By Andrew McIntyre

Law360 (May 15, 2020, 5:23 PM EDT) -- In this edition of Coronavirus Q&A, two DLA Piper real estate leaders discuss the federal response to the pandemic and the ways COVID-19 has affected permitting and deal flow.

Barbara Trachtenberg and Rich Klawiter, both vice chairs of DLA Piper's U.S. real estate practice, shared their views as part of a series of interviews Law360 is doing with attorneys to look at how COVID-19 has brought up new legal questions and impacted businesses.

Trachtenberg works in DLA Piper's Boston office and focuses on transactions, while Klawiter works in Chicago and specializes in land-use and zoning work.

This interview has been edited for length and clarity.

How has the scope of your real estate legal work changed amid the pandemic?

Trachtenberg: It's been a pretty significant shift from the typical transaction deal flow to helping clients analyze orders that are being put in place in state and county and local jurisdictions. Working with clients to analyze leases and understand what rent relief might be available. And analyze loans and figure out what forbearance or other help from lenders might be available. Also helping our clients understand the federal legislation that's being passed to see if there's relief or assistance that they can get from the federal government. It's been a pretty significant shift.

I'll let Rich talk [about] how that shift has been happening on the permitting and development side. What I do is a lot of buying, selling and borrower-side financing. That's slowed, in part because I think people are now starting to get a better sense, now that we're a couple months into this, where property values might be headed. But there are still deals happening. It's just at a much slower pace. We closed a big financing a couple weeks ago, we're working on signing up a purchase agreement now for a small portfolio and I've got a closing scheduled. There's stuff still happening, but I would say that it's not happening at the same deal volume that it was at the end of February.

Rich, how is COVID-19 affecting the permitting process?

Klawiter: I'm here in Chicago, and my practice is very much one of interfacing with local governments and state government. The governor, Gov. [J.B.] Pritzker, he's been terrific, by the way, on really all levels. He was an early mover on the shelter-in-place order that doesn't expire until the end of May. He announced there was going to be sort of a phased opening, which seems to be one of the strategies that governors are using these days. As it relates to permitting, he suspended the Illinois Open Meetings Act very early on, actually in late February, so it does allow for public hearings to occur virtually.

Local bodies of government have been effective at utilizing technology to allow for all the normal due process requirements to be observed. They've implemented a lot of different practices. Suffice it to say at least once or twice a week, I've had public hearings which are done virtually. Public comment is allowed. You can send comments in in advance. You can appear and speak over Zoom or whatever other medium they're utilizing. And we've been able to get a lot of projects advanced. So the Chicago City Council meets virtually. All the important committees like zoning and finance meet virtually. So in terms of the entitlement process, it's going along pretty well in Chicago and in suburban municipalities.

To the extent that local officials really want robust public exchanges, those are very difficult, obviously, to manage because you can't have people in the same room. But short of that, we've been able to get a lot of things done, and big things like building permits and other licensing requirements are able to be fulfilled. The offices are quote-unquote 'open.' In other words, you can file for and obtain a permit. So things are going along about as well as you can expect. There are obviously delays that are suffered, but we've been able to contact everybody from officials in the mayor's office, the local politicians, the local community organizations, and we're managing to get a lot of projects done.

I wouldn't say it's business as usual, but it's business. And that's a positive thing, and projects are getting approved and permitted, and I will say that in Chicago, construction has broadly been defined as an essential service. That's not been the case in places like Boston. In Illinois, Chicago in particular, we have not had pauses in construction. So if you walk around downtown Chicago or any of the hot neighborhoods, you'll see full-fledged construction and construction crews on the site because those projects have been able to proceed because the governor's order exempted construction. We're making the best of the challenging situation.

I wanted to ask you about public input. Obviously it's a challenge. Is that one of the factors that's delaying these projects? Do the projects simply need to wait until there's opportunity for the public to weigh in?

Klawiter: I would say that projects that are relatively routine — let's say somebody that needs a zoning change to allow for them to expand a restaurant — those typically would require a zoning change, and as part of the public process here in Chicago and in most suburban municipalities in Illinois and beyond, if it's not a formal requirement, there's typically a long-established practice that anticipates a community meeting. It's typically not required, but it's very desirable and aldermen and local city council members typically insist on that. Those are able to happen relatively straightforwardly. The local aldermen or the local elected official's office will send out a notice or post it on their website or both, and then they will convene a virtual meeting and anybody who wants to weigh in and participate on Zoom, for example, is free to do so.

We just had a very large project on Chicago's South Side in the Bronzeville neighborhood. The alderman there conducted a virtual community meeting for a project that is many millions of square feet of development. And it went off without a hitch. The developer was able to present their plan, the alderman was able to receive questions. I believe there were somewhere in the range of 50 questions that were submitted either online to the alderman's website or during the meeting itself. And each of those 50 questions was answered by either the developer, the alderman or one of the developer's consultants.

The technology and the political will, I think, exists to move projects along. But where there is a project that ultimately would anticipate very robust community process, that's a little bit more challenging and it really falls to the individual alderman as to whether and to what extent they're willing to move the project ahead in light of the fact that they want community input and community input means different things to different people. So it really depends. But so far, we have not encountered any major stumbling blocks.

The [Mayor Lori] Lightfoot administration, which is the administration that we're dealing with here in Chicago, has been very receptive, as have the 50 local alderman, to moving projects even under the circumstances. But very large projects that require a very robust and protracted community engagement processes, you can only do so much, and we're hoping that these projects stay on track. So far, there hasn't been the circumstance where we have asked for a communitywide meeting and have been either discouraged or our request has been declined. I think the local elected officials are as anxious as anybody to move projects along so that when we do get out of the storm, there are job generators that are in place and projects that are being enabled and construction crews that are able to continue their work.

I want to ask about the federal response to the pandemic. Barbara, what are you telling your clients? How are you advising your clients in terms of ways that they may be able to tap into the federal assistance?

Trachtenberg: It's tough, because I think the theory was that if you send money out at multiple levels, that it will get into the right hands. But I don't really think that the [Coronavirus Aid, Relief and Economic Security] Act was structured in a way to get revenue, that is otherwise maybe not being paid, into the hands of real estate owners. I think that a lot of it focused on getting money into the hands of small businesses who then could use [Paycheck Protection Program] funds to pay their rent, but I think that for the most part, the small businesses are focusing more on making sure that they're hitting the 75% of the loan going to employees in order to qualify for forgiveness.

I think that there might be some money that trickles out to real estate owners as a result of the PPP, but I don't think there's a lot that's going to help them. Freddie and Fannie and other federally backed loan forbearance will help pockets of the real estate industry. But those are mostly multifamily, and not all real estate investors have leverage on their assets, and some of them when they do have leverage don't have very high leverage. It helps some people in the industry, but it doesn't help everybody, that's for sure. Everybody's doing their best and trying to keep money going around.

Klawiter: I just wanted to tack onto that. One of the things that we spotted early on and I know that real estate industry groups have been advocating for are things like originally seeking to loosen the affiliation rules, trying to make multifamily owners eligible for PPP funds to cover mortgage expenses even beyond the 25% that would entitle them [to] the eventual forgiveness. So we wanted to broaden the 75% to be beyond just payroll expenses, as important as those are. And then, obviously, the expansion of the Main Street Lending Program. I think that the latter, at least, is interesting. It seems to be happening.

Originally, the PPP was not means-tested, and one way or another it seems as if that's what the Feds are now trying to do in light of the fact that the program is oversubscribed. So we'll have to see what happens in that regard, but as Barbara said, even from inception, there has not been a really direct effort to directly subsidize the real estate industry other than sort of by virtue of the fact that occupiers might include restaurants and hotel operators and the like. But there hasn't been targeted relief as we see it to the larger real estate industry in the way that, for example, was done in the aftermath of the recession of 2008.

Trachtenberg: We do have hospitality clients who have filed applications and are expecting to get proceeds. But that's very different from the broad real estate industry as a whole.

Do you expect any additional relief for property owners will come?

Trachtenberg: Other than the Main Street Lending Program, maybe there was some rumbling about some insurance stuff. I'd be shocked if it got traction that was retroactive. I'm just not hearing anything that really is happening at the federal level that will get there. There's stuff happening at the state levels.

Klawiter: The topic, as I understand it at least, that's sort of bogging people down on the Hill these days is the question of insulating employers from liability on the part of their employees. What I'm saying is that as distinct from that, we think that attention should be given to providing limited at least business liability protection for landlords who do reopen in a conscientious manner. And I don't know that that's on the table for legislative action, but I think it should be.

I wanted to ask you about the transactional market. Barbara, what does the market look like right now? What sorts of deals are getting done and what sorts of deals are off limits because of the pandemic?

Trachtenberg: As we knew before this all happened, there's a ton of dry powder, and the question is, does this create more or less of that? There are definitely funds that are being created. People are expecting to have opportunities, yet at the same time, I think that it would be premature to start selling right now unless you really needed to, because I don't think it's quite clear yet what impact this all has on property values. I suspect that some people might wait to get a little bit more clarity. At the same time, people have money to invest, and so it will be interesting to see how that goes.

I've got one acquisition that we started working on in the middle of this, and it's still going ahead, and due diligence is going well, and we're just putting provisions in the agreement to deal with the weird world that we live in, and anticipating whether or not we'll be able to record a deed and whether or not the title company will be able to issue title insurance. But other than that, we're operating business as usual. The most deals that we're seeing right now are financings, because interest rates are still great for borrowers. But eventually that dry power's going to come off the sidelines. I just don't know if we're quite there yet.

Rich, do you have any insight on the transactional market in Chicago?

Klawiter: I think it depends on asset class. I think data centers and distribution facilities are moving ahead. I'm working on a couple of projects. If anything, this pandemic has accelerated the desire on the part of those clients to proceed with those projects because they know that they're going to have a tenant waiting for them just as soon as they have a building approved. The other point I would make is that developers, if not creative, are also extremely resilient. And one of the things that I'm seeing is developers looking at assets differently. I'm aware of at least one very substantial national developer that is creating a fund specifically dedicated to acquiring hotels and converting them to multifamily in core markets, which I think is a really interesting play. So that's one instance of the sort of creative lens through which developers are looking at this environment.

The other, as Barbara says, is we will likely be in the world of the haves and have-nots as it relates to real estate, if we're not already there. Putting aside all of the challenges associated with developing in distressed neighborhoods, but just focusing for a minute on the neighborhoods in which our clients do typically develop, hot markets in urban core areas. I think that there is a fair amount of uncertainty and a fair amount of distress, obviously. I think, as Barbara said, there's still an awful lot of capital. And the question is at what point is the acknowledgement going to be of exactly what the level of distress is and how the pricing corresponds to that. And I think when we approach that time, you'll start to see people jump in and look at opportunistic purchases and redevelopments.

Trachtenberg: Rich, it's a good point on the asset class. I think that people probably would have expected that, for example, on the multifamily side, that the multifamily REITs would have seen significantly lower collections of April rent. In fact, it was mid- to high 90s. I think there's a lot of talk about the orders that are being put in place in places like the city of [Los Angeles]. And Rich, to your point, it depends on where you are. In the places where the REITs are invested, for the most part people are continuing to pay their rents and to meet their contractual obligations, so it will be really interesting to see how it shakes out.

--Editing by Kelly Duncan.

Check out Law360's previous installments of Coronavirus Q&A.

For a reprint of this article, please contact reprints@law360.com.