In a recent conversation with a senior finance executive at a Fortune 500 company, it came out that the firm was still not fully compliant with GAAP / FASB guidelines for lease accounting and other corporate real estate activity.  Frankly, this did not come as a surprise.  Major corporations often struggle to implement proper accounting treatments across their CRE operation.  The initial FASB guidelines covering this topic were promulgated in 1976 (SFAS 13), and there have been many updates since that time.  Still, two main factors hinder full compliance: first, the frequently “immaterial” scale of real estate activity (as determined by corporate controllers and auditors), and second, lack of understanding and communication between real estate specialists, attorneys, and accountants.

Some may recall that late-2004 to mid-2005 was a bit of a watershed period in this area.  With credit plentiful, the period saw a rush on large ground-up single-tenant projects, sale-leaseback arrangements, and generous landlord TI financing.  Major corporations suddenly woke up and started asking about proper treatment for all of this off balance sheet capital being assumed on their behalf.  After a few requests for interpretations and earnings restatements by public companies, SEC Chief Accountant Donald Nicolaisen set the record straight on several issues, including the treatment of tenant improvement allowances, free or abated rent periods, and other landlord concessions or inducements.

I am always a fan of going straight to the source to understand issues, particularly government policies and guidelines.  In that spirit, I first reccomend a thorough reading of the Nicolaisen staff letter itself, as posted online by the SEC.  For comprehensive background and analysis, the best article I have found is one called “Increased Clarity in Accounting for Operating Leases“, authored by James M. Fornaro and Rita J. Buttermilch and published by the CPA Journal.

For the corporate real estate professional who wants to be fully educated on the issue, below is a tour de force of the materials you should know inside-out.  For any of the FASB documents, my advice is to go directly to the FASB library and download the most recent (“as amended”) PDF version.

SFAS 13 (Accounting for Leases)

SFAS 66 (Accounting for Sales of Real Estate)

SFAS 91 (Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17)

SFAS 98 (Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases—an amendment of FASB Statements No. 13, 66, and 91 and a rescission of FASB Statement No. 26 and Technical Bulletin No. 79-11)

TB 85-3 (Accounting for Operating Leases with Scheduled Rent Increases)

TB 88-1 (Issues Relating to Accounting for Leases)

FSP FAS 13-1 (Accounting for Rental Costs Incurred during a Construction Period)

EITF 05-3 (Accounting for Rental Costs Incurred during the Construction Period)

EITF 97-11 (Accounting for Internal Costs Relating to Real Estate Property Acquisitions)

In future articles, we’ll try to discuss some of these in greater detail, along with discussion and analysis concerning practical corporate compliance.

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