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The Synthetic Lease Dilemma

Synthetic leases have received a much higher profile in the last few months, but that profile has been far from positive thanks to the continuing fallout and concern about off-balance sheet accounting treatments resulting from the collapse of Houston-based Enron. In fact, many observers consider the synthetic lease vehicle dead for the foreseeable future because corporations are unlikely to embark on any strategy that will involve placing real estate assets into a Special Purpose Entity (SPE), and off the balance sheet, as is the case in a synthetic lease. The current climate on Wall Street and among the investing public just won’t allow it. In many markets, the underlying property value has dropped – exposing companies holding synthetic leases to additional financial liability. Add to this the fact that the Financial Accounting Standards Board (FASB) is now reviewing the rules regarding the accounting treatment of synthetic leases – FASB is due to make recommendations for public comment in May – and there is a great deal of uncertainty regarding this financing tool.

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