Cresa Crafts $50M-Plus Synthetic Lease

The newly structured deal required some covenant changes and new names to the contract, but it still plays out as a synthetic lease. The staying power of synthetic leases appears hardier than the industry originally thought it would be after the feds revised regulations to eliminate orphan assets and the elusive companies that kept the holdings off the balance sheets. The industry is now estimating that perhaps as many as 50% of existing synthetic leases, with a best-guess value range of $100 billion to $300 billion, could hold up, Brant Bryan, principal in Cresa Partners' Capital Markets Group in Dallas, tells GlobeSt.com.

Cresa, which is looking at similar deals for other synthetic lease tenants, says it found far more US opportunity than it thought it would when it went in search of a new lessor with the "substance" necessary to make the deal work. The result was a five-year synthetic lease, with a LIBOR-based floating rate at about 3% interest, for a multi-building complex in a start-to-finish process of 45 days, Bryan confided.

Typically, the transaction cost (bank and legal fees, transfer taxes and title fees) for such a deal is 1%, but it can range from 0.50% to as much as 4% depending on locale, Bryan says. The public company's ID is being kept under wraps until June when disclosure statements are due and the US players' names, from the lessor to the bank that financed it, will be public record.

Bryan believes five-year synthetic leases will be the norm under the revised FASB rules, once thought to be a nail in the coffin for such contracts. The key word is "substance" for a synthetic lease to survive the changed regulations. The lessor must have "substance" and so must clauses that govern any lease transfer. In other words, the legalese must guarantee that a lease transfer can only be made "to a lessor of like substance," specifically one with "sufficient equity and diversity of operations," he explains. In the case of the California company, the synthetic lease was redone to take it from a "variable interest entity" to a more substantive lessor entity," Bryan says.

Synthetic leases were once the darlings of mostly tech companies, but that changed as the 1990s played out. With corporate giants' balance sheet maneuvers unraveling the business world, synthetic leases surfaced as one of the culprits, pushing feds to brainstorm a fix that some feared would kill the deals.