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Simple English definitions for legal terms
synthetic lease
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A quick definition of synthetic lease:
A synthetic lease is a way to buy property where a lender creates a special company to buy the property and then leases it to the buyer. This allows the buyer to deduct the property's depreciation and the loan's interest for tax purposes, while keeping the asset and debt off their balance sheet. It's like renting a house, but instead of a landlord, there's a special company that owns the property.A more thorough explanation:
A synthetic lease is a method of financing the purchase of real estate. In this type of lease, a lender creates a special-purpose entity that buys the property and then leases it to the ultimate user, usually a corporation. The lessee pays rent to the special-purpose entity, which uses the rent to pay off the loan. The synthetic lease is treated as a loan for tax purposes and as an operating lease for accounting purposes. This allows the lessee to deduct the property's depreciation and the loan's interest while keeping both the asset and the debt off its balance sheet.
For example, a corporation wants to buy a building but doesn't want to show the debt on its balance sheet. The lender creates a special-purpose entity that buys the building and leases it to the corporation. The corporation pays rent to the special-purpose entity, which uses the rent to pay off the loan. The corporation can deduct the property's depreciation and the loan's interest while keeping both the asset and the debt off its balance sheet.