Synthetic lease

A synthetic lease is a financing structure by which a company structures the ownership of an asset so that –

Effectively, the asset is owned indirectly by the lessee / operating company, and the company leases the asset to itself. The post-Enron rules of the Financial Accounting Standards Board, which require some measure of independence of a special purpose entity from the operating company, and genuine economic substance to the transaction in which the SPE is a party, made it difficult or impossible to structure a synthetic lease SPE, so synthetic leases have essentially passed out of existence.

Synthetic leases are considered vulnerable in some jurisdictions to recharacterisation.

Generally, the money to finance the asset is borrowed, and the lender takes a security interest against the asset, but has no further recourse against the borrower / operating company.

Reference

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