Early occupancy of is one of the nuances of the commercial real estate negotiations that also impacts the accounting department ASC 842 lease accounting. Here is a quick tutorial on what qualifies as early occupancy, why it makes sense and when it will impact accounting.
What is early occupancy?
Early occupancy refers to a tenant using the real estate asset before the initial commencement date on the commercial real estate lease. As a result, the total length of the lease term is extended, as early occupancy does not affect the original end date of the lease. The stipulations associated with early occupancy can vary, as a tenant can be granted access to a smaller space, or be granted access to the property to install furniture at a reduced rate. Terms related to early occupancy may also require that lessors not interfere with the lessee’s work in the space, such as maintenance and repair work planned prior to the initial occupation date.
When early occupancy makes sense for a lessor/lessee
There are many aspects to a corporate move, and multiple scenarios where it makes sense for a tenant to be granted early occupancy. For example, a tenant may have financial incentives to vacate the previous property earlier than initially expected. For business continuity, logistics planners may also request early access for additional time needed to install complex telecom systems and furniture.
Lease accounting standards and early occupancy
For accounting purposes, the lease does not start until the lessor has possession of the asset. Therefore, even if the lease has been fully executed with signatures, lessors do not start accounting for a lease until they are in possession. The early occupancy period may trigger possession of the asset, which will generate a financial statement impact under lease accounting GAAP. Learn more about CoStar’s lease accounting software and how it can support both the commercial real estate and accounting departments manage lease data and work together to meet and exceed business goals.
Learn more about the hidden benefits of lease accounting compliance.