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May 31, 2012
Lucernex Real Estate Solutions Strategist, Mike Hammerslag, MS(RE), MBA, CPM® (see Mike’s management summary here), discusses the impact of the new FASB 13 rules on subleasing for Retailers.
This is an addition to Jim Duports 2010 Blog: GAAP in Commercial Real Estate Sublease Accounting
Excess capacity and leases with intrinsic economic value have always been an important if oft overlooked component of a retail portfolio, except by Private Equity Firms and Hedge Funds. I often wonder how frequently a review of a leased/owned portfolio is done, by a retailer, from the standpoint of: “Is the underlying real estate more valuable than the net income of the store?”
Obviously some do, some do not (as evidenced by those firms that have been taken over, ostensibly for the value of their underlying real estate), and some are just lucky.
But what of the potential impact of the proposed new accounting regulations on a portfolio review and realignment effort? I.e. Subleasing
A tenant who subleases a space to another tenant has two legal positions, one as a tenant, lessee, of the landlord, lessor, and the other as the sub-landlord to their tenant (i.e. sub-tenant). Under the proposed right-of-use accounting model a lessee recognizes both a lease asset and lease liability on their Balance Sheet when they initially lease space. If they then subsequently become a lessor, sub-lessor, they must then recognize another asset and liability on the Balance Sheet recognizing this new position.
Similarly, if the firm is an owner of a property and then leases space to a tenant they too now must recognize an asset and liability under the right-of-use model as a lessor. But suppose that instead of leasing the asset to the prospective tenant they instead choose to sell the asset. While we all seem to focus on the Leases Project at the FASB/IASB meeting there is also a Revenue Recognition Project that has the potential to have even more dramatic impacts on the assets that a firm owns and sells from their real estate portfolio. One of the possible impacts could be immediate recognition of the entire gain-on-sale with no deferral.
- A sub- lessor/lessee model appears to be forthcoming.
- The model seems to be tracking the same Right-of-Use model already in discussion, thereby making the additional regulation more manageable within a single model.
- The new Right-of-Use model.
- The new Revenue Recognition model.
- Not actively managing your portfolio.
- Not getting rid of overhanging real estate prior to the accounting changes.
Our recommendations are to leverage the teams and vendors you have created to help you through the Lease Accounting change making sure that they can also address any subleasing issues, and furthermore make sure you maintain vigilance of the Revenue Recognition model. Lastly, always maintain an active portfolio management strategy, it will help maintain and create corporate wealth.
And is all else fails … Assign the lease!
Lucernex has been on top of the upcoming FASB changes from the very beginning with members of our staff staying abreast of every phase of the board actions. Lx Contracts, the Lease Administration and Rent Accounting Module of Lx Retail, was the FIRST product updated to meet the expected standards back in late 2010 with an update to our FASB financial engine and Lucernex continues to update the product with each release as the eventual rules become more and more clear.
Lucernex has been recognized as the leader in transitioning retailers from legacy lease administration systems to our market leading cloud based lease administration solution, Lx Contracts. Learn more about our Legacy Lease Administration Upgrade Program.