Research
New Accounting Rules Impact Savannah Tenants
Nov 19th
New accounting guidelines will immediately impact a company’s balance sheet and could have a negative effect on commercial Tenants and Landlords.
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board are merging their generally accepted accounting principles (GAAP) with international standards. As a result, public and some private companies will be required to list almost all leases as liabilities and assets on their balance sheets. This includes real estate leases which are currently not listed.
The boards should finalize the standards next year and they could take effect as soon as 2013. The proposed rules would require Tenants to capitalize the present value of all “likely” lease obligations. This could be difficult to forecast because some tenants rents are contingent on escalations that vary depending on sales volume or the consumer price index. Renewal options and right-to-terminate clauses will also be considered.
Lease vs. Own
New Accounting rules Affect Savannah Tenant Leasing
The lease vs. own question just got a little cloudier. Businesses deduct the full amount of lease payments for tax purposes. Those that own, depreciate a property’s improvements over 39 years. These rules will still apply, but it may make more sense for some companies to purchase real estate if it shows up on the balance sheet as a significant liability anyway.
Single-tenant building users would benefit the most from ownership and could drive down the demand for leased space. Smaller tenants that are in multi-tenant buildings are more likely to stay put.
Corporations already struggling with debt will take a hit as they record the entire outstanding balance of future rental payments as a liability. Public companies may look weaker to investors by affecting debt-to-equity ratios. It could also affect a business’ ability to borrow or trigger debt covenants in existing finance agreements.
Tenants should consider re-negotiating or re-structuring existing and future leases now. The natural result will be Tenants pushing for shorter term leases. This will have to be balanced with their willingness to give up incentives or lower rates as the Landlord takes on more risk, especially with an extensive build out.
Industries most affected will include: Retail, Professional Services, Transportation and Logistics, Telecoms, Healthcare and Real Estate. Here is a great overview of the new rules: New Savannah Tenant & Landlord Rules
Rex Benton is Savannah Commercial Real Estate agent with NAI Savannah, the commercial division of Mopper-Stapen, Realtors and is a contributing columnist for “BiS-Business In Savannah” weekly business publication and is an active blogger: http://www.savannahcommercialrealestate.blogspot.com/ www.naisavannah.com 912-358-5600 Office Space, Retail Space, Industrial Space, Investment Real Estate
Price Waterhouse Pending FASB Lease Accounting Changes
Oct 5th
Check out this SlideShare Presentation:
Price Waterhouse Pending FASB Lease Accounting Changeshttp://static.slidesharecdn.com/swf/doc_player.swf?doc=crepwcreportonpendingfasbchandgestorealestateleaseaccounting-12818834544358-phpapp01&stripped_title=price-waterhouse-pending-fasb-lease-accounting-changes&userName=wdahlstrom
View more documents from wdahlstrom.
Savannah Commercial Real Estate 2009 & 2010
Feb 7th
BLOGGER’S NOTE: This was originally published in my monthly column in BiS-Business In Savannah on January 10, 2010. Look for my column every 3rd Wednesday in Savannah’s only weekly business paper.
In 2009, most involved in commercial (and residential) real estate hung on hoping “in another 6 months” things would start improving. Below is a ‘technical’ chart outlining what happened:
Vacancies: Up
Sales/Leasing: Down
Values/Rental Rates: Way down
Lending: Non-existent (relatively)
Decision Makers: Frozen/Deer in head lights
Owners/Developers and Service Providers: Ramen noodles and prayer
Tightened lending guidelines, uncertain political consequences and less consumer spending made it a tough year in commercial real estate:
Retail:
Nationally, holiday retail sales were up 1.8 percent, beating the 1 percent prediction of the International Council of Shopping Centers.
Oglethorpe Mall general manager Phillip McConnell said Christmas traffic was as strong as ever but, based on the number of bags people were carrying, they bought less. In 2010, the council of shopping centers projects a 3-3.5 percent holiday sales increase, the best since 2006 when sales grew 4.8 percent.
McConnell believes 2009 mall store sales will be off only 3-4 percent from last year. Broughton Street, Southside and the Westside saw a fair share of closures and openings.
I continue to consult national and local retailers that want to be in Savannah, but fewer are expanding or are looking at 2011.
Hotel/tourism:
One positive – hotel occupancy should finish the year down around 4.5 percent from 2008. How’s that a positive? New hotels increased the number of rooms available by 5.1 percent. Savannah was the only city in the region with an increase in demand (.5 percent).
According to Joseph Marinelli, president of Savannah Convention and Visitors Bureau: “Value is king…” Local hoteliers reduced rates 9.1 percent.
Charleston did not fare as well. They had a drop of 5.3 percent in occupancy but only a 1 percent increase in new rooms. Demand decreased 4.5 percent and rates dropped 8.9 percent.
Office and industrial:
In 2009, office development was driven by pre-leases and build-to-suit projects. Small-business professional parks were challenged. Office leasing in the central business district and Southside was flat.
Even with a few impressive leases, big-box distribution vacancies (100,000 square feet-plus) remain high due to the speculative port-related development boom. Land sales have been slow.
With vacancies in the 20 percent range, expect aggressive deal making and little dirt being turned.
Investment sales:
Nationally, investment sales volume was low. Commercial real estate investment returns (based on appreciation or depreciation and income) dropped 15-20 percent, and values dropped 40 percent from 2007 peaks. Cap Rates have climbed across all sectors.
Here are a couple of local sales: Duke Realty bought a 400,000 square foot distribution building, and a AT&T; retail store on Mall Blvd traded at an 8.84 percent cap rate.
2010: Commercial real estate —“the other shoe” will not drop.
“The other shoe,” a trillion dollars in commercial loans due over the next three years, has received a lot of press. It won’t be painless, but most of the loans will be worked out. Though values have dropped, the majority of these loans are for income producing institutional-grade properties. Locally, there are few in this category so, Savannah has minimal exposure.
The bigger effect on local values will be led more by the overall economy, distressed properties, and banks that over-played their commercial lending. My advice to well-heeled investors and business owners (that want to own or lease): economists believe the recession is over, construction costs are down - start looking for opportunities.
Money to borrow is available and vacancies will level off, but neither will drastically correct. Dr. Albert Niemi, former dean of Terry School of business at UGA, expects Georgia to recover slower than other states through 2011 but to be one of the nation’s fastest-growing states afte
rward for the next 20 years. The port, tourism and retiree draw will allow Savannah to play a very active role.
6 Local signs of the national recovery:
1. Gulfstream Aerospace Savannah increases revenues, decreases furloughs.
2. Something goes vertical at Savannah River Landing or President’s Square.
3. Housing starts pick back up; downtown condo supplies reduce.
4. SEDA announces another Megasite user.
5. GPA regains its year-over-year volume growth.
5.5 A few “big-box” warehouse leases are signed.
6. Ramen noodle sales plummet.
Rex Benton is Savannah Commercial Real Estate agent with NAI Savannah, a division of Mopper-Stapen, Realtors and contributing columnist for BiS-Business In Savannah weekly business publication. 912.358.5600 Office Retail Industrial Investment Real Estate
