Update on Proposed Accounting Rules

https://byobroker.wordpress.com/2011/08/18/chages-to-accounting-standards-will-affect-office-leases/

In a developing story (and a follow up to our Aug 11 post here ), the International Accounting Standards Board (IASB) is preparing a draft of proposed accounting changes that may have a dramatic effect on commercial real estate lessees, owners and investors.  The new rules call for companies to capitalize office and equipment leases as long term liabilities that diminish over time.  While this may bring US accounting standards more in line with international norms, it would also have the effect of increasing balance sheet liabilities and reducing access to capital.  From a commercial real estate perspective, signing a long term lease would negatively affect the amount of credit available to a company.  Shorter term leases usually mean higher rental rates, effectively raising the operating costs for a business.  Landlords, while getting higher rental rates, would see their property lose value as a building full of short term leases is not as valuable as one with long term leases.

Right of First Refusal or First Offer…which is better?

When negotiating an office lease you need to ensure that you have enought space now as well as the ability to accommodate future growth—say for the next five years.  BYOBroker offers you a tool to make these calculations ( our SmartBuild program, which we’ll highlight soon), but you can also accomplish this through the skillful use of options.  The rights of First Offer (ROFO) and First Refusal (ROFR) both give their owners an option to pick up additional space, but in very different ways.  If your firm has a Right of First Offer on an adjacent space that becomes available, the landlord is obligated to offer it to you before he puts it on the market to the general public.  This is good for him, because if you pass on it he can lease it to another tenant at whatever rate the market will bear.  The Right of First Refusal however, obligates him to check with you before he enters into a lease with another tenant.  In the event that he is approached by another potential tenant and they negotiate a very aggressive deal, before he can go to lease with  them he must offer the space to you at the same terms, giving you the benefit of their negotiations.   Bottom line, ROFO is good but ROFR is better.

Chages to accounting standards will affect office leases

The Financial Accounting Standards Board, which sets American standards on accounting practices, is mulling over proposed changes to its generally accepted accounting practices (GAAP) regarding the recording of office leases.  The changes would require companies to book leases as assets and liabilities on their balance sheets, a move that will have the effect of making rent more expensive.  Office leases will be booked as a long term liability, with the entire lease on the books from day one, and the right to use the space as an asset.  This added liability will reduce the operating cash that companies have available and could potentially weaken an already struggling economy.  The new rules wouldn’t go into effect until 2013  but may be completed in 2012.  Read the post below:

http://www.costar.com/News/Article/Decision-On-Lease-Accounting-Rule-Changes-Likely-Pushed-Back-Until-2012/131352?ref=100&iid=245&cid=6707B0B5885DE2993BAB818312B089DC

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