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

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

Colliers spearheads two major industrial transactions in recent months:

The commercial real estate industry has been hit hard by the economic downturn, with little to no investment activity, companies going out of business and tenants staying put until an economic recovery appears in plainer site. Several transactions that have recently taken place in Southern California may signal what could be the start of the commercial real estate recovery.

Colliers has been at the forefront of this turnaround in several recent deals. Among the transactions paving the way for a more optimistic outlook in the industry and for the Southern California market are the sale and lease of 21.6 acres of land in Anaheim and a 645,000 square-foot lease in Mira Loma.

In what could be the largest transaction to take place in Southern California in 2009, Birtcher Development & Investments, in partnership with Cornerstone Real Estate Advisers, LLC, acquired a 21.6-acre site in Anaheim. The firm plans to develop a build-to-suit facility for Northgate Gonzales Markets, a family-owned Latin-American market, which signed a 15-year lease on the property.

Birtcher and Cornerstone were represented by Clyde Stauff, senior vice president in Colliers International’s Irvine office and Senior Vice Presidents Patrick Remolacio and Bret Hardy with Colliers Integrated Real Estate Solutions (IRES) group.

Development is scheduled to commence in the fourth quarter of 2009 for the 375,000 SF warehouse and distribution center. The property will be developed according to LEED standards and will feature Spanish-style architecture.

In Mira Loma, IDS USA, a clothing distributor, recently signed a 5-year lease for a 645,000 SF industrial property at AMB Galleano Distribution Center for its Los Angeles regional operations. According to Michael McCrary, senior vice president in Colliers Ontario office, who represented the landlord, AMB Property Corporation, in the transaction, IDS was operating out of more than one location, which was inefficient for its operations.

“With values in the Inland Empire continuing to drop due to decreased demand, companies such as IDS can capitalize on the market and secure a great piece of real estate for their core operations,” explains McCrary.

Originally published in Colliers Real Estate Insider

Pat Remolacio

Bret Hardy

Clyde Stauff

Michael McCrary

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

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

We all recognize the almost predictable cyclical nature of economic markets, and in times of
unbridled prosperity such as those recently experienced, we tend to ignore the signals of
impending correction. Today, it is more expensive to run a company. People, energy and
technology, which change with regularity, are more expensive, and unforeseen competition can
undermine sales at any moment. Simultaneously, the seemingly limitless stores of capital
markets resources have all but vaporized, while cash flow and earnings pressures continue to
mount. Whether your firm is a publicly traded company or privately held, it will be under
tremendous pressure to perform. Companies are required to achieve immediate and sustained
earnings, in a tough, fiercely competitive and often uncertain environment, where change occurs
with unsettling regularity. Companies committed not just to survive, but to prosper in a
reduced-resource environment, will be characterized by the quality and timeliness of the many
decisions they will be required to make. One such critical decision is assuring that corporate
capital is positioned efficiently to provide the highest yield for core business activities, while
minimizing its impact on the balance sheet and continuing to support operational demands….

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

Over twenty years ago, the US experienced a capital gains situation similar to the one anticipated to occur two years from now, in 2011.  In 1986, the long-term capital gains tax rate was increased from 20% to 28%, an increase of 40%.  Investors, anticipating this occurrence, reacted in 1985 by selling off properties. The result was an approximate 80% increase in capital gains tax revenue that year. Due to the abundance of supply over demand, prices for commercial real estate were driven lower.  It is our opinion that if capital gains tax rates increase in 2011, history may once again repeat itself in 2009-2010…

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

GSA Region 9 Real Estate Division Support Services Contract

Colliers’ Integrated Real Estate Solutions Group (“IRES”) based in Los Angeles has secured a multi-year contract with GSA Region 9 to provide support services to its newly created Real Estate Division headquartered in San Francisco. Specifically, Colliers will be responsible for identifying and managing approximately 34 contract employees to be placed in GSA’s main offices throughout the region including San Francisco, Los Angeles, San Diego, Phoenix and Hawaii.  The contract employees will support Real Estate Division activities associated with GSA’s leased and owned portfolio of real estate.

For any questions or additional information regarding this exciting initiative, please contact Darrin Kennedy, IRES Managing Director in Los Angeles at 213.861.3323 or via email at darrin.kennedy@colliers.com

On Wednesday, April 30, 2008, the U.S. Department of the Navy’s BRAC Program Management Office (“BRAC PMO”) received Sealed Bid Offers pursuant to the Roosevelt Roads “Invitation to Bid” publication for the sale of Sale Parcels I and II only.

Subsequent to receipt and review of the Sealed Bid Offers, the BRAC PMO has elected to reject all offers received and to postpone the planned Public Sale Offering until further notice. All bidder deposits received will be promptly returned, and all registered bidders and other interested parties are encouraged to continue their due diligence investigation and redevelopment planning efforts, in anticipation of a future offering of any or all of the previously advertised three (3) Public Sale parcels.

Please contact the Roosevelt Roads Bidder Support office at (800) 434-5880 or via e-mail at info@Roosey-Roads.com with any questions or requests for support or information.

www.Roosey-Roads.com