Synthetic Leasing Allows Companies to Get Properties Off Books

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Researched by Industrialinfo.com (Industrial Information Resources, Inc.; Houston, Texas). More and more companies are looking to a new tool to cut costs and save on real estate and expansion. `Synthetic leasing allows companies all the benefits of owning real estate, but does not burden their balance sheet with debt or long-term assets. Strong financially sound companies like Microsoft (Nasdaq:MSFT) (Redmond, WA), Pacific Gas & Electric (AMEX:PGCCA) (San Francisco, CA), AT&T (NYSE:T) (New York, NY), TriQuint Semiconductor (Nasdaq:TQNT) (Hillsboro, OR), and Krispy Kreme Doughnuts (NYSE:KKD) (Winston-Salem, NC), who is building a new $14 million plant in Effingham, Illinois, have all recently used synthetic leasing methods of financing to purchase land for new construction and equipment procurement,` according to Jay Brunson, Manager of Food & Beverage for Industrialinfo.com.

In the wake of the Enron scandal, synthetic leases are receiving a lot of attention. With companies looking to increase shareholder value, real estate investments can be one of the most costly items. Financial performance can be improved because the synthetic lease is a form of off-balance-sheet financing. Synthetic leasing became a popular option in the late 1980's. In the mid 1990's, synthetic leasing started to die down, but recent accounting support for it has led to its revitalization. In a synthetic lease, a specially created entity owns a property on behalf of an occupant, which leases the property from that entity. Instead of buying their facilities outright, companies can take advantage of a variety of tax breaks and accounting practices.

Industrial manufacturing, high-tech, healthcare, entertainment, banks, and other industries are reaping the benefits afforded by this real estate finance option. Financial institutions participating in synthetic lease deals include NationsBank, Chase, Sumitomo, Citibank, and Prudential Securities.