The poor-cousin status of real estate work in the US may be about to end.
It is often said that US firms do not do real estate. The practice is not viewed as a discrete discipline in the way it is in the UK and the margins do not tend to stack up to the levels of profitability that management expect.
“The American legal model is predicated on achieving 40-50 per cent profitability, but it’s hard to achieve the same levels as corporate and finance in mainstream real estate,” says Tim Webb, who last year left Eversheds – a UK-centric firm with a major real estate practice – to set up the London real estate practice at Greenberg Traurig Maher. “The UK profit model for real estate is probably nearer 25-30 per cent. And while the big American firms, in general, don’t do day-to-day real estate asset management work, UK firms do,” he continues.
This is a proposition that Lovells head of real estate Michael Stancombe will seek to disprove when his firm merges with Hogan & Hartson on 1 May. The combined real estate capability will escalate from 27 to 43 partners and see the firm operate out of 25 offices in 13 jurisdictions. It will also see Stancombe elevated to the role
of practice co-chair alongside Washington DC-based Bruce Palmerley.
Few will be able to rival that level of breadth, apart from the magic circle and what consultant Alan Hodgart has referred to as the ’business law firms’ – outfits such as DLA Piper and, controversially, Clifford Chance – but then that is the idea.
“In terms of mandates [we’ll compete against firms such as] Linklaters and Clifford Chance. It’s less about people like Herbert Smith and Ashurst because we have a different proposition and reach,” predicts Stancombe.
But it does not necessarily follow that bigger is better and Stancombe wants to continue doing the asset management work that many US firms shun.
“Hogan recognises that we do a greater level of ’dirt conveyancing’ and that we can do it profitably and that it brings in work for the rest of the corporate practice. They’re entirely comfortable with that,” he argues, with reference to the firm’s Mexican wave referral model. “We’d still be in the market for doing the full-service work.”
Coupled with this, there is the value-add of being able to access Hogan’s “treasure trove” of clients, which Stancombe puts into two categories – corporate and investors. The corporates he speaks of “occupy offices and trade out of logistic space and historically haven’t been served by Hogan’s UK real estate practice – we expect a huge surge in occupier work”. The investors are made up of “REITS, private equity and the hotels and hospitality practice”.
Still, this seems to assume that Hogan’s US clients, who may have gone to a UK referral firm in the past, are automatically going to switch over to Hogan Lovells, when, in fact, local counsel may have their own relationships they want to honour.
“Don’t underestimate the influence US management will have,” argues Stancombe. “But that doesn’t mean it’s going to be a pushover.”
But with a lack of individual representation on the post-merger international executive, it does beg the question as to whether real estate will have the backing and resources it needs to pursue these relationships.
The international executive or international management committee (IMC) has representatives of all the four mainstream practice divisions bar real estate. Even IP has its own seat at the table.
When quizzed on the gap, Stancombe states that real estate dispute resolution partner Nick Cheffings is on the board and that real estate will have representation through those in the corporate practice: head of financial services and corporate governance Stuart Stein and Lovells corporate head Andrew Skipper. He adds that Hogan chairman Warren Gorrell “comes from a REIT background – they’re his clients – if he can see an opportunity, that can only put us in a position where we’re regarded as a key practice”.
This is all true, but the board that Cheffings sits on has more of a supervisory function in contrast to the focus of the IMC, which deals with practice expansion, financial affairs and business development.
“Would I have liked to have had someone from real estate [on the IMC]? It’s always nice to have that,” Stancombe concedes.
A City recruiter feels that the board’s composition only serves to suggest the predominance of an ’American’ mindset. “In our experience American firms have no interest at all in real estate,” he says. “We’ve moved a few guys in real estate from US to UK firms. Americans call them ’dirt lawyers’. In a premier American firm it’s not seen as being as worthwhile or interesting.”
He adds that this presents an opportunity for expansive firms that are committed to real estate in the next tier down.
“I suspect that [Lovells partners] will feel a bit unloved after all this. If a firm like Camerons, Nabarro, Taylor Wessing or Wragges came along they might move,” he comments.
Okay, so there might be some ulterior motives in taking such a punt, but it is hard to ignore the extent of the fallout in anticipation of the merger. There have already been office closures, both planned and completed: Lovells announced that its Chicago office will close in October, an 18-partner team from Hogan & Hartson Raue in Berlin will spin-off into a standalone practice, Hogan’s Geneva team will leave for Akin Gump Strauss Hauer & Feld and the entire Warsaw office left for K&L Gates. A lack of profitability, conflicts and differences in culture were cited as among the reasons for the splits.
When it comes to cultural differences you cannot get more divergent than being the sole partner in a division to being one of 14 or so. That is the situation facing Hogan London real estate partner Chris Berry.
Stancombe is complimentary about acquiring Berry’s niche team’s finance and hotels capability “both on the bank and borrower side”. But how does Berry feel about moving from being a big fish in a small pond to a small fish in a big pond?
“From my point of view it’s not a problem. I’ve always been in a large department – Linklaters, then Gouldens, then Jones Day – so I’m hardly a sole practitioner. I don’t work in isolation here; that wouldn’t work,” he asserts.
Berry is not the only one who will experience a shift. As this article was going to press, Lovells partners were putting the finishing touches to the farewell party for the man who, in his role as the gregarious host of the firm’s parties at Mipim, was among the more enthusiastic advocates of the Lovells real estate brand – erstwhile practice head Bob Kidby. He leaves to take up a role as a non-executive director at property developer Welbeck Land.
Stancombe may not have his own place on the Hogan Lovells international executive but he will try to ensure that the enlarged firm is as closely associated with real estate as Lovells was under Kidby.