Cendant Corporation has acquired Sotheby's International Realty as a fourth franchise brand to add to its already impressive stable of licensing real estate brands, including Coldwell Banker, ERA and Century 21.

According to principals, the terms of the agreement are as follows: a 100-year term, which consists of an initial 50-year term and a 50-year renewal option, whereby Cendant will license the Sotheby's International Realty brand in exchange for a licensing fee to Sotheby's. The total cash purchase price for the company-owned real estate brokerage operations as well as the license agreement was approximately $100 million, plus an ongoing license fee based on future royalties from the development of the Sotheby's International Realty franchise system and company-owned operations.

Cendant will have two Sotheby's business units, one company-owned real estate brokerage unit and one franchising unit.

Cendant has purchased 15 company-owned real estate brokerages under Sotheby's franchise brand which will be transferred to Cendant's company-owned brand - NRT. Sotheby's International Realty's former president and CEO, Stuart Siegel will become senior vice president for NRT with responsibility for the company-owned operations, which do business as Sotheby's International Realty.

The second business unit under Cendant's Sotheby's International brand will be the Sotheby's International Realty Corporation, headed by Michael R. Good. This entity will be responsible for servicing the current affiliate network as well as for developing the franchise system. Good is a former NRT executive vice president and chief operating officer.

What's significant about this purchase besides the acquisition of brokerages?

Two things. Most of the broker affiliates are independents, boutique brokers with a firm grip on the luxury market in their marketplaces. Second, their affiliation terms are short - about one year, making them very attractive to Cendant as potential franchisees.

The move will bring to the licensing negotiating table a whole new strata of independent brokers whom, Cendant projects, will want to continue their prestigious luxury and international affiliation and perhaps be persuaded to extend their licenses to as long as 10 years. In some markets, Sotheby's will be able to attract even better-performing brokerages who would like to affiliate with Cendant without losing their local brand identity.

Currently, Sotheby's has 216 broker affiliates (including company-owned, international and domestic,) which closed over $4.21 billion in homes last year, with gross commission income of about $90 million.Of those, 148 are independent domestic brokers. An additional 50 are international brokers. Then there are the 15 domestic company-owned brokerages, and three company-owned international brokerages. That's an average of $416,667 in commissions annually.

Many independents who operate with Sotheby's and Christie's use their affiliations as a division of their brokerages, only placing their million-dollar and above listings under their affiliation, so total individual brokerage sales could be quite a bit higher.

Cendant didn't purchase the three company-owned international brokerages, nor did it purchase the rights to license the 50 international brokers. This is a domestic deal, leaving the focus on the 148 independent domestic brokers.

Of the 148 independent domestic brokers, about 10 are affiliated with other franchise organizations. They will be allowed to continue their affiliation until their contracts expire.

According to Cendant spokespersons, they will not be allowed to cobrand with another brand, and it is uncertain until Sotheby's new uniform franchise offering circular is finalized, that other Cendant brands will be allowed to cobrand either.

Explains Richard Smith, CEO of Cendant's Real Estate Division, "We licensed the brand to jointly build a franchise. When you look at franchising, most markets are covered rather well by us and other franchisors, but the high-end luxury market has escaped all the franchise wars. The Sotheby's network serves as a terrific infrastructure, so we have a good leg up more than we imagined and we can grow rather quickly."

With current licensing terms expiring within a year, those 148 independents will have to decide quickly whether or not they want to reaffiliate, and for a longer term.

Says Mike Good, "Obviously, with a 260-year heritage of prestige and prominence and their affiliate network, our vision is to take the Sotheby affiliates and help build them into stronger leading luxury real estate brand, where we will grow the brand."

Stuart Siegel suggests why he believes most affiliates will renew. "Many small boutique offices are looking for an association with a prestigious brand, which is why they joined Sotheby's in the first place. A larger geographic company can provide them with resources and tools to grow their businesses."

The typical Sotheby's client has done business with Sotheby's before either through the company's international auctions, or they've "gone to look at the Faberge eggs," suggests Siegel. "That's the thread that runs throughout who is the Sotheby's customer. They have more than one residence, and when they have a home in Manhattan and another in Palm Beach, they want to use the same brokerage to buy or sell their properties."

Adds Siegel, "The expectation of customers of high-end real estate means that the service level is unmatched. For most people, the purchase of a home is the largest transaction they will ever make. For the high-end client, it is just another deal so high expectations of service are attached. We think we have a really good model of how to meet that expectation."

High-end real estate sales are usually high demand for service. In an era where commissions are undergoing compression and service levels are increasingly misunderstood and unappreciated by consumers, is Cendant making a political statement with its strategic and monetary alliance with a luxury brand name?

"We rarely invest 100 million to make a political statement," says Smith. "This is about shareholder value. We have a very important partner that has to be happy with everything we do. We are capitalizing on a market trend that has been ignored by the big companies, with an affiliate network that is the strongest in the luxury business. With affiliations possible with a one-year agreement, you have a short-term horizon. Our goal is to establish 10-year affiliations and enjoy the benefits of long-term strong partnerships."

Published: February 18, 2004

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