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Disposing of real estate using corporate trade.

Real estate cycles tend to be longer and more pronounced than normal economic cycles. The current economic downturn has left numerous corporations with excess real estate assets without a productive use. The result has been a sharp increase in space offered to the marketplace as subleases, along with properties placed on the market for sale. The problem many of these companies face is that with the oversupply and lack of demand, prices are depressed. Even when a buyer is found, the company faces a book loss at the time of sale or when subleases are executed under GAAP accounting practices.

This is where corporate trading can be a financial lifesaver for many companies. A properly structured corporate trading transaction can both speed the disposition effort and deliver full book value to the seller. The result can be music to a CEO's ears as it results in increased cash flow and earnings.

In a typical corporate trading transaction, some or all of the net cash available from the disposition of the asset is assigned by the seller to the corporate trading company. In return, the corporate trading company delivers a multiple of the cash received in trade credits to the seller. The seller uses the trade credits as partial payment for advertising or other goods and services it purchases through the corporate trading company. The price paid for such advertising and goods and services is the same price the corporation would normally pay. However, the payment is part cash, part trade credits. As a result, the portion paid for in trade credits amounts to a dollar for dollar savings to the company.

A caveat is in order. The old cliche "If it sounds too good to be true, it is" has some application in the corporate trading area. That warning begs the question What are the ingredients of a successful corporate trading experience? Since I have been involved with corporate trading for over 10 years I have had the opportunity to learn and witness the ingredients for success. Without regard to order, the following are some of the keys to quality results:

* Select a high quality corporate trading company--A company with a known track record; a list of satisfied customers; and a track record for repetitive transactions with major corporations.

* Complete due diligence by all participants to the transaction--Specific emphasis should be placed on analyzing the reasonableness of the deal structure; the company's ability to use the trade credits offered in a reasonable time frame (usually one to three years); and a specific listing of the goods and services to be purchased by the corporate trading company for the selling client.

* Full discussion and approval of the proposed trading transaction--This should occur within the company's senior management team, generally including the CEO and other corporate officers as required, to ensure agreement at all levels and full cooperation between company divisions that will use the trade credits. Without properly completing this step, a trade credit transaction can easily be derailed.

* Fully document the trade credit transaction between the selling company and the corporate trading company--As professional real estate brokers,, we carefully review this process with our clients to ensure that their requirements are fully satisfied. We also ensure that the expectations of all parties to the transaction are reasonable with regard to the timing and likely market price available for the asset to be disposed.

* Marketing and negotiations by the real estate broker to sublease the excess space or sell the surplus assets--This portion of the transaction allows the trade credit company to provide the goods and services to improve financial results.

When properly structured and implemented, a trade credit transaction can not only improve corporate results, but can also be the start of a recurring process to improve disposition management, increase cash flow and raise earnings. This is powerful medicine for ailing assets, but must be professionally administered and monitored to ensure proper results. When I have followed this approach with my clients, the transactions have been successful and the clients have been satisfied.
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Author:Hedman, William
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Dec 18, 2002
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