Crash and Learn

C. Joseph Coleman has seen his share of economic thunderstorms in the Sunshine State. But few, he confesses, have seemed as threatening as the current crisis.

“Some days I swear I almost hear the hoofbeats of the Four Horsemen of the Apocalypse,” the Fort Myers business attorney says, sounding as though he’s only half-joking.

With a busted budget, anemic tourist traffic and a residential real estate market in tatters, Florida’s outlook does not—right at the moment—seem all that sunny.

Hank Fishkind, typically among Florida’s more optimistic economists, says the state faces the worst recession since 1975 and predicts that meaningful recovery won’t begin until 2011 or 2012.

Bob Glenn, founding partner with Tampa-based business firm Glenn Rasmussen Fogarty & Hooker, also predicts a slow recovery.

“Florida, I think, has been particularly hard hit in these times because of the real estate and how much of our economic activity is related to that,” says Glenn. “You couple that with a general economic decline affecting tourism, and increases in gasoline prices affecting travel into Florida, and yes, it’s been a tough time for Florida.”

Just a few years ago, the state was caught up in the euphoria of a real-estate bubble, with housing prices higher than ever seen in Florida. Now, with mortgage foreclosure rates among the highest in the country, a $7 billion (and counting) state debt, 8.6% of Florida residents out of work as of January and—for the first time since the Great Depression—more people leaving the state than moving into it, there is trouble in paradise.

Why were so many people paying so much money for Florida real estate? Many were hoping to cash in on the bubble, explains Diane Jensen, a bankruptcy and real estate lawyer with Pavese Law Firm in Fort Myers.

“We’d have vacant lots back in 2004 where the lot might go for $1,000 to people at my bankruptcy auctions. I knew something crazy had started happening when those same lots from one month to the next were going for $11,000, then [to] $40,000 in a span of a year to two years,” she says. “People were just paying ridiculous amounts of money, and the banks were lending it to them … A lot of developers came in and sold properties. And it attracted workers. It was a boom time.”

Many were shocked that it all fell apart so quickly—especially those who had snapped up as much property as they could, expecting to turn a quick buck.

“I had cases where people were buying five and 10 properties at a time in 2005, thinking we’ll sell it to the next person down the road, and never have to pay much on the mortgage payments,” says Jensen. “When the market crashed, they were owning all these properties that they couldn’t sell to anybody for what they paid for the property.”

Tampa real estate attorney David Brittain, with Trenam Kemker, explains how it all came about.

“Maybe the biggest reason [for the bubble] was an easy supply of money to loan,” he says. “When you turn on the money spigot and a tremendous amount of money is literally handed to you, you loan it out. What happened was that the lenders—some of them, but not all of them—began to relax their lending standards, putting out mortgage money and qualifying people who, five or 10 years ago, would not have been able to qualify for a loan.” These substandard loans were bundled into securities and sold to investors.

“[When] enough people began to realize there were mortgages that people couldn’t pay because they were in over their heads, then people [who had invested] began to say, ‘Holy smokes, I’d better dump these mortgage-backed securities,'” says Brittain. “So the money all dries up and, because there’s no credit, there’s no demand … and the prices keep falling until supply and demand catch up to each other. Well, in this case, they had a long, long way to fall—and are still falling.”

Like many lawyers around the state, Coleman—a partner with Fowler White Boggs, among the oldest and largest corporate law firms in Florida—is working at a frenzied pace to help businesses weather the fiscal storm sweeping the state, country and globe.

Coleman concedes this is no easy task. “There are so many condos built and vacant, so many strip centers after strip centers, all very nice-looking, but all empty,” he says. “No one is spared from pain.”

Still, a good lawyer can help smooth the bumps. Though many of Coleman’s developer clients find themselves pinched by plummeting demand for property and banks anxious for prompt payment on loans, he has been able to not only keep them solvent but foster stronger relationships between his clients and lenders.

“These are developers who have always been good clients to the banks,” he says. “Banks don’t want to burn their bridges with these folks. And developers don’t want to burn their bridges with the banks.”

That banks and other lending institutions were so unprepared for the downturn has made recovery harder still. “So many lenders were paralyzed when the crisis began,” says Brittain. “They didn’t want to foreclose, but they didn’t want to not be paid. So they did neither.”

Large financial institutions aren’t exactly known for their flexibility when it comes to creating sweeping new policies. “This hurricane came on so quickly, a lot of them didn’t have those policies in place,” says Brittain.

Brittain, for one, was not surprised when the housing market tumbled.

“My guess was that it was probably going to come crashing down any time,” he says. “I’ll tell you what I missed, and I’m not sure many did pick up, I had no idea of the underlying rottenness of the U.S. financial system.”

Every Florida business attorney, it seems, is trying to untangle the mess left behind.

It’s not just homeowners facing foreclosures. Many developers are facing bankruptcy. Across the state, more than 300,000 homes are sitting vacant.

When a large Florida real estate concern last summer found itself unable to repay a number of loans, Glenn counseled the company to pro-actively offer to help the lender take back the properties. “My first letter to [the lender] was in July, the second in August and the third in November,” recalls Glenn. “In late February they wrote back and said, ‘Great, what would you like to do?’ … [The lender] was simply too overwhelmed to respond sooner.”

Unfortunately, the ripple effects of slumping demand for real estate are being felt—dramatically—throughout the economy.

“This isn’t just about real estate any more,” says attorney John Genovese, of Miami’s Genovese Joblove & Battista. “Every business connected is suffering—construction, home electronics, appliances, furnishings, pretty much everything related to the home. … It touches every industry.”

That includes the legal industry, though business is booming in some practice areas.

Like Coleman, Genovese is swamped with work related to the fiscal crackup. Clients of his 37-lawyer firm include creditors in the recent bankruptcy of residential builders Levitt and Sons of Fort Lauderdale and Mercedes Homes, among the largest casualties in Florida’s condo and housing slump.

“Anything having to do with insolvency—foreclosures, bankruptcies, work-outs, debt-restructuring—is all extremely busy,” says Glenn. “[Also], there are a lot of employment problems. The employment lawyers are busy.”

At Trenam Kemker, Brittain, too, has his plate full—but not with the entrée of his choice: “I’m busy, but it’s not doing the large project development that I really enjoy doing the most. It’s mainly working out disputes: resolving or litigating contract disputes that have arisen because the assumptions that were behind the business deal when it was put together aren’t working any more.”

Genovese sees more trouble ahead. Less available credit and lower consumer demand will likely mean more foreclosures and bankruptcies. In turn, this will lead to more lawsuits as accounting firms, bond issuers, money managers, underwriters and others squabble over money and blame. “There will be years of litigation because of this whole subprime mess,” he says.

Among the thorniest issues facing the real estate industry right now is determining the true value of property. Developers are finding themselves owing more money than a lender says a property is worth. Negotiations and disputes over such deficiencies are becoming a big headache for lenders and borrowers alike.

“I’m afraid we’ll be heading to court over this more and more,” predicts bankruptcy attorney Tom Lehman, of Miami-based Tew Cardenas, which also has offices in Tallahassee and Washington, D.C.

What’s more, measures meant to help fix the financial crisis can sometimes do more harm than good, Lehman says.

For example, lending giant Fannie Mae recently announced it would slap tough new requirements on mortgages for Florida condos. Aimed at stemming record-high default and foreclosure rates among condo owners, these standards also make it even more difficult to finance the purchase of units in buildings already starved for residents and struggling financially.

“This is like saying, ‘You can’t go out with my daughter unless you have not one but two chaperones,'” Lehman quips.

Still, the attorneys remain upbeat about the state’s future.

“There are enough resources or enough positive aspects about either living in Florida, doing business in Florida or retiring in Florida that I think that the long-term future is bright,” says Glenn. “I don’t think we’re going to be there for a while, however.”

Lehman agrees: “Florida’s mixture of climate and culture has attracted residents and visitors for years, and it will continue to.”

Exactly when the economy will pull out of its nosedive is hard to predict. But as Coleman puts it, “It was a group effort that got us into this mess, and it’ll be a group effort that gets us out.”