FASB 13…Transparency good; Accounting upheaval Bad… “a wait ‘n’ see” approach is operative strategy

FASB 13…….is not just for Accounting Professionals…we all need to pay attention.  What are the practical implications for real estate investors?

We have come through a number of years of synthetic leases and off-the-balance-sheet corporate strategies and some abuses.  The IASB and the Federal Accounting Standards Board (FASB) have proposed a working paper draft which essentially will provide more accounting transparency for corporate liabilities.  As drafted, “operating leases” which have often been off the balance sheets, after 2012, if adopted, will be characterized as “capital leases”, whose rental obligations and term will have to be capitalized.  The impact will be significant.  In simple laymen’s language, a rental obligation of $100,000 per year on a modest five (5) year base lease term would have to be accounted as a $500,000 corporate liability on their balance sheet and disclosures.  The same commercial occupancy, same tenant, same location, for a $100,000 rental stream with a twenty (20) year base term would translate into a $2,000,000 liability.  Further, a $100,000 per year lease for five (5) years with three (3) five year renewal options would, also, be accounted as a $2,000,000 liability.  i.e. ($100,000 x 5 = $500,000; plus 3 x 5 years or 15 years x $100,000, producing the same $2,000,000 liability since option periods, if reasonably anticipated, must be included per the current draft.  Looks like shorter term leases will be the order of the day in this Brave New World of Real Estate Lease Accounting.

The Rent vs. Own debate will be back in full force.