WASHINGTON, DC-Bill Bosco, a consultant for the Washington, DC-based Equipment Leasing and Finance Association and principal of Leasing 101, provided the following primer on how the compromise will impact commercial real estate, providing the boards continue along this tract.

1. Lessees will capitalize all leases except for short-term leases, which can use the operating lease method and remain off-balance sheet. The lessee will record rent expense as under the current operating lease GAAP, which produces a straight-line cost pattern.

The exception, generally applying only to leases of an entire building or land, is to use current GAAP capital lease accounting if the lease term is for the major part of the economic life of the underlying asset or the present value of the fixed-lease payments equals substantially all of the fair value of the underlying asset. Capital lease accounting produces a front-ended cost pattern. Lessees had been opposed to the front-end pattern, since they do not view rentals as having an interest component that causes the front-ended pattern.

2. Lessors will use current operating lease accounting if the lease term is not for the major part of the economic life of the underlying asset or the present value of the fixed lease payments equals substantially all of the fair value of the underlying asset. In other cases--generally applying only to leases of an entire building or land--the lessor will use the Receivable and Residual method, which his virtually the same as current GAAP direct finance lease accounting. Lessors of multi tenant properties had been opposed to using the Receivable and Residual method as its pattern of earnings did not reflect the operating nature of their business model.

3. The same rules will not apply to equipment leases since lessees will get straight-line rent expense if the lease term for an insignificant portion of the economic life of the underlying asset or the present value of the fixed lease payments insignificant relative to the fair value of the underlying asset.