Insurance is all about risk management and limiting loss. So how do insurance companies limit the risk within their own businesses? The answer is reinsurance — insurance for insurance companies.
“Policyholders transfer their financial risk to their insurance company,” says Tom Hudock, risk manager with Westfield Insurance. “The company retains some of that risk and transfers, or cedes, the remainder to other insurance companies called reinsurers. Reinsurance is primarily insurance for an insurance company. Large self-insured businesses can also purchase reinsurance to reduce their risk.”
Smart Business discussed with Hudock the purpose and the impact of reinsurance in the insurance industry.
Why do insurance companies purchase rein-surance?
When an insurance company issues a policy, it promises to pay for future claims that may occur. In order to deliver on these promises, an insurer must remain financially sound. Reinsurance preserves policy-holders’ surplus (retained earnings).
There are three main reasons why insurance companies purchase reinsurance: capacity, stability and catastrophe protection.
- Periodically, an insurer will purchase
reinsurance on a single large risk, e.g. a $50
million building. This is called facultative
reinsurance. It provides the insurer with
the capacity to insure a risk that might otherwise be declined.
- Treaty reinsurance is another type of
reinsurance that insurance companies buy
to stabilize their underwriting results for
their portfolio of risks. Loss experience
varies from year to year, and reinsurance
helps smooth earnings.
- Insurance companies are exposed to very large losses from catastrophes, like hurricanes and earthquakes, which could result in bankruptcy. To protect its policy-holders’ surplus, an insurer will purchase catastrophe reinsurance that limits its loss from a single event to a predetermined amount.
How does reinsurance work?
The insurance company provides the reinsurer with loss exposure data, claims experience and the amount of risk that the insurer wishes to retain. The reinsurer then determines the reinsurance premium. A portion of the premium that is collected from the policyholder is ceded to the rein-surer in payment for the risk assumed by the reinsurer.
For example, the insurer may retain the first $1 million of loss and the reinsurer(s) may agree to pay the next $4 million. If a policyholder were to incur a $5 million loss, the insurer would pay its policyholder $5 million, and then be reimbursed $4 million by the reinsurer.
How does reinsurance affect business insurance policyholders?
Depending upon the size, location and type of risk to be insured, a business may have difficulty finding affordable insurance due to the availability and/or the cost of reinsurance. Smaller insurance companies depend more on reinsurance than the large national insurance companies. In some cases, even the largest insurer may not be willing to offer insurance due to the lack of reinsurance.
For example, a business occupying the Sears Tower in Chicago may not be able to buy terrorism insurance because reinsurance for a terrorist event is not available.
How is reinsurance related to industry cycles?
The reinsurance industry also goes through hard and soft markets. In the two years following the World Trade Center attacks in 2001, total losses — including from hurricanes and other long-tail liabilities — exceeded $50 billion, and capital losses from the global fall in equity values exceeded $180 billion. This created a hard market for reinsurance in which demand for reinsurance exceeded supply, causing premiums to rise. This contributed to the hardening of the primary insurance market.
Due to the increase in reinsurance rates, and because 2006 was a very profitable year for reinsurers due to a mild hurricane season, there are signs that the reinsurance market may be softening. This will ease pressure on primary insurers’ pricing.
What else should businesses know about reinsurance and industry cycles?
Most reinsurers write business worldwide, while most U.S. insurers only write business in the United States. The U.S. insurance and reinsurance cycles are linked together but do not move perfectly in sync. Softness in reinsurance pricing contributes to the depth and length of the soft market for primary insurers. Usually, the market does not begin to harden until reinsurer pricing rises.
TOM HUDOCK, CPCU, ARM, ARe, risk manager, can be reached at (330) 887-0654 or email@example.com. In business for more than 159 years, Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented by leading independent insurance agencies, the product we offer is peace of mind and our promise of protection is supported by a commitment to service excellence. For more information, visit www.westfieldinsurance.com.
It’s a lesson Zalesky carries with him to this day, and it is also a cornerstone of the culture at CMI Market Research, the marketing and research firm he founded.
Smart Business spoke with Zalesky, president of CMI, about why accountability can make or break you as a CEO.
Q: What are the key skills that a business leader needs?
No. 1 is a vision for the future.
It’s critical that we can look into the future, see what our clients are going to need and transfer that vision to my key executive team so they can begin a collaborative plan for the future with initiatives, resources and staffing.
Another thing is keeping those critical client relationships fostered. Not on a day-to-day basis but on a semiannual basis, so they understand they are very important to us.
They have the critical time we need inside this organization. I also need to foster my staff in ways that say, ‘You are very important to our future, and we are going to do everything in our power to mentor and grow you.’
Lastly, financially I need to make certain this organization is on course for growth and has the resources to do it.
Q: How do you do that?
We’ve been growing at a compounded 20 to 30 percent rate for the last four years. We quickly realized the opportunity for us to collegially interact was occurring infrequently.
So we have regular activities where we get together as a company from a team-building standpoint now, where we relax and share time in a nonbusiness way. We try to work on professional development for all of our staff. Whether it’s training seminars that are external to the company, or internal training on a regular basis, we’re really trying to foster those opportunities so they can see this is the best place to be culturally rather than anywhere else.
Q: How did you set up that culture?
I played Division I college sports, and it became apparent that you’re allowed to compete. I roomed during camp with the gentleman I was competing with for the starting position. It became quite apparent that you can compete in a very healthy way and still be friends. The organization here is collaborative, but you still need to be accountable to each other on what we say we’re going to do for our clients in terms of time and deliverables. It’s OK to have those discussions that say, ‘You’re not doing what you promised you would do’ in a way that’s honest, fair, respectful, and we live up to those expectations of each other.
Titles and egos stay at the door. We gain respect in this organization based on the ideas and actions we can bring to bear, not on some title we’ve been bestowed.
Q: How involved in operations should a leader be?
A leader can’t be involved in the day-to-day operations in any great way. It is a battle that growing companies face and I face constantly.
You moved from being the technician and knowledge source to the leader. In that process, there can be voids or gaps, but you need to be working on the business rather than in the business. That requires growing and nurturing a senior staff that can do the things that need to be done.
Q: What is the greatest challenge you’ve faced in business?
Evolving from a researcher to a president and CEO. It meant acknowledging the fact that I have to lead with a vision and focus the organization on being accountable for developing initiatives and plans to move us forward.
Q: How did you overcome that challenge?
I live with change and I’m comfortable with change, but when you’re moving into an arena you’ve had no experience in, you need to find others who have already done it. I’ve been fortunate to join a Vistage CEO group of peers to hear from others what it was/is like to forge that path. [Vistage International is the world’s largest CEO membership organization.]
There are 18 CEOs, from companies with revenues anywhere from $10 million to $85 million organizations of similar size. We learn from each other and get the opportunity to share best practices.
I belong to an industry association, and I sit on the board. It’s comprised of presidents in the research business. That, while very meaningful because of issues related to my field, is not going to help me grow my business from a strategic sense. The day-to-day issues a CEO/president faces are dealt with within my Vistage group.
HOW TO REACH: CMI Market Research, (888) 311-0936 or www.cmiresearch.com
Be lean to grow. We run a very lean company. There’s enough gravy in the casserole to please everybody, so we don’t have to break it off and have somebody get the short end of the stick.
We have to make a living. We have to make a profit. If we don’t run it lean ourselves, every franchisor in the country scratches their head and says, ‘OK, well, how do we get more money? We’ve either got to grow more quickly, and that’s not always workable, or I’ve got to work my franchisees out of more money.’
It makes sense to live a little leaner fly coach on airplanes. Split hotel rooms. Not make more than $50,000 on your salary that’s including myself and haven’t since Day 1. Everything we do is frugal and works.
A lot of CEOs out there like to high-step, and they probably got a corner office with a lot of glass and oriental rugs and think they’re hot junk. I don’t play that game. We’re not too hung up on titles around here. We’re more like a law firm a lot of partners that work together every day.
At the end of the day, we want our customers to be raving fans of ours. The bottom line is, if we’re not fair and we’re not lean and we’re not looking at the business the right way, we probably could make more money, but it wouldn’t be as long of a term project and long-lived. It’d be more short-lived, and more people would be unhappy with us.
Buy your buy-in from employees. I didn’t have to give too damn much advice I gave them stock. They have to earn it over a five-year period of time, and once they’re vested, they’re full partners and they’ve got full benefits, but until then, they’ve got profit-sharing and the same percentage.
So many companies these days just pay people pretty well, but I think they’re using them. Unless you make somebody a partner, they’re not truly going to have job security or a future with that company long-term if they ever want to have a beach cottage or do other things or retire at a reasonably early age. I don’t have to say that much. Yes, I’ve strewn out my vision and told them all what I think about fairness and treating people well and running the best company and working your tail off and all the things I talk about, but it gets translated pretty easily, and you don’t have to say it too many times if you own a piece of that company. You just automatically think smartly like that.
If I was just trying to hire a bunch of people, I’d be explaining that every day till I was blue in the face. I just bought my buyin. I bought my people. It works.
Some of them are up at 6:30 and don’t go home till 11 at night. They’re warriors. They get it, and they’re the ones that get the increased amount of stock.
We’ve had to run a few off along the way that are bringing the other guys down. If you’re going to be lazy, and you’re not working your tail off, and you’re not going to work smarter and deliver, then the bottom line is you’re not meant for this company.
You have to pay the piper if it goes down. If this company goes down, I’ve got everything I got tied up into it. It’s a different ballgame, but I’m still willing to share because I want those guys to have the upside.
Everybody’s worked hard, and they deserve to share in the profitability and the ultimate stock of the company one day. I can’t count how many times people e-mail me and thank me, and I say, ‘No, thank you.’ It’s just a great feeling to have everybody in the deal with you, and it wouldn’t feel any better if I made twice as much money and didn’t share it with anybody.
Be blunt. I’m not all that political, and sometimes I may hurt your feelings, but I’ll certainly allow you to hurt my feelings. I’ll fly off the handle and call some idea a moron idea, but I fully expect you to say that to me, and if you don’t, you’re a yes person, and we don’t have yes people around.
We don’t want and encourage those people. We hire honest, hardworking people, but we don’t want yes folks because they’re just brown-nosing fools that aren’t going to get anywhere in life, especially in our company. They work well in another company because the CEO has some big ego.
Sit there and brainstorm, and you get to the damn crust of the problem, and find out exactly all the best ideas. I’ll throw out 10 ideas in a meeting, and eight may be the dumbest ideas ever, but then there’s that one nugget, and you wouldn’t have gotten the one nugget if I had been embarrassed, or we didn’t have some fun with it, or if the CEO yells at somebody and all of a sudden he’s uncomfortable because he can’t go back to me and call me bonehead.
I call people, and they call me, bonehead to my face and behind my back. We’re not full of ourselves. We just know we’re smart enough that people will bet on us, and the rest of it is up to us to work our tail off and hopefully make wise and fair decisions that will benefit everyone. Business is no more complicated than that.
I’ve just gotten to where I am because I work my tail off and was honest with people. If you just absolutely give your word to anybody and never break it, and you do more than you need to do per the contract, you’re going to win.
HOW TO REACH: Raving Brands Inc., www.ravingbrands.com
“There is no business relationship more important than the one between employer and employee,” says Dan Kolber, partner with the law firm Gambrell & Stolz LLP in Atlanta. “Unfortunately, the time has passed where a handshake can seal the deal. Even the most simple employment contract benefits both sides.”
Smart Business talked to Kobler about what should be found in every employment agreement.
What is the most important provision of an employment agreement?
The most important provision is the term. Many employees think they have the security of a long-term contract when in fact they can be terminated on 30- or 60-days notice. Usually it is in the employee’s interest to have a term of at least a year. Most employers will release an employee if he or she gets a better offer.
Duties are also important. When there is a change of control of the business or personalities clash, assigning new duties is one method used to squeeze out an executive. Executives should try to narrowly define the scope of their duties. On the other hand, the employer should want as broad a scope of responsibilities as possible. The employer will want the employee to work full time, while the employee usually prefers to devote ‘substantially all’ of his or her time to the affairs of the business.
How important is compensation?
There are three types of compensation: the right to earn equity in the business; the right to receive cash as salary, bonus or deferred compensation; and the right to receive fringe benefits. Common fringe benefits include life and health insurance, automobiles, country club membership and first-class travel. The right to receive bonuses can range from being discretionary on the part of the board of directors to a formula based on the earnings or sales of the business.
What are some other important provisions of an employment agreement?
Discharge for cause. Of all provisions, this one causes the most problems if not properly drafted. The employer wants it as broad as possible. For example, if the employee ‘fails to discharge his or her duties’ or ‘as a result of conduct that amounts to fraud, dishonesty, gross negligence or moral turpitude.’ The employee should insist on some standard or right to a hearing from an impartial decision-maker in determining discharge for cause.
Restrictive covenants. It is common to require the employee to agree to certain restrictive covenants during the term of his or her employment and for a period after employment is terminated. These restrictive covenants fall into three broad areas: an agreement not to solicit customers, an agreement not to solicit employees, and an agreement not to compete with the employer. The Georgia courts enforce these covenants only where they are strictly limited in time, territorial effect and are otherwise reasonable.
Protection of proprietary information. The employment agreement will require the employee to keep confidential certain nonpublic information belonging to the employer. This provision will state that the employer and not the employee retains ownership of this material. Proprietary information includes methods of the business, actual or potential customers and suppliers and other intellectual property from which the business derives economic value.
Remedies. An alternative dispute resolution provision should be included in every employment agreement. It is better to go to mediation first whereby the parties attempt to work things out among themselves with the help of a neutral mediator who has no power to decide but simply facilitates negotiations. If that fails, arbitration before an arbitrator who has the power to decide the dispute is quicker and less expensive than going to court.
DAN KOLBER is a partner with the Atlanta law firm of Gambrell & Stolz LLP. Reach him at firstname.lastname@example.org or (404) 589-3413.
“Fund managers are always looking to increase their exposure to real estate, because of the consistency of the cash flow,” says Chris Decoufle, senior vice president of capital needs for CB Richard Ellis.
Smart Business asked Decoufle how ownership of real estate can increase the value of a company.
Why is ownership of real estate so important?
Over time, real estate has proven that it is consistent and never goes to zero. We’ve had other forms of investment show their ability to get to zero, such as companies collapsing, etc. Real estate, even in a worst-case scenario, always has an alternative use. It maintains its inherent value. Looking at the demographics of the U.S., there is a direct relationship between population and real estate. As the population continues to grow, so will the demand for real estate.
The trick is within the individual markets. The key is the specific market. From a macro-perspective, the better the location the greater the demand for the real estate, whether residential, medical or retail/office.
Does the size of the company matter?
No. Professional fund managers are always looking to expand their client’s exposure to real estate. This applies to small, medium and large companies. Regardless of size, all companies should look at real estate as one way to enhance the value of their company and portfolio.
Is enhancing the value the same as enhancing the cash flow?
Again, no. Owning real estate is going to cost more than some forms of leasing, primarily in terms of the equity required to own real estate. Typically, you’ll need to put down 20 percent in order to acquire the facility whether an office, industrial or medical building. There are many sophisticated ways that capital markets today cooperate with buyers. Even without the equity component there are opportunities to go with institutional, semi-institutional or private entities that could provide the necessary equity for a preferred return. This could run anywhere from 9 percent to 15 percent in today’s market. The question becomes whether your business is willing to give up that return as part of its internal hurl rate. If you have a reasonable amount of cash it is probably better to come up with the equity on your own.
Is it cheaper to own or to lease?
We commonly face the issue of ongoing expenses and the question of owning versus leasing. With owning comes the cost of a mortgage, which is probably higher than leasing costs. That is offset, however, by depreciation that can be written off. The beauty of real estate is that as the buyer you are more likely to get a reasonably good deal than the seller because if you are prudent and take your time, you are more likely to find that gem of real estate others may have overlooked.
Furthermore, if you have some equity going into the deal you can begin to pay off the cost while the property appreciates in value. Ten years down the road, one-third of the property’s cost will have been paid off and the property itself will have hopefully appreciated by the same amount. If so, you’ve created a nice bit of wealth.
Down the road, a reasonable portfolio of real estate owned free and clear will enable its owner to create a capitalization event. Done through either selling or refinancing, the working capital generated will be comfortably and fairly neutral to your books. Adding debt to the real estate creates a ‘free source of capital’ for the owner without having to issue stock or endanger his or her debt rating. It can be a very powerful mechanism when used correctly.
CHRIS DECOUFLE is senior vice president of capital needs for CB Richard Ellis. Reach him at email@example.com or (404) 923-1224.
Education: Bachelor of Science degree, business administration, Babson College
What has been your biggest business challenge?
The biggest challenge for me was when we [Blank and business partner Bernie Marcus] were fired from Handy Dan back in 1978 and overcame it by starting Home Depot in 1979. That was a political situation and what have you. It was still dealing with adversity how do you find a situation where the glass is half filled and not half empty, and how do you build on it? We did a good job of that over the years.
What is the most important business lesson you’ve learned?
The single most important thing is surrounding yourself with the right people, and that is people that have a similar set of values and believe in a similar set of ideas as you do and will focus on the business and opportunities in a similar was as you do, too.
What was your first job?
The first job I had was in college. I ran a laundry and dry cleaning service and picked up laundry around the campus and delivered it back to students several days later. That was one part of our business. A second business I had was a landscaping business in college, as well.
Whom do you admire most in business and why?
Sam Walton would be a great example. A lot of these things I mentioned are things that Sam lived in his business. The second person, who actually took the business from Sam before he retired, was David Glass. I’d put him up there because David grew the company to proportions that Sam never envisioned and yet maintained the culture of the company.
When Joseph D. Sansone founded Pediatric Services of America Inc., he faced the challenge of taking a children’s health care organization public. But by showing Wall Street the value that PSA had and the return that it could garner, he succeeded. Now, as chairman and CEO of Pediatria HealthCare for Kids, which specializes in treating medically fragile children, he and his 50 employees don’t have to answer to Wall Street anymore, but he says even if you’re not running a public company, you always have to answer to someone. Smart Business spoke with Sansone about why a successful company never crosses the goal line and how to create a value-driven culture.
Involve others in decisions. Get everybody’s buy-in let’s hash it out and make sure we’ve looked at every side and angle of what the issue is, and if the decision has to be made, I’ll make it.
Sometimes it’s not with 100 percent consensus, but that’s what you do. At least you get people’s input.
Autocrats, you can get lucky a lot of the times and your personal gut feeling, and some of these guys, it can carry them a long way, and it often does. But as you grow and get more complex as a company, your need for input from various segments becomes more and more important, and making a decision on your own without including all these people is a real danger to an organization.
If you’re running a small corner grocery store, you could get away with it, but if you’re running Whole Foods, I don’t think you can.
Use process for making changes. Decide which segment of the plan is effective and who had the responsibility for that the first time around, and decide whether or not that person needs help or needs replacing or is unaware of the changes. And then you address that piece of it.
If you look at what affects a company, it’s not generally something that hits at the top. It’s all the way down. Sometimes it hits at the base and creeps its way up, so you’ve got to look at the people who have accepted responsibility for the management of those issues and make sure they’re completing their tasks.
Help employees improve skills. Talk it through and ask them to lay out a business plan of their own for their particular task. If you look at every segment of management and every segment of operations in an organization, each one needs to be planned out, and the person that’s doing it needs to come up with the how, why, when and where of how the task is going to be accomplished.
Sit and evaluate that with them. What decisions have been made? Was it a wrong turn people took? How do you get them back on track? It’s a matter of evaluating the plans of action and refining them to meet whatever new challenges come up.
Keep moving forward. Sometimes you’ve crossed the finish line or you’ve made it to the top, but that sounds like you’ve reached the end of the line. Success is, ‘Have we stayed on vision, and have we accomplished those tasks for the near-term that we’ve set out for ourselves, and are we on the track to achieve those longer-term goals?’
We’ve never particularly crossed the goal line because the goal line keeps being further and further out there. You just continue to revise and refine your business to meet the new challenges and stay a living entity.
Embrace change. Gather all the information you can as an individual, and then gather all the information you can as a senior management team, and lay it on the table. It becomes part of the strategic planning.
Use strategic planning as a living document it’s constantly being reshaped. Stay involved in your industry. Stay on top of the changes. Bring in people that are visionary to work with you.
You want people who are able to do the task and are committed, dedicated and they’ve got that spirit behind them that permeates the company. It’s a combination of knowledge and people.
Having those blend together, you’re able to determine which way to go.
Gauge people by actions, not resumes. Until you start working with them and seeing the results of their work, you don’t know, but you can quickly figure it out in the first few months, an understanding of how they completed their tasks. It’s a matter of maintaining an interaction with them.
Don’t just hand them a task, stick them in a cubicle and say, ‘See me next year.’ You’re constantly working with them and making sure they’re accomplishing what you expected them to accomplish.
Create a value-driven culture. You create a culture no matter what happens.
Culture is decor and a feeling of how this company really works. It is a reflection of senior management’s attitudes, enthusiasms and specific goals. When you meet the top people in an organization, you can tell the value of the organization by how they treat their people and view their company.
If our decision was to run this company to make as much cash as we can, and we didn’t care about the quality of the health care we cared about how can we do it the most profitable that’s the kind of culture you’d have, and you’d have a culture that said, ‘We’re going to make this a money machine’ versus a culture that says, ‘Hey, I’m going to hire the best clinicians and top nurses and best therapists, and we’re going to have great care, and by giving great care, people will want us, and we’ll make money that way.’
That’s a different culture altogether. It’s a decision that top management has in setting up the basic goals of the company. Your culture is a reflection of how you achieve those goals and what the importance of goals are.
Balance values and Wall Street. That’s hard, and these days, it’s harder. At the end of the day, you always have bosses.
If it’s not Wall Street, then it’s venture capitalists. If not venture capitalists, then it’s the bank. Somebody holds the purse strings for you.
The balance is it’s a constant communication with your owners [about] where you’re going with the business, how it’s doing, have you met projections, have you met your budgets. That’s what a businessman does.
HOW TO REACH: Pediatria HealthCare for Kids, (770) 414-0055 or www.pediatriakids.com
The days of oil and gas and real estate limited partnerships tax shelters with 3 to 1, 4 to 1 and 5 to 1 write-offs are but a distant and faded memory in the minds of most experienced investors and real estate professionals. Nonetheless, even in today’s significantly more conservative climate, there is a vehicle available to help taxpaying businesses and individuals defer taxation in connection with the disposition and acquisition of property. It’s Section 1031 of the Internal Revenue Code and it is commonly referred to as a tax-free exchange, a like-kind exchange, or simply as a 1031 Exchange.
“In a typical situation, an owner selling its property would be taxed on any gain realized from the sale of the property,” says Claude P. Czaja, an attorney in the Real Estate Practice Group at Gambrell & Stolz LLP. “Section 1031 provides a mechanism that allows the property owner to defer taxation on the gain and keep all the proceeds invested.”
Smart Business spoke with Czaja about the benefits of a 1031 Exchange.
How does a 1031 Exchange work?
Typically, as a company outgrows its building, it develops a need for more space, and thus a new location. In a retail setting, the desire is to add new stores while reducing underperforming or older units. In each of these situations, the property to be sold, known as the relinquished property, is exchanged with the property to be purchased, known as the replacement property.
At the sale of the relinquished property, the proceeds are not tendered to the seller, also known as the exchangor. Rather, they are placed into an escrow account with a qualified intermediary, who holds the funds for eventual disbursement to pay for the purchase of the replacement property. Exchangor has 45 days to identify a limited number of replacement properties and 180 days to close on the purchase of the replacement property. If these and other technical requirements of the tax code are met, the exchangor will be able to roll the proceeds from the sale into the new facility and be spared from paying any tax on the gain that otherwise would have been realized in a routine sale of the property. This type of exchange is commonly described as a deferred exchange.
Besides real estate, can any other type of property benefit from a 1031 Exchange?
Yes, provided the subject property is like-kind or like-class to the property being relinquished or replaced, as the case may be, personal property used in a business can qualify for the tax shelter effect of Section 1031. Besides real estate, it is not uncommon to see equipment and furnishings, collectibles or larger-ticket items such as aircraft, being exchanged under Section 1031.
Actually, there are certain types of property that are specifically excluded from Section 1031 treatment. This group includes property held primarily for sale, inventory, stocks, bonds and other securities, and notes and other evidences of indebtedness. In general, if the property is not on the excluded list, it can qualify for tax-deferred treatment provided it is like-kind or like class property.
Are there any types of transactions that qualify for treatment under Section 1031 other than the deferred exchange?
Yes. In addition to the deferred exchange, there are a few other types of exchanges worth mentioning:
- Simultaneous exchange. As its name implies, the consummation of the closing of the sale of the relinquished property and the closing of the replacement property occur at the same time.
- Reverse exchange. This is a more complicated, costly and less frequently-used exchange method. In it, the replacement property is actually acquired prior to disposition of the relinquished property. These transactions are sometimes referred to as parking arrangements because the replacement property is purchased and ‘parked’ with an exchange accommodation titleholder who holds title to the replacement property until the exchangor is able to sell the relinquished property.
- Multi-asset exchange. This is an exchange that involves both real estate and personal property. Typical examples include exchanges of hotels or restaurants. In such transactions, the exchangor will exchange the real property as one part of the exchange and the furnishings and equipment as the second part of the exchange, with careful attention paid to ensuring that the furnishings and equipment are separated into groups of like-kind or like-class property.
- Construction exchange. In the construction exchange, the exchangor is allowed to build on or make improvements to the replacement property which is parked with an unrelated entity much like in the reverse exchange method. The exchangor can utilize escrowed exchange proceeds from the sale of the relinquished property to fund construction on the parked property. However, construction cannot occur on replacement property the taxpayer already owns.
CLAUDE P. CZAJA is an associate in the Real Estate Practice Group at Gambrell & Stolz LLP, concentrating on commercial real estate and business transactions. Reach him at (404) 223-2218 or firstname.lastname@example.org.
As improved technology continues to narrow the global communications gap, it is becoming increasingly important for many companies to expand internationally.
“The ‘flat world’ was created by today’s access to split-second communication enabling individuals to retrieve information faster than ever before,” says David Lanier, managing director of brokerage and corporate services for CB Richard Ellis in Atlanta.
Smart Business talked to Lanier about the importance of a company’s ability to go international.
How has the flat world theory changed companies’ real estate needs?
It has made the world smaller from a communication standpoint. However, companies must establish or retain a physical presence in most of those major markets where clients want to expand. A real estate company, for example, still needs its people on the ground in India, China, and Europe to service those clients whose business has grown internationally.
Are more domestic companies seeking a presence overseas?
International expansion is not for everyone, but if your company is involved in the communications, financial services or technology industries, you either have a global presence or your competition will pass you by.
How difficult is it to build an overseas presence? Do you staff with Americans or people native to the country?
Staffing should include a combination of people from the United States as well as natives of the country. For client satisfaction reasons, I think the most effective way, however, is to have your own people on the ground. That way you can look your clients in the face and assure them by saying, ‘You know what, when you go into those foreign markets and you feel a little unsure, you have a CBRE person on the ground with you.’ If that is not possible, the next best alternative is staffing through alliances or joint ventures with existing firms already in those locations.
Are more domestic companies opening branches overseas?
Absolutely. In real estate, our clients demand it. If you are a small- to mediumsized firm seeking only domestic businesses, then you do not need to be international. But for a global service company like CBRE to maintain or grow its international client list, especially on the corporate side, a presence overseas is critical. The size and scale of a large real estate company makes the international market feasible and the expenses associated with growing in emerging markets manageable.
How hard is it to purchase real estate overseas?
The answer varies from market to market. Whether a company wants to buy or lease also depends on the market. Doing business varies greatly from market to market, due to cross-cultural differences, reinforcing the importance of having local influence and local expertise inside your company.
What’s the process when a client is looking to get into real estate overseas?
We have centers of excellence, or expert centers, where we can refer a client. For example, if an Asian client wants to open a foreign office and needs help or advice in doing so, there is a specific group of people with whom they can work with to start the process for any type of real estate service from a multi-billion dollar investment to a single distribution center.
For U.S. brokers, it’s an easy process because it’s not simply a hand-off. No client wants to feel like they have been abandoned and passed off to someone else. It is okay, however, to say, ‘Sir, here is the number to the desk of my contacts in the Beijing office. They’re the experts in your market and I am completely comfortable putting you into their hands.’
Are companies that are not international at a disadvantage?
That’s such as broad question. It depends on the business of the companies. I can’t think, however, of many companies of considerable size and scale that would not benefit from branching out to international markets.
DAVID LANIER is managing director of brokerage and corporate services for CB Richard Ellis. Reach him at (404) 504-7906 or email@example.com.
Born: Lancaster, Pa.
Education: Gettysburg College, bachelor’s degree, business and political science What has been your biggest business challenge?
It’s been being an entrepreneurial-spirited person in a big business kind of culture that was not entrepreneurial-spirited. It was like being in a box for a number of years.
The greatest thing to happen to solve that frustration was the management buyout we started in the fall of ’95. That was the greatest challenge and frustration in finding a way out of that big-company box.
What’s the most important business lesson you’ve learned?
You can’t let the lows drag you down. Hang in and persevere and battle through the difficult times and realize there’s always another day.
There’s always another alternative. There’s always another way that you can move on and solve some of the problems that you have and move on to some opportunities.
What was your first job?
My first job was delivering morning newspapers at 4:30 or 5 in the morning for a number of years seven days a week. Those were challenging days. I started doing that when I was 12 or 13.
What’s your favorite board game?
The only game I play with any frequency is checkers. I enjoy Monopoly, too I play it with the kids and grandkids.
Monopoly is business-oriented, and checkers is just a good competitive and strategic thing. I just enjoy both of those for the competitive nature.
Are you a sports guy?
I’ve always been. I played football and baseball in college. I’m still playing baseball, tennis, golf and basketball. I’m still doing all those things and trying to still feel like I’m a kid. My wife always wonders when I’m going to grow up, and I say never not until they put me in the box.