GAAP Sublease Accounting

Summary of GAAP/FASB Accounting for a Loss Associated with a Sublease

Our interpretation of GAAP sublease analysis according to FASB accounting rules is as follows:
Overview: Start by determining the net present value of all rental costs including write-offs of depreciation and subleasing costs, offset by the sublease income (the NPV write-off). The Income Statement (Profit & Loss statement) is then charged the NPV write-off and it is charged an interest expense based on a declining balance of the NPV write-off, the accretion interest expense. The declining balance is determined by taking the net monthly costs (including sublease income) and the interest expense and deducting that cost from the NPV write-off.

Steps are as follows:

1. Determine a start date for the sublease analysis, e.g. if the space is vacated in January 2004 and put on the market for sublease, then the analysis starts January 2004.
2. Determine the remaining lease obligation for the balance of the term from the start date above (rent, operating expenses, taxes, i.e. what was committed to when the lease was executed).
3. Determine the net book value (NBV) of any assets that will be written off as of the start date above, e.g. un-depreciated leasehold improvements.
4. Make sublease assumptions including

• Timing, when space will be subleased
• Rent and Free Rent
• Operating Expenses and Taxes (Subtenant’s base year?)
• Commissions
• Tenant Improvement costs paid by the Sublessor associated with the sublease
• Other costs associated with the sublease

5. Calculate the total cost of the space, include the write-off of the assets on the start date and any Commissions and Tenant Improvement costs paid by the Sublessor
6. Calculate the total income from the sublease, i.e. rent and any operating expense reimbursement.
7. Determine the Shortfall that is the difference between the cost of the space and income.
8. Determine the present value of the Shortfall using a risk-free discount rate (the NPV write-off).
Note 1: The discount rate may not be the same rate as the corporation uses for internal analysis.
Note 2: Lx LseMod calculates the present value monthly based on a beginning of month payment.

9. Determine the Beginning Balance for calculation of Accretion Interest Expense. The Beginning Balance is the Present Value minus the Cash Shortfall in the current month.
10. Determine the monthly Accretion Interest Expense. This expense is the Interest on the Beginning Balance in step 9 above. The Interest rate is the same as used for the present value calculation in step 8.
11. Re-set the Beginning Balance for the next month by taking the previous month’s balance and reducing it by the Cash Shortfall in the current month.
12. Continue this process until the balance is 0.
13. At the end, all costs net out to 0 on the Income Statement (P&L).

Costs booked against the Income Statement include the following:

a. NPV Write-Off including Depreciation
b. Accretion (Interest Expense)
The net effect of GAAP subleasing is what we used to call “funny money” accounting. However, it does impact the Income Statement (P&L), which in turn impacts taxes, which impacts the After Tax NPV.

Examples See a report example to the right or view a detailed example. You can also view many other financial analysis report examples of Sublease and Lx LseMod Lease Analysis reporting.

Sublease GAAP Monthly Report

Notes

A: If the original lease costs booked to the Income Statement (Profit & Loss statement) were based on GAAP accounting (i.e. the rent was spread evenly over the term), then the calculations of the loss must be based on the GAAP rent, not the Cash Flow rent.
B: Lx LseMod Corporate Lease Analysis includes the option to create a GAAP rent analysis as well as a GAAP sublease analysis.

Disclaimer – The summary above represents our interpretation. It is NOT intended to replace information received from tax accounting professionals.

To see the actual FASB write-up, go to http://www.fasb.org/st/
scroll down the page to Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

Shameless Plug

Lx LseMod Corporate Lease Analysis is the market leading application for Corporate lease analysis, providing GAAP sublease impact analysis within detailed P&L and Cash Flow projections. Companies like GE, MetLife, American Express and Robert Half use Lx LseMod Corporate for lease analysis making it the most trusted name in corporate lease analysis.

While no one can say for sure, it appears based on the recent positive GDP announcement, that the U.S. economy has bottomed out and we are now in the midst of what may be a longer and slower recovery when compared to past economic recessions. The events of the past 24 months have forced growth-minded real estate companies to re-examine or retool their business models to optimize efficiencies and harness opportunities. Economists believe future growth is expected to come from overseas markets, especially Asia and the “BRIC” nations (Brazil, Russia, India, and China).

Many corporate and retail real estate companies are using this opportunity to expand globally into Asia, Europe, and the BRIC nations. New stores are opening and new manufacturing facilities are under construction. There are many reasons for this shift. Growth in the United States is not expected to be as strong as projected growth from the emerging markets. And, the financing markets may be more receptive to opportunities in these faster growing regions of the world. As part of a push by companies to tap into global growth, companies must accordingly adopt a strategy to “globalize their corporate real estate portfolio.

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As an example, imagine a United States headquartered corporation with manufacturing facilities opening in Brazil, China and Canada. How is this United States-based company expected to be able to track the development and eventual operation of these different facilities in real-time, and be able to actively manage all processes? At Lucernex, we believe it is critical to implement a system that will standardize all variables for a company’s global real estate portfolio. The newest version of IWMS software can do just that – easily track and standardize currency, measurements and time zones. And, this software will also help a company better track its leases, costs, and employee count, too. Lx IWMS also now has Lx LseMod software integrated providing fully internationalized lease analysis using any currency or measurement with all results flowing automatically into Lx IWMS site selection module for optimal decision making.

Companies using Lucernex applications are actively benefiting from these tools and have found the value and efficiency it provides to be critical to the real estate development and management process. In today’s emerging global real estate business, if an IWMS system cannot handle a company’s complete portfolio, that company is at an extreme disadvantage.

So many brokers are competing for deals with the same companies every day. I can bet that each company with a lease renewal or relocation on the horizon is about to get 20 calls a week from an almost begging the agent to get an appointment.  With an already skeleton crew or perhaps nearly busting at the seams these companies are looking for the best guy or gal to get the job done quickly, efficiently and thoroughly for them.  There is no time to be reviewing broker’s resumes or interviewing 5 top agent commercial houses.  These CEO’s and CFO’s want to find someone who can solve their problems overnight. It’s the receptionists that file those stacks of resumes and business cards, but there is always one that catches the eye……………..

New agents today are nearing starvation to land a deal, while the “Old Dogs” still keep slamming deals out of the park.  Makes you wonder how they do that……..repeat business is key of course but reinventing yourself in today’s competitive market is critical to be in front of the pack. Don’t be fooled those “Old Dogs” are learning new tricks too.

Recently I saw on my local news channel a story about a guy in Denver, Colorado with a sign saying willing and able to work “I’m a professional who wants a job”.  I thought how clever of him and HEY he made the news!!  I’m sure he resorted to this after months of interviews and taking all the free classes offered by unemployment to reinvent himself.  Not a bad way to make yourself stand out in the crowd of many looking for work, I think. So how do you set yourself apart from the rest of the rat race in brokerage? Many new agents look at the “Old” dogs and wonder how they get those big $100K deals over and over again. What’s the secret?  Honestly the secret is simple. They use easy to use analysis tools like LxLseMod or Argus programs to provide reports showing detailed cash flow associated to all cost in a relocation, investment or renewal.  These guys and gals have learned along the way how to spend their time and having to create homegrown spreadsheets is not how they want to get more business. Plus the idea of producing your own and client point out a mistake. Oy!!  I would not even want to think about that conversation!! These types of programs provide the key points like rent escalations, free rent, constructions costs, moving, buy-out penalties, parking costs etc.  As we know in lease transactions each one is unique and might require specific detail. Can you imagine having to produce multiple types of homegrown info? I assure you I’d be brain-dead after the 3^rd or 4^th go round. These “Old dogs” have zeroed in on the tenants main objective; to discover what the pain is going to be too relocate or renew. Period!! These types of tools make them the “Experts”  in their market and they get repeat and new business this way over and over again.

Reinventing yourself means changing your old cold calling ways. Invest in a tool or tools; LxLseMod Tenant Rep for example can help you become the “Expert” in your market for let’s say R&D, Industrial or even Corporate representation. The key today in successful deal landing is to empower yourself as the industry leader. So now you’re thinking when I’m out pounding the pavement and leaving my business card for potential prospects to contact me, how is my card going to stand out from the rest?  Imagine instead leaving a one page report showing a mock relocation/renewal side by side with all your contact detail on the report vs your 2 x 3 business card and a few pages about how great you are and who you have done business for blah blah blah……yeah you can see it now can’t you. That one page report just became your new resume and business card. That one page report shows the prospect exactly what you THE EXPERT that can provide by servicing their needs in relocation, purchases or renewals. Now YOU stand out in the crowd!!