Realty Executives owner Richard Rector is assuring the Phoenix-based brokerage’s agents and brokers that their closings, commissions and clients’ earnest money deposits are not in jeopardy after agents were temporarily locked out of two offices as the company renegotiates leases with landlords.
The brokerage, ranked by Real Trends as the 11th largest in the nation in 2009 by number of closed transaction sides, dismissed three top executives in January: CEO Glenn Melton, supervising broker Sandy Young, and Chief Financial Officer Karen Dunham.
"It’s no secret that the Arizona real estate market has suffered and, as such, we have needed to adapt to that," Rector said in an email to brokers and agents this week. "Any staffing and operating changes made during the last three months were done with the intention of returning Realty Executives to break-even cash flow."
Realty Executives is in the process of renegotiating office leases with "various landlords" with the goal of reducing rents "to be more consistent with current market values," Rector said in the email, which was sent after employees were locked out of the company’s North Scottsdale and Arrowhead offices.
Terms of a new lease agreement with the landlord shared by both offices have been "challenging," a spokeswoman for Realty Executives said. The offices were closed briefly, but the issue "was resolved quickly the same day," the spokeswoman, Andrea Kalmanovitz, said in an email message.
A lawsuit filed last month by one of Realty Executives’ landlords alleges that after falling behind on rent "various times" in 2010 and negotiating a lease amendment, the brokerage packed up and moved its Pinnacle Peak office in Scottsdale down the road over the course of a weekend, breaking a lease that was not due to expire until 2014.
The complaint alleges Realty Executives obtained a rent deferment and lease amendment under "fraudulent pretenses," as the company "already planned on moving its offices to the other location" when Rector signed the lease amendment. The lawsuit seeks $142,964 in unpaid rent and other sums due under the lease, plus punitive damages associated with the fraud claim.
Attorneys for Realty Executives have not filed a response to the lawsuit in court. Kalmanovitz said "some of the allegations are personal defamatory claims that I believe are unfounded."
Realty Executives’ former Pinnacle Peak office, at 23200 N. Pima Rd., Suite 200, is now on the market for $103,000 per year in rent. The new Pinnacle Peak office is located about two miles away, at 21040 N. Pima Road.
Realty Executives has hired MCA Financial Group Ltd., a consulting firm specializing in mergers and acquisitions, corporate finance and valuation, and financial restructuring and turnaround. The Phoenix-based company has served as an adviser to both debtors and creditors in a number of bankruptcy cases, including Tucson-based First Magnus Financial Corp.
Kalmanovitz said Rector hired MCA Financial "not to pursue restructuring," but "as a consultant to support him with such things as lease negotiations."
"MCA has a great reputation in town for their ability to streamline operations within a business and came highly recommended" to Rector, Kalmanovitz said.
In his email to brokers and agents, Rector acknowledged that the company was losing money, but assured them that their closings were not at risk, and that commissions and clients’ earnest money deposits are maintained in separate trust accounts.
Rector said his franchise company, Realty Executives International, "reported a solid profit" during the first quarter, and that "2011 is shaping up to be a year of growth for the international franchising arm of our company."
Realty Executives International claims 700 franchises with 11,000 sales associates worldwide, including several brokerages in Arizona that are not owned by Rector.
In Arizona, independently owned brokerages affiliated with Realty Executives International include Prescott-based Cazrex LLC, which does business as Realty Executives Northern Arizona, and Realty Executives of Flagstaff LLC.
When another independently owned brokerage — Tucson-based Realty Executives Southern Arizona — rebranded as a Keller Williams franchise last year, Realty Executives Inc. of Phoenix opened up several offices in Tucson. Rector’s brokerage also operates several offices in Yuma.
In the Phoenix market, Realty Executives Inc. has offices in locations including Phoenix, Scottsdale, Glendale, Tempe and Gilbert.
Several Realty Executive Inc. agents told Inman News that they are confident the company will weather the downturn.
"I’ve been with Realty Executives since 1988, and I’m very confident that there is nothing scary going on — it’s a sign of the times," said Janet Mohr, who works as a team with her husband Don out of the Pinnacle Peak office. "I have no concerns about not being paid. I know Rich Rector personally, and I know he’s a good businessman."
Lori Cortright, a broker associate and short-sale specialist who works out of the Arrowhead branch, said in an email that she believes the company has been a leader in some areas, and because of that it is "immediately singled out" when it "experiences the same pains others are experiencing."
She added, "Hopefully, Realty Executives will make it through this difficult market that has lasted far too long. Otherwise, it will be a huge loss for both Arizona and the industry."
Last year, Realty Executives filed a lawsuit against former president and designated broker John E. Foltz, alleging that he disparaged the company’s owners in an attempt to undermine their authority and take control of the company.
The lawsuit alleged that Foltz or employees under his supervision prepared false financial statements, failed to monitor and reduce expenses in the face of declining revenue, mismanaged cash and trust funds, and left the company’s general ledger "out of balance by more than $4 million for a period of several years."
Those issues "severely impacted the company’s balance sheet" and hampered the owners’ ability to operate the company because of their inability to obtain credit, Realty Executives claimed in its complaint.
Foltz has filed a counterclaim against Realty Executives. The case is in the discovery phase, with both sides seeking to interview witnesses and obtain records, and Foltz’s attorney did not respond to a request for comment.
Dominic Scappaticci, formerly the CEO and designated broker for Russ Lyon Sotheby’s International Realty, was named president and designated broker of Realty Executives Inc. in October 2009.
Young — who worked for Realty Executives for 15 years before being dismissed as supervising broker in January — is now at Russ Lyon Sotheby’s, where she serves as branch manager of the Scottsdale Waterfront office.
Young said that it’s her understanding that MCA Financial Group is taking an active role in Realty Executives’ accounting department.
"When I was let go, I was contacted by the consulting company — I also headed up Realty Executives’ REO (bank-owned properties) division — and they wanted passwords, and that type of thing, from me," Young said.
Several agents who spoke to Inman News on the condition that they not be named said Realty Executives and Russ Lyon have recruited each others’ agents over the years — a practice that is common in many markets.
Young acknowledged that some Russ Lyon agents joined Realty Executives when Scappaticci switched firms, and said Realty Executives continues to attempt to recruit agents by promising lower desk fees and lower expenses in other areas.
"I can’t speak to the problems there, but I am getting lots of calls from (Realty Executives) agents" who are worried about whether they will receive their commission checks, Young said. She said she has also been in contact with agents who have left the company and told her they had trouble getting security deposits refunded.