STAMFORD, CT-The commercial real estate industry is awaiting--with much trepidation--the forthcoming new draft rules from 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 leases on their balance sheets.

What the industry already knows about the forthcoming draft suggests the change will not be pretty: there are two changes companies have to worry about. One, all lease obligations are going on the balance sheet--all rent obligations, in other words, will be capitalized as a form of debt financing. 

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

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

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

Berman: This will actually be a plus for 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 transactions that up until now have been very difficult to do in the US.

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

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

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

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