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SYNTHETIC LEASES: NEW TOOL TO SAVE ON REAL ESTATE

"Enhance shareholder value" is the directive for every chief financial officer of a publicly traded company in America. The question is, "What areas of the business can be better-managed in order to achieve greater efficiencies?" For most companies, real estate costs are second only to those for personnel and, therefore, can be fertile ground for savings. A relatively new tool that can be used to improve financial performance in this area is the synthetic lease, a form of off-balance-sheet financing. A synthetic lease provides a company with all the benefits of real estate ownership, but does not encumber the firm's balance sheet with debt or long-term assets that can impair traditional measures and ratios. Nor does it entail depreciation expense that would drag down earnings. In addition, a synthetic lease reduces the high cost, and eliminates the lack of control, inherent is a traditional leasing arrangement. A synthetic lease can be used for existing buildings, including those in which a company may currently be a tenant, or to acquire land and/or construct facilities. Synthetic leases have been applied to warehouse properties, office buildings, water fabrication plants, manufacturing facilities and retail outlet centers. In fact, the rent paid under a synthetic lease is typically 30 to 50 percent less than that paid under a traditional build-to-suit lease. This can easily translate into millions of dollars saved over the lease term. The synthetic lease's dramatic savings, as well as the additional control, flexibility and tax advantages it provides, can appear almost too good to be true, but the underlying technical authority is clear.

Transaction amounts range from $10 million to $100 million, with the average transaction approximately $40 million. The time for processing transactions averages 60 days. However, these transactions can be completed in a 30-day period. For those companies that investigate, the synthetic lease usually becomes the vehicle of choice for occupying real estate. At a minimum, consideration of its advantages is essential for a well-informed real estate occupancy decision. Here's an example: Early in 1996, Symantec Corp. and Lund Financial completed three synthetic lease transactions valued at approximately $90 million. Lund Financial, working in concert with a local real estate brokerage firm, demonstrated the value of the synthetic lease structure to the prominent technology company when Symantec needed to expand its Cupertino, Calif., headquarters. Symantec engaged a real estate brokerage firm to buy land adjacent to its headquarters for the construction of a 142,276 square-foot facility. During the process of evaluating methods of financing the land acquisition and new construction, Symantec came to recognize the advantages of the synthetic lease and its cost savings. The first transaction was not yet complete when Symantec instructed its real estate broker to acquire its then-leased headquarters building. Once Symantec adopted synthetic leasing as a policy tool, management began applying the finance method to its strategic, existing facilities.

The rent paid under a synthetic lease is typically 30 to 50 percent less than that paid under a traditional build-to-suit lease. As Symantec and its consultants neared completion of its second synthetic lease, a Class A office building -- of which Symantec occupied approximately half on a leased basis -- was put on the market for sale. Symantec, its real estate broker and Lund Financial responded quickly to the opportunity. Because Symantec had gained familiarity with synthetic leasing, the company acquired the property (50 percent of which was leased to other tenants), thus allowing Symantec to reduce its rent obligation for about 80,000 square feet to almost zero. "Utilizing a synthetic lease allowed us to reduce our rent expense by over 30 percent," said Howard Bain, CFO of Symantec Corporation. "Moreover, it provided us complete control over our facilities at a significantly reduced cost." Although synthetic leases are a relatively new financing tool, more and more qualified companies are using them to lower their real estate costs. This trend will continue throughout the country as publicly traded firms understand the advantages and cost savings. Michael J. Smith, vice president of San Jose, Calif.-based Lund Financial Corp., manages the East Coast office in Columbia, MD.

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