1.6 Trillion in Real Estate, but still 1 view on Occupancy?
That’s right, trillion, with a “T”.
Approximately $1.6 trillion worth of real estate Right of Use (ROU) assets will go on to corporate balance sheets under the new FASB and IASB lease accounting standards. However, the conversation about asset values has been largely quieted after the successful push to include in the calculation only those renewal options a tenant is “reasonably certain” to exercise.
But facing $1,600,000,000,000 in value, can’t we do better than just tweaking the term?
Yes, we can.
Although this will be the biggest change to lease accounting in 40 years, the real estate investment market has become far more sophisticated over that time. Indeed, over the last 5 – 10 years, the Single Tenant Net Lease (STNL) market has exploded. Investors seeking safe returns have flocked to real estate, and corporations have seen their rent caps approach, or even sink below, their bond rates. REITs have grown, and laws have been passed to increase the flow of foreign capital into U.S. property. Yet many companies continue to choose operating leases as the default occupancy strategy.
Taking this “business as usual” approach will have detrimental effects on corporate financial statements. Shareholder equity will see permanent reductions, and quarterly numbers will become volatile. Companies who wish to avoid this fate – and build a competitive advantage against their peers – should use this opportunity to understand how they use space, and look for the appropriate occupancy strategy for each location. Opportunities to own, finance, or create joint ventures are plentiful for corporations.
The principals of Jackson Cross and Impost Research, LLC have partnered to form Leasehold Equities, LLC to develop alternate occupancy strategies for corporations, and patented an Internal Lease Preferred Stock (ILPS) model to take advantage of the new leasing rules.
Leasing isn’t going away, but there are 1.6 trillion new reasons to reevaluate your strategy.
