Vivian Mumaw
Product Innovation and Lease Administration

I agree with Mindy’s observations from the lease accounting session yesterday and want to offer some additional food for thought. 

As Mindy has pointed out many times, the FASB accounting rule changes do not affect only real estate leases, but also leases on vehicles and equipment. This may be irrelevant to some CRE organizations, but to many of our clients, it’s very significant. Depending on the industry sector they’re in and the way their firms are organized, CRE directors may be responsible for leases on fleet vehicles, copiers and other office machines, or industrial space equipment such as forklifts.

As Jones Lang LaSalle has been leading the discussion on the lease accounting rule change in real estate, some of our clients are coming to us for help in dealing with their equipment leases as well as their real estate leases. We can certainly accommodate them, and there are some efficiencies to centralizing response to the rule change in one place.

Vivian

Mindy Berman
Capital Markets

The CoreNet Global Summit session on FASB lease accounting changes was standing-room only, with well over 100 professionals showing up to find out how this change will affect their businesses. The moderator, Jones Lang LaSalle’s own Kenneth Rudy, asked for a show of hands to determine how many people were familiar with the rule change, which essentially will turn operating leases into capital leases for accounting purposes.

When CoreNet and Jones Lang LaSalle surveyed CRE directors a year ago, two thirds were unfamiliar with the change, and virtually no one was engaging other stakeholders in their companies. At yesterday’s session, about one third were still unaware of the basic information and less than a third had engaged stakeholders. With release of the exposure draft containing the new rules expected in June or July, this slow movement is cause for concern. And many people in the room expressed alarm that the rule change would cause them to break financial covenants that could send their companies into bankruptcy or exacerbate the trauma in the commercial real estate market —concerns that are exaggerated, to put it mildly.

In between the extremes of panic and complete indifference to this issue lies the course I have recommended to CRE directors for several years. First, get educated. Second, take the basic steps to prepare for the change. At a minimum, that is going to mean engaging your corporate finance team and business unit leaders. At some point, the corporate treasurer is going to come to CRE looking for information. It won’t be good if the CRE is unaware of the rule change when that happens.

Mindy