SYNTHETIC LEASE Meaning and
Definition
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A synthetic lease is a financial arrangement utilized by businesses to acquire the benefits of owning an asset, typically real estate, without having to include it as a liability on their balance sheets. In this arrangement, a company enters into a lease agreement with a special purpose entity (SPE) or an independent third party. The SPE, which is typically a partnership or a subsidiary established solely for this purpose, legally owns the asset but does not bear any economic or legal risks associated with it.
Under a synthetic lease, the lessee (the company) makes lease payments to the SPE, similar to a traditional lease. However, instead of treating these payments as operational expenses, the lessee treats them as interest payments on a loan. This allows the lessee to deduct the payments as interest expenses for tax purposes. Additionally, since the asset does not appear on the lessee's balance sheet, it does not impact their financial ratios or capital requirements.
Two important components of a synthetic lease are the operating lease and the leaseback agreement. The operating lease allows the company to use the asset without taking ownership, while the leaseback agreement allows the SPE to return ownership of the asset to the lessee at the end of the lease term, usually at a predetermined price.
Synthetic leases can provide businesses with a tax-efficient way to finance their long-term assets while maintaining flexibility and avoiding the financial burden of ownership. However, they also involve complex legal and accounting structures and may carry some level of risk depending on market conditions and the specific terms of the arrangement.
Common Misspellings for SYNTHETIC LEASE
- aynthetic lease
- zynthetic lease
- xynthetic lease
- dynthetic lease
- eynthetic lease
- wynthetic lease
- stnthetic lease
- sgnthetic lease
- shnthetic lease
- sunthetic lease
- s7nthetic lease
- s6nthetic lease
- sybthetic lease
- symthetic lease
- syjthetic lease
- syhthetic lease
- synrhetic lease
- synfhetic lease
- synghetic lease
- synyhetic lease
Etymology of SYNTHETIC LEASE
The word "synthetic" originates from the Greek word "sunthetikos", which means "put together" or "composed". It is derived from the verb "syntithenai", meaning "to put together" or "to combine".
"Lease", on the other hand, comes from the Old English word "les", which means "to gather together" or "tolease land".
Therefore, when combining the two words, "synthetic lease" essentially means a lease that is artificially created or composed by bringing various elements or components together.
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