A Synthetic Lease, also referred to as an off-balance sheet loan, is a financing instrument which combines the off-balance sheet characteristics of an operating lease and the tax and economic characteristics of conventional debt financing. Simplified, a Synthetic Lease looks like an operating lease for Financial Accounting Standards Board (FASB) purposes, and a loan for tax purposes.
A Synthetic Lease is structured by adding a fixed-price purchase option and a rental adjustment clause with a liability cap to a True Lease. The lease must meet the FASB-13 requirements for an operation lease. Because no upside potential exists for the lessor, and the lease documentation states that the transaction is intended as a loan for federal tax purposes, the Synthetic Lease typically qualifies for tax treatment as a CSC.
The structure of a Synthetic Lease provides an alternative for a customer who places a premium on retaining full tax benefits of ownership and control over the property financed.