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Abstract

This Essay will describe synthetic lease financings and provide an analysis of the advantages and disadvantages of these transactions for the acquisition or construction of a power generation facility. During the past two years, several leading players in the power generation industry have used “synthetic” leases to finance both the construction and acquisition of power generation assets, as well as bulk purchases of combustion turbines. Synthetic leases can offer a tax and balance sheet efficient alternative for the acquisition and construction of a power generation facility and related equipment (collectively referred to in this Essay as a “power generation facility”). A synthetic lease (also known by other names such as “off-balance sheet financing” or “tax oriented operating lease”) is a financing transaction structured through a lease that satisfies the requirements for characterization of a lease as an operating lease set forth in the Financial Accounting Standards Board (“FASB”) Statement 13 (“SFAS 13”) and related accounting rules. Because a synthetic lease allows a project sponsor to enjoy operating lease accounting treatments and avoid depreciation charges attributable to the leased asset, power producers employing this technique may obtain tangible economic advantages in the current market-driven environment. Synthetic lease financing may also allow a project sponsor greater financial flexibility to participate in a number of large scale projects and equipment purchases while mitigating the adverse credit impact of any particular project or transaction. The execution of synthetic leasing transactions in the power generation industry by leading players during the past two years may encourage others in the industry to consider such innovative approaches.

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