Presenter Introduction
Todd Anderson is Senior Managing Director of CB Richard
Ellis’ Global Corporate Services group in Los Angeles,
California. He is the Alliance Director for The Boeing
Company providing the strategic oversight and account
team management to serve their 88 million square foot
global real estate portfolio.
Mr. Anderson is a regular real estate industry speaker and
contributing author of articles, as well as, a “Top Rated”
faculty member of CoreNet Global’s Executive Development
Todd P. Anderson,
Program in each consecutive year since 2000.
MCR, SLCR, CAS
Senior Managing Director,
Global Corporate Services
CB Richard Ellis, Inc.
Email:
todd.anderson@cbre.com
Global Research and Consulting
CB Richard Ellis | Page 2
Counselors of Real Estate
REAL ESTATE IMPACT ON FINANCIAL STATEMENTS
Hot Topic
SFAS 13: Proposed Capitalization of Operating Leases
Presented by:
Todd P. Anderson
Senior Managing Director
Global Corporate Services
Global Research and Consulting
Agenda
1. Evolving FASB/IASB Positions
• Capitalization of Operating Leases?
•
•
SFAS 13/IAS 17 – Accounting for
Leases
Leases: Preliminary Views – March 19,
2009
2. Single Lease vs. Portfolio
Single Property Example
Portfolio of Properties Example
3. Bottom Line
Strategic Portfolio Planning
Preemptive Compliance
Global Research and Consulting
CB Richard Ellis | Page 4
1.
FASB Lease Definition
Global Research and Consulting
SFAS 13 – Accounting for Leases
• Capital or Operating lease; paragraph 7 a-d
• Possession Date; 13-1 paragraph 2 & 3
• Lease Term; FASB Technical Bulletin 88-1
• Renewal Periods; paragraph 5 (f) and (o)
• Straight-line rental rate; paragraph 15
• CPI adjustments; paragraph 5 (n), SAB 101
• Lease incentives; FASB Technical Bulletin 88-1, paragraph 7
• Leasehold Improvements; paragraph 5 (f)
• Other FASB Lease Reference Documents




SFAS 13, 23, 29, 98
Technical Bulletins 88-1, 85-3
FASB Staff Position 13-1
SEC Chief Accountant Letter February 7, 2005 to AICPA Chairman
Global Research and Consulting
CB Richard Ellis | Page 6
SFAS 13 – Paragraph 7 a-d Capital Lease
Capital Lease (on balance sheet) if any one of 4 criteria:
a.
b.
c.
d.
Automatic Transfer of Ownership
Bargain Purchase Option
Lease term exceeds 75% of remaining useful life
The PV of rent exceeds 90% of fair market value
• Determined at inception of lease term
• Minimum fixed term (extensions if highly likely)
• Minimum lease payments, plus any cancellation payment
• Discounted at Lessee’s incremental borrowing rate
 Risk-free credit-adjusted rate
 Incremental borrowing rate
Global Research and Consulting
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Primary Financial Statements
Lease
Purchase
(Capital/Finance Lease)
INCOME STATEMENT
 Revenue
 Expenses
Rent
Depreciation
Interest
 Net Income (Profit)
BALANCE SHEET
 Assets
 Liabilities
 Shareholders’ Equity
Global Research and Consulting
CB Richard Ellis | Page 8
Net Book Value
Debt
Future Balance Sheet Impact
Asset Increase, Liability Decrease, Equity Decrease
SFAS 13/IAS 17: Capitalization of Operating Leases?
 Currently off-balance sheet
 Proposing on-balance sheet treatment (capitalization)
 $1.3 trillion “estimate” for U.S. Companies
Global Research and Consulting
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Future Income Statement Impact
Expense Increase, Earnings Decrease
SFAS 13/IAS 17 – Capitalize Operating Leases
 Eliminate rent expense
 Add depreciation expense (over lease term)
 Add imputed interest expense (amortized over lease term)
Global Research and Consulting
CB Richard Ellis | Page 10
Operating Lease vs Capitalized Lease
Global Research and Consulting
CB Richard Ellis | Page 11
Income Statement Expense Impact
Scenario: 20-Year Term
1,400
1,200
Amount (In Thousand $ 's)
1,000
800
600
400
200
0
1
2
Rent
3
4
5
6
Depreciation + Interest
Global Research and Consulting
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7
8
9
10
Years
11
12
13
14
15
16
17
18
19
20
Income Statement Expense Impact
Scenario: Comparison of 20 & 5-Year Terms
1,400
Amount (In Thousand $ 's)
1,200
1,000
800
600
400
200
Rent
0
1
2
3
6
Dep.+
Int. 4(5-Yr5Terms)
7
8
9
10
Yea rs
Dep.+ Int. (20-Yr Term)
Global Research and Consulting
CB Richard Ellis | Page 13
11
12
13
14
15
16
17
18
19
20
2.
Single Lease vs. Portfolio
Lease Capitalization Implications
Global Research and Consulting
Four 5-Year Leases
One 20-Year Lease
INCOME STATEMENT – Total Expenses
INCOME STATEMENT – Total Expenses
1,400
1,400
1,200
1,200
1,000
1,000
800
800
600
600
400
400
Rent
Rent
200
200
Dep.+ Int. (5-Yr Terms)
Depreciation + Imputed Interest
0
Dep.+ Int. (20-Yr Term)
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1
BALANCE SHEET – Change in Equity
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
BALANCE SHEET – Change in Equity
1,000
1,000
500
500
0
2
0
(500)
(500)
(1,000)
(1,000)
(1,500)
(1,500)
(2,000)
Equity (5-Yr Terms)
(2,000)
Equity
Equity (20-Yr Term)
(2,500)
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
(2,500)
1
Global Research and Consulting
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2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Renew with New 5-Year Leases
Renew with New 20-Year Leases
INCOME STATEMENT – Total Expenses
INCOME STATEMENT – Total Expenses
24,000
24,000
20,000
20,000
16,000
16,000
12,000
12,000
8,000
8,000
4,000
Rent
Rent
4,000
Depreciation + Imputed Interest
Depreciation + Imputed Interest
0
1
2
3
4
5
6
7
8
9
10
11 12 13 14 15
16 17 18 19 20
21 22 23 24 25
0
1
BALANCE SHEET – Change in Equity
2
3
4
5
6
7
8
9
10 11
12 13 14
15 16 17 18
19 20 21
22 23 24 25
BALANCE SHEET – Change in Equity
5,000
5,000
0
0
(5,000)
(5,000)
(10,000)
(10,000)
(15,000)
(15,000)
(20,000)
(20,000)
Equity
Equity
(25,000)
(25,000)
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Global Research and Consulting
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1
2
3
4
5
6
7
8
9
10 11 12
13 14 15 16 17 18 19 20 21 22 23 24 25
Challenges to Implementation
Incorporating future rent adjustments
Changing Incremental Borrowing Costs
Treatment of lease renewals and options
Triple net (NNN) rent equivalents
Global Research and Consulting
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3
BOTTOM LINE
How CRE can Support/Influence
Corporate Direction
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Performance Measure Impacts
 Ratios (EPS, ROA, ROE, EBITDA, etc.)
 Debt covenants
 Capital requirements
 Credit ratings
 Taxes
 Standards and Rules of Thumbs
Global Research and Consulting
CB Richard Ellis | Page 19
Pre-emptive Lease Capitalization Strategies
• Lease administration
 Centralized
 Comprehensive
 Consistent Format
• Financial Analysis
 Net Book Value assessment
 Performance Measure Impact
 Competitive Industry Position
• Portfolio Optimization Strategies
 Portfolio Composition
 Short or long term leases
 Lease vs. own considerations
Global Research and Consulting
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Global Research and Consulting
CB Richard Ellis | Page 21