Final hours for rental firm?

<i>Manhattan Apartments struggles in downturn, but a merger may help the teetering brokerage</i>

Jerry Weinstein, the founder of Manhattan Apartments, in the firm’s office near Times Square
A few months ago, Michele Colen found the apartment she had been searching for: a newly renovated, no-fee Upper East Side studio in a building that welcomed Leo, her golden retriever-dachshund mix.

That day, she swiped her debit card twice: once for the security deposit, and once for the first month’s rent, plus a $50 credit check fee. Her bank statement showed that the funds had left her account, so she was baffled when, a month after moving in, she received a statement from her landlord showing an outstanding balance.

It turned out the $1,500 security deposit check that Manhattan Apartments Inc. — her real estate firm, also known as MAI — had written to the landlord on her behalf had bounced.

She contacted MAI, demanding to know what happened to her money. By the end of September, the check still had not been replaced, and she sued the company in small claims court.

She also filed a complaint with the Department of State.

“I thought I took every precaution, and then they screwed me,” said Colen, whose case goes to trial this month.

Colen is not alone in her frustration with Manhattan Apartments, a troubled firm that The Real Deal has learned is likely on the brink of a merger.

In the past year, the firm has repeatedly bounced checks to landlords, renters and agents, while falling behind on payments to vendors. In September, the New York Times sued MAI, claiming it’s owed more than $66,500 for online advertising. MAI’s accounting firm, Resnick Druckman Group, is suing for $82,640 in unpaid fees. (The Real Deal is also owed money for advertising payments.)

There’s been tumult behind the scenes as well. MAI’s beloved founder, Jerry Weinstein, has ceded much of his control to local landowner Leonard Franzblau, an investor he brought in several years ago to infuse the company with cash.

In turn, Franzblau has hired the owners of boutique brokerage A.C. Lawrence & Co. Real Estate to help manage MAI. In exclusive interviews, both parties told The Real Deal that A.C. Lawrence is in talks to merge with or acquire MAI, a move that would alter the landscape of New York’s rental brokerage scene.

Certainly, brokerages throughout the city have run short on cash as the real estate slump has barreled into Manhattan. But MAI, founded in 1984, is one of the city’s oldest and most established rental firms. At its peak, the company had some 250 agents.

“Manhattan Apartments has been a pioneer in this industry for over 20 years,” said Antonio del Rosario, president of the sales division at A.C. Lawrence.

With some 5,000 rental listings, many of them on the lower end of the price spectrum, MAI should have been well-positioned to ride out the downturn, especially as sales stalled this winter and renters looked for cheaper apartments.

So what went wrong?

Weinstein attributed the company’s cash-flow problems primarily to the economic slowdown. But insiders allege that MAI’s problems run deeper, from sloppy bookkeeping and high overhead to the improper use of clients’ and agents’ money to pay the company’s mounting bills.

“When business was good, it was easy to spend money before you got it,” said one former employee, who asked not to be named. “When business got bad, they couldn’t replace it.”

Weinstein said he is committed to saving his company, but time may be running out. “How their license has not been revoked, I don’t get,” said Colen.

Negotiations begin

Once-proud Manhattan Apartments — in 2007, the firm ranked No. 2 on The Real Deal‘s list of the city’s biggest rental brokerages — is now a shadow of its former self.

“The profits are less, for sure,” Weinstein said, during an interview in the firm’s fourth-floor office near Times Square.

The company now has 110 agents, and has laid off around 30 support staff members since 2007, he said.

In July, The Real Deal reported that MAI had bounced checks to clients and agents and has been late on payments to vendors. Weinstein acknowledged as much, and said he’s working out payment plans with his creditors.

“We’re not doing as much business as we did before, so we have to slow down the amount of money to be paid,” he said.

In the past year, many of the company’s longtime managers and top earners have left. Those departing include longtime rental director Bridget Smalley as well as top agents like Evan Schwartz, Normund Shakner and Andrew Goldsmith.

Many say they left because their checks bounced. According to one former agent: “About 60 percent of the commission checks were returned for insufficient funds.”

Weinstein said all of the bounced checks have now been replaced, but The Real Deal spoke to at least one former employee who claimed to be owed back pay.

Some time ago, Weinstein recognized that his company needed capital, and brought in Franzblau, who owns supermarkets and other properties in the New York area. Franzblau — who directed all questions to Weinstein — reportedly put in about $3 million, and financed the company’s move from its longtime home at 225 West 57th Street to its current office at 729 Seventh Avenue, between 48th and 49th streets.

Franzblau, who now has a majority stake in the company, hired A.C. Lawrence this summer as a consultant to organize MAI’s finances and cut costs.

“[Franzblau] has asked us to come in on his behalf to help him assess the situation here,” said A.C. Lawrence founder Larry Friedman, who now has a desk at MAI.

Friedman and A.C. Lawrence cofounder Anthony DeGrotta began working out of MAI’s office in July, and have focused much of their attention on revamping the company’s accounting infrastructure to prevent bounced checks. “We’re looking at some of the systems and seeing what we can do to help, to change things around,” Friedman said.

The two companies are currently entirely separate entities and do not share listings, but the A.C. Lawrence partners said a merger or acquisition of Manhattan Apartments is likely, though the terms of the deal have not yet been finalized.

“We are moving closer to the negotiating table,” added del Rosario.

Cultlike following

It’s impossible to make sense of all of this without meeting Weinstein.

On a recent Thursday afternoon, the affable 60-something moved from desk to desk in his company’s headquarters, slapping agents on the back and rattling off the number of years they’ve been with the company. (Agent Fay Curtis, 17 years; listings manager Trey Parker, 10 years.)

Even his detractors agree that Weinstein inspires almost cultlike devotion in his agents. “He is amazing in terms of relationships,” said one former agent. “If you meet the guy, you’ll fall in love with him.”

That’s part of what helped Weinstein build one of the most successful rental companies in the city.

Born and raised in Brownsville, Brooklyn, Weinstein was a high school health teacher and nighttime maitre d’ at the Russian Tea Room when he decided to give real estate a try. In 1982, he joined Upper East Side-based Gardner Realty and showed himself to be a natural salesman, becoming the top rental agent for 17 of the 18 months he worked there.

At the time, most real estate companies focused on specific neighborhoods, but Weinstein realized that clients wanted to search throughout New York.

“People asked me for listings all over the city, but I couldn’t accommodate them because we were on the Upper East Side,” he said.

When he founded Manhattan Apartments two years later, his goal was to offer rental listings “from Inwood down to Battery Park City.”

Of course, that was no easy feat. To get listings, he cold-called landlords. “Whenever I would call, they would say, ‘We don’t need you,'” he recalled.

He got his big break when the Spencer Arms Hotel at 140 West 69th Street was converted into rental apartments. The previous agent had leased 23 apartments in five months; Weinstein rented three times that many in six weeks.

“I worked day and night,” he recalled. “I wanted this opportunity to be something I wouldn’t miss. At 10 at night, I was showing apartments.”

By the time he finished leasing out that project, he had started hiring, and the business grew from there.

For years, Weinstein had little direct competition: Citi Habitats, now the city’s largest rental company, didn’t come along for another 10 years.

“There was never really a place that just specialized and focused on rental business,” said one former MAI agent. “That gave [Weinstein] a huge advantage for a long time.”

Weinstein built up an extensive network of landlord contacts and a healthy database of listings. There are some buildings where MAI has leased each apartment 10 times over, he said, estimating that his company has done some 100,000 rentals since its founding. All those listings, along with some 3,000 keys the company has on hand for agents’ use in showing apartments, made it easy for young agents to get started.

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“It’s a great place for people starting out in the business,” said Smalley, who worked there for 23 years before moving last spring to Best Apartments.

There were tough times during the recession of the early 1990s, when Weinstein went from 50 agents to three, but the company rebounded when the market recovered. At the height of the boom, MAI was doing close to 50 deals a day, Weinstein recalled.

“We couldn’t even accommodate the number of people that would come in,” he said. “My daughter used to say, ‘Why don’t you line them up outside?'”

Tough times

In the fall of 2008, the downturn slammed into New York, spelling trouble for every real estate firm in the city. Suddenly vacancies were up, rents were down and landlords, rather than tenants, were paying commissions.

On a $1,000-per-month apartment, a firm would once have made a commission of 15 percent, or around $1,800, Weinstein said. Now, that same transaction would likely yield only $800.

The change in the climate exposed chinks in MAI’s armor. Despite Weinstein’s skills as a salesman, the company had never been particularly well-run, insiders say.

“Jerry’s a really nice man,” one former agent said, “but the last thing anyone would accuse him of being is a smart businessman.”

Weinstein acknowledged that he prefers to focus on the creative side of the business.

“I think of myself more as an artist,” he said. “Writing and designing the Web site, designing the offices. But most important, the ‘art’ of dealing with people and envisioning the way an office should look and function is what I do at MAI.”

Sources said that the firm’s overhead was always high, due in part to Weinstein’s generous nature, and that salaries for staff and managers were outrageous.

“He’s got $2 million worth of staff overhead, and every other company in the city probably has $500,000 to $1 million,” one former agent said.

Though Weinstein did reduce staff when the firm moved, the rent for the new Times Square office is higher than at the previous space, where the company had been for 13 years. Weinstein declined to reveal the firm’s rent, but some estimate that it’s around $40,000 a month.

The company’s bookkeeping has been even more egregious.

Lower-end rental apartments in Manhattan — which MAI focuses on — go very quickly.

But as MAI grew, it didn’t develop accounting systems efficient enough to keep track of so many rapid-fire deals. To expedite transactions, MAI and some other rental companies ask customers to pay the brokerage, rather than the landlord. That way, a client like Colen can swipe a debit card rather than getting a certified check from the bank. Then, MAI can issue a check for rent and security to the landlord, Friedman explained.

Until recently, the firm did this even though the renter’s payment likely hadn’t yet cleared. When times were flush, there was always enough money to make up the difference, but when the volume of deals slowed, checks started bouncing, Friedman said.

As the economy worsened, the problem was exacerbated by the fact that landlords increasingly wanted certified checks from MAI.

“We couldn’t get the money fast enough to pay all those checks,” Weinstein said.

Friedman said he and DeGrotta have implemented systems to prevent the company from writing checks until the corresponding deposits have cleared. One fix is encouraging renters to write certified checks directly to the landlords rather than going through MAI, though it means slowing down the deal.

The company’s accounting missteps may run deeper than a few bounced checks, however.

Multiple sources say that checks may have bounced because the funds were being improperly used to pay MAI’s bills and debt.

“They collect as many deposits as they can, and use them to pay for their business,” said one source.

This kind of commingling is illegal, explained attorney Debra Guzov, who is not involved with MAI. When renters give brokers money for their first month’s rent and especially a security deposit — which is legally required to be kept in a separate, interest-bearing account — the funds must be used for their intended purpose.

“The broker is supposed to pass it on to the landlord,” she said. “They can’t float that money. It’s not their money.”

Colen, an accountant, said she believes something like this happened to her.

“I’m missing $1,550,” she said bitterly. “Maybe [Weinstein] bought something for himself.”

Similarly, agents believe their commissions were delayed because the firm was using them to pay its expenses.

“My feeling is they were using the cash the agents brought in … for themselves,” said one former agent, who said he waited three or four months for some commission checks.

Guzov said many brokerages pay agents their commissions at predetermined intervals, such as every two weeks, but it’s illegal to delay a payment any longer than the predetermined time frame after the firm receives it.

Weinstein denied that improper commingling occurred, saying that accounts for commissions and landlord/tenant funds are kept separate.

He said the reason agents’ checks have been late is because OPs, commissions paid by landlords, take longer to arrive than those paid by renters.

Colen’s complaint is currently being investigated by the Department of State, a process that usually takes four to six weeks, an agency spokesperson said.

Giving up control

Weinstein said it hasn’t been easy giving up some of his control over the company. “It’s hard because I’m giving up the independence I had,” he said.

But, he said, bringing in Franzblau and A.C. Lawrence was necessary.

“We needed more-effective management in the financial and systems area,” he said. “What we weren’t getting before, we’re getting now.”

It’s not entirely clear what Weinstein’s role in a merger would be, but he said he’s hoping it might give him more time to focus on the creative side. And he hopes the potential partnership will lead to bigger things, such as the acquisition of other companies.

“I think we’re laying the seeds for potential growth,” he said.

But some say irreparable damage may have already been done.

Manhattan Apartments is “not a player anymore,” said one veteran industry source, who asked not to be named.

With the departure of so many top-earning agents, millions of dollars in annual revenue has disappeared. “Jerry’s probably got half a dozen producers,” said one source. “He used to have three dozen producers.”

Meanwhile, the landlord relationships Weinstein worked hard to build are disintegrating, sources said, with some owners refusing to accept checks from MAI, or even do business with the company at all.

A spokesperson for Colen’s landlord, BLDG Management, declined to comment.

Under these circumstances, a merger or acquisition could be the ticket MAI needs for a fresh start. Still, the deal may fall through if it appears Manhattan Apartments is more of a liability than an asset.

“We don’t want to get in bed with someone who’s sick,” del Rosario said. “We’re getting them healthy, and then we’ll get in bed if it’s the right move.”

No matter what happens, however, Weinstein said he’s not yet ready to give up on the company he built.

“This business is like my baby,” he said. ‘”Whatever it takes, no matter what, we stay and fight and survive.”