This week?s newletter by The Real Estate Rountable contains the following articles we thought would be of interest to you:
FASB, IASB?Reverse Proposed Standard on Leases; Coalition Urges Re-Examination Amid Concern About Potential Adverse Impact to Banking, Businesses and CRE
During its joint meetings this month in London, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) overturned key tentative decisions that would have amended proposed lease accounting standards related to lessee and lessor accounting models.
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| Reverting to original guidance, FASB?and IASB overturned key tentative decisions that would have amended proposed lease accounting standards. |
By reverting to the original guidance, the Boards tentatively agreed that there should be only one type of lease, which would require lessees to recognize lease expense on a basis consistent with today?s capital leases. These latest decisions are tentative and will not be finalized until the Boards approve a final standard.
In previous meetings, the Boards tentatively acknowledged that there could be more than one type of lease: finance leases where the finance element is ?significant?; and other-than-finance leases where the finance element is ?insignificant? ? thereby providing a straight-line recognition of rental income/expense. But with this reversal to the original guidance, leases would require a front-loaded expense pattern similar to interest expense on amortizing debt. (See FASB?s website for a summary of the May 17 Joint Board Meeting)
In response, a coalition of industry trade groups (including The Real Estate Roundtable and U.S. Chamber of Commerce) on May 26?urged the Boards to re-examine their decisions, noting the recent reversal would reintroduce flaws to lease accounting standards with far reaching, negative consequences for an array of industries, the banking system and capital and credit markets.
The coalition states in its letter that the Boards? ?overarching goal should be to provide investors and businesses with information that reflects the true nature of a financial transaction and, therefore, provides users with the information needed to facilitate rational and reasonable decision making. All of this, however, must take into consideration a realistic cost-benefit analysis.?
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| A joint coalition is urging FASB-IASB to take into consideration a realistic cost-benefit analysis is regarding proposed lease accounting standards. |
As The Roundtable also indicated in a December 3, 2010 comment letter to FASB/IASB (and in a December 8 coalition letter on which we were a signatory), the accounting changes under consideration could cause a cascade of unintended negative consequences for commercial real estate markets, financing, and property valuations; businesses that rent commercial space; loan covenants and contractual arrangements; the financial services sector; and prospects for economic recovery. These communications outline specific concerns and flaws that needed to be addressed in the lease accounting proposals:
? The potential breach of loan covenants and contractual arrangements and loss of cost reimbursement for rent in contractual arrangements that are based on current U.S. Generally Accepted Accounting Principles (?U.S. GAAP?) as well as overall changes to credit underwriting requirements;
? Complicated recognition and presentation requirements that mask true economic activity and do not reflect the value of a contract;
? Adverse impact to capital of banks, during the ongoing financial crisis, due to both lessee and lessor accounting changes;
? Adverse impact on the ability of businesses to borrow, the cost of leases, and capital formation;
? Adverse impact on equipment and real property valuations, with consequential impact on lenders, especially the already fragile banking sector;
? Front-ended lessee cost patterns that do not reflect true economic activity;
??Differing recognition of assets and liabilities, creating mismatches that do not reflect the value of a contract for lessors;
??Rules that are not consistent for lessors?and lessees;
??Inequitable treatment of executory?costs for lessors?and lessees;
? Requirements to forecast and record future events and contingencies that are unique to leases, dependent upon unpredictable changes in the economic environment, and not aligned with existing U.S. GAAP requirements;
? Unknown implementation costs, including the need for costly implementation of new accounting systems, as well as ongoing compliance costs; and
? Changes in behavioral actions that will depress commercial real estate values, as well as a de facto prohibition of accepted business activities including permissible allowable cost reimbursements allowed under contractual obligations and government regulations.
To address these concerns, the May 26 coalition letter outlines a set of principles for an effective leasing standard, which include:
??FASB?and IASB should ensure that the benefits of revised rules outweigh the costs;
? New lease accounting standards must take into account non-accounting issues, such as contractual obligations, industry related practices, and potential regulatory environments, to truly represent lease transactions;
? To ensure accuracy, lease accounting standards should be consistent for the lessor and lessee; and
The FASB?and IASB?Boards intend to finalize all major decisions about the Leases project by June 30, 2011 and continue to discuss final decisions with stakeholders before finalizing the standards by year end. The Boards have not yet reached a decision regarding whether they will re-expose the final standard for public comment.
If you are aware of specific leasing transactions that have been impacted by anticipation of the new standard, please provide this commentary directly to the FASB and/or provide this data to us so that we can pull together additional economic evidence to demonstrate the negative consequences this proposal will have on commercial real estate. Please send your comments to Roundtable Senior Vice President Chip Rodgers, at info@rer.org.
The Lease Accounting issue will be a topic of discussion during The Roundtable?s Annual Meeting next month, which will include a Joint Research Committee and Real Estate Capital Policy Advisory Committee meeting on June 15.
Other Roundtable Weekly reports on the Lease Accounting issue ? Dec. 10 ? March 4 ? April 22).
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EXCESS FEDERAL PROPERTIES
Federal Property Disposal Plan Advances in House Subcommittee; Roundtable Member Testifies in Support of ?Win-Win? for Government and CRE
Legislation that would establish a centralized process to sell, consolidate or exchange unused federal government properties received voice vote approval on Wednesday by a House subcommittee. (The Hill, May 25)
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| Rep. Jeff Denham (R-CA) is chairman of the House Transportation and Infrastructure Subcommittee on Economic Development, Public Buildings and Emergency Management. |
Legislation that would establish a centralized process to sell, consolidate or exchange unused federal government properties received voice vote approval on Wednesday by a House subcommittee. (The Hill, May 25)
Rep. Jeff Denham (R-CA) ? chairman of the House Transportation and Infrastructure Subcommittee on Economic Development, Public Buildings and Emergency Management ? has been working with the Obama administration for months on a disposal plan modeled after the so-called ?BRAC? (Base Realignment and Closure Commission) process used to wind down unused or underused military bases. The White House outlined a similar proposal in its fiscal 2012 budget and circulated a legislative proposal to Congress earlier this month.
Denham?s bill, the ?Civilian Property Realignment Act? (H.R. 1734), would provide for the creation of a Civilian Property Realignment Commission, which would recommend to the president federal properties that could be consolidated, sold, exchanged or redeveloped.
?Today marked the next step toward consolidating our federal footprint, increasing government efficiency and saving billions of taxpayer dollars,? Denham said.
Testifying in support of the legislation?before Denham?s subcommittee earlier this month, Real Estate Roundtable member and JBF?Companies Managing Member Michael Glosserman?said the legislation is ?a ?win-win? situation for the Government and the private real estate investor community. Under the Act, the Government would be able to transition many of its agencies into new, more energy efficient facilities that require significantly less annual maintenance expenses. The private sector would be able to invest in prominent real estate sites that were previously unavailable.? Glosserman also offered in his testimony three suggestions to improve the bill:
? Empower the Commission to identify opportunities that are outside the scope of what may be recommended by individual agencies.
? Incentivize agencies to find opportunities for replacing antiquated facilities or renovating existing facilities.
? Impose longer timeframes for certain categories of assets.
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| Roundtable President and CEO Jeff DeBoer?s May 27, 2011 letter to Chairman Denham on the Civilian Property Realignment Act (H.R. 1734). |
Last month in The New York Times, DeBoer described the proposed commission as a ?positive idea,? while emphasizing that excess government properties should only be marketed in stronger markets for now ? areas such as Manhattan, Boston, Washington, San Francisco and the west side of Los Angeles, which have been recovering more quickly than smaller, secondary markets around the country. (NY Times, April 26)
?Our concerns are about the unnecessary dumping of assets in some markets that are oversupplied?because of economic conditions,? said DeBoer, who testified before the Senate Environment and Public Works Committee on March 30, regarding a separate initiative by the General Services Administration (GSA) to downsize the federal government?s real estate portfolio. [Roundtable Weekly, April 1].
DeBoer also sent a letter to Chairman Denham today commending his leadership on moving the Civilian Property Realignment Act forward and offering to participate on a working group formed to consider the bill.
The White House earlier this month identified approximately 14,000 buildings and structures that may result in $3 billion in savings by the end of this year. An independent board of private- and public-sector leaders will work with the Administration on a streamlined property disposal process to overcome financial, regulatory and political barriers.
Resources: Subcommittee Briefing Memo and Rep. Denham amendment (approved by voice vote)
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