‘You Have To Amputate A Leg To Save The Heart’: Why Developers Need The Right Legal Support Amid Bankruptcy

When Leo Jacobs works with commercial real estate developers, the process goes beyond offering basic legal advice.

“A lot of our clients feel as though they grew a large portfolio with millions of square footage, and if they can’t save those properties, they’re losing their life’s work,” Jacobs said. 

Jacobs, the founder of law firm Jacobs P.C., focuses on helping clients through bankruptcy and commercial litigation as well as helping them traverse the treacherous mental terrain to build resilience in this distressed real estate market.

While many CRE developers have weathered previous periods of economic uncertainty, they may not have been prepared for the escalated interest rates that came so soon after the pandemic, he said. 

“Our clients are used to believing that when the economy dips, it’s going to come right back up and they’ll be able to handle that challenging environment,” he said. “However, this environment was so challenging and it changed the values of their real estate so much that their property values might be worth as much as 40% less than they were valued decades ago.”

When developers are on the verge of bankruptcy, they often make the mistake of failing to communicate properly with their business partners or their lenders, Jacobs said. Or, they may enter into a legally binding agreement with their partners that they may not be able to follow through on — all of which could lead to a lawsuit.

Developers could also cause further problems for themselves if they consult with lawyers who don’t have experience navigating clients through tough financial times.

“A borrower who doesn’t have an understanding on what’s about to happen shouldn’t be going to a lawyer who doesn’t have experience in this area,” he said. “Clients know intimately about forecasting, financing and other business issues through their everyday work, but they don’t know the legal issues.”

Jacobs P.C. counsels clients who need legal solutions in tough times, whether it be determining whether bankruptcy is the right option or advising them on restructuring. 

Jacobs said his decade-long legal career and bachelor’s degree in cognitive psychology enable him to provide a unique approach to assisting his developer clients, helping them manage or alleviate feelings of anxiety and sadness as well as aiding them to look more closely into the issues they’re facing.

“We navigate the clients away from looking at the trees to looking at the forest,” he said. “If clients take a laissez-faire approach to their situation and there’s no urgency, it means they’re not comprehending that they may lose their assets and be liable on a personal guarantee.”

In a Mann Report article, Jacobs likened his approach to that of a “wartime general,” because the legal decisions that are made during trying times are difficult and pressing. 

He also likened a client to someone who needs emergency surgery as opposed to seeing a doctor for a routine visit. While individuals can participate in a discussion with their doctors about their treatment during a check-up, if they elect surgery, a specialist will have to step in with a plan.

“A wartime general takes matters into his own hands and dictates the impossible decisions that have to be made,” Jacobs said. “The decisions are not between good and better, they're between worse and worser. You may lose the property no matter what you do, but sometimes you have to amputate a leg to save the heart, which is their company or themselves.”

Jacobs said that the best course of action for borrowers that invested equity and lenders that invested debt is to communicate with one another without ascribing blame. Both parties need to acknowledge that their issues are a result of the current state of the economy and not because of one another. 

He recommended both parties first participate in mediation and arbitration. While they can litigate if the discussion isn’t reaching a resolution, trying to resolve the issues first will cut down on legal and administrative costs.

Borrowers should also seek out networking events targeted toward distress and bankruptcy, he said. This can connect them with CRE professionals who can assist as well as find the right legal counsel.

“People are afraid to discuss their problems, but it’s more important to go out there, grow your contact list and get the help you need,” Jacobs said. 

This article was produced in collaboration between Jacobs P.C. and Studio B. Bisnow news staff was not involved in the production of this content.

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