New lease accounting standards are evolving: Is there a scary monster under the bed and will it really affect lease vs. buy or other CRE decisions?

Marc A. Maiona, Managing Member, CyberLease

Abstract
The new lease accounting standards will change some business practices, but not the ones most have previously imagined. Why? What has changed? Very recently, the accounting boards (FASB and IASB) made significant changes to the proposals they originally released in August 2010. These changes served to alter the impact the original proposals were expected to have on CRE business practices and strategy. Thankfully, both for CRE and its counterparts in corporate finance, the changes adopted over just the past few months mean some of the most controversial aspects of the new lease accounting standards have been moderated so that they will not have as material an impact as originally envisioned. While all leases will still be capitalised with a front-loaded impact on the tenant’s profit and loss, the revisions to how renewal options and contingent rents are to be accounted for, among other important changes, result in a smaller impact on the corporate balance sheet and income statement — provided CRE professionals understand the newly revised proposals. Importantly, the revised proposals mean CRE’s lease versus buy decisions should not be impacted, but other business practices will be affected. So while the new lease accounting standards represent a monster hiding under CRE’s bed, this article explains why the monster is not as scary as most originally envisioned.

Keywords
lease accounting, lease vs. buy, renewal options, contingent rents, significant economic incentive, disguised minimum rent

Marc A. Maiona is a managing member of CyberLease, LLC, the leading North American lease audit and lease accounting firm. He is responsible for managing many of the firm’s more complex assignments and leads the firm’s lease accounting practice to assist corporations in accurately transitioning their practices to align with the new lease accounting standards. Mr Maiona is an experienced industry speaker, conducting accredited education seminars on the subjects of lease accounting and negotiating additional rent provisions in office leases and is frequently called upon as an expert witness. He has been involved in some of the largest and most complex lease negotiations and compliance audits in virtually every major market in the USA. Mr Maiona received his bachelor’s degree in economics from the University of California, Irvine. He currently serves on the Board of Directors of the International Association of Attorneys and Executives in Corporate Real Estate, and is an Associate Member of the Real Property, Trust and Estate Law Section of the American Bar Association.

To read the full text of this article you will need to subscribe.