Accounting Rule Changes may impact Calgary Industrial Building Users and Tenants

Sep 21, 2010 by

Once again the US is leading the way in tax reform and other financial matters that may impact Calgary Industrial buildings users and tenants.  A recent article posted by the Real Estate News Exchange on behalf of CoStar out of the US states that changes in international accounting standards could effect long term term tenants by requiring them to report lease obligations on their balance sheets.  Traditionally as a tenant you do not report these types of financial obligations on your balance sheet.  You may have to in the future though and as such this could affect any liquidity tests that your current lender may require of you.  Lets say you just leased 20,000 square feet at $7.50 per square foot for 5 years.  This $150,000 per year obligation or a total of $750,000 in liabilities will need be shown on the liabilities portion of your balance sheet.  You have $1,000,000 in equity in your business and $500,000 currently on your line of credit that you use for inventory.  You have a 0.5 to 1 debt to equity ratio that your bank thinks is healthy.  Add this little accounting change ($500,000 plus $750,000 for $1,250,000 in liabilities) and your debt to equity ratio is 1.25 to 1 which is now offside.  The kicker…. where  is the corresponding asset that you bought for that liability?  The solution may be to buy the asset versus lease it or alternatively sign a shorter term lease.
The nuance is whether the real estate lease in question will be determined as an “operating” lease or a “capital” or “finance” lease.  If it is operating the proposed rules do not apply and all will stay status quo as it relates to leasing space.  If they are interpreted as a capital lease then the rules apply.  We have our accounting people checking into the Canadian implications and will keep you posted.

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