With the lease accounting standard set to take effect for private companies in mid-December, the Financial Accounting Standards Board will be considering a proposal at a meeting Wednesday to postpone the leases standard for another two years for private companies and nonprofit organizations.
At a meeting in September, members of FASB’s Private Company Council had discussed the possibility of a further delay in the standards after two earlier delays for the pandemic and to give private companies more time to implement the standard, which will add operating leases to the balance sheets of many companies for the first time. But accountants are facing other challenges with lease accounting apart from the new standard. A new report released Tuesday by the Visual Lease Data Institute polled a group of 200 senior accounting and finance professionals in the U.S. and found that nearly 80% of them said they have experienced negative impacts due to inadequate lease controls.
The most frequently reported challenge cited by the survey respondents was the inability to respond to changing circumstances due to the pandemic (34%), missing an option to extend a deadline (28%), miscalculating lease costs (28%) and forgetting to update unfavorable or unwanted lease terms (28%).
The pandemic has led to other challenges for accountants and finance pros. The survey found that 61% of senior accounting and finance professionals expect 2022 commercial rent to be about the same or higher than before the pandemic, while 61% admit their organization fell behind on rent during the pandemic, and 37% said their organization is still behind on rent.
The senior accounting and finance professionals who responded to the poll indicated they are carrying out their future plans with caution. A number of factors cited by the respondents will be important considerations when negotiating future leases: flexible scaling plans for space (57%), flexible lease termination (49%), shorter lease duration (36%) and an ability to sublease (33%), among others. Only 10% of the senior accounting and finance professionals surveyed use Excel for lease accounting.
“The commercial real estate industry has dramatically changed over the past nineteen months,” said Visual Lease CEO Marc Betesh in a statement. “Businesses have grappled with new restrictions, considerations and challenges, which have directly impacted their real estate needs. Both landlords and tenants are uncertain of what shifts and trends are here to stay, which has made planning ahead more difficult than ever before. We created this report to help both parties better understand the industry and ensure that they are maximizing the value of future leases, setting themselves up for success in 2022 and beyond.”
In terms of commercial real estate tenants, 65% of the tenants surveyed are considering their physical space needs more than one year prior to signing a new lease agreement. Over half (58%) of the tenants are prioritizing leases of at least five years in length, with nearly 20% interested in 10 or more years of occupancy. While plans are being made, the future remains uncertain as 93% of tenants note that their 2022 real estate strategy is temporary and will likely be revised post-COVID.
For commercial real estate landlords, 65% of the landlords surveyed expect their tenants will add space to their real estate portfolios in 2022. Similarly, 70% of tenants plan to expand their commercial real estate footprint in the year ahead. Seventy-eight percent of landlords predict that the biggest demand for leased properties in 2022 will appear in cities. Tier 1 cities like Los Angeles and New York are expected to draw the biggest crowd, pointing to a revival for major metropolitan areas that were previously hard-hit during the onset of the pandemic.
Three-quarters (75%) of the landlords polled expect 2022 commercial rent prices to be about the same or higher than rent prices were prior to the pandemic, which is in line with what 61% of tenants expect, as well. A rent increase may create some challenges as 61% of tenants admit that their organization fell behind on rent during the pandemic, and 37% are still behind on rent.
All of the surveyed (100%) landlords had tenants ask for modifications to their leases mid-term in response to the pandemic. As a result, 99% of the landlords polled have revised their agreements to better accommodate existing and future tenants, including changes to building rules and regulations (57%), operating expenses (54%), indemnification and insurance (45%), as well as sublet/assignment rights, rent abatement and force majeure clauses.
Commercial building tenants learned some important lessons during the pandemic. Based on what they learned from managing their businesses during the pandemic, the tenants surveyed said the following would be important considerations when negotiating their future leases: flexible scaling plans for space (57%), flexible lease termination (49%), shorter lease duration (36%) and an ability to sublease (33%), among others.