FINDING BARGAINS THROUGH BARTER

By Craig Kaufman

A strong economy means a good money supply, rising rents, and a stock market supporting real estate acquisitions by yield-hungry real estate investment trusts (REITs) are making value added commercial real estate transactions increasingly scarce for investors.  Many of the turnaround communities available to investors during the last decade have finished their 180s and are being offered at higher prices than imagined by even the most optimistic developers.

So where do investors go to find great yields on seasoned, well occupied investment apartment communities?  Maybe the answer is to take a new look at communities previously considered overpriced. Sometimes by adding corporate trade dollars to the mix, an overpriced piece of real estate can turn into a bargain.

To get such a bargain, you have to find a seller with the right profile.  You have to find a seller with a spending appetite, or one who is constantly purchasing goods and uses the trade dollars to purchase appliances, parts and supplies, or office equipment.

When you find such a seller--especially one whose property has been on the market for a while--you have the makings of a deal good for all.

HYPOTHETICALLY
Let's look at this situation: The seller has set a price that is unmarketable.  The buyer has a price in mind that makes the purchase attractive.   The two numbers don't match, but if cash equivalent credits are added to the mix, they can.  Say the price of the community is $1.2 million but it pencils only at $950,000.  The seller may have to stick with that price because he's got it at that on the books because he bought when the market was high and doesn't want to take a hit.   How do you bridge that gap of a quarter million?
The secret is to use the tools of corporate barter.  Most often, this system is used by companies who want to dispose of non-real estate, unwanted inventories without liquidating them at fire sale prices.  By selling the inventory at full value, but taking cash equivalent credits, the sellers avoid large losses and are able to book the sale profitably and receive full value.  The credit holder buys a wide range of goods through the corporate trade office by getting a matched best price  The credit holder finds the best price on what he wants and the corporate barter company acquires it for them, on a part cash, part cash equivalent basis.  Typically, the holder of cash equivalent credits will spend 75 to 80 percent cash per purchase and the balance is cash equivalent credits.

BARTER IN REAL ESTATE TRANSACTIONS
Corporate trade in real estate transactions work the same way.  The buyer offers the seller a credit memo that the seller carries on the books as a credit, and which he uses to buy the goods for which he otherwise would pay cash.  Typically, these purchases are made on a part cash, part trade basis.  Instead of paying $100,000 cash for a supply of widgets, the buyer would pay $75,000 or $80,000 cash and the balance in cash equivalent credits.
There are many situations in which the tool of cash equivalent credits could make a difference in a real estate transaction.  For example, an apartment community may carry a high book value because of specialized improvements, for which there is a limited market.  By taking cash equivalent credits as a portion of the price, the seller can bring the cash price in line with the market value and has a better chance to sell the property.  If the seller lets it be known that cash equivalent credits can be part of the consideration, the apartment community could attract a wider universe of buyers and make for a quicker sale.
A sale lease back is another real estate transaction in which cash equivalent credits can play a role.  The seller wants full value from the property, but realizes that if it were a cash sale, the company could not afford to pay rent.  But, if the seller can reduce the cash price by 20 to 25 percent and take the difference in cash credits--spending those as if they were cash for necessary purchases--then it can become very attractive to remain in the property as a resident at a rent less than it otherwise would have been.  For the buyer, the deal is attractive because the building has a solid, seasoned resident.
An attractive deal like that makes it possible for investors to pull their cash out quickly with refinancing and move on the next purchase.

A CLIMATE FOR BARTER
Corporate restructuring and acquisitions create an ideal climate for the use of cash equivalent credits in real estate.  When companies merge, there is often redundant property.  Mergers take place when management perceives profit to be harvested by achieving efficiencies through eliminating superfluous management, staff, and communities.  When banks merge, for example, there are usually a number of branches that close.  When properties are offered at bargain prices, there can be competition in bidding.  An investor can have a leg up on competitors by offering cash equivalent credits--over and above the asking price--to entice the seller.

Sellers savvy to the value to cash equivalent credits can get themselves a bonus on the sale of property.  One seller I know wanted the highest possible price for this housing development land, so he raise the asking price by $10,000 per acre over market value and was willing to take $20,000 off the asking price in cash equivalent credits.   He used those credits to buy advertising to move his finished apartments.

The Internet is making barter easier than ever  A quick search can turn up several sites, information, and contacts.

Kaufman is president of Kaufman and Associate, Inc., Chicago

Posted with permission of the National Apartment Association from the September 1998 issue of Units magazine.  For more information about NAA and Units, call 703/518-6141.