New Lease Accounting Rules (X Post CREresearch)
With the new lease accounting standard (ASU 2016-02) on the horizon, I think it is important for us to think out how it will affect us as the Landlord. For those who are unfamiliar, accounting rules for how the Tenant handles leases on their books is changing. Currently, the only impact to the financials is the recognition of rent expense on a monthly basis. The new standard requires that the tenant put an asset and a liability on their balance sheet for the total lease and reduce it as it is “used”.

This will not affect Landlords in an accounting sense, but I think that any factor that affects the Tenant will eventually touch the Landlord. For example, I can see how a Tenant might try to negotiate a shorter term, thus reducing the value of the lease to the Landlord. It probably will affect the leasing market in some way that I have yet figure out. I think this is something that we should be very aware of.
[{"id": "dlz5nta", "text": "The literature would have a lessee record an asset and corresponding liability. I suspect it won't really have an impact on lessors. Also,\ntenants with leases under 12 months can elect to use the old treatment. ", "replies": [{"id": "dlz76pf", "text": "Right, but I think lessors will be indirectly affected and it would behoove us to think about it. A tenant who wants to keep lower numbers on the balance sheet for financing measurement purposes, for example, would logically want a shorter term for that very reason. Bankers will need to change their measurement too at some point I'm thinking. ", "replies": [{"id": "dlz7ksx", "text": "Honestly I don't think it will matter to renters, since everyone will know about the standards and everyone will have additional assets and liabilities on their books that can be easily separated for analysis purposes (i.e. when applying for a loan or seeking investors), I just don't think they'll change their operations for an accounting exercise. Its simply a gross up on their balance sheet so none of their ratios change, their assets and liabilities both go up equal amounts.  I'll ask some of my clients if they are worries. I'm a public accountant in real estate.", "replies": [{"id": "dlzewi3", "text": "That's a good point. The change will cause the same shift across the board. (I'm a CPA in real estate as well.)", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dpeuat2", "text": "Its going to fuck up a lot of lessees leverage ratios (putting many of them in technical default of their loans)", "replies": [{"id": "dpiv62u", "text": "That was my first reaction but then wouldn\u2019t banks amend the covenants to consider the change that will impact many of their clients?", "replies": [], "depth": 2}], "depth": 1}]