10A — October 14 - 27, 2016 — Financial Digest — M id A tlantic
Real Estate Journal
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F inancial D igest By Debra Stracke Anderson, CCIM, SIOR, Sloan Street Advisors/ ITRA Global 6 things corporate tenants need to know about the new lease accounting rules
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lease need to be added to the balance sheet? If the lease is longer than 12 months, or the combined lease and option to renew which the tenant is “reasonably certain” to exercise is longer than 12 months, then the tenant must record the total value at the start of the lease. When will the new rules take effect? January, 2019 What will the impact be? As a result of this additional indebtedness, some companies will exceed the debt-to-equity ratio required by their bank loan agreements. For example, a tenant that leases 20,000 SF of office space for 10 years at an av-
erage base rent of $25 per square foot will add $5,000,000 in debt to its balance sheet (20,000 s/f x 10 years x $25/s/f/year). Are shorter term leases the best strategy for all tenants? The shorter the lease term, the smaller the liability recognized on a company’s balance sheet. Therefore, a shorter term office lease will be a good strategy for some companies. For others, a shorter term lease is not advis- able because the benefits will be offset by one or more of the following: A.) High construction costs that must be amortized into the lease. For example, $100,000 in
eady or not, the new lease accounting rules will soon take effect and
statement (P&L). In the past, only capital leases, which are essentially purchases, were recorded. Why is this change being made? To provide transparency in order for investors, banks, regulators and other stakehold- ers to make sound judgements about a company’s financial condition. The changes have been made by the domestic and international accounting boards, commonly known as FASB and IASB, respectively, and are estimated to add tril- lions of dollars in lease obliga- tions onto balance sheets. Does the total value of the
construction costs is amortized at $10,000 per year in a ten- year term and $33,333 per year in a three-year term; B.) Rising rental rates. In some markets, rental rates have risen each year for the past 10 years and those who locked in 10-year leases which are coming due over the next two to three years are enjoying rental rates far below market. If these were sizable tenants that had instead entered into multiple three year terms, they would have paid hundreds of thousands of dollars more over the same period as rental rates increased. If history is an indi- cator, rental rates in those mar- kets will continue to increase for the foreseeable future; and C.) Risk management. Com- panies entering into shorter term office leases open the door to the possibility of being forced out of their space by another tenant willing to sign a long term lease, particularly as the supply of available office space in premier buildings decreases. All information herein is from sources deemed reliable, but no warranty, expressed or implied, is made. Debra Stracke Anderson CCIM, SIOR is president and CEO of SLOAN STREET AD- VISORS | ITRA GLOBAL. n Storage company selects Paradigm Tax Group UNITED STATES — Ex- tra Space Storage Inc. (Extra Space), the second largest self- storage unit operator in the U.S., has selected Paradigm Tax Group (Paradigm) to represent approximately 600 of Extra Space’s proper- ties located in 20 states. The assignment will consist of a variety of property tax services including real and personal property tax consulting, per- sonal property compliance, tax bill processing, pre-acquisition due diligence, budgeting and tax estimates. “Efficiency and transparency were two crucial factors when outlining a successful part- nership with Extra Space,” said Mark Wanic , CEO at Paradigm Tax Group. “As- cend, our technology platform, gives us the ability to provide benchmarking, analytics, and the automated standardized deliverables necessary to pro- vide a full-service outsource for their expansive national portfolio.” n
will result in c omp a n i e s with signifi- cant leases appearing as- set-rich, but a l s o he av - ily indebted. Here are six th i ngs you need to know.
Debra Stracke Anderson
What is the change? The new accounting rules will require operating leases, such as of- fice leases, to be recorded on the balance sheet and income
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