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Corporate Real Estate & IAS 17Corporate Real Estate & IAS 17
An analysis of the impact of corporate real estate on An analysis of the impact of corporate real estate on the corporate financial statements under IAS 17the corporate financial statements under IAS 17
Define corporate financial structure and goalsDefine corporate financial structure and goals
Define the purpose of the corporate financial statementsDefine the purpose of the corporate financial statements
Define the three principal financial statementsDefine the three principal financial statements
Define basic financial ratios and describe their usesDefine basic financial ratios and describe their uses
Define the differences in operating and capital leasesDefine the differences in operating and capital leases
Define how leases will be accounted for in the futureDefine how leases will be accounted for in the future
Describe a format for communicating the financial impacts of a real Describe a format for communicating the financial impacts of a real estate strategyestate strategy
Finance covers financial analysis and planning, investment decisions, Finance covers financial analysis and planning, investment decisions, financing and capital structure decisions, and management of financing and capital structure decisions, and management of financial resourcesfinancial resources
The goals of managerial finance are:The goals of managerial finance are:
Primary long term goal: the maximization of stockholder wealthPrimary long term goal: the maximization of stockholder wealthPrimary short term goal: the maximization of profitsPrimary short term goal: the maximization of profitsThe primary members of the finance department are:The primary members of the finance department are:
The Chief Financial OfficerThe Chief Financial Officer
Supervises all phases of financial activity and serves as financial advisor to the board of Supervises all phases of financial activity and serves as financial advisor to the board of directorsdirectors
The TreasurerThe Treasurer
Handles external financial matters and is responsible for managing corporate assets Handles external financial matters and is responsible for managing corporate assets and liabilities, financial planning, capital budgeting and managing any investment and liabilities, financial planning, capital budgeting and managing any investment portfoliosportfolios
The ControllerThe Controller
Handles internal financial matters such as financial cost accounting, taxes, budgeting, Handles internal financial matters such as financial cost accounting, taxes, budgeting, and control functionsand control functions
GAAP is the acronym for Generally Accepted Accounting GAAP is the acronym for Generally Accepted Accounting PrinciplesPrinciples
GGAAP is a set of guidelines and procedures that constitute AAP is a set of guidelines and procedures that constitute acceptable accounting practice at a given timeacceptable accounting practice at a given time
FASB is the acronym for Financial Accounting Standards BoardFASB is the acronym for Financial Accounting Standards Board
IASB is an acronym for the International Accounting Standards IASB is an acronym for the International Accounting Standards BoardBoard
Financial accounting requirements are announced by the financial Financial accounting requirements are announced by the financial accounting standards board (FASB) which is the principal rule accounting standards board (FASB) which is the principal rule making body of the accounting professionmaking body of the accounting profession
The IASB is the International Accounting Standards Board, the The IASB is the International Accounting Standards Board, the international equivalent of our Federal Accounting Standards international equivalent of our Federal Accounting Standards Board (FASB).Board (FASB).
The U.S. is moving towards merging all accounting standards The U.S. is moving towards merging all accounting standards to a joint international standard.to a joint international standard.
IAS 17 is an attempt by the international accounting standards IAS 17 is an attempt by the international accounting standards groups to make leasing activities more transparent to a groups to make leasing activities more transparent to a corporation and their stakeholders.corporation and their stakeholders.
Why the Change to IAS 17?Why the Change to IAS 17?
IAS 17 will make leasing (now financing) activities more transparent IAS 17 will make leasing (now financing) activities more transparent to the stakeholders of a corporation using large numbers of leasesto the stakeholders of a corporation using large numbers of leases
Most corporations prefer to lease assets and real estate rather than Most corporations prefer to lease assets and real estate rather than purchase and own thempurchase and own them
The most cited reasons are to preserve cash and maintain flexibilityThe most cited reasons are to preserve cash and maintain flexibility Maintaining flexibility is critical where location, size and market timing are fluidMaintaining flexibility is critical where location, size and market timing are fluid
Just as important, under the old FASB regulations, leases were an Just as important, under the old FASB regulations, leases were an income statement event onlyincome statement event only
There was no recordation of the obligation on the balance sheet (except as a There was no recordation of the obligation on the balance sheet (except as a footnote)footnote)
Leases: Operating and CapitalLeases: Operating and Capital
Operating Leases:Operating Leases:
An operating lease transfers certain rights to occupy a property An operating lease transfers certain rights to occupy a property while leaving the major risks and benefits of ownership with the while leaving the major risks and benefits of ownership with the OwnerOwner
The most notable characteristic of an operating lease is that your The most notable characteristic of an operating lease is that your company does not record the financial liability on its balance sheetcompany does not record the financial liability on its balance sheet
An operating lease may be triple-net or full serviceAn operating lease may be triple-net or full service
An operating lease is considered an An operating lease is considered an expenseexpense
Benefits of Operating LeasesBenefits of Operating Leases
It usually does not require a large outlay of company capital which It usually does not require a large outlay of company capital which leaves the company more leaves the company more liquid and flexibleliquid and flexible. The company can . The company can expense, and therefore write-off, the full rent paymentexpense, and therefore write-off, the full rent payment
A Capitalized Lease is a long-term lease which is treated, for accounting purposes A Capitalized Lease is a long-term lease which is treated, for accounting purposes as if it were as if it were a purchasea purchase
In In FormForm, a capital lease is similar to an operating lease: rental payments are made, , a capital lease is similar to an operating lease: rental payments are made, and the Owner still owns the propertyand the Owner still owns the property
In In SubstanceSubstance, it is so much like a purchase, it is treated as such in that the lease , it is so much like a purchase, it is treated as such in that the lease conveys so much of the useful life and value of the property that the Lessee rather conveys so much of the useful life and value of the property that the Lessee rather than the Lessor is receiving the benefits of ownershipthan the Lessor is receiving the benefits of ownership
Under a capital lease, rent payments are treated as mortgage payments and carried Under a capital lease, rent payments are treated as mortgage payments and carried on the on the Balance SheetBalance Sheet as an as an AssetAsset and and LiabilityLiability
Under the New IAS 17 Regulation:Under the New IAS 17 Regulation:
The Asset side of the recordation will be called a “Right to Use” assetThe Asset side of the recordation will be called a “Right to Use” asset The Liability side of the recordation will be labeled an “Obligation to Pay”The Liability side of the recordation will be labeled an “Obligation to Pay”
IAS 17 will require every operating lease for your company to be IAS 17 will require every operating lease for your company to be converted to a capitalized status.converted to a capitalized status.
Operating Leases are an Income Statement Event OnlyOperating Leases are an Income Statement Event Only
Capitalized Leases are Similar to Mortgages:Capitalized Leases are Similar to Mortgages:
You Record an Asset and a Corresponding Liability You Record an Asset and a Corresponding Liability
The Asset Will Be Called a “Right to Use”The Asset Will Be Called a “Right to Use”
The Liability Will Be Called an “Obligation to Pay”The Liability Will Be Called an “Obligation to Pay”
Surplus Properties – Subleases Under IAS 17Surplus Properties – Subleases Under IAS 17
How It Was Up Until Now – No ExceptionsHow It Was Up Until Now – No Exceptions New Implications - RequirementsNew Implications - Requirements The New “Double Whammy”The New “Double Whammy” What is “Mark to Market”What is “Mark to Market” How Do I Manage This Now?How Do I Manage This Now?
A capital lease is effectively created A capital lease is effectively created if only oneif only one of the following four of the following four criteria are met:criteria are met:
The lease The lease transfers ownershiptransfers ownership to the tenant at the to the tenant at the end of the lease end of the lease termterm
The lease contains a The lease contains a bargain purchase optionbargain purchase option
The length of the lease term is equal to or greater than The length of the lease term is equal to or greater than 75% of the 75% of the useful lifeuseful life of the property of the property
The present value of the minimum lease payments, using the The present value of the minimum lease payments, using the tenant’s incremental borrowing rate, less any tax credit, is tenant’s incremental borrowing rate, less any tax credit, is 90% of 90% of the fair marketthe fair market value of the property at the beginning of the term value of the property at the beginning of the term
How Do I Manage Surplus Now?How Do I Manage Surplus Now?
Subleasing Surplus Space Will Become More Difficult and Subleasing Surplus Space Will Become More Difficult and Less Advantageous Considering the RiskLess Advantageous Considering the Risk
Your Options?:Your Options?:
““Go Dark” – Close the Facility. Reduces Operating Expenses Such as Go Dark” – Close the Facility. Reduces Operating Expenses Such as Utilities and Security.Utilities and Security.
Donate the Space to Charity. Landlords Normally Do Not ApproveDonate the Space to Charity. Landlords Normally Do Not Approve
Negotiate a Lease Termination – Not Easy But Far Less ExpensiveNegotiate a Lease Termination – Not Easy But Far Less Expensive
Usually Can Be Done Around at 50 Percent of Remaining Rent.Usually Can Be Done Around at 50 Percent of Remaining Rent. Selling Management on This Option May Take Some EducatingSelling Management on This Option May Take Some Educating
AssetsAssets: The economic resources of the business: The economic resources of the business
Assets that can be converted into cash inside one year are called Assets that can be converted into cash inside one year are called current assetscurrent assets
LiabilitiesLiabilities: The debts of the business: The debts of the business
Those payable in one year are considered current liabilitiesThose payable in one year are considered current liabilities Those payable over a period of more than one year are classified as non-Those payable over a period of more than one year are classified as non-
current liabilitiescurrent liabilities
Capital Capital (owner’s equity): The owner’s interest in the business (owner’s equity): The owner’s interest in the business
In a corporation, capital consists of two accounts: capital stock outstanding and In a corporation, capital consists of two accounts: capital stock outstanding and retained earningsretained earnings
The accounting equation states that The accounting equation states that assets must always equal creditor’s claims, assets must always equal creditor’s claims, liabilities and capital (owner’s equity)liabilities and capital (owner’s equity)
The accounting equation is formally stated as:The accounting equation is formally stated as:
Assets = Liabilities + Capital + Profits (revenues - expenses)Assets = Liabilities + Capital + Profits (revenues - expenses)
Double-entry accounting:Double-entry accounting:
The accounting equation is the basis for double entry accounting, which means The accounting equation is the basis for double entry accounting, which means that that every transaction has an effect on two or more accountsevery transaction has an effect on two or more accounts
Measurement of Resources and Measurement of Resources and ObligationsObligations
Resources are those things of value the business Resources are those things of value the business possesses and can use to produce a profit. The accounting possesses and can use to produce a profit. The accounting term for resources is term for resources is assetsassets
Obligations, or Obligations, or liabilitiesliabilities, are amounts owed to non-owners , are amounts owed to non-owners of the businessof the business
The difference between assets and liabilities is the owner’s The difference between assets and liabilities is the owner’s interest or interest or equityequity in the business in the business
The accrual principle translates associated dollars of The accrual principle translates associated dollars of profit or loss to the actual activities of the periodprofit or loss to the actual activities of the period
The accrual principle provides that revenue be The accrual principle provides that revenue be recorded when the activities to sell a good or service recorded when the activities to sell a good or service are completedare completed
Costs Costs directlydirectly associated with producing revenue associated with producing revenue will be expensed in the same period that the revenue will be expensed in the same period that the revenue is recordedis recorded
Materiality deals with relative importanceMateriality deals with relative importance
A transaction must be accounted for within the A transaction must be accounted for within the measurement and principles of GAAP when the amounts measurement and principles of GAAP when the amounts involved are judged to be involved are judged to be materialmaterial
Materiality answers the question: Could this item make a Materiality answers the question: Could this item make a difference to the user of the financial statements?difference to the user of the financial statements?
What is a real estate example?What is a real estate example?
Accounting reports the economic substance of a transaction without Accounting reports the economic substance of a transaction without regard to its formregard to its form
An example would be a pledge to a charity. It is not a legally An example would be a pledge to a charity. It is not a legally binding obligation, but the substance of the transaction is that the binding obligation, but the substance of the transaction is that the corporation intends to pay the pledgecorporation intends to pay the pledge
The company has made a promiseThe company has made a promise
The company’s reputation is at stakeThe company’s reputation is at stake
What is a real estate example?What is a real estate example?
Some assets are long-lived and help produce revenue over several Some assets are long-lived and help produce revenue over several periods, such as real estateperiods, such as real estate
Depreciation (rather than amortization) refers to prorating a Depreciation (rather than amortization) refers to prorating a tangible tangible asset’sasset’s cost cost
Accountants expense the cost of these types of assets over their Accountants expense the cost of these types of assets over their expected, useful lifeexpected, useful life
This is called This is called DEPRECIATIONDEPRECIATION
Some costs are expensed when they arise. These are costs that Some costs are expensed when they arise. These are costs that would not be expected to produce future sales such as utility would not be expected to produce future sales such as utility expenses in an office buildingexpenses in an office building
Straight LineStraight Line: under the straight line method of depreciation, equal periodic : under the straight line method of depreciation, equal periodic charges for depreciation are made to income until the asset is fully depreciatedcharges for depreciation are made to income until the asset is fully depreciated
Accelerated MethodsAccelerated Methods::
Declining BalanceDeclining Balance: this method is an accelerated form of depreciation, which : this method is an accelerated form of depreciation, which results in larger depreciation charges during the earlier years of an asset's liferesults in larger depreciation charges during the earlier years of an asset's life
Sum-of-the-year’s-digitsSum-of-the-year’s-digits: under this method, the years of the asset’s service : under this method, the years of the asset’s service life are added together. This sum becomes the denominator of a series of life are added together. This sum becomes the denominator of a series of fractions, which is then applied to the cost of the asset less its salvage valuefractions, which is then applied to the cost of the asset less its salvage value
What are the Financial Statements?What are the Financial Statements?
They are designed to satisfy the information needs of many different They are designed to satisfy the information needs of many different people:people:
What is an Annual Report?What is an Annual Report?
The heart of the financial statements is the annual reportThe heart of the financial statements is the annual report
It must conform to accounting and reporting standards set by the It must conform to accounting and reporting standards set by the FASB, SEC (if publicly traded) and committees of the AICPAFASB, SEC (if publicly traded) and committees of the AICPA
The part of the Annual Report controlled by Management includes:The part of the Annual Report controlled by Management includes:
Annual Report HighlightsAnnual Report Highlights
A Letter to the ShareholdersA Letter to the Shareholders
The balance sheet boldly declares where a organization stands at a provided The balance sheet boldly declares where a organization stands at a provided moment in timemoment in time
The principal reason the business balance sheet is so essential to you and to any The principal reason the business balance sheet is so essential to you and to any potential traders or lenders is that it's like a photograph of the companypotential traders or lenders is that it's like a photograph of the company
It tells how the enterprise is put together, what its principal resources are and where It tells how the enterprise is put together, what its principal resources are and where any potential dangers lieany potential dangers lie
It only shows one particular moment in time, and therefore is most beneficial in It only shows one particular moment in time, and therefore is most beneficial in conjunction together with the revenue statement and by comparing a number of conjunction together with the revenue statement and by comparing a number of balance sheets over a time period. balance sheets over a time period.
It's called a balance sheet because the two sides balance out. This It's called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has makes sense: a company has to pay for all the things it has ((assetsassets) by either borrowing money () by either borrowing money (liabilitiesliabilities) or getting it from ) or getting it from shareholders (shareholders (shareholders' equityshareholders' equity))
Each of the three segments of the balance sheet will have many Each of the three segments of the balance sheet will have many accounts within it that document the value of eachaccounts within it that document the value of each
Accounts such as Accounts such as cash, inventorycash, inventory and and propertyproperty are on the asset are on the asset side of the balance sheet, while on the liability side there are side of the balance sheet, while on the liability side there are accounts such as accounts such as accounts payableaccounts payable or or long-term debtlong-term debt. .
The Income Statement (or Profit and Loss Statement) reports the The Income Statement (or Profit and Loss Statement) reports the results of business activities for a period of time (typically a fiscal results of business activities for a period of time (typically a fiscal year). These results are classified as year). These results are classified as RevenuesRevenues and and ExpensesExpenses
Revenues measure the Revenues measure the inflows of new assetsinflows of new assets into the business while into the business while expenses measure expenses measure outflow and the using up of assetsoutflow and the using up of assets in the same in the same processprocess
Net income represents an Net income represents an increase in assets and owner’s equityincrease in assets and owner’s equity while while a net loss represents a decrease in assets and owner’s equitya net loss represents a decrease in assets and owner’s equity
The Statement of Cash FlowsThe Statement of Cash Flows
The Statement of Cash Flows is like a The Statement of Cash Flows is like a bridgebridge. It describes all . It describes all of the changes that have occurred in the balance sheet during of the changes that have occurred in the balance sheet during the fiscal year in terms of their effect on cashthe fiscal year in terms of their effect on cash
Questions answered by Statement of Cash Flows:Questions answered by Statement of Cash Flows:
Where did the earnings go?Where did the earnings go? Why was money borrowed?Why was money borrowed? How was the debt retired?How was the debt retired? What happened to the proceeds of the bond?What happened to the proceeds of the bond?
Ratio analysis is the basic technique used in the analysis of the Ratio analysis is the basic technique used in the analysis of the financial statementsfinancial statements
A ratio for a company can be compared to:A ratio for a company can be compared to:
the company’s industry averagethe company’s industry average another company in the same industryanother company in the same industry the same ratio for the company in prior yearsthe same ratio for the company in prior years
Some of the most common ratios are:Some of the most common ratios are:
Market Value RatiosMarket Value Ratios Profitability RatiosProfitability Ratios Liquidity RatiosLiquidity Ratios
Market value ratios apply to a company’s stock price relative to its Market value ratios apply to a company’s stock price relative to its earnings (or book value) per share, as well as dividend related ratiosearnings (or book value) per share, as well as dividend related ratios
Examples of these ratios are:Examples of these ratios are:
The Price-Earnings Ratio (multiple):The Price-Earnings Ratio (multiple):
Market price per share divided by earnings per share. A Market price per share divided by earnings per share. A high P/E ratio indicates investor confidence in the high P/E ratio indicates investor confidence in the company:company:
P/E Ratio = P/E Ratio = Market price per ShareMarket price per Share Earnings per Share Earnings per Share
Book Value per Share is the value of each share per the books Book Value per Share is the value of each share per the books based on historical costbased on historical cost
If market price per share substantially exceeds book value per If market price per share substantially exceeds book value per share, it may indicate good stock market reception to the share, it may indicate good stock market reception to the companycompany
Stockholder’s Equity - Liquidation Value of Preferred Stockholder’s Equity - Liquidation Value of Preferred StockStock Outstanding Common Shares Outstanding Common Shares
Profitability RatiosProfitability RatiosProfitability Ratios reveals the company’s ability to earn a Profitability Ratios reveals the company’s ability to earn a satisfactory return on investment. The ratios are an indication of satisfactory return on investment. The ratios are an indication of good financial health and how effectively the company is managing good financial health and how effectively the company is managing its assets. Some examples of these ratios include:its assets. Some examples of these ratios include:
The The Gross Profit MarginGross Profit Margin reveals the percentage reveals the percentage of each dollar earned left over after the cost of of each dollar earned left over after the cost of sales:sales:
GPM = GPM = Gross ProfitGross Profit Net Sales Net Sales
Return on Assets Return on Assets indicates the efficiency with which indicates the efficiency with which management has used its resources to obtain management has used its resources to obtain income:income:
ROA = ROA = Net IncomeNet Income Total Assets Total Assets
Return on EquityReturn on Equity measures the rate of return earned on measures the rate of return earned on the common stockholder’s investment:the common stockholder’s investment:
ROE = ROE = Net IncomeNet Income Stockholder’s Equity Stockholder’s Equity
Earnings Before Interest Taxes and AmortizationEarnings Before Interest Taxes and Amortization
EBITDAEBITDA is an approximate measure of a company's operating cash flow is an approximate measure of a company's operating cash flow based on data from the company's income statement. It is calculated by based on data from the company's income statement. It is calculated by looking at looking at earnings before the deduction of interest expenses, taxes, earnings before the deduction of interest expenses, taxes, depreciation, and amortization. depreciation, and amortization.
This earnings measure is of particular interest in cases where companies This earnings measure is of particular interest in cases where companies have have large amounts of fixed assetslarge amounts of fixed assets which are subject to heavy which are subject to heavy depreciation charges and depreciation charges and subject to large amortization chargessubject to large amortization charges. It is a . It is a good way of comparing companies within and across industries. good way of comparing companies within and across industries.
This measure is also of interest to a This measure is also of interest to a company's creditorscompany's creditors, since EBITDA is , since EBITDA is essentially the income that a company has essentially the income that a company has free for interest paymentsfree for interest payments. In . In general, EBITDA is a useful measure only for large companies with general, EBITDA is a useful measure only for large companies with significant assets, and/or for companies with a significant amount of debt significant assets, and/or for companies with a significant amount of debt financing. financing.
EBITDA MarginEBITDA Margin refers to EBITDA divided by total revenue. EBITDA margin refers to EBITDA divided by total revenue. EBITDA margin measures the extent to which cash operating expenses use up revenue.measures the extent to which cash operating expenses use up revenue.
Analyzing liquidity is essential for short term creditors to ensure that Analyzing liquidity is essential for short term creditors to ensure that the company has adequate funds to meet current debt.the company has adequate funds to meet current debt.
A company with poor liquidity is a credit risk. Examples of liquidity A company with poor liquidity is a credit risk. Examples of liquidity ratios include:ratios include:
The current ratio is simply the relationship between The current ratio is simply the relationship between current assets and current liabilities:current assets and current liabilities:
Current Ratio = Current Ratio = Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
A stringent test of liquidity that looks at the most liquid A stringent test of liquidity that looks at the most liquid current assets, excluding inventories and pre-paid current assets, excluding inventories and pre-paid expenses (sometimes called the “acid-test ratio”)expenses (sometimes called the “acid-test ratio”)
Quick Ratio = Quick Ratio = Current Assets - InventoryCurrent Assets - Inventory Current Liabilities Current Liabilities
What Does What Does Interest Coverage RatioInterest Coverage Ratio Mean? Mean?
A ratio used to determine how easily a company can pay interest on A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a outstanding debt. The interest coverage ratio is calculated by dividing a company's company's earningsearnings before interest and taxes (EBIT) of one period by the before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:company's interest expenses of the same period: The lower the ratio, the more the company is burdened by debt expense. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy indicates the company is not generating sufficient revenues to satisfy interest expenses. interest expenses.
Interest Coverage Ratio = Interest Coverage Ratio = ___ ___ EBIT_____EBIT_____ Interest Expense Interest Expense
The Greater the IBR – the Greater the Lease ExpenseThe Greater the IBR – the Greater the Lease Expense
The Incremental Borrowing Rate is defined as the rate that, at the The Incremental Borrowing Rate is defined as the rate that, at the inception of the lease, the lessee would have incurred to borrow the funds inception of the lease, the lessee would have incurred to borrow the funds necessary to buy the leased property on a secured loan with repayment necessary to buy the leased property on a secured loan with repayment terms similar to the payment schedule called for in the leaseterms similar to the payment schedule called for in the lease
This rate is NOT the same as the corporate discount rateThis rate is NOT the same as the corporate discount rate
Each lease may have a different rate based on the date of lease inceptionEach lease may have a different rate based on the date of lease inception
Each lease must be adjusted to any changes in the IBR at each Each lease must be adjusted to any changes in the IBR at each accounting period. (this may require a substantial investment in time from accounting period. (this may require a substantial investment in time from now on)now on)
PV of Rent @ 7.5%PV of Rent @ 7.5% $10,000,000$10,000,000
PV of Rent @ 5.0%PV of Rent @ 5.0% $7,500,000$7,500,000
Difference:Difference: $2,500,000$2,500,000
6565
Mark to Market (MTM)Mark to Market (MTM)
Mark to Market Asset and Liability Accounting may be Required Mark to Market Asset and Liability Accounting may be Required under IAS 17. It is presently required for regulated industries such as under IAS 17. It is presently required for regulated industries such as Banks.Banks.
Mark-to-marketMark-to-market or or fair value accountingfair value accounting refers to accounting for the refers to accounting for the valuevalue of an asset or liability based on the current of an asset or liability based on the current market pricemarket price of the asset of the asset or liability, or for similar assets and liabilities, or based on another or liability, or for similar assets and liabilities, or based on another objectively assessed "fair" value.objectively assessed "fair" value.
Real estate leases are also re-evaluated based on the market rents in an Real estate leases are also re-evaluated based on the market rents in an accounting period.accounting period.
Mark-to-market accounting can make values on the balance sheet change Mark-to-market accounting can make values on the balance sheet change frequently, as market conditions change. In contrast, book value, based on frequently, as market conditions change. In contrast, book value, based on the original cost/price of an asset or liability, is more stable but can become the original cost/price of an asset or liability, is more stable but can become outdated and inaccurate.outdated and inaccurate.
Increases in Balance SheetsIncreases in Balance Sheets
A Change in Lease vs. Own DecisionsA Change in Lease vs. Own Decisions
A Change in New Lease Terms:A Change in New Lease Terms: Term of LeaseTerm of Lease Renewal OptionsRenewal Options Tenant ImprovementsTenant Improvements Gross Leases (Full Service)Gross Leases (Full Service) Lease Modifiers (CPI, Percentage Rent, etc…)Lease Modifiers (CPI, Percentage Rent, etc…)
What Changes Should I Expect?What Changes Should I Expect?Changes to Lease Accounting (All Past Leases as Well)Changes to Lease Accounting (All Past Leases as Well)
Impact of These Changes (Amount of Work, Complexity)Impact of These Changes (Amount of Work, Complexity)
Changes to Future Leasing ActivitiesChanges to Future Leasing Activities
What Do I What Do I NeedNeed To Do? To Do?Be Prepared!Be Prepared!
Get Informed (this course) – your peersGet Informed (this course) – your peers Other Information – online, service providers, consultants, etc.Other Information – online, service providers, consultants, etc. Internal Help: Accounting, Treasury, The Controller, The CFOInternal Help: Accounting, Treasury, The Controller, The CFO
Gather the DataGather the Data All Lease DataAll Lease Data All Operating Expense Data and Verify StatementsAll Operating Expense Data and Verify Statements All Separate Agreements – OptionsAll Separate Agreements – Options Verify Contingent Rent ValuesVerify Contingent Rent Values
While Your At It – Check Leases For Other IssuesWhile Your At It – Check Leases For Other IssuesEnvironmental RisksEnvironmental RisksADA ComplianceADA ComplianceOSHA ComplianceOSHA Compliance
Determine If Space Will (or Should) Become Surplus – Determine If Space Will (or Should) Become Surplus – Important!Important!
What Do I What Do I NeedNeed To Do - Two To Do - Two
Covert The Leases To Capitalized FormatCovert The Leases To Capitalized Format
1.1. Separate All Operating Expenses From Each LeaseSeparate All Operating Expenses From Each Lease
2.2. Determine All Contingent Rent Embedded in Each LeaseDetermine All Contingent Rent Embedded in Each Lease
3.3. Determine All Expenses Used in Developing LocationDetermine All Expenses Used in Developing Location
4.4. Determine All Renewal, Cancellation, Contraction and Expansion OptionsDetermine All Renewal, Cancellation, Contraction and Expansion Options
5.5. Verify The “Likelihood” of Any Options Being ExercisedVerify The “Likelihood” of Any Options Being Exercised
6.6. Then Determine The Present Value of Each Lease Based on the Approved Then Determine The Present Value of Each Lease Based on the Approved Incremental Borrowing Rate From TreasuryIncremental Borrowing Rate From Treasury
7.7. Covert Each Lease to Capitalized Format:Covert Each Lease to Capitalized Format: Asset: “Right To Use” – Straight Line AmortizationAsset: “Right To Use” – Straight Line Amortization
Liability: “Obligation To Pay” – IBR Calculation AmortizationLiability: “Obligation To Pay” – IBR Calculation Amortization
A Sharp Pencil, Lots of Paper, Lots of Time, Lots of A Sharp Pencil, Lots of Paper, Lots of Time, Lots of Hot CoffeeHot Coffee
Senior Management:Senior Management:
Your Intentions Through Recommendation to ManagementYour Intentions Through Recommendation to Management All Lease Data and All Associated Billing and Legal DocsAll Lease Data and All Associated Billing and Legal Docs A Preliminary IBR For Use with the Leases From TreasuryA Preliminary IBR For Use with the Leases From Treasury Surplus Property Methodology – How They Account For ItSurplus Property Methodology – How They Account For It Determine Their ExpectationsDetermine Their Expectations Set Up A Reporting MechanismSet Up A Reporting Mechanism Show Management Your InitiativeShow Management Your Initiative
Communicating Real Estate ImpactCommunicating Real Estate Impact
Adopt a presentation format which condenses detail and responds to those items Adopt a presentation format which condenses detail and responds to those items
that senior management wants to addressthat senior management wants to address
The Executive SummaryThe Executive Summary::
An Executive Summary is a transaction report that expresses both your An Executive Summary is a transaction report that expresses both your recommendation and defense of your transaction strategy.recommendation and defense of your transaction strategy.
A good Executive Summary will include the following issues:A good Executive Summary will include the following issues:
The transaction’s The transaction’s strategic contextstrategic context
The recommended The recommended course of actioncourse of action
Arguments Arguments to support the transaction or strategyto support the transaction or strategy
The The effectseffects of the transaction on the operating unit of the transaction on the operating unit
The transaction’s The transaction’s expected performanceexpected performance in relation to goals. in relation to goals.
This part of the report brings the reader into the necessary frame of This part of the report brings the reader into the necessary frame of reference. It is an introduction that:reference. It is an introduction that:
Identifies the Identifies the contextcontext of the summary of the summary Who Who asked for the reportasked for the report WhatWhat operating unit is affected operating unit is affected What the What the transactiontransaction includes includes WhoWho is involved is involved Brief chronologyBrief chronology of the events leading to the report of the events leading to the report SummarySummary of the type of analysis used of the type of analysis used
The bottom-line position.The bottom-line position.
State your recommendation State your recommendation clearly, succinctly, and up frontclearly, succinctly, and up front.. For every “what” of the recommendation - be sure to have a “why”For every “what” of the recommendation - be sure to have a “why”
Depending on the circumstances, senior management may want you to Depending on the circumstances, senior management may want you to recommend a recommend a second or third optionsecond or third option to reflect degrees of sensitivity in the to reflect degrees of sensitivity in the analysisanalysis
Second and third positions should be set up as tiers:Second and third positions should be set up as tiers:
Best caseBest case Probable caseProbable case Worst caseWorst case
Executive Summary: Executive Summary: Real Estate ImpactsReal Estate Impacts
The degree to show real estate impacts is the degree management wants to see The degree to show real estate impacts is the degree management wants to see them and will readily comprehend.them and will readily comprehend.
In presenting real estate impacts, include line items affected in the financial In presenting real estate impacts, include line items affected in the financial statements:statements:
Executive Summary: Executive Summary: Real Estate Impacts Real Estate Impacts
Balance SheetBalance Sheet:: Property, plant, and equipment assets (PP&E)Property, plant, and equipment assets (PP&E) Mortgages payable, with or without principal pay-downMortgages payable, with or without principal pay-down
Cash Flow StatementCash Flow Statement:: DepreciationDepreciation AcquisitionsAcquisitions Capital ImprovementsCapital Improvements Discontinued OperationsDiscontinued Operations Mortgages and principal pay-downsMortgages and principal pay-downs Changes in cash resulting from a transactionChanges in cash resulting from a transaction
Transactions will impact indices drawn directly from financial statement line Transactions will impact indices drawn directly from financial statement line items, financial ratios, and in retail businesses, market-related ratiositems, financial ratios, and in retail businesses, market-related ratios
A strategy is only as good as its underlying assumptionsA strategy is only as good as its underlying assumptions
Critical assumptions are those that have impact on the recommendation and Critical assumptions are those that have impact on the recommendation and financial conclusions as a wholefinancial conclusions as a whole
Heading the list of assumptions to include are:Heading the list of assumptions to include are:
Assumed impact of the transaction on salesAssumed impact of the transaction on sales Assumed impact of the transaction on other overheadAssumed impact of the transaction on other overhead Discount ratesDiscount rates Capitalization ratesCapitalization rates Time requirements to achieve objectivesTime requirements to achieve objectives Cost of capital; interest borrowing ratesCost of capital; interest borrowing rates Excluded cost items (legal, commissions, staff time)Excluded cost items (legal, commissions, staff time) Tax ratesTax rates
The executive summary should state what happens if the The executive summary should state what happens if the recommendation is approvedrecommendation is approved
This can be:This can be:
A list of A list of priority actionspriority actions
A condensed A condensed scheduleschedule of activities of activities
Any Any immediateimmediate corporate impacts corporate impacts
Executive Summary: Executive Summary: Support DocumentationSupport Documentation
It often happens that a senior officer will want to see some item of documentation It often happens that a senior officer will want to see some item of documentation supporting a financial or operational conclusionsupporting a financial or operational conclusion
The executive summary should anticipate this need by including a list of the The executive summary should anticipate this need by including a list of the support documents usedsupport documents used
Example documents include:Example documents include:
A A general narrativegeneral narrative of circumstances surrounding the proposed transaction of circumstances surrounding the proposed transaction A complete list of A complete list of assumptionsassumptions A A pro formapro forma income statement income statement A pro forma balance sheetA pro forma balance sheet A pro forma cash flow statementA pro forma cash flow statement
Learning the Language of FinanceLearning the Language of Finance
Understand the dual agenda now confronting the Corporate Real Understand the dual agenda now confronting the Corporate Real Estate FunctionEstate Function
Administration of Real EstateAdministration of Real Estate Asset ManagementAsset Management
Divide work into Logistical and Strategic componentsDivide work into Logistical and Strategic components
Determine where your time is best spent:Determine where your time is best spent:
Strategically FocusedStrategically Focused Management Advisor on Real EstateManagement Advisor on Real Estate