By Tyler Bradford, Southpace Broker
I don’t know if anybody fully understands it, but changes to the rule by the Financial Accounting Standards Board (FASB) could be a significant game changer for our industry.
Where it will affect my business, is retailers who usually lease their spaces rather than buying real estate, will have to change their generally accepted accounting principles for leases, which will require lease capitalization by both lessor and lessee.
If a company operates 200 stores that are all leased, they have an obligation for a certain number of years for each lease. That could range from five to 25 years. What the new accounting procedure is trying to do is make those companies provide some visibility of the lease liabilities they have throughout the terms of all their leases, which could be a huge liability on a company’s balance sheet. If they do have 25 years of leases for 200 stores, that will mean they may have to start accounting for hundreds of millions of dollars of liability which would flip the financial health of the company in an annual snapshot.
Currently, financial statements do not show accounting for full lease term obligations. What that will mean for retailers and developers going forward could be that retailers will implement an alternative deal structure to keep their liabilities limited. If a retailer’s primary term used to be 10 years, an easy solution is to reduce the term to five years or even one year. The shortfall is that developers who need financing to build their projects need that long lease time to amortize their loan. If they’re getting short term commitments only from retailers they can’t turn around and get their financing from the bank, so there are definitely some short falls there.
It will definitely affect everyone in our industry and many of our clients. It will likely stifle growth for retailers for many years to come. Many retailers don’t have the available cash or credit needed to fund their own construction, so they’ll be opening a lot less stores, which will directly impact us.
The reality is nobody really knows what it will mean it if passes. The FASB has been trying to put this into place for a couple of years already, and now it looks like it will be another four to five years. If it ever does happen though, it will be significant for the future of this industry.