Vijay Yadlapati, NATIONAL ASSOCIATION OF REALTORS® Associate
Commercial Policy Representative
Proposed Lease Accounting Changes
Could Devastate U.S. Economy
What’s the Fundamental Issue?
What’s at Stake?
For businesses leasing space, especially small businesses, this will
change these leases into a major liability. As a result, many businesses will shorten lease terms to minimize the impact. This could
create instability in future rental costs and uncertainty about availability of space, as frequent renewals will be required. For commercial real estate property owners and investors the impact will
be even greater. According to a study released by Chang & Adams
Consulting, under a best case scenario, the current lease proposal
would increase liabilities for public companies by $1.5 trillion and
would raise costs from the increased interest on borrowing by $10.2
billion annually. This would lead to over 190,000 and reduce U.S.
household earnings by $7.8 billion each year. Finally, U.S. GDP by
$27.5 billion each year, which is larger than the Gross State Product
The results of the Chang & Adams study, along with others, indicate the need for FASB and IASB to fully analyze the economic
ramifications of lease accounting rule changes. Furthermore, NAR
believes it is imperative that FASB and IASB undertake and publish
an all-inclusive economic impact study before any final action is
taken on the lease accounting proposal. The study should examine all potential economic consequences for businesses that own,
invest, and rent commercial real estate. This should include, but not
be limited to possible effects, such as higher rents, further reduced
property values due to shortened lease terms, administrative costs
,and problems resulting from obscured financial reporting, which
were not calculated under the Chang & Adams study. Additionally,
the potential increase on borrowing costs for all commercial real
estate participants as well as the financial and regulatory impact
on lending institutions must be fully examined. Also, field testing
should be undertaken to identify any further potential economic
consequences before the lease proposal is finalized, as well as in the
pre and post implementation phases of the final standard.
Thoroughly vetted and sound accounting standards are needed
to create certainty in the marketplace for investors and businesses
alike. A comprehensive examination of the costs and benefits should
be a part of that process.
Responding this past fall to an outpouring of stakeholder concerns
(from NAR and others), FASB and IASB agreed to exempt some
commercial property owners from the new requirements, stating
that lessors would be allowed to measure their investment properties at fair value. Unfortunately, commercial property tenants would
still be required to capitalize real estate leases onto their balance
sheets. FASB and IASB will likely “re-expose” or reintroduce their
lease proposal by mid-2012, with a 120 comment period. While the
potential exists for changes to the current lease proposal, the two
accounting boards remain split on alternative methods for lessee
accounting for inclusion in a new proposal. Both organizations are
not expected to finalize the rules until mid-2013 and the likely transition date could be pushed back to 2016.