The corporate real estate sector will now have to adapt to quite an interesting, yet some would say dry topic of lease accounting regulations. This will be a key driver in motivating important decision on whether to simply buy or let space for corporate occupiers, in particular those who lease large portfolios, for example retailers. Naturally, it will impact those businesses who currently sit on large portfolios of leased space, like retailers, who will feel the pinch and pain of all of this change. The regulation is to help to bring about transparency, but in some contexts will create a massive headache because companies which manage large portfolios, will normally be sitting on properties with large complex leases, subleases and therefore segmented reporting would prove to be extremely challenging.
The liabilities that lessees will carry on their balance sheets will be closely monitored. The knock on effect is that many corporate occupiers who lease vast amounts of space regionally or globally will have to have in place effective data base and analysis protocols to help align strategic business decisions. Interestingly, the impact of this regulation will be vast and will be felt by both lessees and lessors, but for the purpose of argument for this topic, we will focus on those that manage operating leases (for example, a lease of office space for 10 years). As mentioned in the FASB (Financial Accounting Standards Board) News Release 16/05/2013, for operating leases, a lessee does not recognise lease assets or liabilities on the balance sheet. The existing standards have been criticised for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.
On a positive note these changes will help CRE leaders form closer partnerships with their respective CFOs. Finance Directors will take a more proactive and avid interest in property matters and so key decisions that CRE leaders need to implement will therefore, in an ideal world, act more quickly. This wave of change is currently impacting on how Property Directors implement and design their real estate strategies as key decisions around acquiring long term leases may require greater stakeholder involvement and participation, but where there is greater business interest in a particular building or lease the intention will be to buy the property as an investment, which the banks have done historically for example. For short to medium term leases corporate occupiers have focused more of their efforts in promoting flexible working and utilising the services of specialist serviced office providers, where the ’one stop shop’ approach is helping mitigate risk of lease liability on the balance sheet. On a separate note whilst all of this is going on many corporate real estate functions will engage the expertise of the major consulting firms, including the ’big 4’, to help put in place effective guidelines around how best to account for lease liabilities, where we’ve seen an upward trend in greater activity, who are all gearing up their efforts by taking on more people at the senior mid management level to cope with demand and future pipeline. Lease accounting regulations might be a burden in the short term, but will have importance relevance to all firms who carry the liabilities that an operating lease carries and all gears are in motion to get this right, when it all eventually happens in 2017.