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'Rescuing' lost value via trade transactions.

Real estate owners are concerned about declining values and how they can protect at least part of the appreciation their properties enjoyed in the booming 80's

Corporations and other large owners of real estate are reluctant to dispose of unwanted assets because market value would fall far below book value. This, paired with prohibitive tax laws, has practically crippled the commercial real estate sales market.

In light of this dilemma, trading companies are entering the real estate market to help major owners - mainly institutions and large corporation - dispose of real estate assets and recoup the lost value. They do so with a blend of cash and credit be used against further purchase hotel reservations, furniture other goods and services.

One of these companies is Active Asset Recovery, L.P. (AAR). The principals of the Rockland County-based company are President Albert E. Holland, Jr., who has more than 20 years as a senior executive in the investment banking and marketing areas of securities industry; Executive Vice President Mark A. Holod, who was most recently the vice president and group executive of the worldwide corporate real estate group of Chase Manhattan Corporation; and Senior Consultant Ransom B. Jones, a former senior banker with Goldmand Sachs.

The company, formed last fall, is a venture with Active International, a major international trading company.

According to Holod, they formed the company because they believed there was an existing structure - barter/trade transactions - that could protect a property's appreciation in value. The transaction also can be used with leases, sale-leasebacks, mortgages and other real estate holdings.

"We're re-creating an existing strategy and applying it to a different set of inventory," Holod said.

The strategy would be employed when, for example, a corporation wants to sell an asset with a book value of $20 million and a probable market or "street" value of only $12.5 million.

Here's how a typical transaction would work: Active Asset Recovery and the seller agree on a ratio of cash to credits. And they agree on the goods and services that AAR will provide, through its international trading partner, and over what period of time. A specified trade credit equal to the amount required by the seller - in this case book value of $20 million, minus the negotiated cash return, is issued to the seller, and the property is transferred to Active Asset Recovery. The credits are redeemed over time, in combination with cash, for purchases of the specified goods. For example, $10 million of credits would be combined with $30 million cash to purchase $40 million of media.

Holod said this arrangement creates only an upside for the corporation's balance sheet. It records two categories of assets cash $10 million and pre-paid expenses - $10 million. The transaction, he said, also increases a company's cash flow by using pre-paid expenses to purchase goods that they would have paid cash for.

The company is concentrating its efforts on trade credits for media, which is purchased by Active International. Holod said they settled on media as being one of largest annual expenses for a corporation.

Holod said there are skeptics and the word "barter", he said, has a negative connotation for some people. His own initial reaction, he said, was that this cannot be done because real estate is an illiquid.

"We try not to talk about this as barter," Holod said. "In its purest form, it's not. It's a financial transaction."

The two key words, Holod said, are liquidity and value.

Last year, SGD International Corp., a New York based international trading company started a real estate division that offers a similar alternative. CEO Jerry Galuten recruited two seasoned real estate professional. Michael Bell was formerly head of the Beefsteak Charlie's real estate department, and Louis Tallarini was formerly an accountant with Pannell, Kerr, Forster accountants and former president of Real Property Associates.

They are currently marketing SGD's Asset Recovery Management Program to insurance companies, banks, public companies and large developers to help them with their real estate.

The program has been used previously with such corporations as Manufacturers Hanover Trust Company, Good-year Tire and Rubber, and Minolta, to help them recover lost value. The company used the program to help Occidental Petroleum recover $225 billion in oil bills due from the country of Yugoslavia.

As Tallarini, explains it, SGD bridges losses in asset transactions using the purchasing departments of the selling company. SGD pays the seller a receivable and SGD works with the company's purchasing department to convert it to cash. SGD also negotiates a split between cash and purchasing credits and what goods will be purchased.

"It could be anything but salary and taxes," he said.

The selling company then purchases goods and services for which they make part cash payment - at, for example, 75 cents on the dollar. "The balance they pay us with credits against receivable we owe them," he said.

Tallarini said his company has been doing transactions like this for 22 years for all types of assets. They decided to dedicate a division to real estate in August. "[These transactions] work in every economy, but they work best when values are declining," he said.

Tallarini also rejects the use of the term barter. "They are not barter transactions," he said. "These are straight commercial real estate transactions."

One company, ICON International, a New York-based barter firm, is helping companies get more "pay" for their space by offering them goods and services in exchange for the right to direct a sublease. The firm reports it has already closed several deals in Manhattan totalling more than 40,000 square feet on behalf of its clients.

The company, according to one official, avoids taking a loss on the space they lease because the goods or services they receive are worth more than the current market value of the space.

ICON has the option of receiving the monthly income generated by a sublease or holding the space until the market recovers. ICON makes it money on the spread between the low cost of the goods provided to the tenant, since they make large purchases at discounted rates, and the rental income.

These transactions do add some liquidity where actual cash is not readily available, said Mitchell Rutter, director of investments of the Debt Equity Division of Julien J. Studley.

There is a problem, however, he said, if the property is worth less than its mortgage - often the case today. Upon sale, he said, the lender will want to be repaid. The lender won't take credits, he said.

"If they can pay an amount, comprised of cash and commodity, that approaches the expectation of the seller," Rutter said, "then a transaction will be generated that otherwise would not have been in this market because of the capital constraints."

Peter Hausperg, president of Eastern Consolidated, Inc. said it would be tough to find a "match" i.e. a company that wants to sell an asset and has such large purchasing demands.

"It's tough enough to get a deal done with cash," Hausperg said.

Holod and Tallarini agree that these transactions are not appropriate unless the seller makes major purchases.

Richard Eyre, president of the National Association of Corporate Real Estate Executives, and director of real estate for CBS, Inc., said the seller would have to be sure the goods and services they receive are truly worth the cash for which they are being traded.

Holod said Active Asset Recovery is very mindful of the value of the media or other good.

"We're not concerned about the value of the building," he said. "We're concerned about the value of the media."

One benefit of these transactions is they are considered an "installment sale" for accounting purposes.

"Tax on an installment sale is paid as each installment payment is received," said David Biskup, CPA, partner of Kuschner & Lewin CPA's.
COPYRIGHT 1992 Hagedorn Publication
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:discusses recovery of decreased property value through trading companies
Author:Fitzgerald, Therese
Publication:Real Estate Weekly
Date:Jun 3, 1992
Previous Article:Major tenants looking to move.
Next Article:NYC tax assessments up 0.9%.

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