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Phoenix-based brokerage Realty Executives Inc. says it plans to file for Chapter 11 bankruptcy reorganization to give the company breathing room from creditors as it cuts overhead expenses and rolls out new pricing plans for agents.
Owner Richard Rector said 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. 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.
If Realty Executives enters the bankruptcy process, it's been advised by its attorneys that it could emerge in as little as four to six months, "which I think is realistic," Rector said.
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 poised for growth in 2011.
If Realty Executives, the Phoenix-based brokerage, files for Chapter 11 bankruptcy reorganization, that filing would not include franchisor Realty Executives International.
However, to the extent that Realty Executives pays royalties or other franchise fees to Realty Executives International, the franchisor could be considered one of the brokerage's creditors.
Realty Executives International claims 700 franchises with 11,000 sales associates worldwide, including several brokerages in Arizona that are not owned by Rector.
Rector said a 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.
Realty Executives will use the protection from creditors it would 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.
Contact Matt Carter:
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