Synthetic Leases

Synthetic Leases: Underwriting Guidelines

Agents that are asked to insure a synthetic lease transaction should contact underwriting counsel for guidance. If underwriting counsel is uncomfortable with the structure of the transaction because it contains too many of the risks listed above, counsel will suggest the agent add a recharacterization exception to Schedule B of the commitment and title policy as follows:


“Any assertion or determination that (a) the lease referred to at item __________________ of Schedule B is not a “true lease” or (b) the vesting of title in [the insured] is part of a loan transaction, including the assertion that the deed to [the insured] and the lease constitutes a mortgage or other security device.”


Note: Affirmative insurance should never be added to this exception.


Underwriting counsel may even decide that it is not necessary to raise any exception in the first place because of the availability of a defense under one of the following theories:


1.  The “Act of the Insured” Defense: the risk of recharacterization is excepted from coverage under the title policy exclusions because it is a matter “created, suffered, assumed, or agreed to” by the insured, or 

2.  The “Post Policy” Defense: the risk of recharacterization is excepted from coverage because it is a “defect, lien, encumbrance, adverse claim, or other matter…attaching to or created subsequent to Date of Policy.” 


If approved by underwriting counsel, the agent may issue an Owner Policy to the SPE and a Leasehold Policy to the lessee. In both policies in Schedule B, there must be an exception to the terms and conditions of the recorded synthetic lease documentation.


Insuring a Fee Transaction after a Synthetic Lease Transaction