A financing structure designed to look like a lease for accounting purposes (keeping the property off the tenant's balance sheet) while being treated as a loan for tax purposes (allowing the tenant to deduct interest and depreciation).
A synthetic lease is a structured finance product where a special purpose entity (SPE) holds title to the property and leases it to the user company. The lease is structured as an operating lease under accounting standards (ASC 842), keeping the asset and associated debt off the tenant's balance sheet. Simultaneously, for tax purposes, the arrangement is treated as a financing, allowing the tenant to claim depreciation deductions and interest expense. The tenant typically has a purchase option at lease end. Synthetic leases require careful structuring to maintain dual characterization and are primarily used by large, investment-grade companies.
A synthetic lease structure charges the tenant management fees and "lease administration" costs that are not tied to actual services. Because the structure is complex, the tenant does not realize these charges inflate the effective cost of the arrangement beyond what traditional financing would cost.
Synthetic leases are complex financial instruments. Have your CFO and outside counsel evaluate the total cost of the structure against conventional financing and traditional leasing. Pay attention to management fees, residual value guarantees, and purchase option pricing.
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Find My OverchargesThis page provides general educational information. It is not legal advice and may not reflect the most current law in your state. Consult a licensed attorney for advice specific to your situation.
