The institutional real estate transaction market has undergone a structural shift since interest rates rose materially in 2022 and 2023. The straightforward acquisition — buyer puts 60% debt and 40% equity on a stabilized asset — has become difficult to underwrite at prices that sellers are willing to accept. The bid-ask spread that results from buyer and seller having fundamentally different cost-of-capital assumptions has created a market where volume is lower but deal structures are significantly more complex. Our real estate practice has spent the last 18 months working through the legal implications of this shift.
Joint venture structures have proliferated. Where a single buyer previously acquired assets outright, we now regularly see co-GP structures, preferred equity contributions, and GP/LP arrangements that allow institutional capital to participate at different risk levels in the same asset. The legal documentation for these structures is materially more complex than a straightforward acquisition: governance rights, promote structures, waterfall mechanics, and dispute resolution provisions all require careful drafting. The parties who relied on standard forms have discovered that standard forms were written for a different interest rate environment.
Sale-leaseback transactions have increased significantly in volume. Corporate real estate owners who need liquidity but want to retain operational use of their facilities are attractive counterparties for institutional investors who want long-term leased assets without the operational complexity of managing occupancy. The legal structure of a sale-leaseback is straightforward, but the commercial negotiation — lease term, rent escalation, renewal options, purchase options, and assignment rights — is nuanced and consequential. We have seen sale-leaseback terms that appeared market-standard result in significant economic harm to one party five or ten years into the deal.
The underlying legal principle in all of these structures is the same: the documentation needs to reflect the actual commercial agreement with enough precision that it governs unexpected situations — market downturns, partner disputes, interest rate changes, regulatory shifts — without requiring the parties to renegotiate. That's always been true in real estate transactions. The difference in the current environment is that the unexpected situations are arriving faster and with less warning than the parties assumed when they signed.