New accounting guidelines will immediately impact a company’s balance sheet and could have a negative effect on commercial Tenants and Landlords.
The Financial Accounting Standards Board and the International Accounting Standards Board are merging their generally accepted accounting principles (GAAP) with international standards. As a result, public and some private companies will be required to list almost all leases as liabilities and assets on their balance sheets. This includes real estate leases which are currently not listed.
The boards should finalize the standards next year and they could take effect as soon as 2013. The proposed rules would require Tenants to capitalize the present value of all “likely” lease obligations. This could be difficult to forecast because some tenants rents are contingent on escalations that vary depending on sales volume or the consumer price index. Renewal options and right-to-terminate clauses will also be considered.
The lease vs. own question just got a little cloudier. Businesses deduct the full amount of lease payments for tax purposes. Those that own, depreciate a property’s improvements over 39 years. These rules will still apply, but it may make more sense for some companies to purchase real estate if it shows up on the balance sheet as a significant liability anyway.
Single-tenant building users would benefit the most from ownership and could drive down the demand for leased space. Smaller tenants that are in multi-tenant buildings are more likely to stay put.
Corporations already struggling with debt will take a hit as they record the entire outstanding balance of future rental payments as a liability. Public companies may look weaker to investors by affecting debt-to-equity ratios. It could also affect a business’ ability to borrow or trigger debt covenants in existing finance agreements.
Tenants should consider re-negotiating or re-structuring existing and future leases now. The natural result will be Tenants pushing for shorter term leases. This will have to be balanced with their willingness to give up incentives or lower rates as the Landlord takes on more risk, especially with an extensive build out.
Industries most affected will include: Retail, Professional Services, Transportation and Logistics, Telecoms, Healthcare and Real Estate. Here is a great overview of the new rules: New Savannah Tenant & Landlord Rules
Rex Benton is Savannah Commercial Real Estate agent with NAI Savannah, the commercial division of Mopper-Stapen, Realtors and is a contributing columnist for "BiS-Business In Savannah" weekly business publication and is an active blogger: http://www.savannahcommercialrealestate.blogspot.com/ www.naisavannah.com 912-358-5600 Office Space, Retail Space, Industrial Space, Investment Real Estate
Thanks for sharing this very informative post. I hope that this will be resolve as soon as possible.
ReplyDelete