CFO Magazine Updates Lease Accounting Changes to Come

With the December 15th deadline for comments on the lease accounting changes fast approaching many commercial real estate owners and tenants are wondering how the changes will impact them.Many would just as soon see the lease accounting rules stay the way they are. But it is clear that the way companies account for real estate leases on their balance sheets is headed for big changes. The experts agree on one thing- the time to prepare for these changes is in 2011 or sooner!

CFO magazine recently published an interesting article on the impact the lease accounting changes will have on commercial real estate buy vs lease decisions, the length of leases, renewal options and the end of net leases. An excerpt of the article is below:

By Marie Leone
CFO Magazine


Accounting-standards setters are under fire, again. The new leasing standard, proposed jointly by the Financial Accounting Standards Board and the International Accounting Standards Board, has been characterized as naïve, lacking value, and in need of serious reevaluation. The outcry comes not from a handful of opponents but from companies on both sides of common lease contracts — those that rent office space, copiers, or airplanes and those that own the assets.

At the center of the maelstrom is the "right-to-use" asset concept, the accounting mechanism that places leased assets and liabilities on the balance sheets of lessees, as if they owned the assets. That would essentially eliminate operating leases. Credit Suisse estimates that, within the S&P 500 alone, the volume of assets returning to balance sheets could surpass $550 billion.

At those levels, asset ratios could be thrown out of whack, potentially sending debt covenants — if not adjusted — into default, says Ross Prindle, a managing director with Duff & Phelps, while also requiring banks to increase their regulatory capital and wreaking havoc on compensation plans tied to the asset measures.In addition, the proposed standard (called Topic 840 by FASB) requires lessors to recognize assets and liabilities in a new way. A lessor must recognize an asset as representing its right to receive lease payments and, when appropriate, record a liability as representing the contractual right of others to use their equipment or real estate.

Then, based on how much residual value the lessor estimates it will retain at the end of the lease, it must also use one of two accounting approaches laid out in the draft: either the performance obligation or the derecognition model. If the rules seem complicated, that's because they are, says D.J. Gannon, a deputy managing partner with Deloitte. However, he says the proposed changes are well intentioned: rulemakers want to curb abusive leasing practices by companies that structure around the 90% ownership test that currently determines whether a contract is an operating lease and can therefore be removed from their balance sheets.

Be that as it may, in the year-plus since FASB issued its first discussion paper on the topic, more than 300 comment letters have been submitted, most indicating that stakeholders are not convinced that the intended benefits will be worth the additional cost and effort.The comment period is open until December 15, and two days later FASB and the IASB will hold the first of four new "outreach" meetings to get a better handle on what worries constituents. The boards plan to release a final rule during the first half of 2011.


Lessor Has More
What's interesting is that most critics are less concerned about the concept of capitalizing all leases than with how FASB and the IASB propose to treat the leases after bringing them back on balance sheets.
"The board is naïve if they don't think the same kind of structuring will occur under these rules as exists with the bright-line test," asserts Shawn Halladay, a principal at The Alta Group, a leasing-industry consultancy. Halladay says that lessees have only to structure leases for shorter terms to push more of the asset value from their balance sheets. That's because shorter-term leases require the lessor to retain a larger portion of the asset's residual value.

Lessor accounting gets more complicated if the company retains a "significant" amount of the asset's risk or benefit. At that point, a lessor is required to use the performance obligation approach, which forces the company to carry both the asset and the total lease payment receivable (at the receivable's present value) on its balance sheet, as well as a performance obligation liability. In contrast, current capital lease rules require the lessor to carry a lease payment receivable on its balance sheet, but not the underlying asset.
The other accounting model available to lessors is the derecognition approach, which is used when the lessor retains a low residual value on the asset. The impact of the two-method treatment is sure to create "a greater divergence in practice among lessors," says Michael Fleming, also a principal at The Alta Group.

Lessors that hold real estate for investment — most notably in real estate investment trusts — may get a chance to avoid leasing rules completely, says Mindy Berman, managing director at Jones Lang Lasalle, a real estate services firm. Soon FASB will issue a proposal that requires real estate investment holdings to be measured at fair value, testing periodically for impairment, instead of following lessor accounting rules.

to read the full article please visit www.cfo.com

Still Many Questions Among CFOs About Bank Reform

As reported by Vincent Ryan in CFO Magazine

Two years after the fall of Lehman Brothers, the immense overhaul of the banking system is just beginning, and it is far too early for companies to breathe a collective sigh of relief. The banking system is safer — but not by a lot. Banks now have larger capital buffers, and the complex collateralized debt obligations (CDOs) that wrought so much destruction are nearly extinct. Yet 11% of retail banks remain at risk of failure, says the Federal Deposit Insurance Corp. (FDIC).

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act represents not a regulatory finish line so much as the firing of a starter's pistol that will kick off a marathon of rule-making and second-guessing. Key questions remain about how much reform will come to pass, when, and what it will ultimately mean for companies. "Regulation is always in catch-up mode — there's no way around it," says Cory Gunderson, managing director of the U.S. financial services and global risk and compliance practices at Protiviti.


As for what has been settled and what hasn't, three key areas of uncertainty deserve watching: whether public bailouts of megabanks can be avoided in the future, what regulators have done to return commercial lending to normal, and whether Wall Street has been reined in too much, too little, or just enough.


CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large financial organizations reduce their  costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com   or call David Worrell at 888.472.5656


Too Big to Fail?

Dodd-Frank created the Financial Stability Oversight Council, a mandated team of traditionally autonomous financial regulators who now are expected to work together to ensure that the financial system does not develop pockets of dangerous dependency. The group, which held its first meeting last month, has the daunting goal (given recent history) of eliminating "expectations on the part of shareholders, creditors, and counterparties of [large banks] that the government will shield them from losses in the event of failure," the U.S. Treasury says.

Dodd-Frank attempts to ensure that by imposing greater regulatory supervision on bank holding companies with assets greater than $50 billion. It also requires nonbank financial firms and systemically important firms within the next 18 months to develop plans for rapid, orderly unwinding of their businesses in cases of severe financial distress. But will this and any of the other proposed measures prevent the U.S. government from lavishing taxpayer funds on failed banks and being the arbiter of which banks fail and which get life-saving injections of capital?

http://www.cfo.com/article.cfm/14533054?f=search

CFO Zone Reports Cash Flow Top CFO Concern

as repoted on www.cfozone.com

It's all about the cash flow.

The biggest concern among chief financial officers these days is cash flow. Not the economy, not jobs, not health care, not the elections.According to a survey conducted by TD Bank, 69 percent of CFOs and other corporate finance managers at mid-sized businesses say they are most worried about the intense challenge of managing cash flow.The survey of 100 CFOs, controllers, treasurers and other financial executives also found that proper capital allocation and cash flow management will also be next year's top financial management priorities for 41 percent of respondents.

When it comes to cash flow, the survey respondents said the most significant risks over the next year will be an increase in non-performing accounts receivables (21 percent) and reduced sales (19 percent). Only 5 percent of respondents cite the economy as the biggest threat.While CFOs are worried about cash flow, they are not planning to take drastic action. Just seven percent of the finance executives say they plan to cut expenses in 2011.

In fact, 39 percent expect their capital investments to increase next year. Of that group, 21 percent expect an increase of 10 percent or more.One-third anticipates that capital investments will hold steady. Of course, this means roughly 28 percent are planning to cut capital investments.And the most common use for this money figures to be for new technology. This is followed by improvements to existing facilities, workforce hiring and development and office equipment.

CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their  costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com   or call David Worrell at 888.472.5656

What are the most likely constraints on capital investments? The finance pros most often cited cash flow (46 percent), followed by unsure levels of funding from clients and government (18 percent), as well as the political climate, including government regulations and policies (13 percent).

Otherwise, CFOs seem to share the kinds of sentiments most people seem to hold these days. For example, 78 percent acknowledge the economic recovery could take up to two years to materialize while nearly half believe the surest signs of a lasting upturn will be falling unemployment rates, sustained growth in their own organization's sales and an influx of new customers buying their products and services.

Other financial challenges include interest rate volatility, a key concern among more than half of the respondents (55 percent), followed by adequate access to credit for 52 percent.

http://www.cfozone.com/index.php/Newsflash/CFOs-Cash-flow-is-top-concern.html

Bank CFO Talk About Commercial Real Estate Lending

As reported on www.costar.com,
Article by Mark Heschmeyer

"Maybe it is time we start taking bankers at their word that commercial real estate wasn't and isn't a catastrophe waiting to happen. Maybe, just maybe, as they've been telling us for the last four consecutive quarters, there are serious risks but they are manageable and are being dealt with and disposed of.

Why, now?

Because third quarter commercial bank earnings reports released in the last week seem to back up that talk. Individually, there are definitely still banks in trouble. But collectively banks seem to be on the tail end of their commercial real estate troubles. Distressed loan levels have stabilized, the amount of new delinquencies is decreasing and more banks are beginning to push troubled assets back into the marketplace.

Banks' exposure to CRE loans has been a source of concern for many observers, said James Abbott, senior vice president, investor relations and external communications for Zions Bancorporation, but "so far that is not playing out in our portfolio and has been reasonably benign around the industry."

In fact, there are a lot of indications the commercial real estate market is stabilizing and even strengthening, Abbott said.

"If you look at CMBS spreads and some other indicia of this, it's appearing that maybe we're not going to see the kind of storm some had predicted," he said. "But I think it's going to take another two or three quarters perhaps before it's really clear that there aren't substantial losses around the industry in that product type."

Some banks even reported in their quarterly earnings conference calls that they are gearing up for increasing their commercial real estate lending activity or seeing renewed interest in borrowing. Such banks are still the exception, not the norm, but we haven't heard this kind of chatter since 2007.

"I would say that we've continued to be very judicious in the commercial real estate area," said Jerry Plush, senior executive vice president, CFO and chief risk officer of Webster Financial Corp.

"[We] continue to look for opportunities that make sense for us, and we're continuing to see that there is definitely some build-up in the pipeline there that we could see in the coming quarters," Plush added. "We're not saying that there is going to be substantial growth," Plush said. "It would be either to maintain balances or slightly above, but soon you will start to see the emergence of those small business and middle-market numbers rising in the commercial category."

Rene Jones, chief financial officer of M&T Bank Corp., said her bank is seeing customers paying down debt and repositioning themselves for future expansion.

"We’ve seen in the commercial real estate space a number of pretty well healed commercial real estate folks actually just looking at the liquidity and their portfolio, maybe selling down some projects to improve the overall liquidity position," Jones said. "But overall, our commitments aren't up, so I think people are just on hold. The rates are low, they’re trying to lock in some credit today but they’re not necessarily using it because they’re not yet investing."

Beth Mooney, vice chairman of KeyCorp, said they are definitely starting to see stability in commercial real estate, particularly the middle market loan book.

"We have obviously seen that client base de-lever over the last seven to eight quarters. But if you look into the trends from the first, to the second, to third quarter, we had the lowest level of decline in this quarter that we’ve seen through the cycle and we are actually starting to see, particularly in our Great Lakes and Northeastern regions, signs of increased new business activity and modest glimmers of loan growth," Mooney said. "However, on net you still see pressures in the Western markets. They were late into the cycle, but we do see some pickup in business activity and clearly signs of stability in the middle market book, as well as in the core leasing portfolio, which intersects with a lot of that same client base of renewed activity."

Bank executives also highlighted a greater willingness to sell buildings and reported more success in disposing of troubled assets on their third quarter earnings conference calls.

"We’re very pleased with the overall results of our problem assets disposition strategy, and the momentum we are building toward this effort," said Clarke Starnes, chief risk officer and senior executive vice president at BB&T Corp. "In the third quarter, we actually assembled a team of about 12 sales specialists, together with some significant operational and marketing support to begin a sales program for about $1.3 billion in commercial nonperforming loans that were transferred to the held for sale category."

"Our effort consists of a four-pronged strategy. It’s in this priority: short sales to the borrowers; third-party direct; third-party bulk, and then some other option," Starnes added. "We get our best pricing execution when we’re dealing more directly with the borrowers, but it takes a longer time to do that. At auctions you can do it much quicker, but you’ve got to do your discounts. So what we’re really trying to do is blend these various liquidation alternatives to achieve the best execution that we can, while balancing the time to liquidate."

Bob Kaminski, COO, executive vice president at Mercantile Bank Corp., said: "I think our staff has done a good job of working with borrowers on properties that were even in foreclosure to try to affect sales of those properties so that they may be never make it into the ORE bucket. Loans that do make it into foreclosure due to foreclosure process, many times have buyers that are waiting at the end of the redemption period to complete those sales."

"So it’s really on a page-by-page basis," Kaminski added. "You have some properties that are little bit hard to sell, may be spending a little bit of a longer time in the ORE buckets, and others that are more attractive from a purchasing standpoint tending to spend a lot less time in those categories."

Mary Tuuk, chief risk officer of Fifth Third Bancorp, said they have been very focused on higher risk portfolios such as non-owner occupied real estate.

"We’ve worked hard over time to achieve the best solutions possible on troubled credits," Tuuk said. "As part of that process, [the special assets group] continually identifies the loans most likely to result in a successful workout given enough time and which loans are less likely to result in an acceptable outcome. For that latter group of loans, our options include a long-term workout strategy or a shorter-term solution, one of which is the possibility of selling a loan and the redeploying the resources that would be devoted to a longer-term solution."

"We are marketing these loans in several pools targeted at particular (buyer basis). Land loans in one pool, vertical CRE in another, syndicated loans in another and a final pool that we intend to sell to investors, loan-by-loan," Tuuk said. "These loans, particularly the nonperforming ones, would generally represent the more troubled parts of our commercial portfolio with a high content of commercial real estate in general, particularly land and construction."

National Real Estate Investor Covers New Lease Accounting Rules

From www.nreionline.com

Proposed new accounting standards have been drafted in order to push lease liabilities back onto corporate balance sheets. Such a change would represent a major shift for companies that have typically favored the off-balance-sheet treatment of operating leases, and it could have a significant impact on corporate decisions to lease or purchase real estate in the future.

The proposed guidelines are a joint initiative by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board to create a uniform global standard and greater corporate transparency in lease accounting procedures. The most recent draft issued Aug. 17 would establish one method of accounting that requires firms to recognize all lease liabilities and assets on their corporate financial statements.

Another key component is that companies would be required to record the lease value or rent commitment over the entire lease term, including renewal options. Although the intent is to stop off-balance-sheet activity, the changes would add significant weight to corporate balance sheets.

For example, a firm that pays $1 million per year in rent for its corporate headquarters would quickly see its liability multiply depending on whether it has a five-year or 15-year lease. Companies would appear more highly leveraged, which could affect factors such as corporate credit and existing debt covenants.

Crux of the matter
What makes commercial real estate industry professionals nervous is that it is not clear to what extent the new accounting guidelines would influence tenants’ decision-making process. Based on the universe of leased space, the potential impact is enormous.

Although FASB cites data that values leasing activity at $640 billion in 2008, other industry sources estimate that current volume as high as $1.3 trillion in operating leases for U.S. firms alone. Once the guidelines go into effect, which many in the industry believe will occur in 2013, both new and existing leases would be immediately affected.

One fear is that the new accounting practices could deter companies from signing long-term leases, or encourage firms to own rather than lease facilities. Both of those factors could be a detriment to the sale-leaseback and net-lease finance niche where leases typically extend 15 years and beyond.

Sale-leaseback transactions have accounted for $24.8 billion, or slightly more than 50%, of the $46.6 billion in single-tenant sales globally over the past 12 months from June 2009 through June 30, 2010, according to New York-based Real Capital Analytics.


Please visit www.nreionline.com for the complete article.

The lease accounting changes are expected to effect how companies view their real estate holdings and real estate asset management strategies in the future. Some analysts predict the changes will not be reflected on the balance sheets until 2013, but companies need to start the planning process now. Certainly there is need for a complete lease audit process to determine how many individual leases exist and how they could be impacted when they no longer are considered operating leases.

But important decisions will need to made on excess real estate space. In the past one option was subleasing the space to another tenant. Not a perfect solution but subleasing had some advantages. When the lease accounting rules change, subleasing will not remove the lease from the balance sheet and increases risk for the company in their new role as a landlord to the company that is subleasing space.

A better solution would be a Negotiated Lease Buy-Out or Lease Termination program. These are complicated transactions and you should employ someone with direct experience in corporate real estate finance and taxation. One company that has a long track record negotiating  commercial real estate lease terminations is Cambridge Consulting Group. They have saved companies such as Bank Of America and Ford Motor Credit millions of dollars by reducing their lease obligations. For more information please visit their commercial lease termination website- www.commercialleaseterminations.com.

Value Energy Solutions Provides Energy Savings With Lighting Retrofits

Value Energy Solutions recently completed a parking garage lighting retrofit project for the Gables Midtown Apartments in Atlanta, GA. Value Energy Solutions is one of the largest lighting installation and lighting retrofit companies in the nation.  For the past 30 years they have provided multifamily owners, developers and property managers with turnkey lighting solutions that exceed customer expectations and reduce lighting and energy costs. Gables Midtown is one of the newest apartment communities in the Morningside/ Ansley Park neighborhood of Atlanta and offers residents numerous amenities including Earthcraft and Energy Star certified apartments.

 Gables Midtown management is proud of their focus on energy efficiency and water conservation features. When it was time to upgrade the energy efficiency of their parking garage lighting they contacted Value Energy Solutions. Value Energy Solutions thoroughly reviewed the existing parking garage lighting and the Gables Midtown energy saving goals. Originally, the parking deck lighting was the less energy efficient 175 watt Metal Halide Lights. Value Energy Solutions recommended retrofitting the parking deck with 2-Lamp 54wHO (high output) Vapor Tight Fluorescent lights. Gables Residential selected a 46,000 hour (extended life) rated lamp to maximize their energy savings and reduce lighting maintenance costs.

The projected energy savings for the lighting retrofit project is an impressive 47% and the cost of the lighting upgrade will pay for itself in only 17 months. Originally, Gables Midtown was considering using LED lights in the parking garage but Value Energy Solutions was able to offer a more cost efficient lighting retrofit program using new fluorescent lighting technology. Unlike many lighting companies that offer only one lighting product, Value Energy Solutions works with more than 250 lighting manufactures to provide their customers with the right solution at lower price point.

About Value Energy Solutions- Value Energy Solutions is one of the largest energy efficient lighting retrofitting companies in the United States. Realizing the need for building owners, property managers and facility engineers to find ways to conserve energy and cut their operating costs, Value Energy Solutions provides improved energy efficient lighting products as replacements for existing higher wattage fixtures. Value Energy Solutions was launched as a new venture by owners Dean Nations and Alan Carlquist as an expansion of their existing company, Value Lighting, Inc., a premier lighting wholesaler and distributor of lighting products.

The Value Energy Solutions lighting retrofit programs are offered for all commercial building types including Parking Garages, Warehouse/Industrial Buildings, Hotels, Retail Chains, Apartments and Office Buildings. For information on Value Energy Solutions please call Chris Owens, Director of Sales at 770.874.2191. Value Energy Solutions is located at 1110 Allgood Industrial Court, Marietta, GA 30066. To request more information please call or email at info@valueenergysolutions.com.

Lease Accounting Rules Will Have Large Impact on Retailers

As reported in Retail Traffic

Proposed new lease accounting standards from the U.S. Financial Accounting Standards Board and the International Accounting Standards Board have the retail real estate world dizzy with worry as property owners and managers fear the new standards will cripple tenants and lead to shorter lease terms and more conservative expansion strategies.

Financial Accounting Standards 13 (FAS 13) would require all lease liabilities to be accounted for on corporate balance sheets as capital leases rather than as operating leases. That’s an important distinction because operating leases allow tenants to account for lease liabilities as they are incurred. In contrast, capital lease liabilities must be accounted for in their entirety every quarter.

In addition, the new standards would require corporations, including retailers, to account for the full potential liabilities of leases—including options and percentage rent, not just the base rental fee. They would have to provide estimates on all contingency-based payments built into the lease, including lease renewal options, rent based on a percentage of sales and co-tenancy kick-ins.

CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their  costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com   or call David Worrell at 888.472.5656


So, for example, a retailer would have to account for the entire potential 15 years’ worth of costs on a lease with a five-year term and two five-year options. As a result, retailers’ debt loads could appear to balloon up to ten times their current levels.

The Securities and Exchange Commission has estimated that more than $1 trillion in operating leases throughout the entire commercial real estate sector would need to be reclassified when FAS 13 goes into effect. As it stands, the two accounting boards plan to finalize the leasing standards no later than the second quarter of 2011.

The problem with this is that over the past few decades, retailers, more than any other type of commercial tenant, have become dependent on using various forms of contingency rents, says Vivian Mumaw, global director of lease administration with Jones Lang LaSalle Retail, an Atlanta-based third party property management provider.

The intricacies alone will make it difficult to comply with the rule. Retail leases today typically have five- to 10-year terms, with multiple renewal options. In addition, virtually all retailers pay a portion of their rents based on percentage of sales—meaning they pay more if sales exceed a certain threshold—while many also employ co-tenancy clauses, which trigger decreases in rental rates if other retailers move out of a shopping center.

All of that will make it difficult for retail chains to accurately estimate liabilities for the entire length of each lease, Mumaw says. In order to do so, they would have to forecast macroeconomic conditions, as well as the performance of their brand and the performance of each individual store many years into the future.

To read rest of article please visit :
http://retailtrafficmag.com/news/fas13_means_retail_real_estate_10052010/