Original article posted in Inside Tucson Business here.
New accounting rules in 2019, 2020 affect businesses right now.
Since 2010 we at Commercial Real Estate Group of Tucson have been warning you about new FASB accounting standards that will affect how you report your office, retail or industrial commerce real estate lease.
Well, the dates for the changes have been set and NOW is the time to prepare.
You have to get up to speed and start adjusting your financial reporting even though the changes are set for 2019 for public companies, 2020 for private companies.
That’s because the changes by the U.S. Financial Accounting Standards Board (FASB) require you to revise the two previous years of financial statements and make the adjustments on reporting your commercial property and other leases going forward.
Basically, your commercial real estate lease will have to be listed as an operating lease on your balance sheet.
We’ve set out in previous articles the FASB accounting standard changes and how that would affect your business. The new reporting standards essentially require you to record your commercial real estate lease as an up-front liability at the start of the lease.
That can affect your ability to attract new investment, obtain new loans or maintain current loans.
We’ve also provided details about how to report your commercial property lease in the best way to protect your business financial vitality.
There have been dire warnings about adverse effects to the upcoming FASB accounting standard changes, which are being implemented to provide more transparency in financial statements.
In our deep study of the changes, we‘ve discovered ways that you can make the new reporting standards work for you in future commercial real estate lease dealings.
To make the following strategies work, it’s important that you adjust your approach to lease amendments and renewals. That’s because any changes to your lease arrangements not only affects your cash flows, but now also shows up in your balance sheet and income statement.
Bottom line: Look beyond discount rental rates to determine the best deals for your business location lease. Focus on profit and EBIDTA.
Typically, you want to change your commercial property lease—extend, expand, contract, terminate early or create a combination—to give you a financial advantage. You’re usually looking to reduce your rent expenses.
Under the new standards, you also are showing a significant reduction your net income, as well as earnings before interest, taxes, depreciation and amortization (EBITDA, pronounced IH-bit-ah) with any lease adjustment.
That’s because the existing lease’s balance sheet values change when the lease agreement changes.
Knowing what those balance sheet numbers are and how they will change under an amended lease agreement can help you make better decisions in negotiations. For instance, agreeing to initial higher rental rates in an extension could reduce your cash rent expenses while at the same time preserve your profits and EBITDA.
We’ve always encouraged business owners to really look at the numbers when considering a lease renewal instead of moving. We understand that moving is a headache and costly. We also know that you can get better renewal lease rates and tenant improvement allowances if a landlord knows you’re considering a move.
If EBITDA is important for setting your company’s valuation, then you’ll need to look beyond discounted cash flow analysis and see what your bottom-line impacts are for your profit and loss (P&L) statements. You may be surprised at the lower impacts on your EBITDA.
Your current commercial real estate lease is about to expire. You need more space. The current landlord can give it to you. But simply extending a lease that includes additional space will adversely affect both your discounted cash flow and profit.
But don’t give up yet. Doing the right financial analysis of your P&L statement can possibly get you that expansion without losing profitability, which then can pay for more space.
The success of this analysis depends on fruitful negotiations to extend the current lease while reducing the rental rates of the current lease terms, known as a blend and extend deal.
We can help you understand each of these scenarios using FASB accounting tools that show you real bottom-line results. Call us to set up a consultation.