Synthetic Leases

3532 Words Oct 27th, 2012 15 Pages
Abstract

By now most of us have heard and read numerous articles about synthetic leases. We also know synthetic lease transactions are relatively commonplace for financing corporate build-to-suits and acquisitions, and that they are widely accepted by corporate real estate executives, financial institutions, and accounting firms. But is the synthetic lease a panacea for the corporate executive faced with a leasing decision? Are they the perfect solution for keeping real estate assets oil the company balance sheet? Are there any drawbacks to a synthetic lease? Before entering into a synthetic lease, the corporate tenant should know the potential shortcomings of a synthetic lease as well as when and when not to use one.
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Off balance sheet financing, for instance, operating and synthetic leases, not only overstates corporate earnings and perjures their financial positions, it also allows them to preserve the ratios needed to assure debt contracts. This decreases the authority of such contracts, because the companies are not in reality keeping their debt ratios low; they're lying about the amount of debt they actually have (Edman, 2011). Ethical professionals, who willfully present transparent financial statements, are the only true way to prevent misconstrued financial statements. Likewise users of financial data will always have their work cut out for them. Investors must be diligent to discover a company’s true financial state. FASB will never rid the world of every accounting inconsistency (Edman, 2011). Synthetic leases can serve two important purposes: First, for financial accounting purposes, they enable lessees/sponsors to treat leases as operating leases, whereby payments are recorded as rent expense and the underlying assets and the associated liabilities are kept off the lessee’s balance sheet. This treatment of the lease enables the company to show a stronger balance sheet than if the lease was treated as a capital lease (Soroosh and Ciesielski, 2009). Second, for federal income tax purposes, these contracts are structured so that the lessee/sponsor may treat the

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