Over the past several years we have reported that new accounting rules are being developed for public companies and other larger organizations that are required to meet Financial Accounting Standards Board (FASB) rules. After a decade of discussion and negotiation, and in cooperation with the International Accounting Standards Board, the new rules will finally go into effect in December of this year for public companies, and in December 2019 for all others.
The new rules will require companies to recognize leases as a liability on their balance sheets, which is not currently a requirement. This will better represent a company’s financial position. CFOs will now have more to say about commercial real estate decisions. Some companies may find it more advantageous to own rather than lease.
Companies will consider a number of factors in making real estate decisions, including: 1) whether the building is in a strategic long-term location, 2) the building’s projected resale value in 10 or 20 years, 3) the long-term stability of the building’s intended use and 4) the effect of owning or leasing on the balance sheet. It may make more sense for a company to own real estate for uses such as a corporate headquarters, single tenant retail facilities, new production facilities and other uses.
However, companies that typically lease multi-tenant buildings because of the flexibility of size and lease term, or that simply do not have the financial capability to own, will continue to lease. They may adjust their thinking and attempt to negotiate shorter-term leases to reduce the impact to the balance sheet, but they will still be subject to the pressures of the market and a landlord’s willingness to provide shorter lease terms. We may also see tenant improvement allowances reduced to accommodate the shorter terms.
While these changes will cause some disruption in the commercial real estate industry as companies determine their best use of capital and how to minimize the impact to their balance sheets, most expect that business will continue as usual as the need for space and growth continues. Brokers and owners will need to try to understand the impact of the new accounting standards in order to best attract and structure leases or purchases for their clients.