Written by Bret Hardy – Colliers Integrated Real Estate Solutions

June 2010

The proposed changes to Generally Accepted Accounting Principles (“GAAP”), when accounting for real estate (and equipment) lease commitments, will significantly change recognition for leases that are now classified as operating leases. Once codified by the Federal Accounting Standards Board (“FASB”), assets will then be classified predicated on a corporation’s “right-to-use” the leased property, whereas a lease liability will be classified based upon a corporation’s obligation to pay rent.

The objective of the lease accounting being considered by FASB and the International Accounting Standards Board (“IASB”), is to create a common lease accounting standard to ensure that assets and liabilities arising from lease contracts are uniformly recognized in the financial statements. Currently, similar transactions can be accounted for very differently. In the eyes of the FASB, this has created difficulty in distinguishing the true financial condition for companies with significant leasehold interests. Additionally, the current standards allow companies to structure leases to achieve a desired/predetermined lease accounting treatment. The new standard, if adopted, would eliminate that flexibility.

In prior project update articles, we specifically dealt with the questions surrounding the importance of the pending revisions to corporate lease accounting rules and to what degree corporations should be concerned with these anticipated changes. In response, many of our corporate clients have been asking astute follow-up questions surrounding these pending GAAP revisions. This updated edition will attempt to provide several key preliminary answers to many of these questions, albeit strictly from the standpoint of the corporate lessee.

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Bret Hardy

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Who are Invensys’ clients?

Invensys’ clients are some of the world’s most important industrial organizations — large oil refineries; chemical, gas, LNG, power, pharmaceutical and mineral processors; food and beverage companies; metals and mining companies; water and wastewater facilities; pulp and paper mills — and its solutions deliver significant cost benefits associated with the secure, efficient operation of industrial plants and facilities. Invensys Operations Management (“IOM”) is a newly created division of Invensys that combines the Wonderware, Triconex, Foxboro, SimSci/Esscor and Eurotherm business units into a single operating entity.

Assignment & Challenge

IRES was exclusively selected to assist Invensys relative to its 127,000 square-foot IOM / Wonderware corporate headquarters lease negotiation and renewal in South Orange County, CA. Invensys’ specific requirements were as follows:

• Reduce footprint of IOM facilities in Orange County, CA, via consolidation of IOM operations.
• Reduce overall run rate and total facility operating costs in the 2010 fiscal year, and beyond by taking advantage of current market conditions.
• Provide future expansion capabilities for IOM operations.
• Minimize future capital requirements associated with the maturing in-place lease.
• Enhance Invensys “Green Standards” by securing a future LEED® Existing Building rating for the campus facilities.
• Minimize business disruption.

Colliers developed and implemented its ten-step programmatic tenant strategy aimed at achieving the corporate objectives noted above, within a prescribed time period.

Outcome & Results

As a result of the combined partnering efforts of Invensys and Colliers, the Invensys lease in Lake Forest was renegotiated and extended through March, 2019. The revised lease structure provided Invensys with the following benefits:

• Reduction of the original remaining real estate obligation by $2.8 million, or 26.2% of the total remaining rental and operating expense obligation.
• NNN rent was reduced to “market”, representing a 41% reduction in the remaining rental obligation.
• The extension provided the tenant with long-term security and certainty for their core HQ facility and included generous rights to expand into adjacent premises.
• Colliers implemented the process for LEED® certification with a projected completion date of 4th quarter of 2010.
• The negotiations resulted in NO business disruption. In fact, the stability of the operations continues to aid Invensys in employee attraction and retention.

Colliers continues to provide transactional consulting and advisory services on behalf of Invensys’ worldwide operations.

Bret Hardy

January 2010

Written by Darrin Kennedy – Colliers Integrated Real Estate Solutions

OPPORTUNITY

Amidst the economic crisis and ongoing, severe budgetary challenges, state and local governments face significant requirements to modernize all manner of facilities and vital infrastructure. To facilitate and incentivize the funding of these requirements through the Public Finance market and stimulate the economy, a variety of bond programs are available under the American Recovery & Reinvestment Act (ARRA) of 2009 and other recent legislation. The availability and marketability of these new programs and instruments, together with current low interest rates has resulted in historically low cost financing for state and local governments during a challenging capital market environment.

Developers and/or state and local agencies who are active in public/private partnerships (PPP) should take note as these new programs and instruments, subject to specific requirements and restrictions, may potentially provide alternative financing solutions to allow state and local government PPP projects to move forward.

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Darrin Kennedy

September 2009

Written by Bret Hardy – Colliers Integrated Real Estate Solutions

Fact: Pursuant to the World Leasing Yearbook (2009), the international lease volume for public companies in 2007 was approximately US$760 billion.

Based upon this activity, it is obvious that there are trillions of dollars in operating leases (real estate, vehicles, plant & equipment), which are currently not reflected on corporate balance sheets. For decades the Financial Accounting Standards Board (“FASB”), which sets U.S. accounting rules, has tinkered with the idea of restating SFAS 13 (Accounting for Leases). In July 2006, FASB decided to add the discussion topic of how leases are currently being accounted for to its projects agenda. Moreover, this vote was in conjunction with an agreement by the FASB to work jointly with the International Accounting Standards Board (IASB), to try and make a uniformed decision regarding the future treatment of leases. These combined actions were seen as the first formal steps that may ultimately require companies, on both sides of the Atlantic, to recognize operating leases on the corporate balance sheets instead of in the financial statement footnotes.

The objective of the project undertaken by the FASB and IASB is to create a common standard on lease accounting and ensure that the assets and liabilities arising from lease contracts are uniformly recognized in the financial statements. Currently, similar transactions can be accounted for very differently. Additionally, the current standards provide opportunities to structure transactions so as to achieve a particular lease classification. The proposed accounting would significantly change recognition for leases that are now classified as operating leases. Assets will be classified based upon a corporation right-to-use the leased item, whereas a liability will be classified based upon a corporation’s obligation to pay rent. And this is the easy part!

So, why do we concern ourselves with corporate accounting rules?  The following represents a few important reasons:

1. The current discussion paper advocates changes that will impact both LESSEEs and LESSORs accounting treatment.
2. The capitalization of trillions of dollars onto corporate balance sheets will result in a massive shift in financial statement presentation and will affect metrics across all industries. If the latest economic recession has taught us anything, it is that the world is truly flat. Everything affects everything!
3. A major incentive for leasing by corporations will be removed. Corporate ownership in commercial real estate, which is currently significant and by some accounts more than 50% domestically, will likely increase dramatically. Wouldn’t this also significantly affect the net lease and sale/leaseback market?
4. Net lease structures will likely become more appealing to corporations. Lower contractual lease payments, coupled with shorter lease terms will help to minimize capitalization by corporate lessees. Furthermore, the structure of options and guarantees will be further scrutinized.
5. We are certain that the accounting changes will add more DATA on financials, but will it add clarity? Currently, organizations argue that the new rules will only add complexity and uncertainty. With uncertainty comes a more onerous approval process and certainly increases in the cost of accounting for the new lease treatment. In other words, will the likely significant increases in accounting costs result in real substantial benefits?
6. For certain, the traction formulated by the combined forces of the FASB and IASB has created a lease accounting juggernaut. Given the fact that no “grandfathering” of existing leases will be permitted, even now the financial scrutiny of lease structuring within corporations has increased. This scrutiny will only add increased time associated with approvals in an already paralyzed transactional marketplace.

What are the next steps by the FASB and IASB? The following is a summarized timetable of next steps:

• March 2009 – Discussion Paper Issued
• March – July 2009 – Public Comment Period
• Mid-2010 – Exposure Draft Legislation and Publication
• Fiscal year end 2011 – New Standard Implementation (No “Grandfathering”)

Colliers is not able to predict whether the accounting rules will ultimately change, nor can we predict the timing of these changes. However, we are certain that there is strong clarity and purpose behind the FASB and IASB, which indicates that they intend to make radical changes to accounting treatment policy. Moreover, based upon the public comments published, there is a tremendous amount of support from the global investment and accounting community. Colliers will continue to monitor the accounting rule discussions and pending rule changes. Let us help you remain informed and knowledgeable of the potential impacts to your business.

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Bret Hardy

“With many corporations and the Federal Government committing to sustainable buildings as one of their top priorities, we wanted to ensure that we could provide our clients with unsurpassed knowledge and services,” said Kennedy.  “Not many commercial real estate executives have achieved this accreditation so we are proud to be ahead of the curve, for the benefit of our clients’ and the future of real estate.”

The LEED AP Certification is managed by the Green Building Certification Institute (GBCI) and was established with the support of the U.S. Green Building Council.

According to the GBCI website, LEED APs have demonstrated a thorough understanding of green building practices and principles and the LEED Rating System. Only 75,000 people nationwide, in all disciplines of services, have earned the credential since the Professional Accreditation program was launched in 2001.  This amounts to only a 34% pass ratio for the individuals who have studied and sat for the exam.

LEED is an internationally recognized certification system that measures how well a building or community performs across all the metrics that matter most: energy savings, water efficiency, CO2 emissions reduction, improved indoor environmental quality, and stewardship of resources and sensitivity to their impacts.

For more information about LEED Certification, please contact:

Darrin Kennedy
Managing Director
865 S. Figueroa St., Suite 3500
Los Angeles, CA 90017
213.861.3323
darrin.kennedy@colliers.com

Dan Feldman
Project Manager
865 S. Figueroa St., Suite 3500
Los Angeles, CA 90017
213.861.3323
dan.feldman@colliers.com

Click here to download the PDF and read the full article. 

For more information about this article, please contact:

Bret Hardy, CPA
IRES Managing Director
865 S. Figueroa St., Suite 3500
Los Angeles, CA 90017
213.861.3321
bret.hardy@colliers.com

Wilma Warshak, SIOR
Senior Vice President
601 Union St., Suite 5300
Seattle, WA  98101-4045
206.409.1432
wilma.warshak@colliers.com

Together, Hardy, Kennedy and Remolacio will continue to oversee the dedicated consulting and advisory team, whose skills include public accounting, real estate transaction advisory and capital markets expertise. It is the diversity and depth of this experience, which each IRES professional possesses, that allows our group to assemble highly qualified teams to meet each client’s specific needs. Whether these clients are our global corporate clientele including Honda, Invensys, and Penske, or institutional and public sector agencies including the U.S. Navy, U.S. Army and General Services Administration (GSA), IRES has perfected the business model to provide clients with services custom-tailored to fit their needs. Our process-oriented and consultative approach delivers executable advice that is efficient and results-driven, with a focus on adding value.