Real Estate Management in the True Cloud

Does your Straight-line Rent process violate basic accounting principles?

Posted on: Sunday, June 24, 2012

Lucernex Real Estate Solutions Strategist, Mike Hammerslag, MS(RE), MBA, CPM®, discusses how your straight-line rent accounting process can violate basic accounting principles.

The current reporting guideline governing the accounting for leases in the United States is a regulation known as FASB 13. The fundamental premise of that reporting is that the total rent paid under the lease will be accounted for on a straight-line basis over the entire term. But there are issues.

Leases generally quote rent simply and state that the rent will be $X per month or perhaps $Y per year. The lease typically then has a quoted starting month (i.e. the 1st day of that month) or a specific day in the month other than the 1st day. However, the actual day the lease starts is typically not what is quoted in the lease, but rather the date mentioned in the landlord’s letter of “Substantial Completion”, which is the date that the landlord turns the space over to you the tenant.

Once a finite date is known the issue of straight-line rent can be addressed.

Enter your email address to Subscribe to Lucernex Blogs:

How do you calculate straight line rent?

First, we must determine the amount of rent due in the 1st month if it is a partial month. The lease hopefully states how the rent will be prorated. The issue of proration is treated in one of the following manners:
1. The lease is mute on the issue of proration.
2. The lease is NOT mute on the issue of proration and it says:

  • There are 360 days in a year
  • There are 365 days in a year
  • A month is 30 days (another way to say 360 days a year)
  • On an actual days basis (now they have addressed the issue of a Leap Year)

Now that we know how much rent we need to straight-line the next issue becomes how we account for rent and of course the related issue of how it is used in analyses.

Corporate space users typically have a single approach to straight-line rent, retailers however use a variety of accounting methods:
Repeating weekly structures, of:

  • 4 weeks, 4 weeks, and 5 weeks
  • 4 weeks, 5 weeks, and 4 weeks
  • 5 weeks, 4 weeks, and 4 weeks
  • Although some retailers even use more than one of the schedules above in the same year

13 month accounting (using 4 week months)

52-53 week fiscal year:
Option 1 – “Final day of the month (say ‘Saturday’) in the fiscal year end month”

  • Here you always end in the fiscal year end month.

Option 2 – “Specific day (say ‘Saturday’) that falls closest to the last day of the year end month”

  • Here you end in either the fiscal year end month or the next month.

Alternating quarterly structures, of:

  • 12 weeks, 14 weeks, 12 weeks, 14 weeks

There is however a central theme to retailer accounting, it accounts for only 364 days until every 5th or 6th year when a catch-up week, a 53rd week, is accounted for.

Therefore, without properly accounting for the extra day(s), i.e. the 365th and/or 366th day, until the catch-up period, both basic accounting principles of timing and matching are brought in to question. If, however, you argue that this “day” is not material I would remind you that it is not a day on a single lease, but a day on a portfolio of leases perhaps even several thousand leases.

If a firm approaches this issue by using a prepaid rent account (there are other methods), this account will develop a balance potentially in the mid-seven figure range depending on the average rent per lease and the number of leases in the portfolio.

A seven-figure account balance is material and we certainly recommend that it is addressed regardless of the method used to address it!

Shameless Plug

straight lining of rent accountingLucernex 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.

Straight line rent

straight-line rent

straight line rent accounting

FASB 13 straight line rent