Do you know what to do?
It’s not too often that something rocks the world of lease administration. But the new lease accounting standards recently published by FASB did just that. It was a long time coming but it’s here, it can’t be ignored, and things are about to change – big time.
Click here to watch a video from FASB about the reasoning behind the changes.
We’ve been talking with retail and restaurant companies off and on for nearly 8 years about the“looming lease accounting changes”. Some have been anxious about this for years while others know little to nothing about it and don’t seem at all concerned. So… should you be panicking? Or, making a note somewhere in your 2018 calendar to start thinking about things? The right answer is, neither.
Although the reporting changes aren’t required until 2019 (for public companies; 2020 for all others):
- Leases will need to be capitalized per the new standards for two reporting periods prior.
What does it mean????
It means that public companies need to have their leases “in good shape” by the beginning of their 2017 reporting period. What do I mean by good shape? You’re lease data needs to be complete and accurate and, in most cases, your lease terms should result in the least amount possible of capitalized rent that will be reported on your balance sheet.
So what do you really need to do right now?
- Begin looking at lease administration software packages if you don’t already have one. You’ll need one soon and depending on the size of your lease portfolio, it can take a while to populate. It’s amazing what the Millennials are able to accomplish using Excel these days. It’s truly impressive. But spreadsheets aren’t going to cut it any longer.
- Gather up your team. This isn’t just an accounting thing. It’s a real estate thing. You’ll need players from both sides to learn and engage. Chances are your accountants haven’t negotiated retail real estate leases and your development team hasn’t spent much time analyzing balance sheets. The FASB ruling marries the two activities and both sides will need to understand the implications.
- Assess your current portfolio. You’ll need to look at things like the lease type, existing term, option periods, rent structure (percentage rent, CPI increases), any uncollected landlord contributions, even certain parking fees. Restructuring some of these terms will reduce the amount of capitalized rent on your balance sheet. There will very likely be deals you want to renegotiate with your landlords prior to the end of the year.
- Develop a lease strategy for moving forward. There are a bunch of common deal terms that need to be considered differently going forward. Next time you’re signing a one-year deal for a pop-up store or extra space, you might want to consider making it just shy of a year so you don’t need to bother with the additional accounting and reporting criteria. Have you tried to avoid CPI rent increases? This might be a good time to change up. CPI rent increases aren’t included in the capitalization formula and don’t need to be restated unless you substantially change the lease terms prior to the expiration. Landlord improvement allowances collected on or before the commencement will not be capitalized but anything collected after will be. These are just a few of the things that your organization may want to rethink before you negotiate your next deals.
The best part is - if you’re an existing Property Works client, we’ve got you covered. If you aren't an existing client, we can jump right in and help you meet the new standards. Our software is perfectly positioned to facilitate your compliance with the new FASB standards and pretty much all lease data is already captured so you can skip the first “must-do”. And we can certainly help with the rest – all the way through renegotiating your existing leases.
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