Ready or not, the new lease accounting rules are on the way and will result in companies with significant leases appearing asset-rich but also heavily indebted. Here are six things you need to know.
What is the change ? The new accounting rules will require operating leases (like an office lease) to be recorded on the balance sheet and the P& L statement. Previously only capital leases, which are essentially purchases were recorded.
Why is this change being made ? For transparency to enable investors, banks, regulators and other stakeholders to make balanced judgements about a company’s financial health. The changes made by FASB and IASB (the international accounting boards) are estimated to load trillions of pounds on to company balance sheets.
Does the total value of the lease need to be added to the balance sheet ? If the lease is longer than twelve months or the combined lease and any renewal option which the tenant is ‘reasonably certain’ to exercise exceeds twelve months, then yes 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 some companies will exceed the debt-to-equity ratio required by their bank loan agreements. For example, a tenant leasing 20,000 sq ft in Clerkenwell at £65.00 per sq ft for 10 years will add £13 million of debt to its balance sheet (20,000 sq ft x 10 years x £65 per sq ft).
Are shorter term leases the best strategy for all tenants ? For many yes that could be the way to go, ie. the shorter the term, the smaller the liability but for others, probably not because the benefits will likely be offset by high construction costs amortized over the lease term, rising rental rates and the risk of being squeezed out by competing businesses prepared to sign up to a longer term.
If you’re anxious about the impact the new lease accounting rules could have on your business and would like to discuss how a move to more flexible term space could dramatically improve the look of your balance sheet, please call me on 07968 191 233 for a personal perspective on the benefits of transparent, objective and conflict-free tenant representation.
With all good wishes.
All information herein is from sources deemed reliable, but no warranty, expressed or implied, is made.
Setting up a business and acquiring new office space in another country and perhaps even a different continent presents a whole raft of daunting challenges – accounting, payroll, tax, HR, legal, back office as well as real estate.
At our recent Spring conference in Fort Lauderdale, ITRA Global’s international offices shared extensive corporate real estate expertise from Canada, Europe and Australia and delivered personal and professional insights into leasing protocols, key industry processes and national practices across multiple markets and jurisdictions.
Now in its 24th year, ITRA Global continues to set the benchmark in Tenant Representation on a worldwide platform, providing the highest standards of professional care, advocacy, experience and agility to deliver innovative and measurable real estate solutions to corporate occupiers and start-ups alike.
if you’d like to learn more from ITRA Global’s world class team of experts please call me on 00 44 7968 191 233 for a more personal perspective.
It’s really getting hard to find the right space and the very best deals as central London vacancy rates have hit a desperate 14 year low.
The West End has less than 3.5% availability the lowest rate for 26 years.
The City and Docklands just 5.0%.
Fortunately we negotiated early lease breaks for many of our savvy clients who are now able to capitalise on better rental value in emerging markets like Aldgate (£55 per sq ft), Shoreditch (£60), South Bank (£62.50) and Kings Cross (£75).
Where are we taking many of our new start-up clients? Lambeth, Elephant & Castle and Kennington.
Sssshhhh keep it to yourselves – we don’t want to create a stampede!
If you’re as anxious as we are about reduced vacancy and rising rents across all central markets and the impact this could have on your business, call me on 07968 191 233 for a more personal perspective on the real world benefits of transparent, objective and conflict-free tenant representation.
With all good wishes.
Trouble in paradise? It had to happen sometime the only question was when.
Well the answer for Cushman & Wakefield came pretty quickly following the announcement of its take-over by DTZ.
WR Berkley Corporation, who will occupy around 20% of its new flagship 400,000 sq ft Lime Street Tower, EC3 has been forced to look for an alternative leasing adviser.
The seeds of the conflict of interest arose as a result of C&W joining the leasing team to work alongside DTZ who were originally appointed by the US insurer.
It got me thinking. Just how impartial is your real estate adviser?
If you’re worried about Chinese walls and the impact this could have on your business, let me tell you about the real world benefits of transparent, objective and conflict-free tenant representation.
Fingers crossed for some late summer sunshine.