen.”

“More and more transactions abroad are looking like transactions in the U.S.,” said David Bryant, real estate partner at Katten Muchin Rosenman. “In Europe, for instance, they’ve developed a fairly sophisticated real estate financial market, but South America has yet to develop those same levels of ­practices. In part, that’s a function of having a ­sophisticated investor base willing to invest in those economies. And, in part, it’s historical, meaning some countries are developing but have not reached same point or have not been as financially active as Europe.”

“If you go to a different country, they don’t necessarily have the same level of documentation and due diligence as in a pure U.S. deal,” Meyer said. “That’s part of the education on the U.S. investor side — to become more ­familiar with the customs and practices of ­different countries, and also, by the same token, to make an effort to try and lift some of looser standards up to the higher standards of the U.S.

“When you first go into a jurisdiction,” he said, “you’re more tense, you want to make sure that you obtain everything you typically would get, but the more comfortable you get with the process and procedures in that jurisdiction, the more you’re willing to go more with the market.

“If you’re doing a joint venture, you still have to buy assets in that market,” Meyer said. “So, even though you get your joint venture partner up to speed on what you expect to happen from the perspective of the U.S. ­investor, that partner has to go out and find assets and deal with people who are not under that same structure, and you need to give him the flexibility to buy property.”

Knowing no boundaries

Even though the electronic world obviates much of the concern over whether the middle of the United States is the best location to practice law on an international scale, the pressures of this kind of work has ramifications in the office.

“There are geographies that matter and ­geographies that don’t,” Barbe said. “For us, Chicago is as good a place as any. It’s centrally located, but in a lot of respects it doesn’t ­matter, you could do this anywhere. It’s helpful that businesses are located here and we have a strong economy, but it’s not relevant geographically.”

But geography does matter, a bit.

“Chicago is great for Latin America,” Meyer said. “We’re pretty much in the same time zone. Mexico City is a four-hour flight, it’s very convenient. So that’s a real plus. For our people who deal with Australia, Asia, India, it’s much more difficult because of the time difference.”

The complexity of doing deals across ­borders is also forcing firms to adjust their traditional ideas about the structures of their practices. Projects are not restricted to a single office, and the lines of practice areas are ­giving way as well.

“There’s a lot of interchange between the different offices,” Meyer said. “We’re out in New York a lot, in D.C. a lot. We have a development in Costa Rica: our New York office, the Chicago office, and one person from the Houston office are all working on the transaction.

“Just as our clients are looking to integrate on an international basis, our firm does the same thing,” he said. “It’s our London office working with us and our New York office — office distinctions are broken down just as ­international boundaries are broken down.”

“Practice group boundaries are disappearing,” Barbe said. “We’re more industry-focused and client-focused, rather than functioning within the traditional boundaries. We’re ­moving to an industry model — that’s what our clients have done.”

“One thing you see with more and more clients — when people were first making ­investments, they didn’t necessarily have a physical presence in the jurisdictions where they were making the investments,” Meyer said.

“You do see more and more clients opening offices — whether in Mexico City or London or someplace else,” he said. “They want to ­establish a physical presence in the different jurisdictions they’re looking to invest in.
That, to me, shows a maturation of the ­market and people. This is something that’s here to stay, not just an investment-fancy phase that’s going to be here for a while, then go away. People are making significant capital investments in their business plans in these jurisdictions.”

“What does a real estate lawyer want to do? Deals,” said DLA Piper’s Epstien.

“I’m a deal junkie. I want to do deals. The ­international platform puts you in a position to work on fascinating deals. Not every client has got its vision international, but inter­national is one piece of an extreme puzzle. The challenge of doing business abroad is that you’re dealing with currency issues, different practices, different cultures, and trying to knit that together and convince and counsel your client.”