The Effect of New FASB Rules on Commercial Real Estate Leasing

As a result of the credit crisis, sweeping changes to the financial markets were introduced through legislation in the last 24 months.  An independent study was performed after the financial collapse, that found that just within the Fortune 500 companies, there was just over 1.25 trillion dollars worth of lease transactions not kept on the balance sheet. As part of reform, the Financial Accounting Standards Board (FASB) will introduce changes to how companies have to reflect leases on their books starting in 2012….namely by keeping leases on the balance sheet. So how will this affect the way landlords and tenants negotiate their lease transactions?

1. Early Renewals – Tenants will be more inclined to exercise lease renewal options earlier, so that they are better able to forecast their balance sheets in future years so that they can make appropriate business decisions.  Before, they would make decisions first, and figure out leases, and how to account for that cost, later, and more creatively.

2. Migration to triple net (NNN) leases – If you travel to different parts of the country, or own properties in different asset classes, you know that a “standard” lease has many different definitions.  The beautiful thing about a triple net lease is that it is clear and straightforward.  This is exactly why you will see more of them in the future once the new FASB rules take effect.  Tenants will want to know what their up front, overall costs are.

3. Elimination of percentage rent – A popular way for landlords to reward themselves for their stellar location, they get, in addition to a base rent, an additional amount based on the amount of store sales the retailer has as a function of the prime real estate.  Since this figure is not very static, it is hard to account for, which is why you will see it go out the window in negotiations.

4. Shorter terms – Since there may be more of an advantage in certain situations to buy, rather than own a property, you will likely see tenants demanding shorter terms on their leases, rather than being locked into a long term lease that has implications for the balance sheet for many many years.

5.  More purchase options – It may be more advantageous for tenants to buy a property rather than lease it long term,since the benefit of not having a lease on the balance sheet will soon be going away.

6. Carveouts/Isolation of Tenant Improvements – You will begin to see TI dollars not factored into the rent by landlords, since tenants will now have to account for that on the balance sheet.  Instead, tenants will demand that TI dollars be completely separate from their base rental figures.

These are just a few of the glaring ones.  What other changes do you expect to see as a result of the new FASB rules once they go into effect in 2012?