Leased corporate real estate portfolios to be overhauled by new accounting standards

May 28, 2010

                                                                                                                                                Leased corporate real estate is about to undergo a massive change that will fundamentally shift how real estate is viewed by senior management and challenge CRE professionals to support their organization like never before.

Did that get your attention? If not, maybe this will…

In 2012, the International Accounting Standards and the Financial Accounting Boards will, “utilize a completely new model for lease accounting under which lessee’s rights and obligations under all leases, existing and new, would be capitalized on the balance sheet” according to a recently published white paper entitled, “The overhaul of lease accounting: Catalyst for change in corporate real estate” authored by PricewaterhouseCoopers’ Real Estate Advisory Services National Practice Leader, Xavier Menendez.

I know what you’re thinking, yawn, yawn, yawn, “I’m a CRE professional and this is an accounting issue.” Wrong! I’m hoping this post will get you to sit up and take notice, research the new standard and proactively approach your organization’s CFO/Controller to discuss how your organization might prepare for these changes.

The PricewaterhouseCoopers document highlights that the new lease accounting standard will:

  • Eliminate off-balance sheet accounting – assets currently leased under operating leases will be brought onto the balance sheet
  • Replace straight-line rent expense with interest expense
  • Recognize and carry leases at an amortized cost based on the present value of payment to be made over the term of the lease
  • Include optional renewal periods that are more likely than not expected to be exercised and include contingent amounts for percentage rent or CPI increases
  • Impact lease renewal and contingent rents by being continually reassessed, and the related estimates trued up as facts and circumstances change
  • Require significant systems and process changes at adoption date and maintenance on an ongoing basis
  • Not permit pre-existing leases to be grandfathered

The implications will place real estate front and center in the CFO/Controller’s cross hair when the cost and value of these leases are realized. It is likely that many functions now being managed in the RE/FM Department will be assumed by the Finance Department. And, rightfully so given the amount of risk exposure a large leased portfolio has to an organization. The new standard will have a greater impact on retailers and banks that rely heavily on leased facilities to support their operations but it will affect all leased facilities.

Don’t wait to get the memo. Start assembling financial information and lease abstracts, get your information systems in order and document your controls, procedures & processes. Reexamine everything and anticipate how you might alter your corporate real estate strategy to address the tax considerations, operational, economic, regulatory, intercompany, governance, budgetary and financing issues.

What have you heard about these evolving standards? How do you think the new lease accounting standards will impact your corporate real estate strategy?


The “Perfect Storm” CRE Strategy that Reduces Costs and Boosts Productivity

May 20, 2010

As the CRE professional in your organization, what would happen if you walked into your CFO’s office and proposed an initiative with a one year ROI that could reduce occupancy costs by as much as 30%, substantially improve productivity, worker satisfaction and retention, and organizational agility?

My bet is they would want to hear more. You could tell them about the “perfect storm” that is occurring between: the technological advances of mobile devices, VOIP, and videoconferencing that enable workers to no longer rely on a cube or an office in a building; the economic challenges calling for the need to cut operational expenses; and the staff’s desire to access flexible work environments that promote team-oriented work styles and allow field personnel to be closer to clients/suppliers.

What is this magical idea? Alternative workplace strategies (AWS) which, are defined as “the dynamic alignment of an organization’s work patterns with the work environment to enable peak performance and reduce costs.”

While it is the logical transition for organizations who want to shed space and boost staff productivity, AWS is increasingly becoming the ‘new normal’ with the emergence of virtual companies that no longer rely on the water cooler to exchange gossip or the conference room to share ideas.

A study conducted by the International Facility Managers Association and the real estate services firm of Jones Lang LaSalle found that:

  • 62% of companies use some form of AWS
  • 42% utilize flexible work areas designed to support teaming
  • 32% of companies with 1,000+ employees use telecommuting and expect the percentage to rise
  • 65% found an improvement in morale associated with telecommuting – the greatest gains in employee productivity in utilizing “remote” offices
  • 40% saw a decline in the SF/worker as a result of AWS and 20% reported a reduction in the total amount of space

The statistical and anecdotal evidence is fairly clear on AWS’ benefits of occupancy cost reduction and worker productivity making the open office plan, coffee shop, airport lounge, home office, client site and other public places viable alternatives to the traditional “four walls with a window” or the “Dilbert cube.”

If you’ve already implemented some of the principles of AWS, what strategies have you found to be the most successful? If you haven’t yet embraced AWS, what are you waiting for?

Go on, schedule the meeting with your CFO armed with the confidence that an AWS plan will reduce occupancy costs and boost worker productivity. It will be your chance to make a sunny day out of a perfect storm.

“Cloud Computing” Reduces the Hidden Costs of CRE Reporting

May 11, 2010

A recent white paper published by ApeSoft highlighted the hidden costs of using manual reporting tools.

Enter “cloud computing” which, according to Gartner Research’s recently completed CIO Report, is a leading technology that will fundamentally change the way organizations gather actionable business intelligence. This new technology leverages the investments in existing information systems; integrates disparate systems into a central source of reliable data; and helps companies avoid large capital investments for replacement systems.

This centralized source of the financial performance information and total real estate related costs become the critical pieces for the CRE professional to identify targets of opportunity for reducing costs and creating value.

The following compares the hidden costs of manual reporting from silo-ed systems with their cloud computing counterpart:

Wasted Effort and Talent – It is time consuming and a waste of talent made worse when senior management takes the time to manually gather and verify input data, construct formulas, build charts, and distribute the final report to colleagues – automating the reporting process and making dashboards available from a central source requires less time and is more reliable.

Delayed Decisions – Creating the “moment in time” spreadsheets can take time and are rapidly out of date. The longer it takes to gather the data and create the report the longer decisions are delayed – a centralized data source can eliminate the hidden cost of lost opportunities and contribute to more timely decisions.

Dependency on the Super-Spreadsheet Expert – Every organization has “super-spreadsheets” and a “super-spreadsheet expert,” that drive decisions across the company. What happens when this expert is out sick or leaves the company? – with a reliable single source for occupancy cost data you no longer need to be held hostage by the “expert.”

Duplication of Effort – It is not uncommon for different groups within an organization to create similar reports – can be eliminated through the deployment of cloud computing.

It’s becoming increasingly clear as the cloud computing trend continues – it will be the “next big thing” in CRE reporting.

What steps is your organization taking to eliminate the hidden costs of manual reporting from disparate systems? Have you considered “cloud computing”?