Accounting Rules Revision May Impact CRE Leases

A new accounting standard could alter the way tenants lease space, a move that carries serious implications for commercial real estate.  The Financial Accounting Standards Board (FASB) has been cooperating with the International Accounting Standards Board to combine its generally accepted accounting principles (GAAP) with international standards.

According to Russell G. Golden, the FASB’s technical director, the change is intended to put a halt to “significant off-balance-sheet activity for leases.”  Barry M. Gosin of Newmark Knight Frank notes that “We are busy preparing clients to make them aware of the changes and help them analyze how it might impact them.  There are so many complicating factors that will make this an administrative nightmare”.  Because the new standards remove many of the differences in the way companies account for buildings that they own and lease, firms may move towards purchasing properties rather than leasing them.  Shorter leases could be another byproduct.  “If you have a 10-year lease, it will mean putting twice as much debt on the balance sheet as a five-year lease, so some companies may want to go short term,” said Dale F. Schlather, executive vice president of Cushman & Wakefield and chairman of CoreNet Global’s New York chapter.

Office and industrial building owners will see new accounting treatments as well.  Golden notes that as the new rules were written, landlords would record the obligation to provide space as a liability and record the rents they receive as an asset.  Because landlords currently book all of their revenue as rental income, the rents will be recorded partly as interest income and partly as a reduction in the obligation to provide space under the new standard.