Today, March 1, 2010, is Karbank Real Estate Company’s 60^th Anniversary.  We thank our thousands of clients over the past 60 years for their confidence in us.  They (you!) are the reason for our success.

Read a brief history of our company's founding and the story of Karbank's first development project.

Steven Karbank

In 2003, my brother Neil, Karbank Real Estate Company’s General Counsel, and I met with some of Lehman Brothers real estate executives at the Lehman Park Avenue office in New York.  A friend of ours, a Kansas City native, worked at Lehman and suggested that we meet with his real estate colleagues at the firm to see if we might do business with them.

Those executives were in their early 30s and collectively seemed to have had less experience in the real estate business than Neil or I had individually.  They described Lehman’s real estate investments funds, geared to institutional investors and high net-worth individuals.  Their investment strategy was to acquire office, retail and industrial properties ranging from a minimum of $10,000,000 to portfolios of properties in the billions of dollars, hold the properties for 5-7 years, then sell them for a profit.  They typically financed those deals with CMBS (Collateralized Mortgage-Backed Securities) loans.  They also said that Lehman could provide debt financing for 3^rd party acquisitions, usually in the form of 2-5 year “mezzanine” loans with interest rates in the teens. 

It was clear that they knew all the real estate and financing lingo.  They were slick.  They were quick to answer questions on numbers, returns on investment and amortization, but unfocused and bored when asked about the nuts and bolts of real estate: ceiling heights, loading, parking, local market knowledge, vacancies, roofs, etc.   

After their presentation, seemingly as an afterthought, they asked us about our company and portfolio.  We told them that our company specializes in brokerage and development of industrial and commercial property and that our approach to acquisitions and development projects is very simple: we make long term investments, build high quality buildings, avoid excessive leverage and require projects to be positive cash flow from day one.        

As we spoke, their body language changed, as if we were country bumpkins, wearing straw hats, who had just fallen off a turnip truck.  They began to fidget and look at their watches. 

After the meeting finished, as we got into the elevator Neil and I looked at one another and started laughing.  Either we were hayseeds who didn’t understand the complex, sophisticated deals those folks were hyping, or we could recognize fee-generating horseshit real estate deals and impractical financing that didn’t serve the interests of investors and clients.  It didn’t take us long to figure out which was correct.  The truth was, they knew a lot about packaging and buying and selling “deals”, but not very much about owning and operating real estate. 

The real estate landscape throughout the country is littered with struggling or bankrupt real estate projects put together by Wall Street folks.  They spent other people’s money overpaying for existing projects or developing projects that failed because they were poorly conceived, poorly managed or stupidly financed.  They had no monopoly on losing money in real estate.  Many people are expert at it, including big-name developers who regularly crash and burn in down cycles.  The downfall of the Wall Street real estate folks is that they believed that success in investment banking and financial engineering translated easily into real estate success.  They were expert in generating fees, but inexpert in investing for the long-term.  Moreover, they believed that brain power equals judgment.  It doesn’t.  It’s nice to have the former, but it’s necessary to have the latter.  

Steven Karbank

Recently we completed a complex multi-property transaction with a large national company.  Karbank represented the landlord and a veteran broker with a national real estate company “represented” the tenant.  The tenant’s broker spent a considerable time negotiating his own fee and virtually none representing his client’s interests.  His client deserved better.     

Steven Karbank

Many commercial real estate companies market properties for sale with taglines such as “perfect for owner/user” or “excellent owner/user investment opportunity”.  Those phrases are usually tip-offs that the asking prices are too high.   

Steven Karbank

On January 25, 2010, Tishman Speyer Properties LP and BlackRock Inc. announced they were giving up their ownership interests in the Stuyvesant Town-Peter Cooper Village project in New York City.  Their ownership group purchased the property in 2006 for $5.4 billion plus a $900 million reserve fund (thus, a total of $6.3 billion).  The project is now worth an estimated $1.8 billion. Tishman Speyer, BlackRock and their investors, including Calpers (the California public employee’s pension fund), the Government of Singapore, the Church of England, a Florida pension fund and many other groups, will likely lose their entire equity investments totaling approximately $1.9 billion.  Most of the lender’s $4.4 billion of debt financing on the project will likely also be lost.

The quote below is from a December 21, 2009 Bloomberg article about Stuyvesant Town and the anticipated default on the debt by the ownership group and the potential loss of their investment:

Both Speyers [co-CEOs Jerry and Rob Speyer of Tishman-Speyer] said they don’t think the purchase will hinder their standing or ability to buy and sell buildings.

“It’s just unfortunate that we hit this boomerang on this deal,” co-CEO Jerry Speyer said in the interview. “But is this deal going to change the reputation of Tishman Speyer, or what people think of either Rob or myself? I don’t think so, honestly. I certainly would hope not.”

If they are right, either investors and lenders have short memories or losing  billions of dollars is too low a threshold to damage reputations.  Sadly, probably both...        

Steven Karbank

The following is from a January 11, 2010 Financial Times (London) article entitled “US Property Attracts Opportunistic Investment”:

A public sign of such activity [opportunistic investing] came on Friday when Colony Capital won a Federal Deposit Insurance Corporation auction for $1bn of commercial property loans formerly held by failed banks in states hit hard by the real estate downturn. The deal valued the loans at 44 cents on the dollar and was structured so the FDIC contributes $136m and holds 60 per cent of the equity, while Colony, a Los Angeles investment firm, puts in $90m for the remaining 40 per cent.

Tom Barrack, Colony founder, called the investment "an implicit bet that rates stay low" and warned: "If rates go up, everyone will be crushed."

Crushed, hmmm.  I hope Colony’s partners read the Financial Times…      

Steven Karbank

When analyzing a real estate development, investment, or transaction, always consider worst-case scenarios.  Examples may include prolonged vacancies, a significant rise in interest rates, changes in the business climate, changes in tax law, changes in location quality, casualties, construction problems, permitting or weather delays, legal entanglements, etc.  If you cannot afford, financially or emotionally, to handle multiple of these problems at once, don’t do the deal.        

Steven Karbank

Businesses often have a false sense of security in choosing to work with large, national, so-called “full-service” real estate companies.  The reality is that the quality of representation a client receives from a real estate company is dependent on the quality of the particular broker or brokers directly working with the client.  Mediocre or bad brokers will likely lead to mediocre or bad results for the client.  A good broker will likely produce good results for the client.  This applies both to national and local brokerage companies.       

Steven Karbank