The Real Deal New York

A behind the scenes look at the battle for control of Town

As Heiberger and Sitt go head-to-head in court, firm's finances come into focus
By Katherine Clarke | March 01, 2014 07:00AM
From left: Andrew Heiberger and Joe Sitt

From left: Andrew Heiberger and Joe Sitt

While the leading residential brokerages like Douglas Elliman and the Corcoran Group held low-key holiday parties in 2013, three-year-old firm Town Residential went all out with a glitzy 800-person bash at the sleek new Meatpacking District restaurant Tao Downtown, where guests helped themselves to an open bar and passed hors d’oeuvres.

The party was just the latest in a string of upscale events hosted by Town. Renting the space for an evening can cost in excess of $150,000, depending on the time of year and the number of guests. Indeed, for the last three years, the firm, headed by founder Andrew Heiberger, has been the cool new kid on the real estate playground.

It’s opened 10 state-of-the-art Manhattan offices, all in prime locations, and recruited agents from other firms with generous commission splits. It’s also offered concierge services, health insurance and even free candy for its brokers, served in each office’s communal areas known as “town squares.”

Other companies simply have not been able to keep up with the flashy offerings at the new firm, sources said.

“For the first time in history, we all had to deal with the nuisance of a competitor that seemed to not need to be profitable,” said one chief of another brokerage about Town’s rise. “I’m sure this has been a stone in every firm’s shoe since they opened.”

In recent months, however, cracks have surfaced behind the firm’s shiny façade, as Heiberger and Town’s equity partner Joseph Sitt of international real estate investment and development firm Thor Equities have publicly locked horns.

In late January, the situation came to a head when Sitt refused to renew Heiberger’s contract as CEO. Sitt claimed that Heiberger had failed to meet the financial targets the two agreed to when Thor first invested in 2011, and that he had not seen any return on his investment to date.

Heiberger didn’t waste any time before heading to court. And late last month he was awarded a temporary restraining order, preventing Sitt from locking him out of Town’s office, making business decisions without him, and selling his 50 percent stake in the firm. Sitt allegedly claimed the right to sell Heiberger’s stake at “book value,” which would presumably be far less than what the company would sell for on the open market.

As of press time, however, Heiberger’s dismissal as CEO still stood. That will likely be decided in court. The two sides will be back in front of a judge on April 8, if they don’t reach a settlement sooner.

While the sudden upheaval at the company appears to have shocked many at Town, others said the showdown was inevitable. They attributed it to the fact that revenues were lagging behind the cash being plowed into the company to fund its rapid growth and flashy amenities.

“I’m surprised that people are surprised,” said Eric Barron, CEO of Keller Williams NYC. “That’s a company that’s surely not leading with revenue. They’re attempting to buy the market. The car looks sexy, but once you look under the hood … what’s real and what’s not real?”

The economy of Town

Heiberger launched Town with a bang in 2010, predicting that it would become the city’s largest residential firm, overtaking market leaders like Corcoran and Elliman.

And just three years after Town launched, the company has 600 brokers and its 10 offices. In addition, the firm claims it closed $1.5 billion in sales in 2013.

When the firm launched, Heiberger’s bravado could not be discounted. In 1994, he founded rental giant Citi Habitats, selling it 10 years later to NRT, Corcoran’s parent company, for a reported $49.6 million. He’s also developed residential projects, having partnered with Sitt on the Greenwich Club Residences at 88 Greenwich Street in the Financial District, a new construction condo, and with another partner at One Rector Park, a 174-unit condo conversion in Battery Park City. The Rector Park project was one of the fastest-selling new developments of 2012.

In 2011, a year into his new venture, Heiberger enlisted Sitt as an investor to help capitalize Town’s rapid growth model. At that point, Town already had four offices and Heiberger had invested around $3 million of his own money in the company, according to legal documents he filed last month. Sitt committed to investing $8 million over time. In a termination letter issued to Heiberger in January, Sitt claimed to have invested $10.4 million so far. Heiberger, meanwhile, contributed $5.87 million, according to his court documents.

Beyond his friendship with Heiberger, it’s unclear why Sitt wanted to be involved in residential brokerage, which is generally considered a low-margin business in comparison with the giant commercial investment deals Sitt has traditionally been involved in. Sitt may have seen the brokerage business as a potential — and moderately profitable — hobby, sources said.

“Some people look at owning a real estate brokerage firm as fun, like owning a restaurant or a sports team,” said Donna Olshan, CEO of boutique brokerage Olshan Realty.

The high end of the business does have a glamorous element, with celebrity homes and sleek new condos generating buzz.

“Who cares about commercial space in terms of cocktail conversation?” said Paul Purcell, co-founder of Rutenberg Realty. “Have you ever been to a party where someone said, “‘Oh, did you hear? Citibank just took 100,000 square feet on this floor of a building?’ No!”

Initially, Sitt had expected to recover his capital investment within three years, but later extended that time frame after he and Heiberger revised their growth goals, according to Heiberger’s claims. But Sitt still expected to see distributions within the three-year time frame, according to his termination letter to Heiberger.

“It’s commonly known in the industry, and Thor is well aware, that it takes between 18 and 36 months for an office to stabilize,” Heiberger told TRD. “Until the office stabilizes, it will drag on cash flow. In 2014, the company is at a tipping point. The company was about to make millions and millions of dollars in profit in 2014 before all of these problems. We projected revenues in excess of $101 million in 2014.”

A spokesperson for Sitt, however, said that Heiberger’s termination was more than justified.

“Mr. Heiberger knows full well that his agreement provided for his termination in numerous events — many of which occurred — and it is unfortunate that he has chosen to go down this path,” he said. “We will not be distracted by Mr. Heiberger’s wrong-headed and selfish litigation, and will stay focused on Town’s ascent to the top of the residential brokerage business.”

Unprecedented perks

From its founding, Town has aimed to attract the crème de la crème of New York City brokers with unheard-of perks, such as nutritionists, florists and reimbursements for gym memberships.

The firm also provides brokers with access to a concierge called Luxury Attaché — the same company that caters to Google employees and to the residents of trophy residential tower One57 — to help set up transportation for apartment hunting, arrange catering for open houses, and coordinate move-ins. In addition, Town contributes $150 a month toward brokers’ health insurance premiums. Unlike at some other firms, brokers are not required to pay desk fees.

The company also went all out on its office space. In September, it opened its 10th outpost at 446 West 14th Street in the Meatpacking District, inking a 15-year deal for the 7,100-square-foot space, which has a private roof deck. Its corner storefront at 337 West Broadway in Soho features what the brokerage calls an “international water bar” — with bottled water from around the world.

The vast spending that has come to light through the court documents has shocked some in the industry, particularly since Town didn’t have a property management platform, or any other sources of revenue beyond sales and rentals.

“They’ve been spending money like drunken sailors, and that’s not necessarily a bad thing,” Purcell said. “Anyone that wants to build a brand has to have so much in start-up costs, and then a projection as to when they expect to break even. It could be five years, or even 10 years, if someone’s in it for the long haul.”

Town succeeded in attracting some significant talent, including Wendy Maitland and Reid Price, formerly of Brown Harris Stevens; Danny Davis, a longtime Citi Habitats star; Patty LaRocco and Robert Dvorin, two Elliman power brokers; and Ari LeFauve and Lyon Porter, two of MNS’ most highly ranked resale brokers (see related story, “Real estate’s rising stars.”) But the company never attracted as many mega-brokers as Elliman and Corcoran have, and Price and LaRocco have since departed for Elliman.

In addition, the firm may have offered especially favorable commission splits to reel in the mega-brokers they did get, sources said, hoping that they would serve as a draw for other high-production agents.

“They did as well as you could hope to do, coming in as a new name,” said one brokerage head who declined to be named. “They recruited some high-profile agents, but they are loss leaders that were bought and paid for. The firm retains small margins on those agents, and those agents are doing the majority of the business.”

Cash crunch

Cash-flow problems appear to have surfaced at the firm in recent months. The need for repeated cash infusions may have resulted in tension between Sitt and Heiberger, sources said.

“I think their plan was to be able to aggressively pursue opening up a large number of offices and create a network, and that they pushed the envelope a little bit to do it with capital provided by Mr. Sitt,” said Neil Binder, a principal at Coldwell Banker Bellmarc. “Now the problem is that they’ve set up the environment, and now what do they do?”

In February 2013, the firm allegedly had only $106,678 in available cash, while it had $1.94 million in accounts payable, according to a cash-flow summary included in legal documents last month and sent to Heiberger by Town’s controller.

In order to satisfy those expenses, which included $400,000 in payroll, Heiberger claimed that Sitt issued a capital call for $3 million, giving him 10 days to raise his share. He said he raised the money, but that the move was an attempt by Sitt to push him to default and force him to relinquish part of his stake in the firm. Sitt denied that, saying it was Heiberger who issued the call unnecessarily because payroll had already been met.

In his termination letter to Heiberger, Sitt also alleged that the former CEO paid for unapproved expenses, including a personal driver he charged the company for retroactively without permission. He also accused him of making financial commitments to employees, brokers and vendors without Thor’s approval, and making plans to open new offices without informing Sitt.

Heiberger denied Thor’s accusations, arguing that he made all financial information available to Thor.

The duo’s initial agreement had called for Sitt to contribute 80 percent of the cash for capital calls, with Heiberger ponying up just 20 percent. But when the company required additional capital in 2011, 2012 and 2013, Sitt allegedly insisted Heiberger up his contribution to 35 percent and Thor lower its contribution to 65 percent, according to Heiberger’s claims.

Thor reiterated late last month that the company is on solid footing. In an email sent to Town managers Feb. 28, Thor CFO Michael Schurer said: “I can assure you that the company remains financially sound, that it has a ready and sufficient source of new capital to ensure all of its obligations and commitments can be met without concern.”

New development

Town’s failure to gain significant traction in the new development marketing space may also have impacted revenues, sources said.

“New development does more than just add to the bottom line, it adds a tremendous amount of exposure,” said Stephen Kliegerman, head of Halstead Property Development Marketing. “It also provides your brokers with better opportunities to access new development inventory.”

Town is currently marketing just one major new development condo: The Charles, a 29-unit condo at 1355 First Avenue developed by Bluerock Real Estate and Victor Homes. Sales are being led by Town’s Jason Karadus and Ginger Brokaw. Only four units remain, according to real estate listings website StreetEasy.

Besides the Charles, Town has signed on only smaller, boutique condos, such as V33, a seven-unit condo at 33 Vestry Street, a five-unit project at 55 Warren Street, and 70 Greene Street, a three-unit condo.

The firm was handling several rental buildings for the Moinian Group in Lower Manhattan, but that arrangement ended in December 2012, possibly because of damage some of the buildings sustained in Hurricane Sandy.

Kliegerman said the reason for Town’s slow start in new development may have been a lack of an experienced team.

“New development is a chicken-and-an-egg game,” he said. “In order to get good people, you need to have the projects. In order to get projects, you need good people.”

The new development team at Town took a big hit in 2013 when Price departed for Elliman, sources said.

But Town fought back, suing Price in October, claiming he owes the firm nearly $500,000 in profit-sharing loans and that he breached a non-compete agreement.

Price declined to comment.

While representatives for Bluerock and Victor Homes did not respond to requests for comment, Town’s Karadus told TRD that the sponsors were not scared off by the dispute.

“At every firm I’ve worked at, including Corcoran and Elliman, there were power struggles,” he said. “This one, unfortunately, was maybe just a little more public. I don’t think the sponsors are rattled any more than we are.”

A nine-figure sale?

Sitt and Heiberger do appear to have suffered some investor fatigue in recent months. And to recoup their capital contributions and loans, in 2012 and 2013, they allegedly agreed to find alternative sources of financing.

The company negotiated to secure a loan of up to $7 million from Valley National Bank last year, according to court documents. Heiberger claimed, however, that while he personally guaranteed the loan per Sitt’s instructions, Sitt failed to do the same, and the loan application was rejected. Sitt also allegedly refused to allow Heiberger to transfer his interest in the company, or any of his equity in the firm, to new investors, the documents said.

Heiberger alleged that he and Sitt entered into negotiations with an unidentified “leading international brokerage firm” in 2012 and 2013 to sell Town for a “nine-figure number.” But Sitt said he would only agree to sell the company if he received substantially more than his fair share of the profits, Heiberger claimed. “Sitt and Thor have no one to blame but themselves for their failure to obtain the full return of their capital and loan contributions,” Heiberger stated in court documents.

Industry sources were dubious that a nine-figure sum had been offered for Town. “That would be astronomical for a start-up without a great balance sheet,” Purcell said.

Determining a sale price for Town could prove to be difficult, sources said.

“The problem with figuring out what a real estate firm is worth is that the value of the company goes up and down in the elevator every night,” Olshan said. “If big producers walk out the door, your bottom line is significantly hit.”

Industry insiders speculated that an acquisition offer likely came from a firm looking to make an entrée into the New York market, rather than an established firm with offices already in the city.

Sitt and Heiberger declined to identify the interested party.

Uncertain future

Town is so closely identified with Heiberger, it’s tough to imagine the shape of the brokerage without him.

While he’s sidelined, mortgage-banking veteran Jeff Appel, who was appointed president and COO of the company in September, is leading Town’s operations.

When Appel took over, he said the firm was looking to slow its growth and make operations more efficient.

“The company has been moving at the speed of light for three years,” he said at the time. “At this point, it’s time to reorganize and plan for the future. We need to optimize those offices.”

In other words, one brokerage CEO said, Appel was saying “we’re going to cut expenses back so that we can make this into a real company that makes money, as opposed to something that just looks pretty in order to recruit a lot of people.”

The dispute between Heiberger and Sitt has led to uncertainty among the ranks at the company, brokers told TRD. With each day that the litigation continues, more top agents may consider departing, said people close to the situation.

Indeed, while Town’s agent numbers remained steady last month, in the wake of the legal battle, one key agent, LaRocco, defected back to Elliman with her five-member team. LaRocco has listings for several high-profile properties — including a $10.75 million townhouse at 5 Centre Market Place in Nolita owned by Gregory Soros, an artist and son of hedge fund mogul George Soros, and a $35 million apartment at 115 Central Park West owned by Susan Soros, George Soros’ ex-wife — that she’s taking to Elliman.

While LaRocco declined to comment on the ongoing litigation, she noted that Elliman offered her a “stable infrastructure.”

A Town spokesperson denied any suggestion that the company might be suffering as a result of the lawsuit. He said Town hired an employee per day last month and noted that revenues were up 40 percent year-over-year in January. However, those revenue figures were before news of the lawsuit hit. But the spokesperson said Town also signed $78 million worth of sales exclusives, and $250,000 in rental exclusives in the two weeks ending on February 23.

While some industry insiders expressed skepticism that Appel would fill Heiberger’s shoes, others said the mortgage veteran could surprise everyone.

“Jeff Appel is a terrific guy,” Purcell said. “He was a successful mortgage broker, why can’t he be a successful person in this position?”

However, Appel may find himself in an awkward position, trying to streamline the business against a backdrop of the Thor/Heiberger dispute.

“He can’t just run the firm,” Purcell said. “He now has to deflect all the nonsense that goes along with it. It’s the white noise that comes from the industry. This is kind of like Page Six for our industry.”

While some in the industry may be “dancing on the grave” of Town already, said top-producing Elliman broker Leonard Steinberg in a recent blog entry, they may not be wise to write off the company just yet.

“I say ‘press the pause button,’ ” Steinberg wrote. “Joe Sitt is a very rich guy who has the capacity to weather big storms. … I would suspect he is not going to let this go without a fight. Regardless, I think it’s rather tacky to celebrate the misery of others.”