Impending changes for reporting commercial real estate leases create a huge liability on your balance sheet. You must act now to figure out how to lessen the impact.
If you’re a tenant of Tucson retail space, Tucson industrial space or Tucson office space, you need to spend time now examining how new accounting standards will affect your current and future commercial real estate leases.
We at Commercial Real Estate Group of Tucson see very few tenants assessing how FAS 13 will affect their ability to get the lease terms they want or the space their business needs. But it’s a concern that tenants need to look into.
The new lease accounting standards, known as FAS 13 (Financial Accounting Standards 13), would require all lease liabilities to be recorded as capital leases instead of operating leases.
Currently, companies do not have to record on their balance sheet an operating lease, which essentially is a rental contract. They do have to record the asset and lease payments of a capital lease.
The change means that commercial real estate tenants will have to record a commercial real estate lease as a capital lease. This includes all of the lease liability and asset, including options, percentage rent, renewal options, co-tenancy kick-ins and other contingency-based payments.
Reporting your commercial real estate lease this way will make your company’s debt load appear many times bigger than what you currently report.
The U.S. Financial Accounting Standards Board and the International Accounting Standards Board may announce the new standards as soon as the second quarter of 2011. Both organizations are taking comments on the proposed changes until Dec. 15.
Although reporting changes are not required until after the standards announcement, tenants in the midst of a lease now will have to account for that existing lease under the new rule. The change does not grandfather any leases that exist when the announcement is made.
This will have an immediate effect on your business. It will affect your loan profile to lenders. It could cause you to sell your business at distress prices. It could make it harder and more expensive for you to do business.
This dilemma generates many options you must consider to reduce your profit liability and get the lease you need. These include
- Should you opt to buy property instead of leasing commercial real estate space?
- Can you afford to show the financial implications of a long-term lease?
- Are you willing to negotiate a short-term lease to reduce your liability profile and lose the financial benefits of a long-term commitment?
- Can you renegotiate your existing lease to something more favorable under the accounting changes?
- Is a first-right-of-refusal to renew a lease a viable replacement for an option-to-renew clause in a contract?
As your tenant representative, we can help you understand these impending changes to your financial picture. We’ll help you identify the best strategy for leasing or buying Tucson commercial real estate under these new accounting conditions.
But you have to start examining your options now or risk a financial burden that could last for years under an existing unfavorable lease.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States. For more information call 520-299-3400.