Synthetic Leasing and Sale Leasebacks

Practice Contact

Gregg C. Davis
Real Estate and Banking Practice Leader
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View Synthetic Leasing and Sale Leasebacks

We have structured nontraditional loans, including sale-leaseback transactions and synthetic loans. Thompson & Knight attorneys continuously monitor this changing area of the law so that they may provide up-to-date information to their real estate clients.

In a sale-leaseback transaction, a company sells property to an investor and then leases it back, typically in a long-term, triple net lease of 15 to 20 years. A triple net lease requires the tenant to pay all taxes, insurance, and maintenance costs.

In a synthetic lease, a company sets up a special purpose entity (SPE) to hold title to its property and then leases the property back from the SPE. But such deals often require tenants to make balloon payments at the end of the lease, and the tenant assumes all the liabilities of ownership. On the other hand, a synthetic lease allows a company to get the tax benefits of owning real estate, while keeping the debt associated with it off its balance sheet. Under this arrangement, the owner is the lender for accounting purposes. But for tax purposes, the owner is the company leasing the space.

In the last five years, we have also structured, documented, and syndicated off-balance-sheet financing (synthetic leases and sale/leasebacks) of properties worth billions of dollars, including facilities used for research, retail, distribution, manufacturing, and suburban corporate and other business offices.

Spurred by the accounting fraud involving Enron, the Financial Accounting Standards Board (FASB) now requires SPEs to be listed on a company's balance sheet. But as long as all rules and regulations are followed, synthetic leases may continue to provide significant benefits, including the reduction of tax liability. Thompson & Knight will continue to closely monitor the law in this area so that its clients may safely and economically structure their leasing transactions.