Northrop Decision Spotlights FASB Issues

WASHINGTON, DC-Details about Northrop Grumman’s decision to purchase 2980 Fairview Park Dr., a 14-story building in Fairfax, VA., to serve as its headquarters are starting to leak out. The Wall Street Journal reports that Northrop paid partial owner ING Clarion Partners “at least $78.6 million but not more than the $105 million.”

That is in line with price points for a partially-occupied building in that submarket. The Journal also reported something a little more eyebrow-raising: one of the reasons Northrop decided to buy instead of lease--as the DC real estate community had widely expected--was due to forthcoming accounting rules from the Financial Accounting Standards Board that will make leasing less advantageous. 

To be sure, this change is bound to interject uncertainty in the leasing markets as GlobeSt.com reported earlier this year. Briefly, there are two changes companies have to worry about: one is that 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. 

At face value it makes sense for a company to be concerned about these issues, even though for many tenants the issue is a hazy blip on their radar. But Northrop? One observer commented that even $100 million is a drop in the bucket for a company of Northrop’s size, as would be any additional complexity resulting from the rules.  Essentially, there are a lot of reasons why a company would invest in owner-occupied real estate, accounting rules being just one small factor. The FASB standards will have an impact, but it will most likely be felt in the usual tussle between landlord and tenant as they negotiate terms, TIs and other perks.  

This debate over Northrop’s motivations, though, does raise another issue of interest specific to the DC community: how the accounting changes will impact government contractors. Currently government contractors can get reimbursed by the government for their rent expenses, Jones Lang LaSalle’s managing director of corporate capital markets, Mindy Berman, tells GlobeSt.com. It is thought under the new rules, still in draft form, that they won’t be able to do that. “They won’t have a rent expense under the new accounting regime; from an accounting perspective they won’t pay rent. What they will have is an amortization of their occupancy cost.” 

That disconnect is not likely to sit well with government contractors. “There will likely be a push for the government to change its reimbursement practices so government contractors can continue to expense rent.”