Douglas Elliman/Kreisel sold to Insignia.

The re-alignment of the residential management market continued last week as the largest management company in the country purchased both the Kriesel Company and the management division of Douglas Elliman-Gibbons & Ives.

Insignia Financial Group, Inc. is a Greenville, South Carolina based owner-manager of both commercial and multi-family properties and is headed by the great grandson of the founder of Alexander's department stores. Insignia is a publicly-traded company and is listed on the Nasdaq exchange.

The company was founded in 1990 by Andrew Farkas, a great grandson of the late-Alexander Farkas and son of Robin L. Farkas, the former chairman of Alexander's. Through its purchase of over two dozen other companies, it will now manage three times as many units as the next largest such firm in the country.

According to the Multi-Housing Council's January 1, 1995 report, Insignia ranked as the number one multi-family manager, with 206,854 units. The latter total will swell by 51,500 units after absorbing the 8,500 Douglas Elliman units in 100 buildings managed in New York City and the 43,000 Kriesel units in New Jersey, New York and Long Island in 215 buildings. In a recent acquisition, scheduled to close in January Insignia will also absorb National Property Investors (NPI) of Jericho and its approximately 37,000 units.

Insignia is also the third largest multi--family owner in the USA, with an interest in 108,706 units, and is one of the largest commercial managers in the country. Including the NPI and the latest transactions, the company will now provide property and/or asset management services for over 2,000 properties with about 292,000 residential units and 64 million square feet of commercial space located in over 500 cities in 48 states.

"We have some of the finest high-end Class A units in suburban and in downtown urban areas," said Jeffery Goldberg, managing director of Insignia. He said they manage properties for institutional investors such as Prudential, Met Life and others of that genre.

The two local companies will be operated as separate subsidiaries of Insignia, with Neil Kriesel continuing as president and chief executive officer of the Kriesel Company. He will also assume the presidency of Insignia Management Services-New York and become one of three executive managing directors of Insignia Financial Group.

Area cooperative managers expressed a gamut of concerns about the effects a huge nationwide company could have on the local management business, but those concerns ranged from the positive thoughts of bringing new ideas to the marketplace to the sour grapes of competitors left in the dust.

Interviews with dozens of managers, attorneys and board members, most of whom preferred to remain anonymous, captured a picture of both Douglas Elliman and Kreisel as well-run, respectable companies headed by men who hold a great love of the real estate business and a concern for their buildings and employees.

Over the last couple of years, Kriesel quietly built up an extensive 43,000 unit portfolio that includes a huge swath of large properties cutting across Long Island and New York City that included Lincoln Towers and Big Six.

Rumors Wrong

In October of 1990 Douglas Elliman acquired Sulzberger-Rolfe. Since that time, the industry has been rife with rumors about a possible on-going relationship between Howard Milstein and Neil Kreisel.

In actuality, the integration of the Sulzberger-Rolfe buildings into the Douglas Elliman fold was not going smoothly, particularly because the fee structures were so different. Eventually, able to provide more "bang for the buck," Kriesel cut a deal to take on the Sulzberger personnel as well as the ability to pitch the boards, and he won many of the accounts. In return, Douglas Elliman was able to pitch its non-management services to Kriesel boards, if they were so interested. But Milstein did not fund Kriesel.

Nor was Milstein funding Douglas Elliman out-of-pocket, a charge spread because Milstein paid his managers well above the industry average and competitors hoped he was not turning a profit. "He's got the best people in the industry and he is paying for it," said one source close to Milstein. "He is paying them commensurate with their abilities."

Douglas Elliman, as one of the old line, white shoe firms, also caters to some of the wealthiest properties in the nation, concentrated in the Fifth and Park Avenue sections of Manhattan. Those buildings are also willing to pay more to obtain a high jump when a service is requested.

One Douglas Elliman board member revealed they pay about $775 per unit per year for an under 75-unit property. Ranges proffered by other area management heads described industry charges ranging from a very rare low of $225 per unit for certain suburban properties to a high of $1,000 a unit at other white glove buildings. Below $350 or so, they say, it is hard to turn a profit in New York City.

As profit margins are so low, some management companies offer to provide ancillary services to the buildings, for items such as snow removal, gardening, pool service, etc. in the hopes of making a bit more money.

While some firms like Brown Harris Stevens offer bulk purchasing power with no cut to the firm, other companies will provide discounts to the buildings and make a little profit as the middle market provider. Kriesel is known to have passed along all the savings, as does Insignia.

"We've got a national purchasing program and so each of the buildings will absolutely benefit," said Goldberg. They do not take a markup or a middle market fee, he said.

Nevertheless, others predict their efforts to effect savings for buildings in New York City through bulk purchases will fail. "It's much tougher to convince boards to provide ancillary services in the city. These buildings look at me and go, `No no no!'" said one manager. "In the suburbs, they want you to do everything for them."

Confirming that, a Douglas Elliman board member said, "We don't expect any reductions in costs [from purchasing power]. We don't buy anything from Elliman."

One additional fear in New York City, however, is that additional services can invite trouble.

"That would be a touchy subject if your management agent was selling you ancillary services and products," said one lawyer who asked to remain anonymous. "Some do it sub rosa, some do it on the record. But if someone asked me, I would say it was something you would want to stay away from if there is a profit in it for the manager. There is nothing wrong with the bulk purchasing, but the re-selling and making a profit is another matter."

After he acquired Douglas Elliman in December of 1989, Milstein was horrified to uncover unsavory practices. He quickly turned cartons of material over to the Manhattan District Attorney's office for investigation and adjudication. The resulting management scandal caused heads to roll across the tri-state area as management companies and even management firms were weeded out by accusations they had received monetary kickbacks from certain vendors for supplies and construction work.

Kreisel, a quiet and private man who is known for his great pitches to building boards, was able to capitalize on the resulting turmoil in the industry. Untarnished by the industry publicity, he signed up many buildings whose boards were spooked by charges against managers, and some that just wanted a different company.

"One of the key things was that Kreisel had absolutely a clean, stellar bill of health from the District Attorney," said Goldberg. "Douglas Elliman cleaned house and upgraded the ethics."

"He really improved the firm tremendously," said Richard Barry, chief executive officer of Century Operating Corp., a competitor, of Milstein's purchase. "He re-did the whole infrastructure and did a great deal with his computers."

Kreisel's overall operations are headed by three senior staffers, Jim O'Conner, Larry Vitelli and Mike Samuels, who other firms have their eye on. "That team will stay together and there will be big things coming from them," said one source close to Kriesel.

But that comment does not deter competitors. "It will really create an opportunity for the competitors because the senior management people are going to be looking to cut their own deals and take the buildings with them," said one salivating firm head, looking over the Kriesel and Douglas Elliman portfolios and personnel.

Trying to improve services further, Milstein sought last year to address the security concerns of his buildings. Rather than just beefing up his own properties, however, he tried to form a residential security district, modeled on the Business Improvement Districts (BID), that would concentrate on security for the entire Upper East Side.

But even his own boards rebelled against the notion of a private security force numbering in the 500s that would supplement the local police precinct, and last Spring, after a disastrous board presidents meeting, Milstein retreated from the idea.

William Miller, chairman of Brett Wycoff Potter Hamilton, Inc., and chairman of the board of the Apartment Owners Association (AOA), said the AOA also organized against the residential BID proposal because of the way it was being "jammed down everybody's throat."

"We haven't given up on security but we feel there are other resources which we can pursue that can give us the protection without the cost that everyone was gong to face," Miller explained.

Some believe the current deal with Insignia, coming in the wake of this debacle, was a vulnerable but perfect time for Milstein. In fact, Insignia had been courting several other management companies in the area, some of which were told they weren't "big" enough. Frank M. Garrison, executive managing director of Insignia, confirmed they talked to many other management companies.

He said Douglas Elliman had an excellent reputation, so despite the small number of units, they were an attractive company.

"We gravitated to Neil because his business has grown," Garrison added. "That single fact told us something about his organization and people."

Sniffed one unhappy competitor, "He may have grown, but I don't know his `keep' rate."

Sources close to Milstein and Kriesel also insist neither had an option to purchase the other, and it was merely coincidental that they were purchased at the same time. Garrison confirmed that while contracts and closing took place at the same time, neither deal was tied to the other.

Back Offices Remain

Another rumor racing through the industry about a round of back office firings was also denied, as was the notion that the back office functions would be moved to South Carolina. "They will remain in New York," insisted Garrison.

Garrison said Insignia realizes the management business in New York City is a very different business than pure apartment management in the rest of the country.

So while most of the apartment management companies acquired by Insignia over the last few years had their back office operations centralized in South Carolina, that won't be the case for the Kriesel/DE buildings. Insignia also operates regional back offices for many of its commercial properties. "It was better in the regions," added Garrison.

Trend to Consolidations

Miller said the purchases are a sign there is a strong market in New York for real estate. "What is happening is that we keep seeing consolidations of different firms," he said. "A lot are going by the wayside and what will remain are big ones because there is no room for the small boutique firms."

Kent Swig, co-chair of Brown Harris Stevens, said he and his partners recognized the tremendous consolidation in the real estate industry and explained that is one of the reasons they bought Brown Harris. "We wanted to position ourselves to have a major leadership company in the business," he said.

And yet, Leslie Winkler, vice president Penmark Realty Corp., who is also president of the Association of Cooperative and Condominium Managers, an industry organization consisting of management company principals, recalls "Part of the attraction to the rest of us has been the familial, non-national environment."

But others, including Greg Carlson, director of management services for Castle Management that manages buildings in Westchester and Rockland, agreed consolidation to ever larger firms is the trend of the future.

"New York companies are limited in the amount of profit," he said. "But the attraction of working for a national company is that they can provide economies of scale. Before they would trim site managers, now it's the backroom."

Over the next six months, Garrison said Kriesel and his team will be coming up with a consolidation and staffing plan. "This is not just an acquisition, but an acquisition of people," Garrison explained.

"They have good `doers' at both of these firms," noted Barry, who acts as treasurer to the ACCM.

Some of the Douglas Elliman agents are already telling mends they are excited about the prospects of working for a national company and having the ability to request a transfer to another area of the country.

Additionally, Kreisel will be evaluating the Douglas Elliman and Kriesel leases to see where to place the New York operations.