Like markets across the board, the business of credit tenant leases and of net lease transactions in general is striking a tenuous balance between trepidation and evolution following the events of Sept. 11. While deal flow remains relatively healthy and long-term ramifications seem few, market players are nonetheless reticent to proclaim - or even define - business as usual, as evidenced by the postponement of this week's Synthetic Lease and Credit Tenant Lease Forum 2001 in New York.

"The events of Sept. 11 stopped everything in place for a couple of weeks," said Kyle Gore at Legg Mason Wood Walker. "We're just now figuring out how to get things back out into the market that may have been delayed."

Buyside sources are eagerly awaiting the return of such delayed issuance at least $100 million of which is scheduled to hit the market by next week.

Aside from obvious macroeconomic concerns, few players in the credit lease environment see much permanent impact to their landscape. But concrete ramifications while not abundant do exist.

According to a source close to the deal, a potential net lease transaction involving an office building in northern New Jersey has been modified as a direct result of the WTC tragedy. The site, developed by a joint venture between Columbia Development and well-known REIT Mack-Cali, was to serve as a major operations center for beleaguered financial services provider Charles Schwab.

Reportedly, the deal had been on again/off again prior to September 11, mainly due to credit issues and spread concerns surrounding the single-A-minus-rated Schwab. Already faced with subletting space in the facility that it could not occupy, Schwab was approached by Mack-Cali to negotiate a buyout of the lease.

"It was a case of I know you don't want the space and I know people who do,'" said one source, referring to Mack-Cali's recognition of the potential for tenants displaced from the WTC area to occupy the space unused by Schwab. These new tenants most likely stronger credits than Schwab would allow the deal to be done as a straight mortgage financing rather than a net lease transaction.

The WTC attack has accounted for the destruction of approximately 30 million square feet of office space, or 5.4% of New York's office market according to Deutsche Bank Alex. Brown's recent report, September 11th Impact on Real Estate. Ironically, and with all due respect to the tragedy, this is roughly identical to New York's second-quarter office vacancy rate.

In addition to this potential migration out of lower Manhattan, some market players are predicting less demand for top floor space in signature buildings. One source pointed to the aftermath of the Oklahoma City bombing.

"In the wake of Oklahoma City there were a lot of General Services Administration (GSA) deals getting done, especially for the FBI," said the source. "Various federal agencies engaged in sensitive business were concerned that they needed more secure locales, maybe even a stand-alone building. It begs the question whether you'll see more stand-alone government facilities being developed, and in turn more net lease transactions involving government tenants being done...we don't know. Things aren't as obvious as they were after Oklahoma City."

Additional concerns have been raised over the hits that the hotel/lodging sector might take, but one seasoned sellsider pointed out that since there are usually not master leases on hotel or lodging facilities, there aren't many CTL transactions involving them.

Aircraft equipment leaseback certificates and enhanced equipment trust certificates (EETCs) are, to no one's surprise, experiencing severe difficulties.

All told, credit lease market players are not adapting to a new environment so much as knuckling down in an environment of heightened scrutiny.

"In the credit lease world, since you're dependent on credit and structure, you have to pay attention to what the credits are doing," said Legg Mason's Gore. "You have a lot of major companies reporting earnings slowdowns in a challenging business environment. That was true September 10; it's even more applicable now."

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