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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A company can be a tenant for financial accounting purposes and an owner for tax purposes (Soroosh and Ciesielski, 2009). Until recently, accounting standards have not responded to the development of such sophisticated transactions and arrangements. The accounting standards dealing with off–balance-sheet entities have produced inconsistent results, because the standards are incomplete and fragmented. An original pronouncement that indirectly established the foundation for SPE accounting is Accounting Research Bulletin (ARB) 51, Consolidated Financial Statements, issued in 1959. The principles built into ARB 51 were that “the usual condition for a controlling financial interest is ownership of a majority voting interest” (Soroosh and Ciesielski, 2009). The creators of these sophisticated SPEs, however, have been able to design entities where sponsors maintain control without owning majority voting power. The intended transactions for these entities were packaged into legal forms that have no voting interest. The interest of the sponsor, or the sponsor’s control, is secured through legal restrictions on the ways the SPE uses its assets, particularly in regard to what parties the entity may permit access. Consequently, companies have been able to avoid consolidating these entities where in substance they had control, but such control did not meet the definition of