Companies are currently reevaluating their lease portfolios to ensure these costly agreements still make sense in light of their new business goals and operations. As a result, many of these same organizations are making modifications to existing leases or are considering different options and/or terms for new agreements.

Stepping into 2022 should be a good deal less jarring. And yet, there might be changes and surprises. Here’s what experts see as coming up.

The verdict is in: the Financial Accounting Standards Board (FASB) will not issue a third delay to the ASC 842 effective date for private companies, which will take effect Dec. 15, 2021. This means many firms may be flat-footed when the new standards go into effect.

If you thought you would have had more time to prepare for the new lease accounting standard, you’re not alone. As of late July 2021, 75 percent of surveyed senior accounting and finance professionals at private companies with more than 1,000 employees said they were not yet compliant with ASC 842, with 30 percent less than halfway through the process. Furthermore, 40 percent claimed they were only somewhat confident about their ability to successfully adopt the new standard in time for their next scheduled reporting period after Dec. 15. This data indicates that many private companies were, indeed, waiting for another extension.

In a piece of good news for Manhattan’s battered office market, over 3M SF of office space was leased in November — the first time since before the coronavirus pandemic the nation’s largest office market eclipsed the 3M SF mark.

A total of 3.09M SF was rented last month, according to Colliers’ monthly snapshot. That was the highest monthly leasing total since January 2020, when 3.6M SF of office leases were signed just before the pandemic hit the city and brought activity to a sudden halt.

Majority of surveyed tenants plan to expand their commercial real estate footprint in the New Year  

Woodbridge, NJ (Nov. 9, 2021) Visual Lease, the #1 lease optimization software provider, today unveiled a survey of 400 senior accounting and finance professionals and commercial real estate executives, 200 of whom representing the perspective of tenants, and 200 of whom representing the perspective of landlords. The report entitled, “Commercial Real Estate in 2022: Outlook for an Industry in Recovery,” shares insights into how both sides are approaching leases in response to the ongoing effects of the COVID-19 pandemic.  

“The commercial real estate industry has dramatically changed over the past nineteen months,” said Marc Betesh, founder and CEO of Visual Lease. “Businesses have grappled with new restrictions, considerations and challenges, which have directly impacted their real estate needs. Both landlords and tenants are uncertain of what shifts and trends are here to stay, which has made planning ahead more difficult than ever before. We created this report to help both parties better understand the industry and ensure that they are maximizing the value of future leases, setting themselves up for success in 2022 and beyond.” 

Key 2022 trends and predictions from the report include:  

• Ready to Commit to Longer Terms – Sixty-five percent of surveyed tenants are considering their physical space needs more than one year prior to signing a new lease agreement. Fifty-eight percent of tenants are prioritizing leases of at least five years in length, with nearly 20% interested in 10 or more years of occupancy. While plans are being made, the future remains uncertain as 93% of tenants note that their 2022 real estate strategy is temporary and will likely be revised post-COVID.  

• Real Estate Footprints Poised to Expand – Sixty-five percent of landlords expect tenants will add space to their real estate portfolios in 2022. Similarly, 70% of tenants plan to expand their commercial real estate footprint in the year ahead.  

• Back to Work: Urban Revival – Seventy-eight percent of landlords predict that the greatest demand for leased properties in 2022 will appear in cities. Tier 1 cities like Los Angeles and New York are anticipated to draw the biggest crowd, signaling a revival for major metropolitan areas that were previously hard-hit during the onset of the pandemic.  

• Rents Bounce Back, But Not All Businesses Will – Seventy-five percent of landlords expect 2022 commercial rent prices to be about the same or higher than rent prices were prior to the pandemic, which is in line with what 61% of tenants expect, as well. A rent increase may create some challenges as 61% of tenants admit that their organization fell behind on rent during the pandemic, and 37% are still behind on rent.  

• Future-proofing Leases to Accommodate Changing Demand – All surveyed (100%) landlords had tenants request modifications to their leases mid-term in response to the impacts of COVID-19. As a result, 99% of landlords have revised their agreements to better accommodate existing and future tenants, including changes to building rules and regulations (57%), operating expenses (54%), indemnification and insurance (45%), as well as sublet/assignment rights, rent abatement and force majeure clauses. 

• Approaching New Terms With Caution – Based on what they learned from managing their businesses during COVID-19, tenants note that the following will be important considerations when negotiating future leases: flexible scaling plans for space (57%), flexible lease termination (49%), shorter lease duration (36%) and an ability to sublease (33%), among others.  

• Poor Lease Management Led to Costly Mistakes – Nearly 80% of tenants have experienced negative impacts due to inadequate lease controls, the most frequently reported being the inability to respond to changing circumstances due to the pandemic (34%), missing an option to extend a deadline (28%), miscalculating lease costs (28%) and forgetting to update unfavorable or unwanted lease terms (28%).  

For full study results, download Commercial Real Estate in 2022: Outlook for an Industry in Recovery. 

About The Visual Lease Data Institute 

The Visual Lease Data Institute is a collection of market-leading data, trends and insights on lease accounting, management and optimization created and curated by Visual Lease, provider of the #1 lease optimization software. The Institute was founded on 35 years’ experience managing lease data and financials and was created to arm organizations with the knowledge required to achieve and maintain lease accounting compliance and leverage their leases as strategic business assets. 

About Visual Lease 

Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS platform is embedded with more than three decades of best practices from major corporations and leading industry professionals. Our award-winning solutions are used by 800+ organizations to manage 500,000+ real estate, equipment and other leased assets. Committed to ongoing innovation and unparalleled customer service, Visual Lease helps organizations transform their lease compliance requirements into financial opportunities. For more information, visit visuallease.com.  For more information, visit visuallease.com. 

Media Contacts 
Erica Bonavitacola 
Visual Lease 
T+1 732 860 4838 
ebonavitacola@visuallease.com 
 
Anna Patrick 
Gregory FCA 
T+1 212 398 9680 
apatrick@gregoryfca.com 

The upcoming FASB accounting changes are not only a challenge for corporate accounting teams, but also for the commercial real estate group. To get you up to speed, here’s an executive summary of the new lease accounting standards (both U.S. and international) with a focus on the business risks involved.

FASB accounting: a primer for CRE executives

When do the IFRS and FASB accounting changes take effect?

Both the new lease standard from the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released their respective new leasing standards in the first quarter of 2016.

The US standard, ASU 2016-02, is effective for public business entities for annual periods beginning after December 15, 2018. The International standard (IFRS 16) takes effect in January 2019.

What’s changing and why?

The essence of the two standards requires that leases are to be put on the balance sheet as “Right of Use” (ROU) assets, and corresponding liabilities. That’s a big change for commercial real estate accounting. And it’s not only accounting for real estate that’s changing: the new FASB accounting rules also impact equipment and asset leases.

The purpose of the IFRS and FASB accounting change is to be provide greater transparency in a company’s leverage since leasing is in essence a form of financing.

How are the IFRS and FASB accounting changes different?

Perhaps the greatest difference between the US standard and the International standard is the question of finance leases versus operating leases.

The FASB decided to maintain two methodologies, one for operating leases, and one accounting for financing or capital leases. The IASB opted to classify all leases as financing leases. The FASB argued that there was a need to differentiate between the two types of leases to maintain a level of simplicity since most leases wouldn’t meet the criteria for a capital lease.

Under the new FASB accounting rules, the four criteria for a capital lease are:

• The lease automatically transfers ownership of the property to the lessee by the end of the lease.
• The lease contains a bargain purchase option.
• The lease term equals 75% or more of the estimated economic life of the property.
• The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair market value of the property.

Conversely, the IASB opted to classify all leases as financing leases, again arguing for simplicity.

Learn more: IFRS & FASB Changes: a Lease Accounting Quick Reference Guide

IFRS and FASB accounting changes: Understanding the risks

With the release of new leasing standards by both the FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) CRE executives face one of the most daunting challenges in recent memory that will impose considerable legal and operational risks on public companies.

Missing the IFRS / FASB accounting compliance deadline

Perhaps the biggest risk with the new leasing standards will be missing the effective dates. If you aren’t well along with the implementation process, you’re already late. The new standards require that public companies put all leases of more than one year on the balance sheet as “value in use” assets and corresponding liabilities. It’s been estimated that the new standards will result in over $1.2 Trillion in incremental assets and liabilities on worldwide balance sheets.

The Financial Accounting Standards Board (FASB) new lease standard will take effect for fiscal years, and interim periods within those fiscal years, beginning December 15, 2018 primarily for public business entities. The effective date for the International Accounting Standards Board (IASB) will be January 1, 2019. Most commentators estimate that it will take at least a year or more to complete the transition to the new leasing standards.

For companies with centralized real estate organizations and centralized lease data bases, implementation of the FASB accounting changes will be tedious but relatively straight forward. But many companies have their leases scattered through their divisions which could well extend the time to convert by several months, maybe years. Getting all lease data into one unified database will be the priority, and then updating your lease administration software to complete the necessary calculations will be the next step.

Certain industries which primarily lease their operating assets will be challenged to meet the deadlines. This would include retailers with large portfolios of stores, airlines with vast fleets of leased aircraft, and shipping companies, with large fleets of leased water craft. With the explosion of cloud computing, IT assets have been growing exponentially, and most of these servers and main frames are leased.

CRE managers will be well advised to coordinate closely with external auditors on the update and transition process. Failing to convert could result in a violation of the Sarbanes Oxley (SOX) regulations which could result in sizable fines, and possible prosecutions, with all the bad publicity that would come with an SEC violation.

Learn more: Lease Portfolio Management: Policies & Procedures to Reduce Risk

Lacking the resources and expertise to implement the FASB accounting changes

Chances are you will not have sufficient manpower or expertise to collect the data you need to convert to the new FASB accounting standards. An immediate priority will be to assess staffing levels and recruit the necessary manpower to complete all tasks of conversion.

It may make sense to contract with consulting firms that have the necessary expertise and manpower to get the job done. While more expensive, this approach assures that conversion meets deadlines with full compliance.

Impact of the FASB accounting changes on loan covenants

Other risks that will come with the new standards will be possible violations of loan covenants. By substantially increasing the liability side of the balance sheet, could affect allowable debt levels in various corporate financing contracts. Coordinating with your company’s key lenders will be a priority action item.

What other changes can you expect as a result of the new FASB accounting standards?

In one of my early blog posts in 2015, I characterized the coming leasing standards as a “Tsunami” in that the changes would sweep across corporate portfolios like a monstrous wave, causing havoc with corporate accounting, leasing strategy, and balance sheet reporting. Like any major change to rules and standards long embedded in corporate accounting, the impact to corporate leasing practices will be forever changed.

Learn more: Corporate Real Estate Strategies and the New Lease Accounting Standards

How these changes will affect real estate markets, corporate real estate ownership, leasing demand, and other related factors is up for speculation. One thing’s for sure. CRE managers will be held accountable for the successful transition to the new standards. With only months left, time is of essence.

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Organization recognized as one of the fastest-growing private companies in America for the second consecutive year

Woodbridge, NJ – August 17, 2021 — Visual Lease, the #1 lease optimization software provider, was named on the 2021 Inc. 5000 list of the fastest-growing private companies in America. Rankings were based on participating companies’ three-year growth rate, and this inclusion marks Visual Lease’s second consecutive year placing within the top 20% of the private companies recognized.

“These past few years have required businesses to pivot and work differently,” said Visual Lease’s founder and CEO, Marc Betesh. “In navigating this challenging climate, many organizations have uncovered new ways to operate and support their customers. Our consistent and continued growth mirrors just how important lease accounting compliance has become for companies across all sectors, and how Visual Lease is rising to help them take control over their lease portfolios.”

The list represents a unique window into the most successful companies within the American economy’s most dynamic segment—its independent businesses. Intuit, Zappos, Under Armour, Microsoft, Patagonia and many other well-known names gained their first national exposure as honorees on the Inc. 5000.

In addition to this recognition, earlier this year Visual Lease was ranked among the Top 100 Software Companies of 2021 by The Software Report. The company was also honored with a Bronze Stevie® Award in the Fastest Growing Company of the Year category in The 19^th Annual American Business Awards^® and named a Top Workplace in New Jersey by NJ.com.

In 2020, Visual Lease gained its first placement on the Inc. 5000 list of fastest-growing companies in America and was named among the top third of high-growth companies on the Deloitte 2020 Technology Fast 500. Visual Lease was also recognized by NJBIZ as one of the Best Places to Work in New Jersey and was named No. 10 on NJBIZ’s list of New Jersey’s 50 Fastest Growing Companies in 2020.

To keep up with all of Visual Lease’s announcements and milestones, visit its newsroom.

About Visual Lease

Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS platform is embedded with more than three decades of best practices from major corporations and leading industry professionals. Our award-winning solutions are used by 800+ organizations to manage 500,000+ real estate, equipment and other leased assets. Committed to ongoing innovation and unparalleled customer service, Visual Lease helps organizations transform their lease compliance requirements into financial opportunities. For more information, visit visuallease.com.

Media Contacts
Erica Bonavitacola
Visual Lease
T+1 732 860 4838
ebonavitacola@visuallease.com

Katie Vroom
Gregory FCA
T+1 212 398 9680
kvroom@gregoryfca.com

There is power within your lease portfolio. Over the last year, public and private businesses have taken a closer look at their leases – and experienced the downstream benefits of lease optimization. Businesses who must comply with the new lease accounting standards (e.g., FASB ASC 842) are now examining their leases with a higher level of scrutiny than ever before. Additionally, over the last year, companies looked to their leases to reduce the financial impact of COVID-19. In return, these businesses have experienced operational benefits associated with lease optimization.

What is lease optimization?

Optimizing your lease portfolio means:

1. Having a controlled inventory of all lease documentation that is updated to account for all changes and modifications.
2. The ability to capture, monitor and act on all critical lease dates, including end of-term options.
3. Ensuring changes in lease terms are reflected in payment schedules and lease accounting disclosure reports.
4. Conducting regular audits of your leases and the underlying assets by taking stock of your portfolio and identifying gaps and opportunities.

Lease optimization allows your business to uncover savings, streamline lease accounting compliance and accommodate pivotal business needs with agility.

Identify cost-saving opportunities

Over the last year, businesses looking to cut excess business expenses were increasingly mindful of their leases, given leases are the second largest business expense besides payroll. Lease optimization helps organizations identify areas of their leases where they are overspending – and save money through visibility into that data.

Real customer lease optimization examples

Here are some examples of how Visual Lease has helped hundreds of customers save money through lease optimization. Before partnering with us:

• A large manufacturing company lost $105k because they did not realize that their lessor was continuing to bill expenses for surrendered property.
• One of the largest insurance companies in the US lost $185k because they didn’t realize their landlord needed to offset operating expense increases against tax decreases.
• A national bank lost $500k because the tenant forgot to request reimbursement for tenant improvements from the landlord.
• A large tech company lost $210k because the tenant was not aware that tax abatements were not being added back to the base tax amount.

These are examples that with the right information, perspective and tools in hand, lease optimization can be leveraged to materially improve business processes and generate savings in a previously undermanaged area of an organization.

Capture modifications and adjustments that impact lease accounting compliance

Leases change – and adjustments need to be tracked and evaluated under the new lease accounting standards (ASC 842, IFRS 16, GASB 87).

Determining whether a modification has taken place can be operationally challenging, particularly for companies with large lease portfolios or for organizations that do not have the systems and processes in place to properly handle and account for these events. This analysis is complicated and will most likely require a dedicated team and technology to ensure attention to detail.

That said, this is THE perfect time for you to take the extra steps towards optimizing your lease portfolio.

You need to feel confident throughout every stage of the lease accounting compliance journey:

• Day 1 – Compliance (centralizing leases and producing accurate reports)
• Day 2 – Sustainable Auditability (implementing processes and controls)
• Day 3 – Optimization (revisiting and bridging gaps)

Accommodate business needs with agility

Another positive of lease optimization is that it enables your business to pivot and identify emerging lease needs as your organization grows – or vice versa. Having the ability to access your leases in one centralized location – and report on your portfolio in any way helps you to identify the most effective way to scale your lease portfolio to meet your needs.

This article originally appeared here in Forbes.

As a result of Covid-19 and the changing landscape related to leases, private companies have received more time to prepare for and adopt the new lease accounting standards in their financial reporting. Last year, the Financial Accounting Standards Board (FASB) further delayed the deadline for private companies to comply with the lease accounting standard ASC 842, which brings most of a company’s operating leases onto its balance sheet. This delay has given private companies nearly two additional years to comply with the new lease accounting standard. Because public companies have already gone through this process, there are many lessons that can be derived from their journey to help private companies as they move through their own adoption.

Perhaps the biggest lesson learned from public companies, which we’ve seen through our clients’ experiences, is that adopting the new lease accounting standard takes time, can be quite complex and results in a resource-consuming process, particularly if there is a lack of cross-departmental collaboration. With the ASC 842 deadline for private companies looming, there are several things private organizations can do to set themselves up for success.

Know What Lease Data To Gather And Where To Get It

Public companies learned that gathering and validating data was the most challenging part of the lease accounting compliance journey. Companies with large, diverse lease portfolios found lease contracts — and thus the data within those documents — can be scattered across any number of separate sources. Not only is it tedious to gather contracts and relevant data, but it’s also easy to overlook required information if the individuals abstracting the data don’t have an informed sense of what is required for compliance. Failure to properly capture all the relevant data elements can ultimately diminish the value of a company’s financial reporting. Due to this important — and heavy — lift, and despite the deadline delay, getting an early start is key to a private company’s successful adoption.

It’s worth noting that not all required data elements for effective lease accounting compliance will be found within an organization’s lease agreements. In some cases, only about half of the data will be found within contracts, while the remainder will be contained in other sources and require some level of judgment to establish.

When private companies begin down the road to lease accounting compliance, they should first reflect on what the required data is and where it can be found within their organization. These answers can be overwhelming, but in this case, knowledge is power. This is because there can be as many as 70 distinct data elements, such as lease terms, payment schedules, end-of-term options and incentives, that need to be identified and captured to be compliant with the lease accounting standards. To properly collect, organize and analyze all the required data, private companies should get ahead of the process and start to prepare now.

Use A Centralized Data Repository

Another lesson learned from public companies is the importance of a central lease document and data repository. A 2016 survey by PwC found that 39% of companies manage their lease agreements and related accounting in a decentralized manner. While this approach can work for some, it’s time-consuming and can increase the chance of human error during the data collection process. Public companies that had an organized centralized lease portfolio learned that it saved them time on gathering and analyzing required information, which ultimately saved them money in the long run.

When setting up a centralized lease portfolio, public companies were able to streamline and optimize global reporting processes and track lease data in real time, which has proven benefits for lease accounting compliance. By having all of the necessary lease data at their fingertips, these organizations experienced a faster, more efficient lease compliance process while also uncovering cost savings including overpayments, unreceived lease incentives and reduced full-time equivalent costs, among others. Not to mention, centralizing leases can be instrumental in supporting a company’s audit process.

Put Dedicated Teams In Place

Public companies have also seen the value of having the right people in place:

• Cross-departmental collaboration: Working with other internal teams on data collection creates visibility across an organization, streamlining the process and positioning the accounting team as a stronger partner to their business.
• IT assistance: When opting to leverage a centralized data repository or any other dedicated technology, it is critical to enlist one’s IT department from the outset of the project to ensure a smooth implementation, particularly as it relates to the eventual integration with other systems such as an ERP.
• Dedicated players: Bringing in experienced lease accounting, project management and other expert professionals — whether they’re in-house or outside service providers — can minimize the impact on a company’s other resources.

While every organization’s lease accounting compliance journey is different, many public companies discovered that some of the most daunting tasks with the new leasing standards were only tangentially related to accounting. Rather, the most significant challenges were in the preparation process. Once private companies get their leases in order and dedicate the time and resources required, they are positioned to better achieve compliance and drive a positive impact on their business’s financial reporting and compliance.

This article originally appeared here in Forbes.

In 2020, many companies were forced to make tough decisions regarding their leased commercial spaces. From office closures to consolidations and deferrals, many of these decisions will have long-term impacts beyond the pandemic. To survive and thrive in today’s new norm, these same companies now need to evaluate how these decisions will continue to affect the leasing landscape, and what that means for their future finances and operations.  

Lease Market Considerations for 2021 

Covid-19 had a devastating effect on the real estate market in 2020. As organizations continue to adapt to remote work environments, the trickle-down effects will likely play out over the next few years. Unlike the economic downturn in 2008, the commercial real estate market was in a strong position at the start of 2020 — in fact, it was predicted to grow. However, as tenants struggled to meet their rent obligations, and tenant-landlord tensions and lawsuits ensued, the market quickly took a downward spiral. 

Despite this negative trend, several bright spots signal recovery within commercial real estate. We surveyed several hundred companies across retail, manufacturing, health care, financial services and more to gain critical insight into how the leasing market has changed since the start of the pandemic and to help organizations to make better-informed business decisions for the year ahead.  

Revenue Impact of the Pandemic 

By the end of 2020, nearly three in five respondents to our survey reported a 59% loss of revenue in their business since the start of the Covid-19 outbreak in March 2020. Of those that saw a negative impact on revenue, 80%, fortunately, expect that impact to be short-term. As a result, many organizations are more likely to seek and prioritize opportunities to save money — and leases provide a way for companies to do just that. 

Over the past year, many organizations made changes to space and equipment leases. However, most still need to get creative and find other ways for monetary gain. PPP loans, insurance policies and lawsuits were some ways that businesses across all sectors chose to subsidize their company’s overhead in the short-term, but these options are now carrying over into 2021. 

The Future of Office Space 

To cut additional costs, many have turned to their commercial office leases to identify savings. With the pandemic, there has been a monumental shift in the traditional office space, but most companies are not resolved on what that looks like for their businesses in the future. This year, the industry will need to consider several changes to the office market as they make broader business plans: 

• Remote work: The acceleration of remote work has shifted the office environment, resulting in widespread downsizing and a decreased demand in the market. Despite this change in behavior, there are now new opportunities for organizations looking to retain office space in major cities, such as opting for smaller regional offices or expanding office space to allow for social distancing.
• Coworking: Coworking spaces and other short-term rental options may see a rise in popularity as companies continue to explore ways to stay out of the traditional long-term lease options but still provide a home base to employees.
• Subleasing: In addition to coworking, the sublease market has become larger than it was during the dot-com bubble, providing another flexible lease situation for companies to consider.

Important Lease Clauses In 2021 

Lease clauses offer necessary legal protections for both tenants and landlords. However, the onset of the coronavirus pandemic presented unique challenges, which left attorneys scrambling to identify protections for their clients. Many explored force majeure clauses to save costs, only to find that these clauses do not typically extend to pandemics or other public health crises. 

To date, the biggest impact that Covid-19 has had in the market is that it’s suspended progress on new transactions, and by the end of 2020, global CRE deal volume declined 36% YoY. Tenants have been reluctant to sign new leases and because of this, landlords do not have visibility into the future of their buildings. To add to the lack of certainty, where leases are expiring, others could potentially not be renewed until there is more clarity on their business needs, leading to reduction through attrition in the short-term. As such, new leases should include updated clauses to make new and existing tenants feel comfortable with signing their agreements. Our survey identified the most important lease clauses to consider in today’s environment as flexible termination (34%), specific pandemic force majeure clauses (32%) and shorter lease windows (16%). 

To effectively navigate today’s commercial real estate landscape, it’s important to recognize that some changes brought on by the pandemic — such as remote work environments and reimagined workspaces — are likely here to stay. Companies will need full visibility into lease terms and options for negotiation and payment to better manage their businesses in this new climate. Flexibility ultimately creates a win-win scenario for tenants and landlords alike in 2021 and beyond. 

As the accounting profession navigates the challenges brought on by COVID-19, FASB shifted the deadline to grant private companies more breathing room to achieve compliance with its major lease accounting standards, including ASC 842, and recently released proposed changes to its lease guidance – some of which are a direct result of the pandemic.

In attempt to become compliant with the new lease accounting standards, particularly ASC 842 and IFRS 16, there are many intricate details that accountants often have questions about. Today we’ll address frequently asked questions regarding accounting for real estate CAM charges, and accounting for leasehold improvements.

Real Estate CAM (common area maintenance) Accounting FAQs

1. What are CAM expenses?

Common area maintenance (CAM) fees are common charges in commercial real estate leases. Charged in addition to rent, average CAM fees cover the lessor’s operational expenses including maintenance, janitorial, repairs, snow removal, landscaping, etc.

Tenants are charged their pro-rata share of these charges on an annual basis. Specifically, the tenant’s share would be the percentage of the tenant rentable space to the total rentable space of the property.

Real estate CAM charges vary according to the type of real estate property. For example, retail property such as shopping centers will have different charges particularly relating to open areas, versus office space that will have minimal open areas.

2. How do the new lease accounting standards affect CAM accounting?

Under the new lease accounting standards, ASC 842 and IFRS 16, real estate CAM charges are treated differently. As a result, lessees must be crystal clear about what’s included in CAM, given it’s not always so cut and dry.

Real estate CAM charges are not included in the asset value of the lease. Instead, they are expensed in the year they’re incurred. It’s important to scrutinize CAM charges to be sure that capital costs are not included in the expenses. This is a frequent error and thus tenants must be vigilant that capital costs are not included in the CAM charges.

Another key factor in CAM charges is the issue of establishing a cap and floor to the charges. CAM charges can fluctuate and thus it’s important to establish limits on the degree by which the charges can extend.

3. How should I handle CAM reconciliation?

CAM reconciliation is the process of reconciling estimated charges with actuals. Typically, an audit of the CAM charges is made at the end of the fiscal year and the differences between estimated versus actual costs are calculated. Either the landlord or tenant are made “whole” through the reconciliation process.

Accounting for Leasehold Improvements FAQs

1. What are leasehold improvements?

Leasehold improvements (LHI) are defined as capital improvements made to a tenant’s space such as dry wall, electrical, carpeting, lighting, etc. Most office leases offer what is called a “work letter”, which defines what the building owner will provide to the tenant in terms of basic improvements. These improvements can be offered as a credit in the rent or provided separately.

Leasehold improvements are typically provided over and above the building allowance. The tenant will typically amortize the improvements over the term of the lease, and in most cases the improvements revert to the building owner upon lease termination.

2. How are leasehold improvements impacted by the new lease accounting standards?

Leasehold improvements are an asset, but are not included in the calculation of the tenant’s total lease asset per the new FASB lease standard.

How do CAM and leasehold improvements impact my leasing strategy?

CAM and LHI are two areas of lease management that require careful and diligent attention. Both areas are subject to negotiation, and your organization should strive to leverage these factors to their advantage during initial lease negotiations.

Fortunately, the new lease standards will not affect CAM or LHI investments adversely, but careful attention to these factors could pay dividends over the term of the lease.

Learn more: Lease Portfolio Management: Policies and Procedures to Reduce Risk

With the new FASB/IFRS lease accounting standards, significantly more assets and liabilities must now appear on the balance sheet. Yet, some businesses still aren’t using lease accounting software to help with the complex task of managing their lease portfolios. 

What are some of the lease accounting auditing risks that arise when you don’t use a software solution?

Exposure of lease accounting auditing risks

The new standards are designed to expose lease accounting auditing risks and reveal if an organization lacks the proper checks and balances in their accounting process.

No one wants to find out through an audit that they’ve been doing their lease accounting all wrong. Yet that is exactly what can happen when you do your accounting manually or with a spreadsheet application.

 The truth is, the risk of failing an audit is greatly increased when you don’t have a software system in place that mirrors your lease accounting policies and procedures.

Underestimating lease complexity

People often underestimate the difficulty of accounting for all their lease assets and liabilities. Even for businesses with a relatively small lease portfolio, facilities and equipment are the second biggest cost (behind the #1 cost, people).

 Once you start breaking down a portfolio and digging into the details, you may be surprised at the complexity of the leases and the costs associated with them. Not only are there different classes of assets (such as real estate and equipment) and different types of leases (operating and finance), but all are calculated differently.

 For example, real estate lease are very complex transactions, with common area charges and other details that must be reported accurately. Leasing office space might require complex calculations for how the building’s tenants divide costs such as:

• Cleaning the lobby and other shared areas
• Trash removal
• Parking lot maintenance
• Lawn/Landscape care

 There are many other important lease details that are easy to overlook. For example, you may have some embedded leases that are part of a larger contract, such as an IT support services agreement included in an equipment leasing contract.

 Unlike manual accounting, Visual Lease puts a proven process in place for capturing all these pertinent data points.

No audit trail for tracking change management

When you use a spreadsheet or calculators, there is no audit trail to help you track your change management process. That means you have no proof you’ve followed the policies and procedures you’ve put in place for change management, approval flows, and other lease accounting requirements.

 For example, lease data changes need to be recorded and tracked as they happen, so that if an audit takes place — for a credit evaluation, a bank loan, shareholder reporting, or other purposes — you can prove that everything is in order and up to date.

 Visual Lease reduces lease accounting auditing risks by providing an audit trail that thoroughly documents your change management process, including:

•  Who made a change
• The date and time the change was made
• Whether approval was needed for the change and, if so, who approved it
• If the change was required due to a data error or to show a change in lease management

 (Read more about changes to leases in our blog on lease accounting remeasurements.) 

Lack of controls

In lease accounting, everything is about controls and making sure you are consistent across your accounting process.

But with a spreadsheet or manual accounting process, there is not much you can do to control who can see the data or make changes to your lease records, which exposes your business to lease accounting auditing risks.

Visual Lease software helps to keep your data secure with password protection and a wide range of authentication features you can use to manage access, user roles, and permissions for your lease accounting system.

(Read more about lease accounting data security features.) 

No one place for your data

If you’re using a spreadsheet or calculators and manually entering the information in your balance sheet, you lack an important resource: a single data repository that includes all the supporting evidence behind it.

 With Visual Lease, you get a single-source repository that brings all your lease data together for easier tracking, change management, reporting, and verification should an audit need to be done.

Lack of notifications for important events

When you’re doing your lease accounting manually, you don’t have the ability to flag events and set notifications for important dates and events, such as:

•  Lease renewals
• End dates
• Payment increases
• Opt in/out deadlines

 With Visual Lease software, you can have the system alert you to important dates so you can stay on top of lease changes that have an impact on your liabilities.

Lack of visibility into location-level costs

Without software for administering and maintaining your lease portfolio, you may not be fully aware of the cost of leases at the location level.

For example, one customer had a warehouse that was paying $1,600 a month to lease a forklift — and had been doing so for eight years! For that amount of money, the company could have purchased the equipment several times over or leased a newer forklift with all the latest features.

Visual Lease provides visibility into these types of expenses so you can identify business risks as well as leasing accounting auditing risks. You can also set up the system to alert you to lease renewals and remind you to review the costs, to see if they still make good business sense.

Human error and incomplete data

Recording all your lease data and doing calculations by hand is not only difficult and time consuming — the chance of human error increases your lease accounting auditing risks.

A single typo or a misplaced decimal point can throw everything off. If you do business in other countries and must deal with multiple currencies, having to figure out the calculations on your own is an added challenge, with added risk of human error.

In addition, with the new lease accounting standards, more than 40 different types of data must be tracked to do the required calculations. Unless you have a very simple lease portfolio, how do you know which fields you need?

Visual Lease software guides you through the process using tried and true calculations that have been validated by more than 700 customers and our industry-leading accounting partners.

Plus, having already helped public companies successfully transition to the new FASB/IFRS standards, Visual Lease has best practices built into the solution.

 To learn more about how the Visual Lease platform can help you avoid common lease accounting auditing risks, give us a call. 

Until recently, Corporate Real Estate (CRE) and Accounting departments had little reason to talk to each other. 
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CRE is primarily responsible for obtaining space and managing facilities-related issues. The Accounting department’s job (related to real estate) has been to pay the bills and record the expenses in the ERP. Before FASB ASC 842 and IFRS 16, accounting for leased property assets was straightforward. And for most companies, there was little effort to manage the expenses associated with property assets; those were considered necessary costs of doing business. So there was not much for CRE and Accounting to talk about. 

Because of the new lease accounting standards, that situation has changed dramatically in the past year. Companies must now account for leased assets and liabilities on their balance sheets. Real estate lease portfolios often represent many millions of dollars, and that value can have a big impact on financial statements. 

Plus, the new lease accounting standards make leasing costs more visible, and companies are realizing how much money they stand to save by better managing real estate leases.

That’s why, as companies assemble their teams and work toward compliance with the new accounting standards, it’s critically important that Accounting and Real Estate teams work together. 

What Accounting needs from Real Estate for lease accounting compliance

As a lease accounting and lease management technology provider, Visual Lease is often involved in the initial meetings as organizations begin planning for adopting the new standards. Because this process is new to them, many organizations make the mistake of thinking Accounting can manage it on their own. Many times, CRE is not even included in those early meetings.

The first thing that’s important to understand is how much time and effort it will take to gather all your lease data in one place. Few organizations have a central repository for lease information. Lease contracts are filed away in drawers, and lease data lives in spreadsheets on the computers of the people who manage those assets. Especially for a distributed organization, finding it all and centralizing lease data will be a big job. 

To further complicate things, accounting for real estate leases under the new standards requires much more information about leases than was needed in the past: information that Accounting does not have access to. We’re not only talking about the details of lease contracts, but also information about property decisions, such as whether or not leases are likely to be renewed at the end of the term. 

This information can only come from the CRE team. That’s why Accounting will need the help of the keepers of real estate lease data and the decision makers, to achieve compliance with the new standards. 

And there’s more: getting compliant is not a one-and-done exercise. Real estate leases change often: they are revised, renewed, and canceled as the space needs of the business change. Payment amounts for rent and maintenance may also change over time. Every time that happens, Accounting must update journal entries and balance sheets. So organizations need to set up processes for CRE to keep Accounting in sync with lease changes that impact financial reporting.

What CRE gains from working with Accounting on compliance

As Accounting teams begin to understand the magnitude of the effort required to collect and report on lease data (especially for complex real estate leases), they reach out to CRE for help. 

At first, lease accounting data collection may seem like a burden on the CRE team. However, it’s important to realize that this is an opportunity for CRE to “gain a seat at the table,”  become a more valued part of the organization, and demonstrate to the C-suite that their work is directly tied to business performance.

As I mentioned, the new lease accounting standards make real estate leases much more visible financially, and therefore a higher priority for the organization. Real estate lease information will now be needed for business planning and forecasting, and will affect not only the books but also things like debt covenants and borrowing capabilities. Suddenly, CRE has important expertise, control over critical assets and essential data, and their decisions have a much larger financial impact than ever before. 

And, due to the complexity of the new lease accounting standards, almost every organization with more than a few leases will need a central repository for lease data and software to perform calculations. Some software platforms, like Visual Lease, include tools that help manage leases and optimize lease expenses. 

So, that puts CRE in a position to become real heroes: they will have the data, the tools, and the status to drive process and policy changes that save the organization millions of dollars. 

How will organizational relationships evolve after FASB compliance?

At the very least, Accounting and Real Estate teams will communicate and collaborate more effectively during and after implementing the new lease standards. 

For example, we’re seeing two different strategies emerge for sharing the responsibility for lease accounting calculations between Accounting and Real Estate:

• Real Estate is responsible for collecting raw data (including details about options and other decisions) and generating the necessary lease accounting calculations. The Accounting team has the ultimate responsibility for financial reporting, so they must vet the numbers from Real Estate and use them to create the journal entries that feed reports.
• Real Estate collects only the raw data and passes that to Accounting to perform the calculations and create journal entries. In that case, Accounting will need to work closely with Real Estate to make sure the data is complete and broken down into the level of detail needed for calculations.

Changes in responsibility are also leading to changes in the organization’s reporting structure, with more Real Estate teams now reporting into the CFO’s office. That’s happening because Financial leaders want more visibility and involvement in Real Estate decisions. It’s not only lease-or-buy decisions that are important, but also choices about lease length and the availability and structure of lease options. When the two groups work more closely together, Accounting can calculate the financial impact of various alternatives before the decisions are made. 

Instead of moving Real Estate into the Accounting department, some organizations may choose instead to handle decision making related to property leases, including negotiating the leases, through the Finance and Legal departments. In this scenario, Real Estate will keep only the responsibility for facilities management tasks, and in companies where this is an important focus, for culture and employee experience.

Either way, it seems likely that the new lease accounting standards will drive changes in skill sets, responsibilities, and collaboration between the CRE and Accounting teams.

Over the past few years, Visual Lease has helped hundreds of public companies achieve compliance with the new lease accounting standards. For many organizations, real estate lease accounting turned out to be much more complex and time-consuming than they anticipated.

Part of the problem was that adopting IFRS 16 and FASB ASC 842 for real estate leases and other leased assets was a new challenge; every company was working through the process for the first time and had little idea what to expect.

At this point, public companies have successfully worked through the process, albeit somewhat painfully in some cases. The good news for private companies facing the compliance process this year is that you have the opportunity to learn important lessons from their experience.

To help ensure your compliance process runs smoothly and delivers the best possible outcome, we’re sharing some advice about the common mistakes and oversights we saw and how you can avoid them.

1. Overlooking the cost-saving potential of real estate lease accounting

For most companies, real estate leases represent the bulk of leased assets (not necessarily in number, but in terms of financial value). That’s why it’s smart to think bigger when setting your goals for real estate lease accounting. This exercise can bring more benefits than merely achieving compliance with the new accounting standards. The data you collect for real estate lease accounting calculations, together with your lease software, is a powerful business planning tool that can help you take control of property costs.

Thinking about these larger goals as you begin to plan for your compliance project will impact what data you collect, the team you put together, and the tools you select.

Learn more:

Lease Accounting Changes: The Silver Lining You’re Overlooking

2. Putting the entire compliance burden on the Accounting team

At first glance, it may seem like moving to the new standards is something the Accounting team can handle on their own. We can tell you from experience that you’ll need more than Accountants on your team. And the sooner you get them involved, the better.

If you fail to include the people who negotiate and manage leases, you’ll miss key insights about how leases function and where to find critical data. We’ve seen Accounting teams operating in a silo overlook important pieces of data and end up scrambling to collect it as their compliance deadline approached.

When it comes to real estate lease accounting, you’ll need the expertise of the Real Estate team. Real estate leases are extremely complex, and some of the data you need for lease accounting calculations will need to come from the people who are making property leasing decisions. Here’s just one example: for each real estate lease on your balance sheet, you’ll need to know the likelihood of that lease being renewed at the end of the current term.

Beyond Real Estate, you may also need to include representatives from Procurement, IT, and Legal on your compliance team.

Learn more: FASB Lease Accounting: How to Assemble Your Readiness Team

3. Underestimating the task of gathering real estate lease data

Here’s a promise: it will take more time and resources than you expect to collect all the lease data you need for lease accounting calculations. That especially true for real estate lease accounting, due to the complex nature of those leases and the fact that you can’t get all the data you need from the lease contracts. Our advice: don’t delay!

Organizations make the mistake of hearing an estimated implementation timeline from a software vendor (ours is 90 days) and assume they have plenty of time to get started. However, that 90 day timeline starts when your team is ready with lease data abstracted, assembled, verified, and ready for importing into the system.

Not having your data ready for software implementation (i.e. incomplete data and incorrect data) can result in significant delays.

Learn more: Lease Accounting Compliance Deadline: Will You Be Ready?

4. Lacking expertise about the standards

There are many policy and accounting decisions (such as electing practical expedients) that need to be made early in the compliance planning process. If you’re not thoroughly grounded in the nuances of the new standards, you might make the wrong choices, or fail to make them at all until so late in the process that you delay your compliance project. It’s important to consider how those decisions will impact your financial reporting and your business in the long term.

Our advice? If you don’t trust your own knowledge of the standards, turn to your accounting advisory partner for help and include them on your compliance team from the beginning.

And, you may also benefit from getting advice from Real Estate partners for your real estate lease accounting.

Learn more:

Lease Accounting Decisions: Why It’s Smart to Partner With an Accounting Advisor

5. Failing to plan for post-compliance lease management

To gain the true value of real estate lease accounting and complying with the new standards, you may need to re-think leasing policies and procedures and plan for post-compliance changes.

For example, you will likely need to put new procedures in place to keep Accounting informed about new leases as well as any lease changes that impact financial reporting. Real estate leases do change frequently: space is added or given up, maintenance charges change over time, and leases may be canceled mid-term or renewed with modified terms.

With the increased impact of leases (especially real estate leases) on the balance sheet, many companies are taking a closer look at their real estate leasing policies and making adjustments that help them make better business decisions.

Learn more: Lease Accounting for Real Estate: How Will the New Standards Impact Leasing Practices?

Lastly, you’ll want to take advantage of your lease software and the lease data you’ve worked so hard to collect. With the right tools, you can find and prevent overpayments, which can easily save you millions on property expenses.

Learn more:

How Lease Accounting Software Can Help You Save Money on Leases

Visual Lease has decades of experience with real estate leases, so our platform is designed not only to help you achieve lease accounting compliance, but also to help you manage leases and optimize your real estate expenses.

Want to see how Visual Lease can make lease accounting and lease management work for you? Schedule a demo now.

Business agility is a paramount goal for today’s business enterprises. Given the rapid pace of change, and the shortening of one of my favorite metrics- “the meantime between surprises,” management always wants to be able to move on a dime in response to competitive threats, and suddenly emerging opportunities.

Business agility is possible with the new generation of cloud-based software, databases and prolific networks. But the static nature of real estate assets and leases challenges the notion of agility.

Back in year 2000, I collaborated with friends at MIT on a project we called, “The Agile Workplace.” We covered a lot of ground, including various forms of telecommuting, flexible office layouts, and collaborative applications. Our premise was that workplace agility was gained primarily by freeing the workforce from the traditional boundaries of work hours and assigned office locations. A liberated workforce was an agile workforce.

Most of the concepts we advanced then have been adopted over the last twenty years. But how do you make your real estate portfolio more agile?

I believe there are five key factors.

5 key steps to a more agile real estate portfolio

1. Ensure that you have a robust and facile real estate portfolio management software. The system will identify opportunities to transform certain leases into more flexible contracts through renegotiating options and terminations. Use the system to identify locations that are prime sublease opportunities; and rank these locations as priorities for disposition via a sublease.

2. Opt for short term leases going forward. This will give you more flexibility in your real estate portfolio by not tying you down with long term contracts. It will also reduce the impact of the new FASB lease standard. (Longer leases translate into higher net present value for assets and liabilities.)

3. Target highly marketable buildings in desirable markets, to facilitate sublease opportunities. Always consider exit strategies when entering a new lease; since this among other things will increase the agility of your occupancy by making your lease more marketable.

Learn more: Real Estate Market Reports for Enterprise Lease Portfolio Management

4. Strive for uniform office standards and layouts to minimize reconstruction time and complexity. Move toward unassigned workstations, to facilitate a more agile workplace arrangement.

5. Target co-working locations for a portion of the office population. Co-working has proven more flexible (and agile) since the offices are shared on a “just-in-time” basis. In the same vein, expand telecommuting which reduces demand on office space, as well as making a portion of your employees more agile.

Learn more: The Benefits of Co-Working Office Spaces and Flexible Workplaces

Adopt an agility mindset for managing your real estate portfolio

Business agility is a high priority for today’s global organization. We don’t think of the corporate real estate portfolio as a particularly flexible asset class. But by adopting an “agility mindset” in the leasing process, and addressing the factors cited above, it’s possible to move your leased portfolio toward a more flexible and “agile” future state.

Information technology is revolutionizing CRE

Technology is transforming everything today and this is true for commercial real estate technology as well.

When I look back to the early 1970s when I started as a CRE manager, we were very limited in information technology. I remember slaving over primitive spreadsheets to analyze a lease. Email was just beginning, and relational databases were in their early stages of development. Various processes like gaining approvals, finalizing a lease, or completing a build-out project, would take weeks. Today, it seems we’ve entered a new world. The IT tools of today super- charge CRE’s productivity, efficiency, and understanding of markets, transactions, and data.

So, what are the major commercial real estate technology drivers enhancing the profession?

Commercial real estate technology that’s making a big impact

Virtual reality (VR)

In no particular order, I would begin with virtual reality. Usually the stuff of science fiction, VR is particularly suited for use in commercial real estate technology:

• It facilitates virtual tours of prospective buildings and interiors.
• It allows project managers to visit and inspect construction projects virtually, minimizing the time and cost of travel.
• It allows CRE managers to review different layouts and furniture schemes.
• It enables virtual collaboration between CRE managers, service providers, and other stakeholders in the leasing lifecycle.

Internet of Things (IOT)

Another technology that is having a major impact on the CRE process is IOT.

Essentially a network of objects such as the myriad of building components and systems, IOT provides insight to a building’s performance, possible failure rates, energy usage and costs, and how thousands of disparate components work together. IOT creates enormous data sets that can be analyzed in real time to detect maintenance and other building issues before they lead to system failures.

We’ve all seen the IBM advertisement where the elevator maintenance man shows up because “Watson” (IBM’s super computer) detected a maintenance issue days before it led to a breakdown. Now with broadband, high speed networks, IOT drastically reduces the time and expense of building operations.

Artificial intelligence (AI)

The use of Artificial Intelligence as a corporate real estate technology is evolving rapidly and will have a profound impact on operations.

Consider the drafting of a lease document. AI will complete the many stages in developing a lease document, by populating the various categories of the lease from data searches, ensuring accurate calculations, and producing rent payment schedules based on the terms in the lease.

Wireless and more

There is a myriad of other technologies that are changing the CRE world. I’ve written about many these in earlier blog posts such as blockchain, beacon technologies, and collaborative applications.

I continue to be amazed at the power contained in the latest smart phones, and how these devices have changed the way we live, work, and play. The advent of wireless technology has revolutionized how and where we work. Work is no longer a place we go to, but what we do. And the transformation of the workplace such as co-working, has created a whole new generation of entrepreneurs and professionals unconstrained by the traditional 9 to 5 work day.

Commercial real estate technology will continue to evolve rapidly and will change every aspect of the facilities and real estate domain. It’s anyone’s guess what the next big thing will be. One can only speculate how robotics, big data, and such advances as neural networks, will change how we manage leases and properties in the future. But one thing’s for sure: it will be different!

Back in the 1980’s I was a manager in the corporate real estate department of Xerox Corporation. One of my assignments was to participate in a quality improvement program called “Leadership Through Quality.” Our mission was to use the tools and techniques of quality management to improve Xerox processes, services, and products. A key tool in this effort was corporate real estate benchmarking.

The value of corporate real estate benchmarking

Benchmarking can be defined as comparing one’s business processes and performance metrics to the best practices and metrics from other companies. The processes and methodologies of benchmarking can be a valuable tool in the management of corporate real estate.

Corporate real estate benchmarking methodology

One of my colleagues at Xerox was Robert Camp, who wrote one of the early books on benchmarking. Camp developed a 12-stage methodology that has endured the passage of time.

This methodology applies to a comprehensive benchmarking effort. A more abbreviated process can be used. Camp’s process was as follows:

1. Select subject
2. Define the process
3. Identify potential partners
4. Identify data sources
5. Collect data and select partners
6. Determine the gap
7. Establish process differences
8. Target future performance
9. Communicate
10. Adjust goal
11. Implement
12. Review and re-calibrate

Usually benchmarking is used to identify a specific problem in the company’s real estate portfolio such as space utilization, unit costs, leased rates, comparison of real estate values to prevailing market values, or cycle times such as average project cycles.

To take advantage of benchmarking, it’s essential that you have a robust lease management system that can provide the space and cost data to be used in the benchmarking process.

Learn more: The Corporate Real Estate Strategic Plan

Benchmarking for corporate headquarters

I recall an assignment when I was a consultant at Pricewaterhouse Coopers that asked the question: “How does the client corporate headquarters facility compare to other major headquarters in the area from the standpoint of cost and utilization?”

We benchmarked nine headquarters facilities in the client market area and discovered that the client headquarters was flagrantly too expensive, too inefficient, and too grandiose. Based on the benchmarking results, the client’s Board of Directors commissioned a relocation project to a less expensive and more efficient structure.

Optimizing facilities and costs

Another use of corporate real estate benchmarking can be used to measure the metrics of internal facilities and costs. Here management is concerned with those facilities that represent unusual variances either in utilization or costs, as a way to target remedial action.

As Director of Corporate Real Estate at Dun and Bradstreet, I used corporate real estate benchmarking to evaluate the leased facilities in the European portfolio, primarily to determine candidates for consolidation. I specifically recall a location in Milan, Italy where the space per person and unit costs were way out of the norm. The facility was located in an ancient Milanese villa, and the space per person exceeded 1000 square feet per person. When I presented these benchmarks to the country manager, I received major push back, saying that the facility’s design and décor were needed for image and marketing purposes. Since the unit was a top performer, I didn’t win the argument with senior management.

Commercial real estate performance metrics to target

Corporate real estate benchmarking should be a fundamental tool in the CRE manager’s tool kit. I would urge CRE managers to include a series of benchmarks in the annual real estate plan.

Such benchmarks as average space per person, average facilities cost per person, and average cost per square foot as compared to market rates can provide management with a keen insight to the portfolio’s performance relative to best in class metrics.

From my experience, corporate real estate benchmarking can be a way to establish annual performance goals. Using benchmarks can set the stage for strategic actions to meet these goals such as facilities relocations, consolidations, and/or lease renewals/ renegotiations.

Are you struggling to get ready for FASB? Learn more about real estate lease accounting:
FASB Accounting Overview for Corporate Real Estate
Corporate Real Estate Strategies and the New Lease Accounting Standards

Why measure and optimize equipment lease performance?

Most large, global organizations have some form of management and oversight in place for their real estate leases. After all, those leases represent millions of dollars and you want to make sure you’re getting the best value for your investment. But up until now, equipment leases have been under the radar.

That’s partly because of the de-centralized nature of equipment lease procurement and management: there could be hundreds of people, working in many different functions and regions, leasing different types of equipment. There’s no one group overseeing equipment leasing throughout the organization.

Also, equipment assets, unlike real estate, tend to move around and are harder to track. It’s much more likely that leased equipment will get lost, stolen or damaged before the end of the lease.

As a result, few companies have bothered measuring equipment lease performance, even though they may have many thousands of equipment leases globally. That’s changing now because of the new FASB and IFRS standards for equipment lease accounting.

Starting at the end of this year for public companies, all equipment leases get brought onto financial balance sheets and reports. That means they are now visible. Equipment lease performance will be increasingly scrutinized by financial leadership, external auditors, and investors.

Will you be able to explain why you’re spending so much to lease equipment? Let’s take a closer look at all the ways you waste money without centralized lease management for equipment. Then we’ll show you how you can take control of the situation with something you’re already doing: collecting equipment lease data for FASB.

How does poor equipment lease management cost you?

There are great reasons why companies choose to lease equipment instead of buying it. Leasing improves cash flow and makes budgets more flexible. It also allows you to get the benefits of new equipment and technology sooner than you might if you purchased equipment assets.

However, the financial benefits of leasing often disappear without careful oversight to prevent mistakes and wasted expense. For example:

• Failing to renew equipment leases by the option date and having to pay more for the renewal.
• Making poor decisions about purchase options.
• Agreeing to leases with terms that cost you more than you’re saving.
• Continuing to make lease payments after the lease expires.
• Failing to terminate leases for equipment that’s no longer in use.
• Paying the wrong amounts, especially for variable payment leases.

These are just a few of the ways your organization loses money without centralized equipment lease management and oversight in place.

The good news is, you can use the lease accounting data you’re collecting for FASB to help you analyze the effectiveness of your lease decisions. Then you can use that information to put standardized policies and procedures into practice that improve performance.

Tap into FASB data & technology to measure equipment lease performance

Like most organizations, you’re probably scrambling to collect and centralize all the lease data needed for compliance with the new FASB and/or IFRS standards. And your organization is probably investing in equipment lease accounting software to perform calculations, send journal entries to your GL system and produce disclosure reports. This situation can be a great opportunity to use that lease data and technology to your advantage.

First of all, you’ll need a central repository that captures ALL your equipment lease data, not just what’s required for FASB.

Also, choose equipment lease software that does more than accounting. For the same price or even less, you can get a comprehensive platform that helps you manage equipment leases (and real estate leases too) as well as handle the accounting.

Learn more: Equipment and Property Lease Accounting: Can One System Do Both?

Here’s what to look for:

Asset-level equipment lease tracking. Some products only track leases at the contract level. But equipment lease contracts often include hundreds of individual assets on the same contract. To properly manage your leased assets, you need to be able to track serial numbers, locations, and other data points associated with each item on the contract.

Easy customization. For a large global organization, you need to organize your system and your data according to the way you work. Make sure you’ll be able to make changes as your company makes structural changes such as mergers or acquisitions.

Flexible reporting. To get the intelligence you need to improve your lease performance, you’ll need the ability to slice and dice equipment data by a variety of criteria.

Intelligent alerts. To prevent missing critical lease option dates, set up alerts to notify lease managers in time to act.

Equipment lease audits. Validate all lease payments against lease contract terms and avoid overpaying.

With your centralized lease data repository and management technology in place, you’ll be able to create reports that reveal the true cost of your equipment leases.

Want to see how that works in Visual Lease? Schedule a personalized demo.

Use lease intelligence to develop standards

With the right lease data at your fingertips and a comprehensive leasing system, you can:

• Find out which types of lease structures and lease terms provide the best financial return.
• Break down equipment lease performance by regions, business units, type of asset, asset manager, or any other criteria that helps you compare performance.
• Find out where you’re losing money.

Here are just a few ways you can use that intelligence to standardize equipment lease operations across your organization and improve performance:

1. Develop policies for negotiating lease terms for different types of assets.
2. Set up lease approval requirements to make sure policies are enforced.
3. Establish timelines and procedures (and assign responsibility) for regularly updating equipment lease data. That should include the location of leased assets and usage status.
4. Set up procedures for handling end-of-term and early lease terminations.
5. Track and compare the performance of people and groups responsible for lease procurement and management.

Don’t miss this opportunity to take control of your equipment leasing and stop wasting money. The experts at Visual Lease can help you get the right data and analytics in place to drive cost-effective process improvements.

Over sixteen years ago while a Gartner analyst, I launched a series of research reports on the subject of virtual teaming. Because of mobile technology and the growth of telework, it became clear that virtual teaming would become the norm in business operations. Today virtual teaming is widely adopted, and organizations need collaborative real estate technology to help business processes become more efficient and productive.

Why real estate technology must be collaborative

Corporate real estate involves a number of disciplines that must be coordinated, including internal staff and external service providers. Collaborative applications can be adapted to ensure seamless process flow through a real estate project life cycle; from project planning, site selection, leasing, interior construction, equipment and furnishing procurement, staff move, and punch list functions.

In addition, the application can be used in the lease administrative process to update rent payment schedules, lease addendums, and notifications.

So, what is the best practice in the procurement of collaborative real estate technology?

5 Steps to select the best real estate technology tools

1. Document your key CRE processes.

This should involve identifying key participants, their roles and responsibilities, and how they interact through the real estate project cycle.

The resulting process map should then form the basis of what type of collaborative application is best suited to support all phases of the project life cycle.

2. Specify goals for real estate technology.

Before developing a request for proposal (RFP) you need to specify key goals for real estate technology tools. Specifically, do you need to:

• Increase the rate of the real estate life cycle?
• Standardize work flows?
• Improve visibility and collaboration between teams?
• Create, edit, and work on shared documents with team members?
• Integrate with other tools?

Once you’ve established specific goals, you now have the basis for evaluating whether alternative applications can meet these goals.

3. Evaluate real estate technology delivery.

The next issue is software delivery. Do you want the application to be hosted on premise or in the cloud? This question will depend on the overall practice of your organization’s approach to software delivery:

• Do you have the technical capability to host on premises?
• Is cost an issue?
• To what degree does the application integrate with other applications, and depend on a centralized database?
• Is security an issue?

4. Gain buy-in for adopting real estate technology.

Another critical issue is whether the application will receive employee buy-in. Does your organization have a collaborative culture? Or are the employees more independent and less likely to readily adopt a collaborative tool?

The most effective way to address the adoption issue is to form an employee evaluation committee, consisting of representatives from the key CRE functional groups.

Have the committee evaluate various alternative software solutions, both through vendor demonstrations and trial utilizations. The committee will be charged with the objective of evaluating and then recommending their preference. Employee input will be a critical factor in the selection process.

5. Compare price and value.

The final consideration in the Software selection process is the question of pricing. You need to have a clear understanding how the pricing model relates to software features and value. Is the pricing flexible relative to adding new users, new features, and versions? What is the maintenance component in the pricing?

Learn more:
Get the Best Lease Accounting Software By Comparing Price and Value

What can you gain by choosing collaborative real estate technology?

The collaboration application can be the central platform for CRE operations. If properly acquired and configured, it can vastly improve team productivity, coordination, and goal achievement. And most importantly, the application will enhance the efficiency of CRE processes, by improving communication and data sharing between team members and external service providers.

Learn more:
Lease Portfolio Management: Policies and Procedures to Reduce Risk
Blockchain Technology: The Impact on Corporate Real Estate

In my last couple of blog posts, I covered the basic elements of real estate market analysis and the real estate market cycle.

In case you missed them:
Real Estate Market Analysis: A Primer for CRE Executives
Understanding Real Estate Market Cycle for CRE Market Analysis

In this post, I’ll reveal how you can use office real estate market reports to gain insight into specific market trends. Office real estate market reports are an essential tool in the effective management of the enterprise leasing portfolio.

To illustrate the use of commercial real estate market reports, let’s consider a major market in the Bay Area, California, Silicon Valley. This market is the center for technology innovation, and is the home of some of the major technology firms like Google, Apple, HP, and Facebook. Silicon Valley has experienced significant growth in space and many large tenants are reaching their ten-year renewal point from market lows in 2008.

Here are the key questions you need to address in assessing the market:

• What has been the growth in employment and how will this drive demand?
• What is the trend in vacancy and how will this affect net absorption?
• What’s been the trend in net rental rates?
• What is the over-all market outlook.

Let’s take a look at the answers you can find in the real estate market reports from Cushman & Wakefield, Jones Lang LaSalle, and Savills Studley.

Real estate market analysis report examples

Below are excerpts from three real estate market reports for the 4th quarter of 2017. Notice how the reports vary in emphasis but still give a composite picture of the Silicon Valley market.

Cushman and Wakefield:

• The current average asking rent of $4.57* psf (full service) is up from $4.51 psf one year ago. They expect average rents to flatten across the Valley as the concentration of deals will be in lower rent markets.
• Net absorption in Q4 was 222,000 sf, an increase from the negative -78,000 sf recorded in Q3.
• They anticipate that activity will improve in 2018. Tenant demand remains strong at 9.9msf of active market/ R&D requirements.

Jones Lang LaSalle:

• 2017 marked the 7th consecutive year of positive occupancy gains for Silicon Valley.
• With the Valley entering its 8th consecutive year in the current cycle, tenants that signed 10- year deals between 2009 and 2010 are nearing their renewal exercise date.
• Those that signed leases when rents were at cyclical lows may consider less expensive submarkets in an effort to keep their occupancy cost contained.

Savills Studley:

• Deal volume spiked to 1.5 msf, the strongest total since the fourth quarter of 2016. A flurry of leases over 100,000 sf fueled the quarterly spike.
• The regions’ overall availability rate decreased by 110 basis points to 14.9%, dropping 40 basis points from year end 2016.
• The class A rate fell by 240 basis points to 18.6%, its lowest mark since sub-leasing late 2016, and has dropped 10 basis points from year end 2016.
• Regional overall asking rent ($3.99 dipped by 3.5% during the fourth quarter, but has increased by 7% year-on-year.
• Class A rent has spiked by 6.3% from year-end 2016 to $4.20.

(*Note: rental rates are quoted on rate per SF on a monthly basis in West Coast markets, not on annual basis which is typical in other US markets.)

Major deal activity in real estate market reports

• Savills Studley focused on the impact of co-working. WeWork made a big move in the Valley during the 4th quarter subleasing 450,000 sf at 301 and 401 San Antonio Avenue in Mountain View. The facility will house WeWork’s Enterprise division which is targeting leases with major corporations. Amazon for example, leases nearly 15,000 sf at WeWork’s Valley Tower center in Downtown San Jose.
• Cushman & Wakefield also focused on WeWork. The largest deal of the quarter was a sublease by WeWork from Linkedin (456,000 sf) in Mountain View.
• WeWork is rumored to have a tenant in tow for approximately 228,000 sf of that space.

Tips for using office real estate market reports

• Work with your broker or tenant representative in analyzing and interpreting market reports in advance of leasing projects.
• Update market outlooks for major leasing locations on a semi-annual basis.
• Use the real estate market reports to identify risks such as limited availability, abnormal rental rate increases, or changes in local codes that would impact long term occupancy.

CRE Managers: Stay on top of market trends

CRE managers should remain cognizant of market trends in locations where leasing actions are anticipated over the next two years. Real estate market reports are an essential tool in keeping the CRE team up to date on market trends. Focus on net absorption, employment trends, changes in occupancy, and rental rate trends. Be aware of changes in your key market cities; and be prepared to respond with actions that limit leasing risk and exploit market opportunities.

To learn more about lease portfolio management, read these related articles:

Lease Portfolio Management: Policies & Procedures to Reduce Risk
Corporate Real Estate Strategies and the New Lease Accounting Standards

FASB lease accounting is changing the game not only for companies with leases, but also for the real estate brokers who help them to manage their property leases. Now, in addition to providing lease administration software to clients, brokers will be smart to consider providing lease accounting software solutions as well.

In fact, if they don’t, real estate service firms may find themselves losing clients.

Keep reading to learn why, and what to do about it.

Why lease administration software is important for real estate brokers

Commercial real estate services firms typically provide day-to-day management of property leases for their clients. This service is a relatively small source of revenue. However, it serves as a foot in the door to get the more profitable business: the big transactions when companies acquire new space.

That’s why many commercial real estate brokers offer lease administration services. As part of that service, they include a software solution that can used by both the client and the service provider. It helps the service firm more efficiently manage leases, and it gives the client easy access to their lease information when they need it.

Now, the upcoming lease accounting changes are shifting that model. Real estate firms are in danger of losing their foot in the door if they don’t offer lease accounting software solutions as well.

FASB changes & the need for lease accounting software solutions

The lease accounting changes coming from FASB and IFRS (in January 2019 for public firms, and a year later for private organizations) mean that companies need to track much more lease data than they did previously. Just about every lease must be brought onto accounting balance sheets.

So, companies need an automated way to centralize lease data and perform the necessary calculations. While the entry-level lease administration tools offered by real estate firms may handle the basic lease management functions, there’s no support for lease accounting. That means every company with more than a handful of leases is out there shopping for lease accounting software solutions.

The dilemma for companies: one system or two?

The need for lease accounting software solutions creates a dilemma for large organizations that currently maintain lease data in a broker-owned lease administration tool.

Should they purchase one of the standalone lease accounting software solutions, and keep lease administration information in the existing system?

Or, should they move to one complete, integrated lease solution that does both?

The two-system approach: a logistical nightmare

As companies begin to investigate the technology infrastructure they will need to meet lease accounting objectives, it quickly becomes clear that the two-system approach is problematic at best.

For one thing, the lower-end lease administration tools that real estate service firms typically offer don’t integrate well with other systems. Until now that wasn’t a problem, because they didn’t need to.

Because of the new lease accounting rules, lease payments and other data will need to be regularly fed to general ledger systems. Since low-end lease admin tools can’t send data feeds, companies would be forced to use manual export/import processes.

Not only is that incredibly time consuming, but it’s expensive to set up. For the real estate firm, integration with lease accounting software solutions could cost more than they’re currently paying for their administration tool.

For the client, relying on manual data moves is risky: it’s prone to error. When it comes to accounting data for multi-million dollar real estate leases, it’s a risk many CFOs (and their audit firms) won’t even consider.

And there’s even more manual work involved in keeping lease data up to date in lease accounting software solutions. Property leases can and often do change during the course of the lease: payments change, options are executed, and space is added or removed. That means more manual movement of data, and more risk of mistakes, when you’re stuck with two systems.

Few large organizations are going to accept a difficult ongoing data management process like this. That’s why end-to-end lease administration and lease accounting software solutions are catching on.

The issues with moving to a single system

When a large company decides to move to a combined solution, they face another problem with their real estate firm.

Finance executives may not want an outsourced real estate firm to have administrative access to their accounting data. That decision may be made based on lease accounting guidance from audit partners. And they certainly don’t want their real estate firm to OWN their lease accounting software solution.

For real estate services firms, the handwriting is on the wall: clients need to centralize all their lease data, and many will choose to take it back into their own hands. That could easily mean the real estate broker loses their foot in the door that ensures they get the bigger business associated with property leases.

Can real estate service firms keep their clients’ business with lease accounting software solutions?

Smart real estate service providers won’t just take this situation lying down and wait to lose customers.

The good news is, if you’re proactive you can get out in front of the problem and actually improve your relationship with your clients.

Our advice? Take these steps now:

1. Get educated about the upcoming FASB and IFRS lease accounting changes.

Learn about the challenges companies are facing and the data they need to collect. Understand lease accounting problems and solutions. Also, be able to speak to clients about the risks and opportunities related to FASB compliance, and how you’ll be stepping up your management practices accordingly.

Here are a few articles to get you started:

Lease Accounting Changes: The Silver Lining You’re Overlooking
Lease Portfolio Management: Policies & Procedures to Reduce Risk
Corporate Real Estate Strategies and the New Lease Accounting Standards

2. Learn about end-to-end lease administration and lease accounting software solutions.

You may be able to improve your position by offering technology that better meets your clients leasing needs instead of one that’s only half a solution.

We’re happy to show you Visual Lease and explain how we stack up to our competitors: REQUEST A DEMO.

3. Get a seat at the table and help clients make smart decisions.

The fact is, if your clients choose the right lease accounting software solutions, you can still keep their lease administration business.

Visual Lease, for example, has the security infrastructure in place to allow an outsourced firm to work with a client’s lease administration data, while controlling access to sensitive accounting data.

Don’t wait for your clients to come to you with this problem.

Find out who is involved in your clients’ FASB/IFRS implementation process and technology selection. Get involved and earn their trust by recommending smart lease accounting software solutions. If you do, you can stay in the game and keep your valued clients.

In case you missed it: Real Estate Market Analysis: A Primer for CRE Executives

In this post, I’ll delve into the question of the real estate market cycle. Understanding the cycle is a fundamental element of understanding the broader real estate market. However, before discussing the real estate market cycle, we should look more closely at what we mean by the real estate market.

There are many elements that make up the real estate market. This blog is focused on commercial markets as opposed to residential markets. Specifically, our market definition includes office, industrial, retail, and hospitality markets. Also the markets are further differentiated into urban and suburban markets, building class (A,B,C) and locale (city and regional markets).

The 4 phases of the real estate market cycle

Real estate markets follow a predictable 4 phase cycle. A Harvard blog post labeled the four real estate market cycle phases as:
Phase 1: Recovery; Phase 2: Expansion; Phase 3: Hyper Supply; Phase 4: Recession.

Real Estate Market Cycle Phase 1 (Recovery)

Here the markets are on an upward trend; essentially coming out of the last down turn. In many urban and suburban markets, buildings are suffering from high vacancies, declining rentals, and some cases of bankruptcies and foreclosures. Unemployment is relatively high, and demand has diminished.

Real Estate Market Cycle Phase 2 (Expansion)

The markets are showing signs of recovery. Tenant demand is rising, along with rental rates. Real estate developers are beginning to buy and build new properties. Space absorption is increasing, and the general commercial markets are steadily improving. These trends vary by city and sub-markets, but in general this is a period of recovery.

Real Estate Market Cycle Phase 3 (Hyper Supply)

This is the period in the cycle when markets boom, and become overheated. Most recently, this phase occurred in 2005 with many markets becoming over built, and supply exceeding demand. The result is declining rents and growing vacancies.

Real Estate Market Cycle Phase 4 (Recession)

This is the bottoming of the market. (Remember the recession of 2008?) Foreclosures abound, bankruptcies depress the property markets, tenancy contracts, and many properties stand vacant for months. But the markets finally bottom out, and the general economic scene shows signs of recovery. The cycle repeats itself, with tenant demand increasing, rents rising, and occupancy improving with improved employment trends.

Where are we now in the real estate market cycle?

Most pundits believe we are in a long-term period of economic expansion and growth.

Brandon Turner of BiggerPockets.Com wrote the following:
“Many people subscribe to the ‘18-year real estate cycle’ theory, first outlined by economist Homer Hoyt in the 1930s and later re-popularized by economist Fred E. Foldvary, who accurately predicted the 2008 collapse of the real estate market in his report, The Depression of 2008. The 18-year real estate cycle looks at the previous 100 years in American housing prices and, except for a long winter caused by World War II, has found that the market has generally operated on an average of an 18-year cycle from peak to peak, seeing a peak in 1989 and again in 2007.”

Learn more: The Real Estate Development Game

Understanding the real estate market cycle is a key aspect of market analysis.

In the next blog post, I’ll focus on a specific real estate market and examine the critical factors that underscore the market’s dynamics.

Don’t miss it: subscribe now!

Why lease accounting may impact corporate real estate strategies

The new lease accounting standards from FASB (U.S.) and IASB (international) essentially require all leases to be brought onto the balance sheet. That’s a big change. According to JLL, currently more than 85% of lease commitments don’t appear on the balance sheet.

After the new rules take effect, balance sheets will show very different debt-to-equity ratios and return on assets. These changes may have far-reaching impacts on the organization, such as loan covenants and greater scrutiny on lease policies and decisions. And it’s happening soon: January 2019 for public companies.

The questions for corporate real estate is, should these lease accounting standards change your corporate real estate strategy? And if so, how?

Corporate real estate strategies you may have to re-think

If you’ve researched the impact of lease accounting on corporate real estate management strategy, you’ve probably seen a wide range of opinions. However, there’s one thing everyone agrees on. The increased financial impact of leasing will mean increasing scrutiny of your corporate real estate strategies and decisions. You may also face new approval requirements from finance leaders for real estate leasing decisions.

Now is the time to think through your current corporate real estate strategies, understand how the new lease accounting rules may impact your organization, and adjust accordingly.

The buy vs. lease decision

Under the new lease accounting rules, you will lose some of the financial benefits of leasing space. Does that mean you should decide to purchase buildings instead of leasing?

Some experts predict that when looking to occupy all or most of a building (like a corporate headquarters), more organizations will now consider the option to buy. According to CBRE, if you’ve got excellent credit you may find that the cost of capital to purchase is lower than the long-term cost to lease.

However, others experts argue that many other factors (besides balance sheet impact) will continue to be the main drivers in the decision to buy or lease space. Some of these include:

• business requirements and forecasts
• availability of capital
• debt and equity covenant restrictions

Remember that the lease accounting changes, in most industries, will impact everyone equally. Your competitors are facing the same challenges you are. However, if you are the lone company in your vertical with a lot of leased space (versus owned) then you may want to rethink your corporate real estate strategies related to leasing.

Lease term length

Under the new rules, longer leases can have a more detrimental effect on the balance sheet due to larger lease liabilities. Does that mean you should consider shorter lease terms as one of your corporate real estate strategies?

There’s already a trend toward shorter lease terms globally. The average lease length for commercial space in the U.S. is 7 years, but in some international markets the average is 2 to 3 years. With the lease accounting changes factored in, some predict that trend will grow.

However, there are practical considerations that may preclude shorter lease terms. For one thing, there’s a lot of risk for landlords with shorter leases. Tenants may also not want to risk having to move every 2 to 3 years. And for certain industries where leasehold improvements are common, having to depreciate that cost over a short lease may not be realistic.

That being said, it’s possible we may see leases for smaller turnkey spaces becoming shorter with more options. But remember, options that you are “reasonably certain” to exercise will be included (for accounting purposes) as part of the lease term anyway.

Lease structure

In many industries, fixed, all-inclusive lease payments are common for the sake of simplicity. However, under the new lease accounting standards, a higher proportion of variable payments (i.e. with payments for taxes and maintenance separated out) may result in smaller lease liabilities. Should you consider modifying lease structures as one of your corporate real estate strategies?

To be sure, structuring leases with separate payments for lease and non-lease components will simplify the workload for your financial reporting team under the new standards. But that can be more work for accounts payable (unless you have lease management software that makes variable payments simple and automatic).

Even with fixed lease payments, you can ask landlords to provide details about breakdowns of your payments for reporting purposes. However, landlords may consider that proprietary information and may not be willing to comply. If you face that situation, outsourced real estate partners can also provide helpful information.

Sale-leaseback is another lease structure that changes significantly with the new standards. Until now, these transactions served as a form of off-balance sheet financing. With this advantage taken away, you may find this lease structure a less attractive option in your playbook of corporate real estate strategies.

More resources for strategic corporate real estate leadership:
Lease Portfolio Management: Policies & Procedures to Reduce Risk
The Uncertain Future of the Corporate Real Estate Profession

The bottom line: how to decide what’s right

Who is right in all these debates? The fact is, there is no one correct answer for everyone. You need to make decisions that are best for your organization. That means considering lease accounting impacts along with other factors that currently affect your corporate real estate strategies and decision making.

Here’s the difficulty: you can’t possibly do that without all your lease data in a central repository. And without software that makes it easy for you to analyze your lease data, find out where your risks and opportunities lie, and make informed decisions about corporate real estate strategies.

Just about every organization is rushing out to get lease accounting software to push out balance sheet calculations. But lease accounting software alone can’t help you with the critical decisions ahead. The lease accounting changes can serve as your opportunity to implement a comprehensive end-to-end lease solution that helps you improve corporate real estate strategies along with lease accounting.

Learn more:
Lease Accounting Changes: The Silver Lining You’re Overlooking

Virtually all real estate service firms offer some type of real estate market analysis. These reports are typically offered at no cost and some are quite good. Some larger firms such as CBRE, Jones Lang La Salle (JLL), and Cushman and Wakefield, offer global reports with focus on all the major market cities. Typically reports covering market analysis of real estate are issued quarterly with annual forecasts and summaries.

The reports are based primarily on brokerage activity, and most are quite detailed and accurate.

What real estate market analysis reports cover

Generally the reports cover the following categories:

• Gross and net rental rates (in $ per square foot) by property type, including office, industrial, retail, apartments, land valuation.
• Key statistics include absorption rates, vacancies, implicit interest rates, and major transactions including major leases, subleases and sales.
• Markets are organized by major metropolitan areas (both suburban, and central business district). Markets are further divided by property quality: A,B C. Many of the reports cover international markets including Canada, UK, Continental Europe, Asia, Australia, and Middle East.
• Most reports provide forecasts of rental rate trends, interest rate trends, and outlook on availabilities, and shortages.
• Key statistics include vacancy rates, absorption (rate at which space is absorbed), space growth or reduction, interest rates, and major transactions.
• The reports usually provide a commentary on market conditions, and key factors influencing market dynamics such as employment trends, new construction, regulatory changes, and changes in key factors such as zoning changes, etc.

The value of a focused real estate market analysis report

CRE managers can order special market reports that focus on specific markets and sub-markets. Ordinarily, real estate service firms will provide market analysis as part of a brokerage assignment. Sometimes it’s wise to have more than one report to validate projections and trends.

Real estate market analysis: the latest trends

In reviewing the latest reports, I was struck by some key findings:

• The Tech industry is the key driver in office markets nationwide, particularly in West Coast markets.
• The trend of growth in urban markets is beginning to subside with a resurgence in suburban markets.
• Growth in shared offices continues to trend upward, with growth in most urban and suburban markets.
• In general, the real estate markets worldwide are in good shape with no contraction anticipated over the next three years. Some analysts raise concerns with a downturn possible after three years, but there is no consensus on this possibility.

CRE managers need to stay abreast of real estate market trends and adjust leasing and portfolio strategy as appropriate.

I recommend taking a five year view of the markets, and update your company’s real estate strategy based on a five year rolling forecast. This means becoming knowledgeable about the insights provided by real estate market analysis reports, and following the trends on a quarterly basis.

Learn more:
Lease Portfolio Management: Policies and Procedures to Reduce Risk
CoreNet Global Summit: 4 Mandates for Corporate Real Estate

That’s why we have prepared this quick reference that explains the IFRS and FASB changes in the new standards. You can also see the differences between the IFRS changes and FASB changes to lease accounting.

Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

Scope of IFRS and FASB changes

FASB changes in ASC 842

Scope includes leases of all property, plant, and equipment.

IFRS 16 changes

Scope includes leases of all assets.

Definition of a lease

Under both standards, A lease contract must convey the right to control the use of a specifically identified asset for a specified period of time. A customer controls an identified asset when the customer has both the right to obtain substantially all of the economic benefits from its use and the right to direct that use.

FASB changes in ASC 842

A lease is defined as a “contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”

IFRS 16 changes

A lease is defined as a “contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.”

Definition of a short-term lease

FASB changes in ASC 842

A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise.

A lessee may recognize the payments on such a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.

IFRS 16 changes

A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option.

A lessee may recognize the payments on a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.

Lease accounting overview

Under both standards: As of the lease commencement date, a lessee will recognize both:

1. A liability for its lease obligation (initially measured at the present value of the future lease payments not yet paid over the lease term).
2. An asset for its right to use the underlying asset (i.e., the right-of-use (ROU) asset) equal to the lease liability, adjusted for lease payments made at or before lease commencement, lease incentives, and any initial direct costs.

FASB changes in ASC 842

Lease classification
A lessee will classify a lease as a finance lease when the lease meets any of the following criteria at lease commencement:

1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
3. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion will not be used for lease classification purposes.
4. The present value of the sum of lease payments and any residual value guaranteed by the lessee that is not already reflected in lease payments equals or exceeds substantially all of the fair value of the underlying asset. Note that for measurement purposes, lease payments will only include amounts probable of being owed by the lessee under a residual value guarantee.
5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

FASB operating lease and finance lease treatment
For a finance lease, the ROU asset is generally amortized on a straight-line basis. This amortization, when combined with the interest on the lease liability, results in a front-loaded expense profile in which interest and amortization are presented separately in the income statement.

For an operating lease a straight-line expense profile that is presented as a single line item in the income statement.

IFRS 16 changes

All leases will be recorded as per the FASB’s finance lease approach when amortizing the ROU asset.

Lease term

FASB changes in ASC 842

Lease term is the non-cancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option or in which the exercise of those options is controlled by the lessor.

Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee, (2) a contract term obliges the lessee to exercise (or not exercise) an option to extend or terminate the lease, or (3) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.

A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.

IFRS 16 changes

Lease term is the noncancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option.

Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee or (2) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.

A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.

Lease payments

Under both standards, lease payments include:

• Fixed payments
• Variable payments that are based on an index or rate (e.g., CPI) calculated by using the index or rate that exists on the lease commencement date.
• Amounts that it is probable will be owed under residual value guarantees.
• Payments related to renewal or termination options that the lessee is reasonably certain to exercise.

Lease payments do not include variable lease payments that are based on the usage or performance of the underlying asset (e.g., a percentage of revenues).

FASB changes in ASC 842

Variable payments based on an index or rate would only be reassessed when the lease obligation is reassessed for other reasons (e.g., change in the lease term, modification).

IFRS 16 changes

Variable payments based on an index or rate would be reassessed whenever there is a change in contractual cash flows (e.g., the lease payments are adjusted for a change in the CPI).

Discount rate

Under both standards, lessees use the rate charged by the lessor if the rate is readily determinable. If the rate is not readily determinable, lessees will use their incremental borrowing rate as of the date of lease commencement.

FASB changes in ASC 842

Private-company lessees can elect to use a risk-free rate.

IFRS 16 changes

No exemptions provided for private-company lessees.

Lease modification accounting

Under both standards, a lease modification is any change to the contractual terms and conditions of a lease.

A lessee will account for a lease modification as a separate contract (i.e., separate from the original lease) when the modification (1) grants the lessee an additional ROU asset and (2) the price of the additional ROU asset is commensurate with its stand-alone price.

Lessees would account for a lease modification that is not a separate contract by using the discount rate as of the modification effective date to adjust the lease liability and ROU asset for the change in the lease payments.

The modification may result in a gain or loss if the modification results in a full or partial termination of an existing lease.

Sublease treatment

FASB changes in ASC 842

The intermediate lessor would classify a sublease by using the underlying asset of the master lease.

IFRS 16 changes

The intermediate lessor would classify a sublease by using the ROU asset of the master lease.

Sale-leaseback treatment

FASB changes in ASC 842

The transaction would not be considered a sale if (1) it does not qualify as a sale under ASC 606 or (2) the leaseback is a finance lease.A repurchase option would result in a failed sale unless (1) the exercise price of the option is at fair value and (2) there are alternative assets readily available in the marketplace. If the transaction qualifies as a sale, the entire gain on the transaction would be recognized.

IFRS 16 changes

The transaction would not be considered a sale if it does not qualify as a sale under IFRS 15.A repurchase option would always result in a failed sale. For transactions that qualify as a sale, the gain would be limited to the amount related to the residual portion of the asset sold. The amount of the gain related to the underlying asset leased back to the lessee would be offset against the lessee’s ROU asset.

There are many organizational models that are used to manage corporate real estate. Companies adopt primarily two models: centralized and decentralized. In this article, we’ll explore the differences and how they impact your organization’s ability to transition to the new lease accounting standards: FASB ASC 842 and IFRS 16.

Two common CRE organizational models

In the decentralized model, typically the business units handle all the primary functions of the corporate real estate function to include leasing, design, construction, facilities management, lease administration, etc. The decentralized model is popular with large diverse organizations that prefer to control all the key disciplines of the real estate function at the unit level.

The centralized model serves as the real estate support staff for all the business units. This model is popular with homogeneous companies with a singular service or product offering. Major accounting firms and banks are typically organized with a centralized corporate real estate function serving all the lines of business.

Major challenges of implementing the new lease accounting standards

Now consider the major tasks needed to implement the new lease accounting standards with respect to these two organizational models. The first step is assembling and organizing the lease portfolio data. Invariably this task will be a challenge when leases are scattered throughout the business units. Just getting the leases assembled and organized will be an administrative nightmare. And there will be the issue of consistency across unit portfolios.

Learn more: Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance

Which organizational model is better equipped to manage the transition to the new lease accounting standards?

The centralized corporate real estate organization has the advantage of uniformity and consistency in the real estate file, making the task of conversion to the new lease accounting standards significantly easier. The centralized group has the advantage of familiarity with the portfolio and can retrieve files and data readily. The centralized group also has the benefit of having worked with corporate finance, legal, and accounting; and thus these relationships will work to make the conversion process more efficient.

The centralized group also has more direct access to senior management, and can resolve issues of lease strategy, balance sheet effects, and other issues that surface during the transition process.

From my experience the greatest impediment to a company wide change is effective communication. The centralized group is typically more unified and enjoys smoother communication processes than a decentralized group that must cope with different personalities, unit culture, and differences in approach.

Most decentralized real estate organizations will most likely form a multi-unit task force with representatives from each of the unit real estate groups chartered to gather and organize the lease files from each of the units.

Creating a task force to execute the new lease accounting standards

Despite the organization models and their respective challenges, it’s likely that a multi-discipline team will be formed to manage and execute the transition process. Most likely the task force will create a separate lease database and create in essence a “parallel universe” that will have all the specific calculations and values prescribed by the new lease accounting standards.

The advantage of this approach will be minimizing disruption to ongoing operations. This approach will require a high level of cooperation and collaboration from the real estate staff(s). From my experience it’s a best practice to appoint a senior manager to lead such a task force, and have the leader report to a fairly high level in the corporate structure.

The task force should include a representative from corporate accounting, corporate finance, and also include external specialists such as representatives from the accounting firm supporting the organization’s annual audit.

Learn more: FASB Lease Accounting Changes: How to Assemble Your Readiness Team

There’s been increasing interest in what is known as beacon technology. Usually associated with retail marketing, beacon technology first emerged in 2013. Today the technology is driving a huge growth in retail sales with a 10-fold increase in retail sales from $4 billion in 2015, to $44 billion in 2016.

Apple invented the standard for beacon technology in 2013. Essentially the technology depends on users downloading the app on their smart phone which allows them to receive messages from Beacon enabled locations. In essence, the technology employs Bluetooth low energy (BLE) wireless technology that sends a signal that can be received on a user iPhone that is near the beacon transmitter. The user must opt in to the specific Beacon application. The beacon sends out a signal every second or more to a short distance which can range from a few feet to several hundred yards.

While Apple invented the technology, it does not provide the hardware. There are several leading vendors of the beacon transmitters including Kontakt, Bluesense, Gelo, Estimote, and Google’s version, Eddystone.

CRE applications for beacon technology

So why should CRE managers have an interest in beacon technology? Essentially beacon technology is an extension of the smart building format that focuses on building automation and the Internet of Things (IOT). With beacon technology, managers can keep track of space utilization by tracking workstation use, vacancies, etc. Beacon technology can also track such things as energy use, by tracking temperature fluctuations, floor space use, employee traffic patterns, etc. CRE managers can use the technology to push messages to visitors such as meeting location, daily event schedules, and other information helpful to visitors.

In the event of emergencies, beacon technology can alert employees of incident status, exit routes, and alert rescue personnel of employee locations, and status.

Beyond office and retail use, beacon technology is being widely employed in the sports industry. Major League Baseball has deployed beacon technology in 20 of the 30 major league parks in 2015. Baseball fans can get information on concession deals, seat upgrades, and game schedules. And museums have discovered the benefits of beacon technology by delivering exhibit information, floor plans, and information on specific exhibits that replaces the audio headsets. Museums gather information on attendee interest with specific exhibits that help with future planning.

Concerns about beacon technology

Beacon technology raises the issue of personal privacy. Critics note that the technology can be abused by tracking individual’s buying behavior and location within stores and offices. Another issue is the question of uniform standards. There is no one universal standard for cell phone manufacturers, although this is expected to be remedied in the near future. The fact that users can opt out of a beacon technology solves the privacy issue, but is not a long-term solution.

Beacon technology: another trend to watch

Beacon technology is yet another example of how technology is transforming the personal experience from the workplace, to retail, sports, education, hospitality, entertainment, and an almost limitless variety of activities at the intersection of people and places. I’ve stressed the need for CRE managers and professionals to stay abreast of technology trends since it is surely technology that will define the CRE mission of the near future.

In a recent article, the president of IBREA, Ragner Liftrasir, drew a vivid characterization of the blockchain platform. Lifthrasir wrote:

“The Internet made it possible for individuals to transfer information quickly, cheaply and paperlessly without obtrusive intermediaries. Similarly blockchain technology offers the same advantages for transferring VALUE. You use the internet to transfer words and pictures. You use blockchain platforms to transfer money and assets.” Ragnar Lifthrasir Realcom, March 29, 2016

What is blockchain technology?

Blockchains basically consist of a distributed ledger and a cryptocurrency. It’s essentially software and as such can be updated, stored, transferred, and all the things we come to associate with software.

When we hear the term “blockchain” we think of Bitcoin, but there are myriad versions of blockchain including Ethereum, and other versions.

What’s the expected impact of blockchain technology on corporate real estate?

Lifthrasir identifies four key areas in real estate where blockchain will have a major impact. These include:

a.) disintermediation
b.) fraud prevention
c.) digital currency
d.) smart contracts

Disintermediation

Most of the middlemen in a real estate transaction can be eliminated by the use of the blockchain. For example: “Blockchain will enable every property, everywhere, to have a corresponding digital address that contains occupancy, finance, legal, building performance, and physical attributes that conveys perpetually and maintains all historical transactions. Additionally, the data will be immediately available online and correlatable across all properties. The speed to transact will be shortened from days/weeks/months to minutes or seconds.” – Jason Ray, Nov 2, 2015 Linkedin.

Fraud protection

In terms of fraud protection, blockchain technology, specifically Bitcoin, will have a major impact:

“By offering a 100 percent incorruptible resource, whereby the sender and recipient of funds was logged, and where “digital ownership certificates” for properties are saved, the blockchain would effectively make forged ownership documents and false listings a thing of the past. The unique “digital ownership certificates” would be almost impossible to replicate, and would be directly linked to one property in the system, making selling or advertising properties you don’t own almost impossible.” – Don Operas, February 6, 2016. Techcrunch.Com

Digital currency (Bitcoin)

Again quoting Ragner Lifthrasir:

“Bitcoin is a digital currency. Ethereum has its ‘Ether’ token. Unlike the Dollar or Euro, blockchain currencies aren’t paper that are later represented by software, but are 100% software from birth. The power of software is its programmability. The power of cryptocurrency is you can program it to escrow and distribute itself. With fiat (Non-crypto) money, you need humans and banks. When someone rents an apartment, the landlord takes a security deposit in case the tenant damages the property. By law, he’s supposed to keep the funds in a separate escrow account and not spend it. Once the lease ends, the tenant has to rely on the good faith of the landlord to return the deposit. But if you’ve ever attended small claims court you know how frequently this human/trust-based system fails.

Bitcoin has a function called multi-signature. In bitcoin, you use your private key to approve the sending of the digital currency to another person. With ‘multisig,’ you can create a transaction with three private keys, where at least two are required for spend. By using bitcoin, real estate escrows can be done more securely, quickly, and cheaply.”

Smart contracts

The final area where blockchain technology will have a major impact for real estate is the notion of the “smart contract.” Again quoting from the Liftrasir article:

“Examining a simple real estate transaction can demonstrate how smart contracts could drastically alter the way business is conducted. Presently, Party A and Party B would enter into a contract that requires Party A to pay $200,000.00 to Party B in exchange for Party B agreeing to convey title to Party B’s condominium unit to Party A upon receipt of payment. If Party A pays the money, but Party B later refuses to convey title, Party A is required to hire an attorney to seek specific performance of that contract, or to obtain damages. The determination of the outcome will be made by a third party: a judge, jury, or arbitrator.

Using a smart contract, however, avoids the potential for one party to perform while the other refuses or fails to perform. Using a smart contract, Party A and Party B can agree to the same transaction, but structure it differently. In this scenario, Party A will agree to pay $200,000.00 worth of virtual currency to Party B, and Party B will agree to transmit the title to the condominium in a specialized type of coin on the blockchain. When Party A transfers the virtual currency to Party B, this action serves as the triggering event for Party B, which then automatically sends the specialized coin which signifies the title to the condominium at issue to Party A. The transfer is then complete, and Party A’s ownership of the condominium is verifiable through a publicly available record on the blockchain.

Structuring this transaction as a smart contract ensures that the transfer occurs as soon as funds are received, and results in a publicly available, verifiable record of the transfer. Because the contract automatically performs based upon the predetermined rules agreed to by the parties to the contract, there is little risk of fraud, and virtually no need for external measures to enforce performance of the agreement. Thus, no specific performance action would ever be necessary to compel the transfer after payment is made because the coin, which represents title to the condominium, is automatically transferred, and the transfer is automatically published, to third parties on the blockchain.” – Drew Hinkes, July 29, 2014, InsideCounsel.com.

Recommendation for real estate: start planning now for blockchain technology

In conclusion, there’s no question that blockchain technology will revolutionize the real estate industry. Real Estate moves slowly with lots of middlemen and convoluted processes. Blockchain technology can address most of the issues with cost savings, efficiencies, fraud reduction, and speed. I encourage CRE professionals and managers to delve into the subject and identify how the blockchain platform can be used in your business.

The problem? Some organizations are delaying the inevitable. While many have a plan in place for adoption, others are significantly underestimating what’s needed to ensure compliance, including the guidance and support of outside resources. The new IFRS leasing standard will go into effect for most public companies by early 2019. As 2017 winds down, the demand for resources will increase while expert vendor availability tightens up. And you can guess how that will impact the cost of acquiring these resources.

Getting started on your FASB and/or IASB transition as soon as possible by appointing your internal and external teams, rallying your people and choosing lease accounting software that’s quick and easy to implement can make all the difference in being ready for the IFRS new lease standard by the effective date — and controlling how much it costs to get you there.

Preparation for FASB & IASB lease accounting changes: No better time than the present

According to a recent article in the Journal of Accountancy, 31 percent of executives say their companies are unprepared to comply with the new Financial Accounting Standards Board (FASB) lease rules changes. Similarly, a survey by PwC and commercial real estate services firm CBRE found almost one-fourth (23%) of respondents admitting that they hadn’t begun their lease accounting IFRS 16 adoption efforts yet.

The delay is somewhat understandable. Many organizations are still regrouping from the implementation of FASB’s new revenue recognition standard, which applies to annual reporting periods beginning after December 15, 2017, and may not be ready to tackle yet another major FASB-related project.

However, creating an inventory of your leases will involve many departments beyond simply your accounting team, so you need to be realistic about the time, money and resources it will require.

Securing internal buy-in for FASB & IASB lease accounting changes

To be ready for FASB and/or IASB adoption by the deadline, preparation starts with determining the internal bandwidth to be dedicated specifically to the IFRS 16 and ASC 842 transition and putting together a mosaic of what this effort will look like. Consider the following points:

• Who or what team is going to manage the project?
• How will you assemble and abstract the data?
• What resources will you need for implementation and training?

As outlined in a previous post, your accounting department needs a solid collaboration with real estate, procurement and IT to ensure accurate lease data can be collected, calculated, shared and integrated for complying with the new lease standard. These teams need to work together, drawing knowledge from each department’s expertise, to fill in the missing pieces and create a comprehensive strategy for adoption of FASB & IASB lease accounting changes— including identifying the external resources you’ll need.

Take your accounting department, for example. Early on, you should seek the guidance of an audit or advisory partner as your first touchpoints to help lay the preliminary groundwork for your adoption plan of attack. Schedule a meeting with your advisory partner or a trusted lease accounting technology vendor.

• Your advisory partner will give you both information and advice that will help in making policy decisions regarding ASC 842 & IFRS 16 adoption.
• Your lease accounting vendor can give you an overview of how a system works and provide a look at what data you should start thinking about collecting to get compliant with FASB & IASB lease accounting changes.

As many organizations are discovering, it takes much more than simply your accounting team to plan for the coming changes.

Lining up the right external resources

As time passes, the competition for external vendors — already a limited pool — is exponentially increasing. To make sure your company has the help it needs for adoption of ASC 842 & IFRS 16, it is important to secure your resources now and avoid settling for a less-than-ideal fit when it comes to crunch time.

The earlier you start the search process, the greater the benefits:

• More power over scheduling and vendor selection.
• A better picture of what to expect during the process.
• Guidance and best practices in terms of the overall project and any integration implications.
• A clearer understanding of what your policy decisions need to be.
• More control over your software implementation timeline.

The benefits of a lease accounting system

With your teams working together on the FASB & IASB lease accounting changes, is there still a need to purchase new technology? Absolutely. Unless you want the hassle of running calculations every time you need to produce a report — whether quarterly or annually — lease accounting software will improve the efficiency and accuracy of the process by updating and automating recurring reporting. And the sooner you have automation in place, the sooner your company will be ready for FASB & IASB adoption.

The new standards mean a more complex balance sheet with more data to collect and process, increasing the volume of accounting you need to do. Many companies are adding hundreds of asset leases (at a minimum) onto the balance sheet. A lease accounting system will keep those leases and related data in an accessible, centralized location, allowing you to run calculations and report on your enterprise lease information as needed.

Lease accounting software will also make the adoption process proceed more quickly, so your staff can return their focus to their primary responsibilities.

The bottom line? Protect yours

Make no mistake: the FASB and IASB lease accounting changes call for significant effort — and more complex and time-consuming analyses than many businesses are anticipating.

With time drawing short for FASB & IASB adoption and expert help becoming more difficult to engage, the process will continue to grow in complexity and cost the longer you delay. By preparing now, and leveraging available technology and resources, you will gain a clearer idea of what to expect in the coming months — and ultimately, save money and gain peace of mind without the last-minute scramble as the deadline nears.

If you haven’t already, start the discussion today to enact a plan for a smooth adoption of the new standards.