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March 2010 |
Miller, Rubenstein,
Hoffman & Hawkinson
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The end of operating leases?
 A recent report published jointly by the United States
Financial Accounting Standards Board and the International Accounting Standards Board has provided serious momentum toward a major shift in accounting practices that will require most real estate leases to be treated as capital leases
instead of operating leases.
Operating and capital leases differ in several ways. Generally, in an operating lease, the lessee is only given the right to use the asset being leased and does not assume the "risk of ownership." Therefore, the lease payment is considered
an operating expense on an income statement and does not impact the balance sheet. On the other hand, capital leases require that the lessee treat its leasehold interest as a depreciable asset and the payment obligation as a liability
(similar to the treatment of long-term debt from a financial institution), in essence assuming the risk of ownership.
Clearly, for companies with significant lease commitments, the changes to the rule (Financial Accounting Standards No. 13) will create dramatic adjustments to their balance sheets. Because capital leases are treated as financed
transactions, a company will appear substantially more leveraged. Thus, public companies could have to combat misconceptions about their financial health.
Furthermore, expensing real estate leases on a straight-line basis will also no longer be applicable. Under the proposed changes to FASB 13, when determining the commitment of a lease, tenants will have to plug in factors like lease
renewals, options and contingent rents.
The argument for the switch is that operating leases do not provide as accurate a portrayal as possible of a company's financial position even if the majority of analysts and lenders already consider operating leases when making capital
decisions. It is hoped that the switch will make the practice consistent in all industry sectors.
The time frame for implementation remains vague but discussions with your accounting firm would certainly be worthwhile. In your planning, give considerable merit to how you will create new reporting procedures and on a larger scale, how
the changes may alter long-term real estate strategies.
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Independent tenant representatives offer true fiduciary relationship
 Service should be key when assessing your tenant
representative relationship. Unfortunately, many full-service real estate companies put brand above their customers, merging offices and blending service lines like interchangeable commodities, exposing tenant rep customers to a host of
conflict of interest risks, and offering representation without a truly pure fiduciary foundation.
In the last few years, more full-service companies have been absorbing regional brokerages or buying out competitors. In a marketing flurry, slick logos are created, press releases sent and printing presses whir with waves of freshly inked
business cards. If you have ever worked with a full-service commercial real estate company, at one point in your relationship you more than likely read more than one e-mail signature that asked you to "please note new e-mail address" or
assured you of its sender's "local service with a global reach."
Many of these brand swaps happen with little notice, surprising customers weeks after being made official. The nature of many commercial real estate executives is to negotiate quietly. Despite being a major player in the transaction,
tenant customers are rarely invited to the table. Instead, time is granted to institutional landlord clients for whom the company oversees national portfolios.
Companies needing office or industrial space will always be served best by independent real estate firms that focus exclusively on the needs of tenants. As business consultants focused on real estate, independent tenant representatives
operate openly with their clients and foster intimate relationships by sharing market insight, hidden opportunities, and lease oversight services throughout the entire term of your lease, not just when it is time to renew.
They also have the distinct advantage of being able to assess building options for you absent fiduciary relationships with building owners.
Earlier this year, the national commercial real estate industry contracted once again with a roll-up of several independent firms under a new national brand. The press release announcing the new identity highlighted that the company now
manages 420 million square feet of space in 57 markets. That kind of footprint will require a great deal of attention to be paid to landlords, a service it will certainly handle diligently.
A footprint that size makes quite an impression. Hopefully, the needs of tenants will not get stepped on in the process.
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Used office furniture options may be worth exploring
 For the startup company taking its first steps out of the
garage and its haphazard arrangement of collapsible lawn chairs and camp tables, the cost of office furniture can quickly lead to second-guessing the decision to sign a lease. However, even the most seasoned CFOs can be surprised by the
cost of a few cubicles, cabinets and credenzas.
Fortunately, there is a secondary market where companies and dealers unload "previously enjoyed" office furniture at healthy discounts. Whether you need break-room tables or executive suites, it is worthwhile to peruse the used market when
relocating or expanding your company.
It is key that you search for used furniture with reasonable expectations. You may see nicks on desk drawers and screws missing from shelves. However, you can often find furniture in perfect condition for considerably less than retail
price. Furniture vendors may have arrangements left from companies that never paid, closed or ordered too much particularly in today's soft economy.
Used furniture vendors can generally provide you with good lead-time regarding availability, so be prepared to act when the call comes. However, if you don't find what will suit your office, don't just jump at any good deal. Have a plan
and remain focused on what is best for the company, balancing need with price.
Pre-owned furniture is often found in sets that did not match its intended destination. Many companies are not wholly dependent on office color and design schemes, so it's possible to make a number of options work.
The difference between a new and used collection is not always that dramatic, so do not expect to find Craigslist prices every time you look. You may also notice some additional fees for delivery, repairs or teardown, which are typically
built into the price of new furniture.
Finally, it is critical that you work with a credible dealer. Consult your tenant representative about preferred vendors and even about pending subleases or upcoming occupancies in the market, as one company's misfortune could become your
next reception area.
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