A Real Carrot

Although Inktomi's story is unusually harsh, Jim Leslie of CRESA Partners' Capital Markets Group points out that new FASB regulations (Financial Accounting Standards Board's FIN 46) will require companies to restructure billions of dollars of synthetic leases by June 15, 2003. You'll find the arcane details posted in a white paper at the CRESA Partners' web site with a link on the home page [Ed: White Paper no longer accessible].

According to Leslie, synthetic leases were (and are) designed to reduce reported real estate operating expenses by 25 to 50%. Under normal circumstances, this should reflect favorably on a company's stock price. (Although this didn't help Inktomi, which saw its share price drop 99%.) Leslie believes that there are at least $100 billion of synthetic lease obligations outstanding and that many of these will need to be restructured as traditional sale-leasebacks, company-owned facilities, or conforming synthetic leases. It's a huge task.

But you don't have to engage in fancy accounting footwork to lose real money. You can simply pay too much. Like Tishman Speyer Properties, which bought the two-building, 770,000 square foot Market Center in San Francisco for $189 million just as the dot-com boom was cresting in December 1999. Now it's only 18% leased, and rents have fallen from $85 to $30 per square foot. So last week Tishman Speyer defaulted on its $160 million loan. (Wall Street Journal, Feb 7, 2003) Oops.

--Peter Pike