Sublease vs. barter: firms dealing with excess space

Real Estate Weekly, Sept 4, 2002 by Elaine Misonzhnik

In the past 12 months, as the economy continued to falter and layoffs were announced on a regular basis, the real estate market has become flooded with sublease space. Even the brokers were astonished--apparently, during the boom of the late 1990s, many companies hoarded space just in case of expansion. Now, however, they are left with an unwanted asset that's difficult to dispose of.

That's where corporate barter comes in. Originally created on the premise of exchanging excess inventory for necessary services, these companies have begun venturing into the world of real estate--taking extra space off corporations' hands and paying for it with travel packages and advertising campaigns.

Heineken, for example, just bartered off its Rockefeller Center office and Best Foods exchanged a 330,000-SF food processing facility in Jersey City, N.J.

According to Geoff Disston, vice president of real estate at ICON International, a national barter firm, the transaction allows corporations to get rid of a liability and use it to pay operating expanses at the same time.

"We give them trade credit for the property and they use it as partial payment to buy staff through us--usually its print media campaigns, travel, and various advertising products," he explains. "By bartering with us they save tens of millions in expenses."

The practice has just started to take off in New York, but according to the Corporate Barter Council, such transactions have doubled in value in the past decade. They have already being used by such firms as AT&T and Mitsubishi.

"We help move vacant properties fast and we offer cash flow savings and value recovery over the contract period (anywhere from 12 to 36 months)," says Disston. "And we really buy any kind of assets. We bought a potato chip factory from Frito Lays, a 25-acre land parcel in Tijuana, farms, class 'A'. office buildings, distribution center."

The barter companies make a profit both from selling their products and from subleasing the bartered properties. But some experts wonder whether the exchange is really in the best interest of the corporations. They say that it works primarily for large, international companies that have a lot of media and advertising expenses.

"You have to be in a situation where you have a consistent advertising budget and where you do it proactively," says one executive in Industry Week.

"There are millions of horror stories out there," says another.

But Disston insists that bartering is a perfectly safe way to get rid of unwanted inventory.

"Our clients tend to be large, international companies with large expanses in advertising, printing, and travel," he admits. "But we try to identify the assets that companies can sell and ultimately get them a higher value."