Synthetic leases: benefit or burden?

The bull market for publicly traded equities has left many companies searching for new and innovative ways to bolster their stock prices in hopes of attracting even more investor dollars. This competitive environment has led many sophisticated corporate real estate users to employ a relatively new technique known as the synthetic lease. In its simplest form, a synthetic lease is a type of off-balance-sheet financing that provides a number of benefits for the corporate lessee, including enhanced financial ratio performance; as much as 100% financing with competitive pricing; realization of future property appreciation through a fixed-price purchase option; and tax benefits, including deduction for both interest expense and depreciation. Two key issues are at the core of receiving financing treatment for federal income tax purposes: disregarding the transaction's form (a lease) in favor of its economic substance (a financing); and proving that the lessee retains the benefits and burdens of ownership.