STAMFORD, CT-The commercial real estate industry isawaiting--with much trepidation--the forthcoming new draft rulesfrom the Financial Accounting Standards Board on lease accounting.A seemingly arcane bit of accounting, these rules will, in fact,have a major impact on how tenants and landlords account for leaseson their balance sheets.

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What the industry already knows about the forthcoming draftsuggests the change will not be pretty: there are two changescompanies have to worry about. One, all lease obligations are goingon the balance sheet--all rent obligations, in other words, will becapitalized as a form of debt financing.

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The second is that the occupancy expense that runs through theP&L will increase substantially, but companies will no longerbe able to recognize rent expense. Instead, it will be anamortization of an asset they have.

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Mindy Berman, Jones Lang LaSalle’s managing director ofcorporate capital markets, has been tracking the decision closelyand, prior to the release--it is widely expected the draft exposurewill be made available this month--she has come to more detailedconclusions about what changes may be coming. “This is going to bea game-changer for real estate companies,” she predicts, with theimpact felt not just on tenant leases but also on such transactionsas sale-leasebacks and how retailers estimate their long-termleases. Indeed, one blanket assumption just about any real estateowner can make is that tenants will be angling for short-termleases until the impact of the rules becomes clearer.

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GlobeSt.com: Let’s get started with the good news.Sale-leasebacks: how will they be impacted?

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Berman: This will actually be a plusfor a lot of companies. Under current accounting rules,sale-leasebacks have very strict standards with which to comply.The new changes will allow for the facilitation of transactionsthat up until now have been very difficult to do in the US.

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Currently, they must be deferred over the term of the leaseback,but I believe the new standards will allow sellers to receive animmediate gain. I would guess we will start seeing an uptick inthese types of transactions as a result.

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GlobeSt.com: But retailers will not be solucky with the new rules.

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Berman: No. Unfortunately, the changeswill be difficult for retailers to absorb. Retailers have asubstantial amount of leases as a percentage of their debt relativeto their industry, so they will be disproportionately affected.

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FASB is likely to say that the entire lease obligation has to beon the balance sheet, including renewal periods if the tenant islikely to remain in place, which, of course, most retailers do.Also, retail owners get most of their rent from anchor tenants inthe form of a percentage of sales, but now the FASB rule will makeit difficult for retail tenants to estimate what their long-termobligations will be.

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