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Presenter Introduction

Presenter Introduction.

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Presenter Introduction

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  1. 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 Program in each consecutive year since 2000. Todd P. Anderson,MCR, SLCR, CASSenior Managing Director, Global Corporate Services CB Richard Ellis, Inc.Email: todd.anderson@cbre.com

  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

  3. Agenda • Evolving FASB/IASB Positions • Capitalization of Operating Leases? • SFAS 13/IAS 17 – Accounting for Leases • Leases: Preliminary Views – March 19, 2009 • Single Lease vs. Portfolio Single Property Example Portfolio of Properties Example 3.Bottom LineStrategic Portfolio Planning Preemptive Compliance

  4. 1. FASB Lease Definition

  5. 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

  6. SFAS 13 – Paragraph 7 a-d Capital Lease Capital Lease (on balance sheet) if any one of 4 criteria: • 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

  7. Primary Financial Statements

  8. Future Balance Sheet ImpactAsset 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

  9. 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)

  10. Operating Lease vs Capitalized Lease

  11. Income Statement Expense Impact

  12. Income Statement Expense Impact

  13. 2. Single Lease vs. PortfolioLease Capitalization Implications

  14. SINGLE PROPERTY EXAMPLE (Continued) Four 5-Year Leases One 20-Year Lease INCOME STATEMENT – Total Expenses INCOME STATEMENT – Total Expenses BALANCE SHEET – Change in Equity BALANCE SHEET – Change in Equity

  15. PORTFOLIO OF PROPERTIES Example(Continued) Renew with New 5-Year Leases Renew with New 20-Year Leases INCOME STATEMENT – Total Expenses INCOME STATEMENT – Total Expenses BALANCE SHEET – Change in Equity BALANCE SHEET – Change in Equity

  16. Incorporating future rent adjustments Changing Incremental Borrowing Costs Treatment of lease renewals and options Triple net (NNN) rent equivalents Challenges to Implementation

  17. 3 BOTTOM LINEHow CRE can Support/InfluenceCorporate Direction

  18. Ratios (EPS, ROA, ROE, EBITDA, etc.) Debt covenants Capital requirements Credit ratings Taxes Standards and Rules of Thumbs Performance Measure Impacts

  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

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