Don’t miss the discussion between Andrew Zezas of SIOR NJ and Marc Betesh of KBA Lease Services. Together they outline the upcoming changes to lease accounting under GAAP and their potential impact on commercial real estate, developers and occupants.
Topics Include
FASB and IASB: Who Are They and Why Are They Important?
Upcoming Changes and Reasons behind the Initiative
Treating a Lease like an Asset
The Effect of Draft Delays, Roundtables and Comment Letters
Renewal Options and Inaccurate Projections
Evaluating the Likelihood of Exercising Options and Economic Incentives to Renew
What Tenants Should Do Today
Andrew Zezas, SIOR, 2011 President of the New Jersey Chapter of the Society of Industrial and Office Realtors, interviews Marc Betesh, President and CEO of KBA Lease Services, about upcoming FASB changes to lease accounting. Subsequent to this interview, FASB announced that it would defer issuance of the revised Exposure Draft to the first half of 2012.
On July 21st, the FASB and IASB (collectively the “Boards”), verified our presumptions relating to the Leases topic- they will re-expose the lease accounting proposal containing their revisions and tentative decisions thus far. Essentially, the Boards intend to give interested parties the opportunity to comment on the updated proposal, a process that began on August 17th, 2010, with the publishing of the original Exposure Draft.
Affirming the Boards’ intent to drastically overhaul the way leases are accounted for, Leslie F. Seidman, Chairman of the FASB noted, “During our discussions of the extensive comments we received on the exposure draft, the boards have reaffirmed the major change to lease accounting, which is to report lease obligations and the related right-to-use on the balance sheet.”
The FASB website indicates that the new exposure draft will be reissued by Q4 of 2011. Hans Hoogervorst, Chairman of the IASB, realizes the need for comment: “Although we have yet to conclude our deliberations on this project, the direction of travel indicates that there are aspects of our revised proposals that would benefit from additional input from interested parties.” One thing weighing in favor of the Boards’ plan for a celeritous comment and deliberation period is the fact that over the last few months their re-exposure has, in retrograde fashion, moved closer to the original draft. See our Lease Tips Article from July, 7th. Please stay tuned as we continue to follow the Boards’ deliberations.
For further details, periodically check the leases project sections of the IASB and FASB websites.
For the full press release please visit the IFRS website.
Duke Long interviews Marc Betesh, President and CEO of KBA Lease Services, about upcoming FASB changes at Corenet’s Chicago conference.
Realtor magazine, the official magazine of the National Association of Realtors, talks FASB with Marc Betesh.
In the article, titled The Facts On FASB, Realtor Magazine’s Mariwyn Evans questions FASB’s proposed changes to lease accounting rules.
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Proposed changes by the Financial Accounting Standards Board to lease accounting rules could make record-keeping a lot more complicated and lease negotiation more difficult, says Marc Betesh, president of KBA Lease Services and Visual Lease in Woodbridge, N.J.
What are the changes that the Financial Accounting Standards Board (the private-sector group that sets rules and reporting standards for accountants) is proposing for leases?
The fundamental change under FAS Topic 840 is that all off–balance sheet transactions involving operating leases, which includes most real estate leases, will be eliminated. Currently, companies don’t show operating leases for real estate on their financial statements, except in footnotes.
How will companies account for their leases if the new rules are adopted?
Leases will appear on a company’s financial statement as though the company had purchased and financed the leased asset. The lease will be shown as a “right-of-use asset” with a corresponding liability for the rent payments and any direct costs like brokerage commissions. The actual figure used will be the net present value of the rent calculated at the interest rate it would cost the company to borrow money. The liability appears the same way, although direct costs are excluded. As the company makes rent payments, each payment is recorded as a payment of principal (a portion of the NPV of the asset) and interest. This amortization requirement could mean that a disproportionate amount of the rental liabilities will shift to the first years of a lease.
Why are the changes eliciting such controversy?
There is a lot of debate on two points—operating expenses and lease options. The right-of-use asset is supposed to cover only the pure use of the space, not the cost to service it. So companies will have to separate out service costs like common-area maintenance charges, taxes, and insurance from the right to use the space. Stripping out these costs will be easy with a pure triple-net lease since the tenant pays all those costs separately. It’s more muddled with a modified gross lease since the landlord pays these costs for the first, or base, year of the lease.
What is the issue with lease options?
Under the new rules, tenants will have to consider how likely they are to exercise lease options from the first day they sign a lease. If they are likely to extend a lease, they have to include the option term and the option rent in their calculations. Making the option decision so early is very subjective and seems to undermine the purpose of the rule change, which is to provide more transparency and reliability in financial statements.
To make things even more complicated, the tenant also has to re-evaluate these probabilities on a regular basis and recalculate the amortization to reflect any changes.
How could these changes affect the overall leasing climate?
Under the new proposal, tenants may prefer shorter leases, which will be problematic for landlords that need longer leases to secure financing or sell a property at a higher price.
When will the proposals be finalized?
It seems likely that the proposals will be enacted sometime this year and go into effect a year or more later.
Commercial real estate blogger Duke Long interviews Chris Werely about Visual Lease’s functionality, ease of use and design. Visual Lease is an affiliate of KBA Lease Services.
Tomorrow’s webinar will explore the underlying theory behind the proposed FASB changes. IFMA, a professional association for facility management professionals, and KBA Lease Services, a nationwide lease auditing firm, will outline the potential ramifications and offer advice as to best prepare for the impact.
Topics Include:
Background:
Last August, the Financial Accounting Standards Board (FASB) sent shockwaves through the commercial real estate world when they proposed significant changes to how leases must be recorded in a company’s financial statements. Although the Boards continue to deliberate, every major company (any company that follows GAAP) will be impacted by the upcoming changes. At a minimum, substantial attention and manpower will be required to comply with the new rules. But the changes could also impact such decisions as whether to lease or buy or how buildings will be serviced.
We recently had the opportunity to chat with Duke Long and Jason Sandquist from CREpodcast about the proposed FASB/IASB lease accounting changes and how all parties can prepare.
Marc and Chris drop some serious information on what could be a coming storm if businesses, tenants and commercial brokers are not prepared. We discussed the impact on the industry as a whole – as well as what the affects will be for both tenants and landlords in regards to how they handle lease accounting. They also fill listeners in on how to start planning for these changes and implementation strategies if the proposed changes do take affect.
Visit KBA Lease for more information on lease auditing and don’t forget to check out their blog as they keep it up-to-date with all the latest news as well as Visual Lease, which is the offers some of best leasing management software around.
Marc Betesh and Christopher Werely will be interviewed by crePodcast’s Duke Long and Jason Sandquist on February 23rd. CrePodcast (Commercial Real Estate Podcast) covers news from every aspect of the real estate industry and features real conversation from industry leaders around the world. Past interviews include Stephen Spooner, Executive Chairman of OSCRE, Mike Manning, VP of Marketing at LoopNet, and Garret Krueger from ROFO . An archive of past podcasts is located here.
The February 23rd podcast will focus on the upcoming lease accounting changes and what can be done now to prepare. This interview continues a string of interest in KBA’s expertise on this topic from trade associations, service providers, and major corporations.
Duke Long is the owner of The Duke Long Agency in Indianapolis, IN and is the author of the popular one of the most popular real estate blogs. Jason Sanquist is a Real Estate Client Advisor at Adam Commercial Real Estate in Minneapolis, MN.
Marc Betesh, President and founder of KBA Lease Services, is scheduled to speak about the FASB’s upcoming lease accounting changes at the New Jersey chapter of SIOR on February 2nd, 2011. Mr. Betesh’s presentation “How Proposed Lease Accounting Changes May Affect the Brokerage Business,” will help commercial real estate brokers address tremendous concern across the real estate industry. The event, hosted at the Wine Library in Springfield, NJ, will be geared towards educating and informing SIOR members of the impending changes.
Mr.Betesh and Lou Ferro of KBA Lease Services, in conjunction with Gary Illiano of Grant Thornton, will also be hosting a free webinar on Feb 2nd at 12pm EST outlining the impact on corporate real estate due to the upcoming changes.
To register please visit www.kbalease.com/fasbwebinar.
Small errors in calculation of your base year can add up to significant costs every year of the lease.
Great results. Very professional with clear and excellent follow-up.
We were very impressed. Very professional with clear and excellent follow-up.
Great job! Very professional and responsive!
KBA is by far one of the most effective lease audit firms we have ever used.
KBA provided us with a variety of solution options and were patient as we selected the one that worked best for us.
KBA has been fantastic. They've helped us with everything from lease questions to audits and negotiations.
Small errors in calculation of your base year can add up to significant costs every year of the lease.
KBA is by far one of the most effective lease audit firms we have ever used.
Never before have I had such a pleasant experience with lease audits. You make it so easy!
KBA provided excellent communication and their follow-through was like clockwork!