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In this transaction, Company A owns and operates wholesale data center facilities which Company A leases to 

large corporate enterprises. Customers lease space to house their own servers in these data centers and 

customers have access to the space 24 hours a day, 7 days a week. Company A does not use the data 

centers for the storage of its own servers. Company A does not manage or maintain the servers located in its 

data centers. Company A manages the HVAC and electrical systems for the data center facilities and is 

responsible for ensuring the physical security of its facilities. Company A also offers project management 

services to fit out the leased space with cabling and racks prior to move in to suit a particular customer’s 

needs.

Company B intends to operate the data center facilities of Company A. However, in order to finance the 

transaction, Company B will enter into an agreement with Bank, pursuant to which Bank will purchase the real 

estate on which the business is conducted and equipment used in the operation of the business. Bank will 

then lease the real property and equipment to Company B, pursuant to a lease agreement with Company 

B. The lease will have a term of approximately 10 years (we expect that the data center has a useful life of at 

least 20 more years) commencing simultaneously with the purchase by Bank, and will include standard 

restrictions on lessee's ability to assign without landlord's consent and a purchase option. Neither Company A 

nor Company B are affiliates or associates of Bank. Company B will not be paying any consideration for any of 

the assets to Company A. Bank will pay to Company A the full consideration.

Assume that the lease agreement in this transaction is virtually identical to the “synthetic lease” described in 

Informal Interpretation 0005015, in respect of the material facts stated therein, and similar to two other opinions 

considering a “synthetic lease” during that time (Interpretations 0005005 and 0009003). Interpretation 

0005015 described a synthetic lease in which (i) the acquisition of assets by a trust (i.e. Bank) was exempt 

from reporting requirements pursuant to Rule 802.63 and (ii) the commencement of the lease was not a 

reportable event. On (ii), the PNO agreed that prior to any exercise by the lessee of the purchase option under 

the synthetic lease, the rights and obligations of the lessee under the synthetic lease and the related 

documents were deemed not an “acquisition” of the leased assets by the lessee, because the lessor (i.e. Bank) 

retained legal and beneficial ownership of the assets that were the subject of the lease. 

Given the fact that the opinions specifically discussing synthetic leases are quite dated, we would like to 

reconfirm that the parties may rely on these opinions. This outcome would be consistent with other opinions 

involving retail gas and convenience stores (e.g. 1720005) wherein a REIT acquired beneficial ownership of 

the real property on which the stores were located and leased the property to the buyer/operator of the 

stores. In those opinions, the REIT, and not the buyer of the operating business, was deemed to have 

acquired beneficial ownership of the real property.

In addition to confirming the validity of the 0005015 opinion generally, we would also like to point out one 

distinction between the present synthetic lease and the one considered in Interpretation 0005015. The prior 

opinion noted:

“If at the end of the lease the Lessee does not exercise the option, the Lessee is required to pay the Trust as 

an amount equal to approximately 85%-90% of the Option Price and the Partnership will sell the property to a 

third party. The sale proceeds would be applied first to pay any portion of the Option Price not paid by the 

Lessee, and the excess, if any would be remitted to the Lessee.”

In the present transaction, if the lessee does not exercise the option, the lessee would be required to pay the 

Bank an amount equal to 100%, rather than 85-90%, of the option price.

For completeness, we also note that a synthetic lease does not have any of the attributes of a “purchase styled 

as a lease” line of interpretations published by the PNO (see e.g. PNPM 5th Ed., Int. 24). Under this line of 

interpretations, a bona fide lease does not transfer beneficial ownership to the lessee, unless the lease 

agreement is effectively a "purchase styled as a lease" that (1) exhausts the useful life of the leased property 

or (2) amounts to the present transfer or installment purchase of the underlying assets. For purposes of 

distinguishing a "purchase styled as a lease" from a routine lease, we understand that the PNO considers 

whether the term of the lease encompasses the entire useful life of the asset, or includes a rental charge far 

above market, coupled with an option under which the lessee subsequently may purchase the property at a