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Off-Balance-Sheet Corporate Finance with Synthetic Leases: Shortcomings and How to Avoid Them with Synthetic Debt

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  • Richard A. Graff

    (Electrum Partners, Chicago, IL)

Abstract

Synthetic leases provide corporations with off-balance-sheet finance for acquisition of tangible assets. The financings are less efficient for financial planning purposes than conventional on-balance-sheet debt. The inefficiencies can be avoided by replacing synthetic leases with synthetic debt. Synthetic debt finance transforms lease obligations into the investment equivalent of senior corporate debt. The distinguishing features of synthetic debt are: (1) synthetic debt represents a fixed-rate off-balance-sheet fixed-income obligation with the same default risk as on-balance-sheet debt; and (2) in default synthetic debt provides the financier with immediate recourse against the obligor comparable or superior in recovery protection to conventional senior debt.

Suggested Citation

  • Richard A. Graff, 2001. "Off-Balance-Sheet Corporate Finance with Synthetic Leases: Shortcomings and How to Avoid Them with Synthetic Debt," Journal of Real Estate Research, American Real Estate Society, vol. 22(1/2), pages 213-242.
    • Handle: RePEc:jre:issued:v:22:n:1/2:2001:p:213-242
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    References listed on IDEAS

    as
    1. Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-922, September.
    2. Graff, Richard A & Young, Michael S, 1996. "Real Estate Return Correlations: Real-World Limitations on Relationships Inferred from NCREIF Data," The Journal of Real Estate Finance and Economics, Springer, vol. 13(2), pages 121-142, September.
    3. Richard A. Graff & Adrian Harrington & Michael S. Young, 1997. "The Shape of Australian Real Estate Return Distributions and Comparisons to the United States," Journal of Real Estate Research, American Real Estate Society, vol. 14(3), pages 291-308.
    4. Young, Michael S & Graff, Richard A, 1995. "Real Estate Is Not Normal: A Fresh Look at Real Estate Return Distributions," The Journal of Real Estate Finance and Economics, Springer, vol. 10(3), pages 225-259, May.
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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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