Look, we get it. As a busy CRE professional you may have read a few articles, taken a quick glance, and maybe even gotten a hot second’s worth of advice on the new FASB Leasing Standard. However, once your accountant, lawyer or other professional let you know that as a commercial real estate professional your direct impact was minimal you probably hung up the phone and got back to doing business.
While that may have been the anticipated reality, at this point all CRE pros realize that the larger impact on their client’s bottom line and changing accounting methods have created real-life changes in their day-to-day business. Here we break down the impact the new FASB leasing standard has had on commercial real estate.
Lease Length and Renewals
In the world of commercial real estate, stability and predictability in your long-term occupancy rates is a vital aspect of your day-to-day business. Whether through multi-year leases or pre-negotiated renewal deals, the modern era of CRE has been fairly reliable in the ability to predict rises and declines and to map out and prepare for where your leasing efforts will need to be a year, two or even more from now.
With the new FASB leasing standard updates, however, the year long and under lease has become a unicorn of tenants. Under this magical number and your lease obligations can continue to be documented as an operating expense. Stray over that 12-month threshold, however, and your clients are forced to document the entire balance of their lease payments as debts and assets in a complicated accounting maneuver that would make your high school algebra teacher proud.
The result of these date-based restrictions is that tenants are increasingly seeking shorter leases. Renegotiations are commonplace and renewals are highly analyzed as they may force additional obligations onto a lessee’s balance sheet. While short is never sweet in the CRE world, quality landlords with exceptional reputations will still score the repeat tenant come lease renegotiation time, but may need to increase their appetites for uncertainty in the meantime.
Big Pressure Negotiations
With the demand for changes and specific lease clauses has come a ratcheting up of tensions during common lease negotiations. Transactions that typically would have been routine now require increased scrutiny to ensure compliance with FASB leasing standards. While the implementation of the updates may not be mandatory until late 2018 or 2019 (depending on your specific type of organization) any lease in effect on these dates must be accounted for on balance sheets in their entirety.
The consequences on companies that lease property are significant enough to warrant this heightened level of alertness. Carrying substantial debt on the books can limit the ability to obtain favorable rates on loans or qualify for the best leasing terms. With this in mind, CRE pros are experiencing increasing scrutiny of their individual contracts and demand for instantaneous answers to common questions regarding provisions, limitations and more.
To sum things up, commercial real estate owners and managers are facing demands on their time, resources and an increased lack of certainty of the future of individual portfolio assets. To offset these FASB standards updates induced headaches, CRE pros should consider looking to their CRE property management software partners.
A professional and experienced solution like Quarem’s Access and Vantage software platforms, can help owners and managers stay on top of client demands, monitor important lease expiration dates and track clauses such as renewals and early exit options, that are especially relevant given the FASB leasing standards. Contact Quarem today for an initial consultation of your portfolio needs and find out how our services can help provide a beacon of clarity in uncertain CRE waters.