On August 17, 2010, the Financial Accounting Standards Board (FASB), an independent body that establishes accounting standards for the private sector that are recognized by the Securities and Exchange Commission as authoritative, issued an Exposure Draft detailing proposed changes to standards governing how landlords and tenants account for their leases. The proposed changes are intended to increase transparency for investors by, among other things, requiring that the full long-term payments associated with the leases be shown on the balance sheet of the tenant as liabilities. Renewal options and contingent rents would be included when calculating liability under lease agreements. Operating leases would be capitalized and represented as current liabilities.
The business community and the real estate industry in particular were concerned that the proposed changes would have a negative impact upon businesses, without achieving the goals of increased transparency for the investor community. The proposed standards would dramatically increase the level of debt that appears on some corporate balance sheets, without there being any real change in the economic condition of the tenant. This could create disincentives to tenants to enter into long-term leases, making financing of projects more difficult.
NAIOP, the U.S. Chamber of Commerce, and associations representing insurance and financial services, among others, signed a coalition letter setting forth specific concerns and urging a delay in implementation of final standards. NAIOP filed its own comment letter to FASB on December 10, 2010. The Final Rule was published by FASB in February 2016, and the standards for public companies must be fully implemented by 2019.
NAIOP opposes FASB's changes to lease accounting standards. The standards would have a negative effect on the duration of lease terms, lessen the availability of capital for real estate development, increase accounting complexity, and add substantial administrative costs for compliance with the new standards. FASB should undertake a comprehensive review of the economic impact that such a change would have on the commercial real estate industry before final implementation of the rule is required.
On May 16, 2013, FASB and its international counterpart, the International Accounting Standards Board (IASB) issued a Revised Exposure Draft of the leasing standards. While some revisions were made by FASB in response to concerns raised by the real estate community, leases would still have to be carried on company balance sheets. FASB has issued he Final Rule, and public companies must implement the standards by 2019.