Three partner led deal teams all work on complex loan transactions that involve the same degree of...
The Future of Transactional Deal Teams - Part 2 - Due Diligence
Continuing from my previous blog post where I discussed various law firm staffing models for finance transactions and their approaches to drafting loan documents, let's now delve into the intricacies of due diligence in a typical real estate loan transaction.
Examples of due diligence tasks in the context of a real estate transaction are review of various items such as title commitments, surveys, entity search results, organizational documents and non-recorded agreements related to the property. These tasks are crucial in ensuring the smooth and successful completion of a real estate loan transaction.
Traditional Big Law Team
This is often a black box of billable time where associates review various documents and provide summaries to the partner, which then get cleaned up and sent to the client. This is often what junior associates spend a large amount of their time on during any given day and this is not work the partner wants to do (or can do given their rate and the length and volume of documents),
- Title and survey review can be particularly expensive, even if performed by a paralegal. Usually there is a large number of title documents to carefully review to confirm there are no hidden issues (which can often be subtle like indemnities or rights of reversion). This is a very important part of any transaction, but often the cost outweighs the cost of some of the high value legal work like document negotiation because of the time to complete this task.
- A typical transaction will also require junior associates or paralegals to review other non-recorded agreements related to the operation of the property (property management agreements, leases, asset management agreements). Often a summary will be produced which is sent to the client. This is also a very expensive task for a law firm and some of these tasks are already being outsourced or performed in-house by clients to save costs.
- All of this work often goes through multiple levels or review and revision and ends up being very expensive.
Traditional Big Law Team with Less Junior Associates
- In some cases this team can actually handle due diligence tasks more efficiently because more senior lawyers know what to focus on. This works especially well when the team has high quality paralegals that can handle title and survey review, so the senior lawyer can quickly review their work.
- Senior lawyers are also good at writing the final work product to deliver to the client, so this model does cut out the multiple levels or review and usually results in high quality and fast work product.
- The downside is that often partners and senior lawyers are left doing very junior tasks. You still need to read all of the documents and that does take a long time. When things get very busy this model becomes stressed quickly.
Legal Team of the Future
The legal team of the future will rely heavily on AI tools to jump start the due diligence process. Even if these tools are not perfect now, I expect they will start to get better and better over the next few years as models improve and lawyers and vendors come up with creative solutions to speed up these tasks.
Large language models are very good at reading and writing. As a result, they can be very useful in reviewing documents quickly and providing summaries but currently there are some limitations. For example, large documents need to be broken up and this can sometimes result in the model failing to connect concepts across the pieces of the documents. They also are not able to incorporate facts or reasoning into their review unless carefully guided by the user.
This all said, very soon it will be common for teams to upload a document into an AI tool that produces a really good summary that can then be further refined and checked by a lawyer. The legal team can then take those summaries, clean them up and provide insight and action items to the client. This should work well for title review, summarizing property related agreements and reviewing things like search results or organizational documents.
- While technology will never fully replace the expertise of a trained human eye, these tools will serve as an additional set of eyes, significantly minimizing the chances of human error.
- The legal team of the future will become more and more comfortable with deploying fixed fees for transactions because there will be less of a variance in due diligence costs (which drive up fees and often result in write-offs).