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A Real Estate Powerhouse / It's a big deal when Melville's Prudential Long Island Realty spends $72 million to expand into Manhattan

It's a Saturday morning in March, and Dorothy Herman is

jetting off to Las Vegas to receive Prudential Real Estate's top honor: real

estate broker of the year.

The night before, Herman, the chief executive of Melville-based Prudential

Long Island Realty, had inked the deal of a lifetime: Her company bought an

established Manhattan firm, Douglas Elliman, for $71.75 million from Insignia.

The deal would not only transform her enterprise, but create a regional real

estate powerhouse, industry observers say, with dozens of offices strung from

Manhattan to the Hamptons.

But because Insignia is a publicly traded company, Herman - called Dottie

by almost everyone - could not say anything about the deal until it was

publicly released the following Monday, March 17.

When the 2,500 Prudential agents at the Las Vegas conference witnessed

Herman win the broker award Monday morning, they were told of the Douglas

Elliman acquisition. "There was a standing ovation," said RuthAnn Fay, Herman's

personal assistant, whom longtime employees have dubbed Dottie Jr.

Fay said agents, 300 of which had made the journey from Long Island, were

"standing on their chairs," in celebration. Prudential always sought a strong

Manhattan presence, Herman later said.

But in Manhattan, the mood at Douglas Elliman appeared more tentative.

"Someone called me and asked if I would put lawn signs on co-ops," Herman

recalled, still unsure whether this was a joke or a jab.

After taking a red-eye flight from Las Vegas, Herman met Tuesday with the

top brass of Elliman on the fourth floor at 575 Madison Ave., as well as the

250 Elliman agents on the second floor. Herman had not met any of them before;

that was one of the conditions of the sale.

"It was just me. It was nerve-racking," Herman, now 50, said. But the

high-energy executive also had been prepared by more than 20 years of work as

an agent in the trenches. "I went in there knowing that I'm a broker," she

said, "understanding what brokers need."

Of the hundreds of questions, the most common one was, "Is the firm's name

going to change?" she said. But "I knew the Douglas Elliman name is like gold;

I wouldn't want to touch it."

Monday, the two operations will change the names at their Long Island

offices to Prudential Douglas Elliman Realty. But in Manhattan, Douglas

Elliman's name will be unchanged; the firm's marketing material will state that

it is part of Prudential Douglas Elliman Realty. However, both will use the

common pitch: "From Manhattan to Montauk."

The combined firms now have more than 50 offices throughout New York City

and the Island, second only to NRT, a division of the Manhattan- based Cendant

Corp., which owns well over 100 offices in the tristate area, including

Coldwell Banker Residential in New York and New Jersey and the Manhattan-based

Corcoran Group.

In all, Prudential Douglas Elliman has about 2,000 agents, who closed $6.5

billion in home sales last year. Prudential Long Island has 40 offices and

accounted for $2.4 billion in sales last year, while Douglas Elliman has 13

offices and posted approximately $4 billion in sales.

While some New Yorkers might wince at the thought of a toney Manhattan firm

being taken over by a Long Island company, Prudential Long Island had an ace

in its hand to play for Elliman's agents: The company has six offices in the

Hamptons and one on the North Fork, with the types of listings Douglas Elliman

agents would desire for their wealthy clients in Manhattan and on Nassau

County's North Shore, where the firm has three offices.

And Herman, along with her investment partner, Howard Lorber, has ambitious

plans to grow in the next few years. Lorber, president of New Valley Corp., a

publicly traded, Miami-based real estate firm and chief executive of

Westbury-based Nathan's Famous Inc., says he has $150 million in cash for

expansion.

Prudential Long Island is half owned by Lorber and 40 percent owned by

Herman. The remaining 10 percent belongs to Prudential, although Herman is to

buy out Prudential's stake in the next 10 years.

Such deals are going to speed up the already consolidating real estate

industry, experts say.

Big firms nationwide are gobbling up market share at a ferocious pace, says

Steve Murray, co-editor of Real Trends, a Littleton, Colo.-based publishing

company that tracks the residential brokerage industry. In 1991, the top 500

firms accounted for 16 percent of all agent-handled transactions, according to

Real Trends. By year-end 2002, that figure was 29 percent.

Murray said that a decade ago, it was unusual to see three or fewer firms

controlling two-thirds of a metropolitan marketplace. Today that is the case

about half of the time.

Murray says competition from the big players has made it increasingly hard

for smaller firms to compete. Profit margins are being squeezed and some firms

also are having to pay more, or split a greater portion of commissions, to find

talented agents.

But consolidation also is helping consumers by driving down commissions. In

the past 10 years, commission rates have fallen across the nation from 6.1

percent to 5.1 percent, Murray's research shows.

At the same time, buyers and sellers are also facing a market with fewer

firms. While the metropolitan area is still largely a "boutique market,"

consolidation is a nationwide phenomenon and New York is catching up to the

rest of the country.

On the Island, there are still 1,679 individual firms, according to the

Long Island Board of Realtors. The next largest firm by number of offices is

Coldwell Banker Sammis, with 16 offices. But many independent offices have been

joining franchises such as Century 21 and RE/MAX in recent years. Century 21

now has more than 100 franchises on Long Island and in Queens.

In Manhattan, Douglas Elliman is among the top three residential brokerage

firms, competing with Corcoran and Brown Harris Stevens.

Herman, who carries around a photocopy of former GE chief executive Jack

Welch's golden rules in her wallet, acknowledges that the days of ma- and-pa

real estate firms are coming to end. But Herman also says big firms can offer

more to consumers through better information and services.

For instance, Douglas Elliman has just released new sales kits that include

a magazine with 100 full-color pages showcasing its upscale listings. The

cost: $600,000.

Real estate agents also need training and access to ever-changing

technology to make sales, Herman said. Firms need to shell out large sums on

information technology and elaborate Web sites, which feature houses and

provide virtual tours, photos and floor plans on a listing.

The larger firms also own stakes in mortgage and title companies. Herman's

firm owns a significant part of Preferred Empire Mortgage, a Melville- based

mortgage brokerage firm run and co-owned by Marcia Kaufman; Prudential also has

a stake in Liberty Land Title, an abstract company.

While niche firms that tap specialized markets will continue to thrive,

many small to midsized firms just don't have the money to compete, Herman said.

They will be acquired or go out of business.

Like Prudential, Cendant is "always looking" for new firms that have a

"compatible culture," said Bob Becker, president of NRT, Cendant's real estate

division. Cendant was among the bidders for Douglas Elliman earlier this year

and about three years ago tried to buy Prudential Long Island.

"I could have retired a wealthy woman," Herman said, but my dream has

always been "to connect Manhattan to Long Island through a real estate firm."

Still, Herman is acutely aware that such acquisitions can fall apart.

If "all the [Elliman] brokers walk out the door, my $72 million would be

for nothing." So far, the firm has not lost any large producers, she and top

Douglas Elliman executives said.

When Herman arrived at her Madison Avenue office two weeks ago, she poked

her head in the various offices, smiled and asked each person "How are you

doing?"

Kay Brover, executive vice president of broker development and one of those

who received such a greeting, said that while it's only been three months

since the acquisition, "we act like we know each other so well."

Herman sits on office cabinets, chatting with the agents. Hours later,

while driving around, she says, "I don't believe in hierarchies."

Herman also seems to have the strong support of Roslyn-raised Geoffrey

Wharton, chief executive of Elliman. Hired just nine months ago, the urbane

Wharton, 61, is best known in the industry for his management skills and work

in commercial real estate. So he, too, has something to prove. Wharton, wants

to show he can cut it in the residential marketplace.

"I want to shake things up," he said.

Wharton added that Elliman will benefit from Herman's management style.

"She has passion," he said, "and is also sincere, direct and candid."

Herman was not born into the world of real estate. The Syosset resident,

who earned a bachelor's degree at Adelphi University as she thought about

becoming a teacher, changed career paths after college. She studied financial

planning and real estate appraisal at night. By day she worked at a small real

estate firm, and later Merrill Lynch Realty.

Prudential Real Estate Affiliates bought 450 Merrill real estate offices

nationwide in 1989 - including her office.

Herman later headed Prudential's Long Island operations until she and a

well-known broker named Carll Burr III and some of his partners, joined up to

buy Prudential Long Island Realty's 32 offices.

Prudential lent them the money, and Herman started with a 30 percent share.

Over time, Herman bought Burr's partners out.

Three years ago, Burr wanted to sell the company after a handsome offer was

made to buy Prudential Long Island, sources say. He refused to comment on the

topic.

Herman and her current partner, Lorber, ended up buying him out, and

started strategizing to enter the Manhattan market. "I thought about starting

from scratch," Herman said.

But earlier this year, Los Angeles-based CB Richard Ellis, which had

purchased Insignia Douglas Elliman, announced that it wanted to focus on the

company's commercial real estate business and put Douglas Elliman up for sale.

It was Lorber who knew Andrew Farkas, the chief executive of Insignia Financial

Group Inc., and the bidding began.

Since the acquisition, the management at the firm has all stayed on, so

Wharton and Herman have been able to tap the institutional knowledge of

long-time Douglas Elliman executives, such as chairman Alan Rogers.

A two-person acquisition team also has been sent in from Prudential Real

Estate's Irvine, Calif.-based head office to help Herman and Lorber build the

firm.

With a map of Long Island and New York City strewn across a table, with

blue stars representing the locales of all the offices, Larry Goebel, a senior

vice president of mergers and acquisitions, says, "I expect the size of the

firm to double within five years. And I'm being conservative."

Goebel said the company is "in discussions to acquire 15 firms on Long

Island," adding that Prudential Douglas Elliman is in negotiations to buy a

leading residential operation in Manhattan. The company is also looking at

possible acquisitions in the Hamptons, as well as contemplating an expansion

into Brooklyn - and even eastern Florida.

Herman said the company wants to capitalize on people's changing

lifestyles, whether it's 20- and 30-somethings living in Manhattan, families

owning a home on Long Island, a second home in the Hamptons or a retirement

place in Florida.

Herman spends Tuesday to Friday mornings in Manhattan, going to various

Douglas Elliman offices across the city and visiting about 10 properties a week

to get to know the city market.

On a recent day, she met three agents, two suited men in TriBeCa and one

snappily dressed woman in Chelsea, all showing pricey listings.

"I don't like to sit in an office," Herman said, as she was being driven

around in a four-wheel-drive Ford Excursion, with Fay managing her schedule.

"My car is my office. I live in it," she said. "I take phone calls and call

people back." And there is no time for lunch.

Her cell phone rings. "Tell him I'll call him back, I promise." She adds,

"I'm helping a client sell properties in Tuscany."

Herman gets out of the Excursion to view the lofts. Wearing strapless high

heels, she trips. "They tell me to wear black and flat shoes in Manhattan," she

said. "I can do the black, but my heels are so comfortable."

Herman visits a three-bedroom, 4,000-square-foot loft on Murray Street

listed for $2.65 million that has two private-gated elevators. She also sees a

4,400-square-foot loft, with the original bricks and columns, on Broome Street,

that has been renovated according to the principles of feng shui.

"Well, you know the city better than I do," she tells some brokers.

But it likely won't take her long to catch up. She has gone into markets

before without local knowledge, and in the face of sharp hostility.

When Herman broke into the Hamptons in December 1997, opening an office in

East Hampton Village, local brokers said, "You'll be gone in a year," recalled

Lili Elsis, one of Herman's first East End hires. Sharing listings with

Prudential was deemed beneath these established firms, which do not participate

in the region's multiple listing service.

Paul Brennan, who hails from a well-known Bridgehampton family, said Herman

was considered "Up Island," someone who was born west of the Shinnecock Canal.

"She was viewed as not having the style or the pizzazz to be out here."

One year into Herman's Hamptons campaign, Brennan, who had at one time

worked for Sotheby's, joined the Up-Islander. "I was impressed by her passion,"

he said. "She's a battler, with tenacity who keeps going. She eats, breathes

and sleeps real estate."

Herman said, "I've been to all the courses seeking balance in my life" but

"I can't just switch off at 6 p.m. and go home. I just can't do it." She often

throws her work and personal life in one basket, she added, taking business

clients out with her family, or holding charity events that her firm sponsors

and which are attended by many Prudential agents.

She said her husband, Jay Herman, an attorney at Certilman Balin Adler &

Hyman LLP in East Meadow, has always supported her career. And her daughter,

Christine, 28, is now a Manhattan schoolteacher. "They are used to me running

around - being all over the place," she said.

Within a year of landing in the Hamptons, Herman expanded to Sag Harbor,

Southampton, Westhampton and Hampton Bays. Bridgehampton came next. And last

year, Enzo Morabito, now manager of Prudential Long Island's Southold office,

persuaded Herman to set an office up in the North Fork.

Today, the connection between Manhattan and the Hamptons is coming

together, with East End agents traveling to Manhattan once a week to meet the

Elliman reps, Herman said.

For example, Elliman's Dolly Lenz, who earns $4 million to $5 million in

commissions per year, is working with Jay Flagg, manager of the Southampton

office, on a $29-million deal in Southampton Village. "We send e-mails to each

other several times a day," Lenz said.

Recognizing these possibilities, Raymond Smith said he left Sotheby's

Hampton's office almost two months ago to join Prudential.

It's synergies like these that spurred Cendant to buy the Corcoran Group in

Manhattan two years ago, NRT president Becker said. Cendant and Prudential are

now eyeing Daniel Gale, the largest independent real estate firm on Long

Island with 400 agents and 15 offices, says Daniel Gale president Patricia

Petersen. And Daniel Gale, which pulled in $1.5 billion in sales last year,

itself has acquired firms recently.

Lee Frank, now manager of Daniel Gale Sterling in Roslyn, sold her

independent firm to Daniel Gale because "they had greater technology - and more

contacts," she said. Also, "Everyone knows the whale [Daniel Gale's logo]."

Other firms, such as National Homefinders and Coach, say they have been

approached by some big players. "The door doesn't stop knocking," said Kevin

McClarnon, president at National Homefinders, which had $700 million in sales

last year. "Consolidation has been occurring for the past 10 years and will

continue. If anything, it will get faster since many firms are run by people in

their 50s and 60s."

Meanwhile, Douglas Elliman is looking to build its rental business,

focusing more on the sub-$5,000-a-month market, said Yuval Greenblatt, who

heads the firm's rental operation. Lorber added that he aims to the double the

size of Douglas Elliman's property management division, which now consists of

60,000 units.

The firm also wants to boost its relocation business, helping corporate

executives and foreign nationals enter the Manhattan market. While the

relocation business is not a big earner itself, Herman is betting that these

clients may eventually want to buy a house in the Hamptons, elsewhere on Long

Island, Manhattan or Florida.

And what if the housing market, after many hot years, should begin to

tumble?

Herman notes that when real estate turned sour in the early to mid-1990s,

she survived. "I had to close offices," she said. "It wasn't pleasant, but I've

done it before."

Still, this deal has unquestionably changed her life. "I now have an

apartment in the city, the papers are calling me - and some are comparing me to

Barbara Corcoran," she said, referring to the renowned founder of the Corcoran

Group.

Herman, too, has a much more higher profile these days. She acknowledges

that she may be on the cusp of fame among New York business circles, but adds,

"I didn't even think of that when the deal was made."

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