They Honk When The Krohs Fly By

For 77 years, the name Kroh stood for quality and reliability in the real estate industry. Kansas City-based Kroh Brothers Development built homes, shopping centers and office buildings from California to Florida. Along the way, it attracted such blue-chip investors in its projects as Arthur Levitt, the chairman of the American Stock Exchange, and the Hall family of Hallmark greeting-card fame. But in the past few months, Kroh has virtually collapsed. Beset by lawsuits and shunned by wary lenders, the company is now struggling to reorganize under Chapter 11 provisions of the bankruptcy law. The brothers who ran the firm for 18 years -- John Kroh Jr., 46, and George Kroh, 49 -- have resigned, and a battalion of lawyers is trying to sort out the company's obligations to more than 2,000 creditors.

That scene may become painfully familiar in the months ahead as other developers find themselves stretched too thin to adjust to the new tax law. The National Realty Committee, which represents some 300 big U.S. developers, estimates that the changes required by tax reform will cost the real estate industry as much as $50 billion during the next five years. Under the old tax rules, real estate investors could shelter salary and other income with losses generated by limited partnerships. Kroh relied on such partnerships for as much as 20% of its capital, or some $20 million a year. Money was thus readily available for construction of shopping centers and office buildings that might not turn a profit. The funds helped Kroh and other firms maintain a healthy cash flow even when they were not making money.

By severely restricting real estate shelters, tax reform has drained that important source of money for the industry. In troubled markets, such as the farm belt and the oil patch, the changes have added to the pressure on shaky developers. Two weeks ago Dallas-based Vantage Companies, the seventh largest U.S. developer, notified its creditors of plans to delay some loan payments and restructure as much as $1 billion in debts. Last week Austin-based Nash Phillips Copus, the seventh largest U.S. builder of single-family homes, put itself into Chapter 11 proceedings.

The saga of the Kroh brothers shows how fast fortunes can turn in the real estate business. During the past five years, they had nearly tripled their firm's holdings, from 5.3 million sq. ft. of property to 14.3 million sq. ft. The company was transformed from a family-run Kansas City operation into a national firm with 458 employees, assets of $197.4 million and investments in 13 states. Credit came easily: recognizing the company's record of success, banks extended Kroh Development $39 million in unsecured loans.

In that heady atmosphere, the Krohs became involved in a tangle of overlapping partnerships and took on mortgages and other liabilities that no one fully grasped. Donald Jones, a longtime Kroh senior executive who is now president of the firm, recalls that company officials were often stunned when obligations they had not known about came due. Says a bitter John Kroh Sr., 82, who retired as head of the company in 1969 and handed over control to Sons John and George: "They just stopped watching the cash register."