Colliers Integrated Real Estate Solutions - Real Estate Strategic Advisory Services, Investment Sales, Structured Real Estate Finance

How will FASB’s pending changes impact corporations?

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

With two LEED AP professionals (Darrin Kennedy & Dan Feldman) LEEDing the charge, IRES has adopted a proactive approach to providing LEED-related real estate services to both public and private sector entities. LEED, along with green trends in general, has entered the public consciousness, and IRES is finding that its clients are very interested in making facilities energy-efficient and becoming more savvy about environmental design.

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February 2010 – IRES partners with client, Invensys, to help them save millions by negotiating an early lease renewal at their 127,000-square foot corporate headquarters.

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

The Recent Changes to the Public Finance Market Provide Alternative Financing Solutions for Public/Private Partnerships

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

Will there be changes affecting accounting treatment for corporations?

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

Darrin Kennedy and Dan Feldman of Colliers Integrated Real Estate Solutions will be added to the exclusive list of LEED Accredited Professionals (LEED APs).

“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

We are pleased to announce that Colliers has placed 12th on the 2009 Global Outsourcing 100 list, moving up six places over last year.

In creating this ranking, the International Association of Outsourcing Professionals (IAOP) recognizes the world’s best outsourcing service providers across all industries, based on applications received and evaluated by an independent panel of judges. Colliers has been included each year since the list’s inception four years ago.

“Each year the competition to be named to the top 100 companies continues to reach higher levels, as the outsourcing industry continues to grow and mature in many markets. This year, the judges evaluated the most diverse set of applicants we’ve ever had, ” said Jagdish Dalal, Managing Director, Thought Leadership, IAOP and chairman of the judges’ panel.

Our competitors had the following rankings: CBRE (8); Jones Lang LaSalle (15); Newmark (52); Grubb & Ellis (62); Cushman & Wakefield (72). The full list may be found in a special advertising section of the May 4 issue of Fortune magazine or at the IAOP’s website: www.outsourcingprofessional.org.

Congratulations to all Colliers professionals around the world for uniting to provide exemplary service for our clients.

IRES and its joint venture partner, Knighthorse, provided substantial strategic and financial advisory services on two of the more high-profile federal government initiatives within the past several years. First, IRES/Knighthorse was the exclusive program and financial advisor to the Department of the Army from 2002 to 2008. Under multiple contracts, IRES/Knighthorse developed and implemented the Korea Build-to-Lease program to acquire military housing in Korea utilizing a customized BTL structure. Second, IRES/Knighthorse teamed to provide financial advisory services to GSA in connection with the development of the new 1.35 million square foot Department of Transportation Headquarters in Washington D.C. The building was completed and occupied in 2007.

Not surprisingly, DA and GSA encountered significant budget scoring issues relative to both of these important initiatives and IRES supported both agencies in addressing such issues from a compliance perspective. Perhaps underscoring their importance, these two initiatives are discussed in detail in the attached white paper (see pages 14-16) entitled, “The Crisis in the Federal Government’s Infrastructure, Federal Budgetary Scorekeeping: Impediments, Alternatives and Opportunities” as emblematic of recent challenges faced with respect to budgetary scoring and the use of leases and private sector financing. This white paper was prepared by the Privatization, Outsourcing and Financing Transactions Committee of the ABA Public Contract Law Section, and it is helpful in explaining the federal budgetary scorekeeping rules, the public and private sectors’ views of these rules, and discusses potential legislative and regulatory alternatives that may enhance the Federal Government’s ability to efficiently and cost-effectively fund important infrastructure and other capital-intensive projects.

Click here to download the PDF and read the full white paper.

For more information about this case study, please contact:

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

Joseph Faccone
Knighthorse President
3 Bethesda Metro Center
Bethesda, MD 20814
202.412.2535
jf@knighthorse.net

IRES was selected by GSA Region 9 in June to provide real estate support services to its newly created Real Estate Division headquartered in San Francisco under a multi-year contract. Within a very short timeframe, IRES was responsible for identifying, hiring, and training approximately 34 contract employees placed in GSA’s main offices throughout the region including San Francisco, Los Angeles, San Diego, Phoenix and Hawaii. The contract employees support Real Estate Division activities associated with GSA’s leased and owned portfolio of real estate.

Click here to download the PDF and read the full case study.

For more information about this case study, please contact:

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

Most government agencies or public institutions today are facing the constant challenge of managing facilities and infrastructure in an environment of limited fiscal resources.

To the extent that government agencies require new, standalone or single tenant facilities, they can be efficiently and competitively procured from private developers/investors on a Build-to-Lease (BTL) basis. Excellent credit quality and sophisticated use of innovative lease provisions are among the key characteristics which allow for efficient underwriting and project financing by private lending institutions. Substantial value stemming from certain inherent advantages possessed by government agencies when competitively sourcing new facilities from private developers/investors can best be harvested for the government agency’s benefit through application of a focused, end-to-end procurement process. The bottom line result is the acquisition of leased facilities at wholesale rather than retail lease rates. This article discusses the features and benefits of the BTL Competitive Procurement Process jointly developed by Colliers’ Integrated Real Estate Solutions Group and the Knighthorse Corporation (IRES / Knighthorse).

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

For more information about this article, please contact:

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

Joseph Faccone
Knighthorse President
3 Bethesda Metro Center
Bethesda, MD 20814
202.412.2535
jf@knighthorse.net