Synthetic Leases

Indicators of Risk

Due to a number of title claims in the industry that have resulted from some recharacterization challenges to sale-leaseback transactions, companies have responded by taking exception to this risk in those transactions where this possibility appears too great. A typical list of the risks indicating that a saleleaseback might be recharacterized as a financing usually includes:


1.  The purchase price for the sale is less than the property is worth.

2.  The “rent” is equal to or greater than the debt service for an equivalent loan.

3.  The purchaser has a “put option” to return the property to the seller, or the seller must repurchase it, at the end of the lease.

4.  The seller’s repurchase option price reduces to a token sum over the life of the lease.

5.  The seller will build improvements on the leasehold, but the term of the lease is too short to depreciate its investment on the improvements.

6.  The lease permits substitution of properties in a multi-property transaction.

7.  The lease may indicate that it is for security only, or make reference to “the lender” or “this mortgage.”