Local Leaders Discuss Options in Post-Synthetics World

NEW YORK CITY-If you thought that rules governing the use of synthetic leases were about to change across the board, you are probably wrong. That was the upshot of a press gathering hosted by WP Carey Tuesday, a gathering that amounted to a primer on the past and future of synthetic leases. While sale-leasebacks–a Carey mainstay–figured heavily in the proceedings as one of the most sensible alternatives to synthetics, much of the discussion focused on how the landscape is going to change when the Financial Accounting Standards Board pulls the trigger on its new ruling in coming weeks.

According to PriceWaterhouseCoopers analyst Chris Whitley, one of two speakers at the event, few things are certain in terms of synthetics’ future until the FASB unveils its ruling, timed loosely for when draft wording is okayed. That, says Whitley, may happen as late as early next year.

He indicated that when the ruling finally hits the streets, it won’t alter the nature of synthetics straight across the board but only for particular structures. In those cases “Where the lessor is a special-purpose entity and the lessee is the primary beneficiary,” he stated, “we know that those synthetic leases will be consolidated. If the lessee is not a special-purpose entity, those leases may not be affected.” But that may offer small comfort to an industry in which 90% of all synthetics are held by SPEs.

Whitley noted that, while the issue was thrust into the spotlight by Enron’s accounting practices, how to deal with synthetics has been a thorn in the FASB’s side for “10 or 15 years. Those efforts have obviously stepped up and “since ’01 it’s been trying to solve what it couldn’t solve for 15 years–how to deal with synthetic leases.”

How the industry deals with them post-FASB might be hard to swallow but easier to puzzle out. Unwinding synthetics carries little economic burden, stated Carey president Gordon DuGan, and there are both ownership and leasing alternatives to the structure. Ownership strategies include reliance on straight-line mortgage financing or credit facilities while leasing options include continuation of the synthetics or switching to sale/leasebacks.