Karr & Babush: problem solvers.

Since they joined together and started their own consulting firm, former senior banking executives Jerome Karr and Daniel Babush have been providing real estate owners and lenders expert advice on what they can expect from existing and contemplated deals.

The former Citibank executives started the Manhattan-based financial and real estate firm, Karr & Babush, in 1985, and over the past five years the two partners have specialized in formulating and implementing problem solving strategies in today's real estate market.

Karr & Babush offers clients litigation support, project supervision, due diligence, and situation analysis under the umbrella of its diverse range of services. The firm conducts operational and financial analysis in commercial real estate for lenders, borrowers, owners, developers, financial partners and attorneys, as well as helping in forecasting, creation of bankruptcy strategy, debt restructuring and litigation support.

While Karr & Babush does about 50 percent of its business in New York City, with another 15 percent coming from the suburbs of the city, the firm represents clients nationwide, including clients in Tennessee, Florida and Colorado.

As senior banking executives, Babush and Karr, who met while attending the Wharton School where they both have MBA's with a concentration in real estate finance, have participated in successful high profile real estate transactions, but they have also earned solid reputations for skilled workouts and restructuring.

"We met at Wharton in the real estate program," said Babush, who was a workout strategist at Citibank. "There was a great crop of people at that time in 1973. Fresh out of Wharton we handled a great deal of loans for Citibank."

Babush was a senior executive at Citibank for 12 years, where he was in charge of the funding of Citibank's long term real estate lending program. During that time, Babush was responsible for $800 million of such transactions, including $470 million in the greater metropolitan area.

Prior to that, Babush was vice-president for Property Development at Citibank's Real Estate Industries Division, where he developed a series of innovative projects, such as Citibank's entry into profit participation lending.

Karr, who is responsible for direct management of rental property for Karr & Babush, has played an instrumental part over the years in the review and assessment of some of the country's largest office projects and condominium conversion plans. In providing assistance to attorneys, Karr has formulated plans of reorganization under Chapter XI of the Bankruptcy Code, as well as giving support litigation defense in cases with claims as high as $150 million.

During a 10-year career with Citibank, Karr served as vice-president of the Real Estate Industries Division, where he was responsible for financing the acquisition and development activities of large urban development companies and managed a 500 million portfolio.

Karr moved from Citibank to Lehman Brothers, the investment banking firm, where he was in charge of the evaluation of corporate real estate portfolios in connection with leveraged buy-outs, restructurings, mergers, acquisitions, due diligence in the formation of investment pools and other syndicated equities, and the underwriting of public real estate offerings.

Karr was a vice-president at Lehman Brothers for two years before deciding to join with Babush in forming their own real estate consulting firm. Babush and Karr invested money together to buy property for their own accounts, in which they have profitably managed multi-million dollar portfolios.

"It was apparent to us a recession was coming, even though it was not apparent to everyone," said Karr. "We shifted into problem real estate, and in 1988 and 1989, all there was was problem real estate."

Babush claimed that the two partners were conservative and prided themselves on cutting through grandiose promises and unrealistic expectations in order to advise institutional investors who are not professionally involved in development and operation of projects in which huge sums are often at stake on the true state of today's complicated real estate environment.

"Advice after injury is like medicine after death," Babush said. "We tend to be conservative. In 1987, we knew the bottom was going to fall out of the market, we just didn't know when."

According to Karr, over the years, Karr & Babush has done a lot of litigation work, workout negotiations, and has frequently been called in by attorneys to provide a view of property assets in order to get both sides to stop arguing.

"We work directly with counsel so that our work product is not subject to discovery, unlike that of expert witnesses," Karr stated. "We work closely with counsel and their clients to establish legal strategy, and provide financial analysis, market research, determination of valuation ranges, gathering evidence, review of depositions and interviewing, and choosing and working with expert witnesses."

Babush said We put a lot more information into such situations in a cognitive format that the parties can understand as real when finished. As a result, there's a lot more understanding and the range dramatically diminishes."

Karr & Babush also provides in-depth economic analysis for investors, which includes building completion costs, marketing effectiveness, general overhead, legal fees and carrying costs.

In the early stages of a project, Karr & Babush assists in obtaining capital from investors and easing accessibility to credit for real estate buyers. The two partners' "hands-on" experience in managing properties and creating worthwhile investments for individuals has provided them with particular skill in assessing real estate investment trusts (REITs).

While at Citibank, Babush was a workout specialist responsible for negotiating realistic restructuring of large scale real estate loans to the nation's largest REITs and land development firms. As a result, he frequently conducted evaluations of multi-asset real estate portfolios of REITs, home builders and land developers.

Although many feel that REITs, shareholder-owner entities that earn and distribute profits from real property ownership and lending, offer the best way for an individual investor to rebound from a poor market, Babush and Karr disagree, arguing that REITs lack flexibility.

"When you look at all the articles at that time, REITs were heralded as the hottest thing since swiss cheese," Babush said. "I think we've started seeing the bloom off the rose and we're starting to see more and more marginal deals."

Babush noted that REITs were not favored by pension funds and insurance companies, and that the emerging trend reveals that approximately 80 percent of pension fund officers are investing in real estate directly, with only about 19 percent favoring REITs.

According to Karr, REITs, like any other investment, demand a critical eye and a cautious investment approach, adding that REITs must invest substantially all of their assets in real estate. As a result, Karr observed, in a downturn, a REIT cannot make substantial alternative investments nor easily revamp to take advantage of market shifts.

"Because they are legally bound to invest only in real estate, they lack the ability to sidestep a downturn in the market," Karr said.

Karr stated that with the nationwide drop in property values, many properties are over-financed and require new equity to bring debt down to acceptable financing levels. REITs fill this gap, he said, by providing alternative liquidity to the market and are a source of financing for large-scale holders of property, often a lender of last resort.

"With banks and insurance companies still tight-fisted on real estate lending, particularly for commercial and multi-family residential properties, the equity REIT has become a lender of last resort," Karr added. "As a result, most hold a fairly liquid portfolio and are unable to sell assets or upgrade portfolio quickly."

Located at 15 Park Avenue, Karr & Babush has experience in office leasing and management, land development, consulting, water resources, club membership and development marketing to provide clients with a strong second opinion for evaluating management's proposed strategies.