Lease Accounting: Market Impacts. Lease Accounting. Simplified.

Transcription

1 Market Impacts Lease Accounting. Simplified.

2 Market Impacts Agenda Lease Accounting: All leases on balance sheet for tenants. 6 Resulting Predictions Why we believe it will be true. How the market will adapt. Marc Maiona Founder / President 28 Years CRE Leasing

3 Different Tenants Will See Different Future What is the tenant s real motivator? What part of your firm s financial statement results do you care most about --- what drives financial decision making for your firm? Are you balance sheet or P&L driven? If it s the P&L, is it the entire P&L or really just EBITDA that drives decisions?

4 Different Tenants Will See Different Future Why it matters When I know what part of your financial results are most important to your firm, I can design and negotiate your leases to improve the results you care most about. Your existing leases can often be restructured to improve that portion of your financial results you care most about.

5 Different Tenants Will Care About Different Impacts What are the impacts? Debt / liabilities on balance sheet Shareholder equity concerns Debt-to-Equity impacts EBITDA performance Net Income early in lease term Net Income later in lease term Net Income at adoption date

6 Not All Rent Is Created Equal 1 NNN Lease Structures Will Be Preferred If Not Required

7 Not All Rent Is Created Equal What will tenants ask for? Can landlords win, too? NNN charges not subject to capitalization Gross / Modified Gross Leases: Remove service components Property Taxes & Insurance in Gross Leases are not services. Which tenants care? Which buildings have an advantage?

8 Tenants Already Shifting Strategies 2 Tenants Will Shift To Longer Initial Lease Term

9 Tenants Already Shifting Strategies Renewal Options and Reasonably Certain What constitutes a significant economic incentive? Discounts Penalties Tenant improvement values / remaining useful life Strategic value 10 year lease treated as 20 year deal for accounting Look what happens to the financials is it good or bad?

10 Go Ahead, Touch The Third Rail 3 EBITDA Focused Tenants Will Prefer Finance Leases

11 Go Ahead, Touch The Third Rail EBITDA Focused Companies: The Third Rail Goes Away Operating Leases = Bad for EBITDA Capital Leases = Good for EBITDA Realization that all leases come on balance sheet. Can dramatically improve EBITDA performance potentially even just via favorable renewal options.

12 Subleasing Before and After Rules Change 4 Subleases Will Accelerate & Then Be More Painful

13 Subleasing Before and After Rules Change Subleases the math changes. Loss Calculation Tomorrow Today PV of Head Lease Rents - PV of Sublease Rent + Write off of LHI Asset - Deferred Rent Credit Liability Reduces size of loss for sublessor = Loss on sublease is larger on day 1 of sublease. How big of a difference can timing have on financial performance?

14 Should I Stay or Should I Go? 5 Early Renewal vs. Relocation Decisions Will Change

15 Should I Stay or Should I Go? How Amendments May Change Stay or Go Decisions When do you have to book the impact? Amendments = Ink on paper New Leases = Possession

16 What Language Are You Speaking? 6 Deals Will Require Greater Financial Literacy

17 What Language Are You Speaking? What CFOs hear Vacancy Rates Absorption Market conditions Construction activity Expiration date Availability What CFOs care about Net Income EBITDA Shareholder Equity Debt / Equity Regulatory Capital Assets & Liabilities

18 Marc Maiona (949) LeaseCalcs, Inc. All Rights Reserved