Better Call Paul: One of LA’s Top Lawyers Reflects on Decades of Deals
If you’re a developer or lender in Los Angeles commercial real estate, chances are you know Paul Rutter. The industry vet has more than 40 years of experience under his belt and has worked on deals including the development, financing and leasing of the U.S. Bank Tower, Gas Company Tower, and Wells Fargo Center in L.A., plus the acquisition of several million feet of office space in L.A. and Orange County.
Rutter co-founded law firm Gilchrist & Rutter in 1983 and practiced law until 2006, at which point he joined REIT Maguire Properties then Thomas Properties Group, providing Rutter with a front-row seat to the financial crisis.
Rutter returned to his law practice in 2014 with a fresh perspective on the ins and outs of the real estate market. He joined Cozen O’Connor in 2017 and his clients include the Grand Avenue Joint Powers Authority: the developer of The Grand mixed-use development, a $1 billion public-private partnership, along with Related Companies.
Today, he splits his time between the firm’s Santa Monica and Downtown L.A. offices.
Commercial Observer: What’s your favorite part of the job?
Paul Rutter: Bringing a new client in. And I do like the thrill of the kill.
Well, lawyers are said to be sharks.
We have to keep swimming or we die, right? Do you know that expression about minders, finders and grinders? Well, there are finders, they bring the client in. There are minders, the guys who make sure clients are taken care of. And then there are grinders, who just sit and grind away and produce the documents. I do all three of those.
Did you always have an interest in real estate law?
I didn’t know what I was going to do. I’m a third generation lawyer, and my son is now a fourth generation lawyer. But we didn’t have any real estate background in our family.
I started practicing in a firm that let me experience many different areas of law: estate planning, family law, litigation, corporate law, and real estate. And I gravitated towards real estate. I really enjoyed seeing the construction of something that will live beyond my lifetime and the feeling that I was helpful in making it happen.
What was one of the first transactions you worked on?
Wow, now that’s ancient history. One was a fun project called Huntington Harbor [in 1978]. My client was dredging the harbor and building a seawall and a private marina. Around the marina, we built a retail center. I was involved from the very early stages of that project and helping with various issues — dealing with the coastal lands commission, California State lands commission, the city of Huntington Beach, and working with the contractor on contracts. We had a lot of very interesting issues with that project — everything from boat slip agreements with people that wanted to live on their boats to the leases with the various retail operators. It was not a smooth process, let me just put it that way.
I also did a lot of leasing for the towers here [in L.A.] at Wells Fargo Center, although at that time it was called Crocker Center.
In the late 70s and early 80s those projects were under construction and we worked on everything involving them, including contracts with the city, leases with various big tenants, construction and contracts with the architects and engineering firms. One tower was built in 1979 and the other in 1981 so we worked on how the buildings related to each other through reciprocal easement agrements. Each [building] was financed separately by different lenders, so each lender had to be involved and had to approve those agreements. That was a real challenge and I learned a lot from that process.
Sounds like your first few transactions were pretty complex. How was that learning curve?
Very steep! You learn very quickly. When I started out, I’d no idea what a subordination non-disturbance and attornment agreement was. I remember learning a lot from the title companies. Now, this was back in the early 80s when people were not as sophisticated as they are today, and there was an intense learning curve for the industry. But a lot of these title officers had been around for 30 years. I would go to them and say, “Okay, explain this to me. Why do you need this?” Of course, I had senior partners at my old firm, who also were helpful. But in ‘83, we started [Gilchrist & Rutter] with four lawyers and were on our own. We had to learn very quickly how to put deals together, but I think we were very successful doing it.
What are some of the key lessons you learned back then?
One is what goes around comes around. So, make sure you’re treating the person on the other side of the table the way you want to be treated, because they’re going to be on the other side of the table again at some point. It’s a very small industry; there’s maybe two degrees of separation between everyone.
Another lesson was to welcome input from various sources, whether it’s a title officer or a bank officer or a city official. I remember working with some city officials who didn’t necessarily have to be helpful, but I went in there and said, “Look, we’re going to build this project, I want to make this successful for all of us. We need your help, we want this project to be something that you’re proud of, and we want to make sure we do it in a way that is constructive for the city.” We got them to become allies and partners in effect, in making the project successful.
You left the law world in 2006 to work for Maguire Properties. What was your focus?
You remember the EOP [Equity Office Properties] and Blackstone [Real Estate Partners] deal, where Blackstone took down that portfolio and sold off part of the portfolio to various buyers? Well, our company was one of the buyers. We bought the Orange County and Downtown Los Angeles portfolio, which was several billion dollars in value [$2.88 billion]. This was in 2007 and the market peaked around June. The deal was 26 loans together with a line of credit to the company itself. So it was a pretty significant transaction, and they all had to close concurrently. I always view that as the peak because that was 90 percent financing. [RBS] Greenwich Capital was one of the big lenders and also Credit Suisse. It was very highly levered. But, we bought in Orange County at the worst possible moment.
[Maguire Properties] had built a high-rise office tower there and it was one of the most beautiful buildings in the area. We completed it in 2007 and we had pre-released the building; 450,000 square feet to New Century Mortgage. They declared bankruptcy on April 2, 2007 and we closed on the EOP portfolio two weeks later. So we lost a 450,000 square foot tenant in a brand new high-rise we’d built and we were buying millions of [additional] square feet.
We’d done a subprime tenant analysis in the [EOP] portfolio, because we knew there were problems, to stress test it. And we came up with, I think, 25 percent. But, what about all the developers and the title companies and the brokers and all the people that feed off of the real estate industry? Did you count those? They all went under. We closed on the portfolio on April 28 and our biggest tenant was Ameriquest mortgage — 650,000 square feet. On May 1, 2007, within three days, they wrote us and said, “We won’t be paying [our] rent anymore.” We said, “What?!”
Nobody will make these mistakes again, but we had underwritten New Century so carefully, we had done all this analysis, we had done all the stress testing, and this was a relatively new public company. Plus, the four senior executives were making a fortune, very high-powered and high-flying. We were institutional, we were trying to make sure that they really had the wherewithal. One thing that wasn’t clear in the subprime industry — at least when I remember looking at this — was they originated the loans, but had no obligation to hold them. They would immediately sell them instead. So we thought, “Well, that’s good.” I mean, what’s the risk then? They’re selling them. But no, what we learned was that there was a putback provision [where buyers could demand that loans originated outside of guidelines would need to be repurchased by the originator].
What happened to the New Century building?
Well, our company continued to own it for a period of time and we had other tenants. Then the big [leasing] deal we did was Hyundai Capital. They put their name at the top and it’s still there. After I left the company building was sold, I think for much less than the cost of building. Then the guy who bought it made a fortune because he held it and sold it when things recovered.
That must have been a really interesting time for your career.
It was a very stressful time [laughs].
But I suppose you learn more during those periods?
You do. You learn from your mistakes and you learn how to deal with adversity. I went to a different company at that point. This was 2008 and I went to Thomas Properties Group, which was headquartered across the street here at City National Plaza. This was the height of the recession, and we were having problems with loans coming due, and no source of refinancing. So we had to work loans out. We were spending time on extending, blending or, in some cases, outright giving back buildings because there was no hope.
Our company owned 12 buildings in Austin — acquired from EOP at the height of the market in June 2007 — and they were all suffering from too much debt … The big issue there was that Lehman Brothers was our partner in the acquisition. I had joined Thomas Properties on September 4 2008, and I had a couple of weeks where nothing was really going on. And all of a sudden, Lehman declares bankruptcy on September 15. They owed us $100 million on a line of credit. It was hard to get in touch with anyone but we got hold of their executives who were being supervised by Alvarez & Marsal [the professional services firm] at that point; they’d taken over and become the in-house [counsel]. So we said, “You guys owe us $100 million. Here’s the demand for payment.” We were entitled to draw down on funds [which we did] and — of course — they quickly defaulted. And we sued them. I think we were the second big lawsuit against Lehman. We worked on that until 2012.
How did it play out?
We got Lehman to put new money in, we put new money in, and we had a partner that helped us put additional money in from a pension fund. We sold four or five of the buildings and we kept five downtown buildings.
The long story short is [that] that became part of an unwinding of our company, which we sold in 2013. In the merger, the Austin portfolio was separate and sold partly to the pension fund and partly to an investor in Austin. Then I came back to practice law.
I took two weeks off after we sold the company. It was a very intense period of about eight or nine months to get that merger done, start to finish. But I realized I didn’t want to be retired. So, I called up my former partners [at Gilchrist & Rutter]. My name was still on the door after all, and I said want to come back, so I did. I wanted to see if I could build a practice from scratch again, which I had to do. And I started getting calls, so it was fun.
What types of debt transactions were you working on when you first started out?
At that time it was primarily bank and life insurance companies, so the banks would do the construction loans, and you’d do a takeout with a life company. That was very much the model. One of my favorite stories is I did a construction loan with a bank — I won’t name names — and it was one of my very first loans. Now, a bank doesn’t want anybody to prime their lien, and in California law, if work has started on a project before the bank’s deed of trust has been recorded, the work that’s done [afterwords] relates back in priority to the day that the work started.
[Under the “relation back” doctrine, a contractor’s lien could trump a security deed that the lender recorded after construction work began, giving the contractor the ability to be paid first in a foreclosure proceeding. Without certainty of seniority, construction lenders may not make that loan.]
Our client at the time had gone out and had done surveying work on the site of this major tower and there were survey markers on the site. So, the day before the deed of trust was recorded, our client was out erasing the survey marks on the property, trying to avoid a broken lien issue. They actually had to erase them, because the title company will inspect the property the morning of the recording to make sure that no work has started. So we had to hold off all the contractors, you know, the shovels, the, the tractors, they couldn’t have them on the site — not even a trailer, right? But they saw the markers on the ground. So they’re out erasing them. Another funny thing about that loan — again, I was a newbie, but even I knew this wasn’t supposed to happen — well, it was a several hundred million dollar loan. And the loan officer at the bank, who was also kind of new, said, “Where would you like the funds wired?” She was going to fund several hundred million dollars to an account. She didn’t realize there had to be disbursements as the project progressed. So we said, “You know what, we think you probably shouldn’t wire all that money.”
Leverage is a key difference in today’s debt markets I guess?
Definitely lower leverage, much more conservative underwriting. The lending level is very carefully controlled, but I think recently some of the underwriting has loosened a little bit, which I think is probably a harbinger of things that may not be good.
I hear that there’s some tug of war going on around bad boy guaranties.
Yes, I’d just say that there’s been increasing pressure on some of the non-recourse carve-out guaranties. Some borrowers don’t get into it. But if a lender is negotiating leverage, some will. And they figure out ways to try to force the lender into more concessions. Nothing that’s really too problematic. But for a while, let’s face it, they weren’t negotiated.
Who’s a typical client for you today?
I represent lenders [like] City National Bank, and I’ve done a number of loans for them; construction loans, permanent loans, lines of credit … they’re very active. I also represent developers. I’m working on a project in West Los Angeles right now that involves a complete repositioning and re-skinning. They want to redevelop and upgrade the amenities, and upgrade the tenants.
Then, I’m working on a couple of joint ventures and an opportunity zone deal. It’s my first one and I think it’s the first one our firm has actually done to completion. It’s a housing project that my client realized is in an opportunity zone in a suburb of Aurora. He brought together six investors and I formed a joint venture among them to do the deal. We are right now in the process of joint venturing with capital, which is going to be 80 percent of the deal. So it’s a very exciting project.
Do you do a lot of joint venture-focused work?
I do. We formed a joint venture between a California pension fund and an East Coast residential equity fund recently. And now that joint venture is out, [we’re] joint venturing with local sponsors to do housing projects.
I also represent the Metropolitan Transportation Authority and I do work with them on what’s called the joint development projects. They have a number of properties around their stations, which they own, and they want to see those developed. I worked with them on one about a year and a half ago, which is now under construction, called Ivy Station in Culver City. The Expo Line goes from downtown through Culver City to Santa Monica. So the MTA owned a big piece of property adjacent to their station, and we joint ventured with a developer, Lowe Enterprises, to develop retail, housing, hotel and office space. It’s a very significant project.
I’m also working with them on Union Station, and a project called Link U.S. [Link Union Station]. I’m working on a [memorandum of understanding] among all the agencies that are involved — so the railways, the Metro, the metro link, the state of California’s high-speed rail. All these agencies are involved in deciding how the money gets spent, and how the project will proceed.
When you look at Downtown L.A. today, how has it changed over the past few years?
Well, it’s exciting what’s happened in South Park. Of course, you see the cranes, I’ve been involved in some of the South Park residential projects. I’m involved in The Grand project, again, adding a lot of residential and commercial space. So I’d say that the transformation is extremely invigorating and exciting and rewarding. It took the genesis of the residential community really coming in and sowing that seed. First you have the artists in the lofts, and then that gets displaced by higher-end housing. And then you see this gentrification happening. But that residential base really created the foundation for a lot of what’s happening elsewhere in the city and the growth of the city.