Shopping Centers Today International

DEC 2015

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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sions for the past 13 years. The new rules are to take full effect in 2018, though balance sheets from fiscal 2017 will be ex- pected to reflect the new accounting sys- tem. That means retailers must respond quickly once the rules are released. These regulations could prove espe- cially costly for large retail, restaurant and service firms that lease hundreds of store locations. Not only will expenses for corporate reporting and data collec- tion increase dramatically, but changes to company real estate management, forecasting, budgeting and tax-planning systems will be capital-intensive as well. And still other complications may result, including a disincentive for retailers to sign long-term leases, according to Betsy Laird, ICSC's senior staff vice presi- dent for global public policy. Leases of 12 months or less will be exempt from the rules, and so retailers may retreat to those, she says. H o w f a r b a c k existing leases will be grandfa- thered before they must be rebooked is up in the air too, and even whether they will be grandfathered at all, accord- ing to Thomas Quaadman, vice presi- dent of the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce. Companies would also have to monitor any lease-triggering event, such as a termination or renewal, because that would require amended reporting, he says. The accounting bodies do agree on almost all of the new standards, but a few big sticking points remain, Quaad- man says. FASB says the rules will skew debt-to-equity ratios and raise the cost of borrowing and/or place companies in viola- tion of lending cov- enants, he notes, while the IASB is more accept- ing of the rules a s p r o p o s e d . FASB has also s u p p o r t e d t h e adoption of a dual-model approach that retains the existing distinction between capital and operating leases, but IASB calls that too complex. Retail landlords will be largely left alone, because their assets are in under- lying real estate, not in leases, observes Sean Moynihan, a principal in the At- lanta office of Toronto-based commercial real estate services firm Avison Young. Landlords would be wise, however, to negotiate retail leases with an eye toward the way they impact a tenant's financial statements and not just cash flow, says Moynihan. Those landlords working with tenants more concerned about bal- ance-sheet impacts than profit-and-loss ones can structure a lease to get higher net-effective rents while at the same time mitigating that balance-sheet impact, he says. Working with professionals who thoroughly understand those issues is critically important, Moynihan says. And landlords should also review their lease portfolios for instances in which early lease renegotiation is advantageous to the retailer before these changes take effect, especially if that cre- ates higher land- lord net-operating income or higher n e t - e f f e c t i v e rents, he says. T h e s e n e w regulations were 128 S C T / D e c e m b e r 2 0 1 5 These regulations could prove especially costly for large retail.

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