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The Wall Street Journal

Press Release
October 2, 2002

The Property Report - Building Value Firms Await Ruling on Use of Synthetic Leases
By Ray A. Smith - October 2, 2002

Although some companies are pulling out of controversial so-called synthetic leases, many are waiting until the Financial Accounting Standards Board issues a final ruling on the transactions.

"A good number of people have taken a wait-and-see approach, more than I would have expected," says Gordon F. DuGan, president and co-chief executive officer of W . P . Carey & Co., a New York-based real-estate investment firm that has helped Advanced Micro Devices Inc. and PetsMart Inc. get out of synthetic leases. Others companies getting out include Inktomi Corp., Cisco Systems Inc. and Krispy Kreme Doughnuts Inc.

A synthetic lease allows a company to get the tax benefits of owning real estate, while keeping the debt associated with it off its balance sheet. Under the arrangement, the owner is the lender for accounting purposes. But for tax purposes, the owner is the company leasing the space. With low borrowing costs, synthetic leases are a cheaper way to finance real estate. Popular in the late 1990s, they fell out of favor last year after discovery that special-purpose entities, including synthetic leases, were used heavily by Enron Corp. Critics have charged that such leases are an accounting trick that hides potential liabilities and can be used to boost earnings per share.

On Monday, the FASB held an open roundtable discussion on draft regulations that would toughen rules on certain special-purpose entities set up to handle specific transactions. The board hopes to issue a final ruling by the end of the year.

If the regulations result in tighter restrictions, some analysts expect that a flood of real estate will go up for sale as companies scramble to unwind synthetic leases. One alternative is a sale leaseback in which tenants sell the building and then lease back the space. A scramble to conduct sale leasebacks could result in some buying opportunities for real-estate investment trusts and institutional investors, says Michael Rotchford, senior managing director at Cushman & Wakefield Inc., a New York real-estate services firm.

Some companies, though, have decided not to wait on the FASB. IDEC Pharmaceuticals Corp. had originally considered using synthetic leases to finance the development of a new headquarters campus and a manufacturing facility. Instead, the San Diego company ultimately decided to raise money through an offering of senior notes. "We were not willing to put one into place until we knew exactly how it was ultimately going to be accounted for," says Chief Financial Officer Phillip Schneider.

Others still are considering using synthetic leases. A spokeswoman for AOL Time Warner Inc. in New York says the media company's current plan is to use a synthetic lease to finance the construction of its new Manhattan headquarters and a production facility in Atlanta.

"It's really hard for companies to make a decision like `Let's put this on our balance sheet, let's elect a product that may result in higher costs'" to finance a property, says Thomas R. Fileti, a partner in the real-estate group at Morrison & Foerster LLP, a San Francisco law firm.

A quarterly survey by CoreNet Global, an Atlanta-based association of corporate real-estate executives, showed that just 30% of 130 respondents addressing how accounting scandals are affecting corporate real estate said they will stop or reconsider using synthetic leases.