Local Accountant Not Sure that Accounting Changes will effect Calgary Industrial Real Estate Owners and Tenants

Oct 8, 2010 by

We have had a chance to catch up with some of our accounting associates on the question we asked in an September post (See Post) regarding some accounting changes being proposed in the USA that could effect both tenants and landlords who have interests in commercial and industrial real estate.  They generally were not as concerned about the proposed changes as they are exactly that… proposed.  However they did have the following points.

The proposed changes are generally aimed at publicly accountable enterprises. There are two standards of GAAP in Canada, one for public entities traded on stock markets etc and one for private entities.  Many users would not be affected as a result of their private company nature.  A typical user who buys a building to occupy one floor and rents the other to an outside party would likely not be publicly accountable and therefore not affected by these rules. But Chinook Mall, owned by the Ontario Teacher’s Pension Fund, could have some major changes for its major tenants.  Big tenants that are publicly traded like Canadian Tire for example could have some big changes, but the majority of tenants are likely local companies that would fly under the old rules.

The other component that is of concern is the complexity.  Not unlike the recent HST accounting changes and GST in the past, companies are going to have to spend significant time and resources to interpret the rule if they come into effect.   A company leasing its space is going to have to capitalize the lease as a long term intangible asset (future rights asset).  This will have to be evaluated on a yearly basis and have an offsetting liability. Theoretically companies would no longer have a rental expense, rather a write down or amortization of the future rights asset and the interest implied in the long term liability.  According to our accounting friends, this is going to require some very direct instruction from CCRA because it is going to get very complicated.  Two entities with the exact same circumstances could easily manipulate their situation to be completely different and therefore the rule changes would be useless.

The interpretation from the accountants is that these proposed changes are going to really affect tenants who have to do extremely long lease terms such as the Safeways and Home Depot’s and users doing large complex design build leases in the Calgary Industrial market.  The other component is the developer who need those long term tenants to make a viable business case for financing new projects as the long term lease market may dry up. It may cause a fundamental shift to ownership of units for tenants and thus require more large developers to consider condo ownership versus the current one landlord approach.

Stay tuned.