The overhaul of lease accounting: Catalyst for change in corporate real estate

April 2016

Overview

With the release of the new lease accounting standard as well as other market factors such as activist investors pushing for real estate monetization, we have begun to see companies that own or lease significant amounts of real estate for use in their operations reconsidering their real estate strategies. At a minimum, compliance with the new standard may drive companies to consider significant upgrades, replacements or overhauls of their legacy accounting systems, processes and controls. The new standard may also have a significant impact on a company’s financial statements. The scope of adoption issues are well beyond just financial accounting, and many companies are already starting to plan for the coming changes.

For some companies, the new lease accounting standard will represent just another compliance exercise, but one that for some is likely to entail significant cost and complexity that will need to be managed. For others, the compliance exercise will serve as a much-needed catalyst for change in their overall corporate real estate strategies. Because the new model will eliminate the off-balance sheet accounting for existing operating leases, it may also eliminate some of the perceived accounting advantages of leasing. Changes to strategy may include re-evaluating lease versus buy decisions, considering alternate lease structures and revisiting common terms such as variable/contingent rent to lessen the impact (e.g., net lease structures over gross/modified gross leases for CAM/insurance/real estate taxes, leases based on CPI).

For many significant users of real estate, managing investor and other user relations during the transition will be critical. The issuance of the new standard has created a significant buzz and analysts and shareholders may start raising questions about the potential impact.

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Byron Carlock, Jr.
US Real Estate Leader
Tel: +1 (214) 754 7580
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Tom Wilkin
US REIT Leader
Tel: +1 (646) 471 7090
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