How Lease Accounting Standards May Affect Lease vs. Buy Decisions

2 min read
April 17, 2019
CoStar Real Estate Manager Blog

How Lease Accounting Standards May Affect Lease vs. Buy Decisions

A company’s need for commercial real estate is driven in large part by both its current and planned physical requirements. Space needs can change dramatically over time— inspired by a variety of factors, including growth, a decrease in economic and industry activity, potential acquisitions, productivity improvements and physical obsolescence. Further, local demographics may change needs for particular locations. There is also speculation the new lease accounting standards will affect lease versus buy decisions.

Lease versus Buy

Beyond recent statistics showing increases in such indicators as equipment leasing finance volumes in the US, there are also many operational reasons why companies will continue and may even increase leasing options rather than ownership. These reasons are entirely unrelated to the change in the new accounting standards. A compelling reason frequently cited is that leasing allows tenants to include embedded contracts for professional property management. In the future, we could see an expansion of service options included in property management lease contracts.

Similarities and differences

While there are some similarities across industries, these issues will vary significantly from company to company and by property type.

Lease Types: Retail

Retail companies typically require several different types of property for its operations, including:

  • store locations
  • warehouse locations or DC’s to story inventory
  • equipment needed to move warehouse inventory
  • vehicles needed to transport goods from warehouse to store
  • racks and shelving needed to store and display goods
  • cash registers, safes and time clocks
  • principal corporate offices in central business districts

Leases Types: Banks

Banks usually maintain a variety of properties for their operations, including:

  • various bank branch locations
  • processing operations often in freely replaceable office space in suburban residential markets
  • data centers used to house IT applications
  • high visibility, critical corporate offices in central business districts
  • desks and furniture needed for offices and branch locations
  • computers, printers, copiers and other equipment needed for offices and branch locations

As part of the adoption process, management will need to catalog existing leases and gather data about lease term, renewal options, and payments to measure the amounts included on the balance sheet. Considerable time and effort will be necessary for collecting and analyzing data, depending on the number of leases, the inception dates, and the availability of records. Other factors, like embedded leases, which had not been a focus before, may need to be identified and separately recorded.

Lease administration software from CoStar manages payment obligations, creates and receives notifications, views changes and updates across entire lease portfolio, sets approval workflows for abstracting quality control and more. Be Strategic. Plan your transition. Modeling selected leases will give you relevant data to share with internal constituents. It will also help stakeholders understand what data you have and provides customizable reports and business intelligence on how your leasing strategy may need to change to minimize any potentially adverse accounting implications resulting from the new accounting standard.