A synthetic lease is a financing technique structured to be an operating lease for the lessee’s financial accounting purposes and a financing for U.S. federal tax purposes. Synthetic leases are most often used in acquisition or construction facilities for company headquarters or other real estate projects, corporate aircraft and large equipment, but the technique has wide application. They provide a method to finance the full cost of construction or acquisition at competitive rates without requesting funds from a corporate credit facility while permitting the lessee depreciation deductions.

Although this financing technique’s popularity dipped years ago, we’ve experienced increasing synthetic leasing engagements and requests to assist with evaluating and implementing synthetic leasing as a new product offering. These developments are occurring even in the face of new financial accounting changes that once effective will affect the lessee’s balance sheet treatment of leases, including synthetic leases. This alert provides a brief description of synthetic leases, their history, financial accounting changes and some advantages/disadvantages of this specialized type of lease.