'Rescuing' lost value via trade transactions - discusses recovery of decreased property value through trading companies

Real Estate Weekly, June 3, 1992 by Therese Fitzgerald

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.