Phoenix-based brokerage Realty Executives Inc. filed for Chapter 11 bankruptcy reorganization on Saturday, with owner Richard Rector saying the move will give the company breathing room from creditors as it cuts overhead expenses and rolls out new pricing plans for agents.
Rector said Friday the 1,100-agent brokerage has been renegotiating leases on 14 offices Phoenix and Tucson with an equal number of landlords. Difficulties with two landlords that resulted in Realty Executive agents being temporarily locked out of three offices led Rector to conclude that seeking protection from creditors in bankruptcy court was his best option.
"It’s impossible for agents and brokers to do their business with those kinds of interruptions," Rector said. "Unfortunately, a couple of landlords have been uncooperative, forcing our hand and putting other landlords who we’d worked things out with at a disadvantage, too."
Realty Executives was sued by one of its landlords last month, Saypo Cattle Co. Inc. The lawsuit alleges that after obtaining a rent deferment and lease amendment, Realty Executives moved its Pinnacle Peak office in Scottsdale to another building, leaving $142,964 in rent and other sums due under its lease unpaid.
Rector said the company revealed its plans to file for Chapter 11 bankruptcy reorganization at a Thursday meeting that was attended by about half the company’s agents.
"The amount of support expressed there was pretty gratifying," Rector said. "There will probably be a few people who will not stay with the company, but many were understanding, and some wondered why we didn’t do it sooner. They are sophisticated, and understand what this tool allows us to do."
Companies filing for Chapter 11 bankruptcy reorganization typically propose a plan of reorganization to keep their business alive and pay creditors over time. Rector said closings, commissions and clients’ earnest money deposits are not in jeopardy.
Rector said he’s been advised by attorneys that the company could emerge from the bankruptcy process in as little as four to six months, "which I think is realistic."
The company dismissed CEO Glenn Melton, supervising broker Sandy Young, and Chief Financial Officer Karen Dunham in January, which Rector said last week in an email to employees was part of a plan to return Realty Executives "to break-even cash flow."
The brokerage’s franshisor, Realty Executives International, "reported a solid profit" during the first quarter, Rector said in the email, and is not a party to the bankruptcy proceeding. Realty Executives International claims 700 franchises with 11,000 sales associates worldwide, including several brokerages in Arizona that are not owned by Rector.
But because Realty Executives owes outstanding royalties or other franchise fee payments to Realty Executives International, the franchisor is one of the brokerage’s largest creditors.
Realty Executives, the brokerage, owes its franchisor, Realty Executives International, $598,735, according to a list of the 20 largest unsecured claims against Realty Executives, which total $4.2 million.
Rector himself tops the list, with Realty Executives owing him $1.25 million on a shareholder loan. Law firm Greenberg Traurig was owed $838,418, making it the company’s second largest creditor.
Other creditors include Saypo Cattle ($81,907), Habitat for Humanity International ($52,820), Searchhomes.com ($48,000) and Alter Group Lockbox ($47,837).
The voluntary bankruptcy petition filed Saturday estimates that Realty Executives has between $1 million and $10 million in liabilities, and upwards of 1,000 creditors. The petition estimates the company’s assets in the $1 million to $10 million range.
Rector said the Chapter 11 bankruptcy filing would allow his Phoenix-based brokerage breathing room "to make some changes in the footprint of our offices," closing some and downsizing others to reflect the increasing mobility of agents in an age of smart phones and tablet computers.
"Really what it comes down to, if you look at the history of the real estate business, is that square feet per person is shrinking with (increased usage of) mobile and iPads, and that’s really where we need to be."
Many Realty Executives agents already work out of their homes, cars, or rented suites, singly or in teams and groups, Rector said.
He said Realty Executives will use the protection from creditors it will be afforded in bankruptcy court to create new pricing structures for agents "to be more competitive in the marketplace."
While the intent is still to provide full services, the brokerage may, for example, allow agents to pay a component of their fees based on closings, rather than a set desk fee, he said.
Rector acknowledged that the brokerage’s cash-flow issues were not limited to figuring out the right number of square feet of office space per agent.
"We’ve had issues in the past with the economy where we had to downsize some offices, but in my 35 years in the business, I’ve never seen anything like the conditions in the last three to five years," he said.
Realty Executives last year sued former president and designated broker John E. Foltz, alleging in its complaint that Foltz or employees under his supervision prepared false financial statements and mismanaged cash and trust funds. Those alleged actions, among others, "severely impacted the company’s balance sheet" and hampered the owners’ ability to operate the company because of their inability to obtain credit, according to the complaint.
Foltz has filed a counterclaim against Realty Executives and the case is in the discovery phase.
In a motion for a court order prohibiting utilities from disconnecting service, attorneys for Realty Executives said that in 2007, the brokerage had more than 1,800 sales agents in the Phoenix area. The company’s growth was accompanied by "a significant increase in brokerage and overhead expenses," including more than 120 non-agent staff members providing support to 17 branch offices.
Although the real estate market "significantly decreased" in the spring of 2007, Realty Executives "continued to renew and expand office leases and greatly outspent its competitors from a marketing and advertising perspective," and the brokerage ended up in the red, attorneys for the company said.
In another motion, the company sought court approval to pay employees for the April 16-29 pay period. The company’s $110,011 payroll for period included $11,075 to designated broker and President Dominic Scappaticci.