How Will Lease Accounting Changes Impact Sale/Leaseback Transaction

Many CFOs have realized many benefits in the past from sale/leaseback transactions. Selling Commercial property and leasing it back has allowed many companies to free capital that has been tied to real estate and redeploy this capital more strategically. New lease accounting changes may change this market dramatically. This topic was recently addressed in an article In CFO Magazine.

Space Race
By Russ Banharn


...All of this would sound even better if it were not for the proposed changes to lease accounting currently on the table. The Financial Accounting Standards Board and the International Accounting Standards Board have both proposed major alterations in lease accounting (see "Taking the 'Ease' Out of 'Lease'?" December 2010). Under the proposals, tenants would be required to place the obligation to pay rent over the entire lease term on their balance sheets as a liability. Right now, only the current rent is booked on the financials, as an expense on the income statement. Many observers predict these changes will be adopted.

If so, those companies seeking to spruce up their balance sheets by eliminating mortgage-debt obligations through a sale-leaseback may change their minds, since a lease liability would effectively treat all leases as a capital lease, which would gum up the balance sheet. "If a company is trying to raise capital, a sale-leaseback would still be a very viable option," says NorthMarq's Houge. "But the proposed changes to the accounting standards will affect other agreements, such as credit agreements requiring a minimum debt coverage ratio, and that could be a problem."

Others predict that future sale-leaseback deals will involve shorter-term leases, in the 3-to-5-year range. "If the rules change, the longer the lease, the greater the liability, so companies may want shorter leases than the typical 10-to-20-year term that makes sale-leasebacks work," says White of Real Capital Analytics. "It comes down to a financial decision: if you can borrow unsecured debt cheaper than what a real estate investor is offering, you may pass."

to read the full article please visit
http://www.cfo.com/article.cfm/14550844/3/c_14551704?f=search