synthetic lease

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Synthetic Lease

When a company creates a special-purpose entity to arrange for a loan to purchase property, and then leases the property from the entity.The synthetic lease therefore keeps the loan off the company's balance sheet, while the company provides enough income to the special-purpose entity to cover the interest rate on the loan.

Synthetic Lease

The creation by a parent company of a special purpose entity to which is given a certain property and which leases the same property back to the parent company. A synthetic lease allows the parent company to use the property for any purpose it wants while not recording it as an asset on its balance sheet. Instead, it is recorded as an expense. This way, rather than paying taxes on the property, it may write off the rent from its taxable income.

synthetic lease

A financing method that confers certain aspects of ownership to the lessee, who, for accounting purposes, treats the arrangement as an operating lease. Neither the asset nor the lease is included on the lessee's balance sheet. A synthetic lease is a type of off-balance-sheet financing that results in a company understating its financial obligations.

synthetic lease

A transaction that appears as a long-term lease from an accounting standpoint but as a loan from a tax standpoint.In the past,such transactions were booked as leases in order to remove loan liabilities from the balance sheets of companies.The company did not have to disclose the duration of the long-term leases, simply the amount of annual lease expenses. Now, the Sarbanes-Oxley Act requires publicly traded companies to disclose the true nature of such off-balance sheet transactions.Unfortunately,many such synthetic leases included both real and personal property.Today,perhaps 10 years after they were originated,the transaction must be reported as a loan liability;the real property posted as an asset at its current value;and the personal property,now practically worthless,posted at its value.The result has been huge losses posted to corporate balance sheets because of the accounting corrections.

References in periodicals archive ?
Used in particular transactions involving complex and large-scale assets, such as airplanes, ships, industrial plant and equipment, and large real estate projects, a structured leasing transaction can fall within one of the following two categories: (i) leveraged transactions (mainly cross-border leasing with a trust); and (ii) synthetic leasing.
The increased tax benefits afforded by operating leasing have provided a strong stimulus to create "structured" transactions that give operating leasing the same characteristics as true financial leasing, the so-called synthetic leasing transactions.
She was involved in providing financing solutions that included syndicated loans, asset-backed securitization, high yield corporate bond, mezzanine debt, synthetic leasing and business credit to middle-market companies as well as large corporations.
SEVIN, Additional Evidence on the Lease Choice Decision: A Study Incorporating the Use of Synthetic Leasing, Ph.
Empirical studies of incentive trade-offs in the leasing context assume that the lease choice is driven by a preference for one incentive over the other, but the mere existence of synthetic leasing suggests that some high marginal tax rate firms also want the advantages offered by off-balance-sheet financings.
Through the use of a technique known as synthetic leasing, Acxiom is financing the $30 million-$35 million building without having to carry the debt from the transaction on its balance sheet.
Synthetic leasing involves the creation of a special purpose entity (SPE) to own the property, though the SPE company need only own a small percentage, as little as 3 percent, according to SS&CT Technologies Inc.
The popularity of synthetic leasing, a common financing tool for years, may be waning after the Enron debacle has applied greater scrutiny to "creative accounting.
AOL Time Warner is such a firm--and they will reportedly stick with synthetic leasing on two major projects, one being the billion dollar AOL Time Warner Center in Manhattan.
Synthetic leasing has been studied both by academic researchers (Morsfield 1999; Weidner 2000) and by practitioners (Holmes 1996; Sandler 2000).
Hahn's practice focuses on the areas of asset securitization, residential and commercial mortgage securitization, equipment lease finance, synthetic leasing, leveraged leasing and banking.
We also used a $75 million synthetic leasing facility in connection with developing integrated cancer centers.