Synthetic lease keeps property off balance sheets.
AS IT RISES IN THE RIVER Market District, the centerpiece downtown Little Rock construction - Acxiom Corp.'s new 12-story office building - is incrementally revealing its innovative nature.Externally, as the structure s contoured face and blue-green glass curtain wall become apparent, people are realizing that the building is more than another pile of brick and steel downtown. (See sidebar.)
But the Little Rock information technology company is not confining its creativity to the physical building. Through the use of a technique known as synthetic leasing, Acxiom is financing the $30 million-$35 million building without having to carry the debt from the transaction on its balance sheet. The company also retains the tax benefits of real estate ownership.
It's all legal, and Acxiom discloses synthetic leases in filings with the U.S. Securities and Exchange Commission.
"This method of financing is good for our shareholders and is a good business decision," said Acxiom spokeswoman Alison Melson. "The synthetic lease is the most cost-effective method of financing the building and gives us a great deal of flexibility. At the end of the five-year lease, we have the option to extend the lease, buy the building or walk away under certain provisions disclosed in our financial filings."
Synthetic leasing involves the creation of a special purpose entity (SPE) to own the property, though the SPE company need only own a small percentage, as little as 3 percent, according to SS&CT Technologies Inc. The rest is financed, typically by a bank.
The company, such as Acxiom, then leases the property from the SPE, which carries the property, debt and depreciation on its balance sheet..
Synthetic leasing didn't start at Acxiom with the Little Rock building. The company entered into such agreements for computer equipment, furniture and .airplane financing to the tune of $99.1 million last year and $67.8 million during 2000, according to Acxiom SEC filings.
"Of the total funded in 2000, $34.8 million was received in a sale and leaseback transaction of equipment that had previously been owned by the company," Acxiom's annual report filed in June 2001 stated.
A recent article in CFO Magazine questioned the practice in light of the current poor economy and the probability of rising interest rates, which could affect the underlying financing of the leases, which typically run five to seven years.
"While in theory synthetic leases can be rolled over into new ones when the term is up, in practice the lenders have to be willing to go along," the article stated. "And if lenders are willing to roll over a synthetic lease, they may charge so much that it may not be worthwhile."
In Acxiom's case, the company is facing substantial minimum lease payments under non-cancelable leases; including the synthetic leases. For 2002, the minimum payments total $68.9 million; 2003, $54.6 million; 2004, $35.5. million; 2005, $21.1 million; and 2006 $15.2 million.
Aside from the financial uncertainty, the continuing fallout from the bankruptcy of Houston energy trader Enron Corp. has made anything involving SPEs worrisome to investors.
"Enron management preferred [off-balance-sheet accounting] because it would enable Enron to present itself more attractively as measured by the ratios favored by Wall Street analysts and rating agencies," an internal Enron report said in February. "Enron engaged in numerous transactions structured in ways that resulted in off-balance-sheet treatment. Some were joint ventures. Others were structured as a vehicle known as a 'special purpose entity.' From the early 1990s through 2001, we understand that Enron used SPEs in many aspects of its business. We have been told that these included synthetic lease transactions, which involved the sale to an SPE of an asset and lease back of that asset (such as Enron's headquarters building in Houston)."
Still, synthetic leasing has clearly become an accepted business practice, and Acxiom's few such disclosed contracts bear no resemblance to the wild proliferation of intricate arrangements that spurred Enron's downfall.
"We have always fully disclosed the presence of the synthetic lease in our SEC and financial filings," Melson said. "Acxiom's synthetic lease has always been included by the banks and the credit rating agencies as part of our capital structure."
And, Melson concluded, the synthetic lease represents a " very small part on a relative scale of Acxiom's overall assets of more than $1.1 billion."
RELATED ARTICLE: Contours and Glass Give Different Feel To Acxiom Building
THE NEW ACXIOM CORP customer service building under constriction in downtown Little Rock will add a curved, moving panorama to the city skyline, said project designer Reese Rowland of Polk Stanley Yeary Architects Ltd.
"We like the building to reflect what the owner of the building is about," Rowland said. "When you think about Acxiom, they're really in the business of moving information. How do you express movement?"
In this case, with a curving north face coated with a wall of blue-green glass.
"We like for the building to really look like it was meant to be in that place only. One of the striking things about that site is the way the interstate ramp kind of curves off right onto the road. As you are driving, the building is curving with you," he said.
The elevator core and the stairwell are pulled to the building's edges and are enclosed as much as possible in glass, he said, to let natural light flow through the building.
"They have a lot of spaces where they go upstairs one floor or downstairs one floor," Rowland said, so Acxiom workers use the stairs often.
"With the clarity of the glass, you can see people moving around in the building," Rowland said. "This particular color, blue-green, allows in the most naturallight and reflects a way the most ultraviolet light in that family of glass."
By locating the building's parking garage on the south side, the designers have enabled those inside to enjoy a river front view.
"We wanted to get all the people up above the bridge so that they would have that view," Rowland said.
The building is also designed to pair with the coming Clinton Presidential Library, another modernist structure, in the River Market Area, Rowland added.
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| Author: | Whitsett, Jack |
|---|---|
| Publication: | Arkansas Business |
| Article Type: | Brief article |
| Geographic Code: | 1U7AR |
| Date: | Apr 8, 2002 |
| Words: | 1016 |
| Previous Article: | Arkansas Business List: Public Companies Annual Reports. |
| Next Article: | Hayes Handpiece of Arkansas. (New Businesses). |
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