SERVICE PROVIDER FOCUS
New Players Join Financial Services Arena
by Laurie Joan Aron
A new crop of real estate finance providers has joined the competition to fund corporations' new expansion plans. Armed with a new set of financing options, they are determined to stake their turf while market conditions are favorable.
Real estate executives about to finance new or expanded industrial or commercial facilities are in for a surprise if they think the local bank is the only one funding source worth exploring.
Caught the Synthetic Bug?
Off balance sheet financing via synthetic leasing, although still not that widely known in real estate circles, is definitely the next major buzz. Structured correctly, the synthetic lease meets IRS requirements for ownership, with all the resulting tax advantages. At the same time, synthetic lease is an operating lease by FASB standards, and stays safely off the balance sheet, keeping the return on investment clean of asset drag. According to Craig Lund, president of Lund Financial Corp., San Jose, California, which structures off balance sheet details, the monthly cost of off balance sheet financing can be up to half the cost of ordinary leasing. "Synthetic leasing gives you the lowest cost for facility occupation. That's the shortest, sweetest, explanation," says Lund. "It's the most appropriate for strategic assets, like manufacturing and headquarters facilities -- the core of the company."Silicon Valley computer and software companies have caught on to synthetic leasing in a big way. "When a company buys real estate, it's telling the world it has nothing better to do with its money," says Lund. "Treasury people are very psyched about this. The downside is that the value of the property can drop. If it appreciates, you capture it. You sign a lease and capture value."
Lund recently assisted networking software company Novell, Inc., with synthetic leasing arrangements for two projects, on in San Jose and the other one in Provo, Utah. In San Jose, Novell is constructing a five-building, 534,000-sq. ft. (49,000-sq. m.) campus valued at approximately $157 million. In Provo, Novell is consolidating its Utah campuses by constructing two buildings comprising 578,000 sq. ft. (53,700 sq. m.) and valued at approximately $115 million.
Lund has also helped semiconductor makers Symantec and Lam Research develop facilities via synthetic leasing. "It works very well for office space and office headquarters, for manufacturing, for clean rooms," says Lund. "You can pick this product up and move it just about anywhere." Lund suggests that synthetic lease financing would work perfectly well in Europe, although it would likely not fly, legally, in much of Asia, where there are restrictions on who can own property.
Synthetic leasing is being pushed by lenders for the simple reason that "it's a way to lend money to companies," says Lund. "Novell has $1 billion in cash. Why would they need to borrow more? A bank can say, 'We can create an instrument for you, and fund the construction of your real estate at less than six percent.'"
Incredibly favorable synthetic lease rates exist, explains Lund, because this form of financing is a kind of thin edge of the wedge for an aggressive financial institution to develop a broader relationship with a creditworthy customer.
Could the synthetic leasing bubble burst? Could an FASB or IRS rule change negate its benefits? "Is it too good to be true?" asks Lund. "You have to be very careful in how you structure them. Some synthetic lease agreements are very flaky." Some accountants are beginning to caution that synthetic leasing is on the radar screen of FASB's Emerging Issues Task Force. "It's under scrutiny," says Jack Barthell, a partner with Coopers & Lybrand's capital markets practice in Washington, D.C.
"The most important consideration is that real estate has to align with the business plan," says Louise Root, corporate real estate principal, who is also with Coopers & Lybrand in Washington, D.C. "Do you want to own and control it? Do you want to finance it on or off the balance sheet? Will Wall Street look back on that negatively? That depends on the entire balance sheet. It all goes back to the business plan."