How Changing Accounting Standards Will Impact Property Managers

Under Accounting Standards Codification 842, companies will be required to report lease obligations on their financial balance sheets. If a company leases real property, like an office space or warehouse, then it will need to record its rental payments and the length of obligation as a financial liability on any records.

For owners of commercial real estate, the changes will impact everything from the length of leases to tenant renewals. For property managers, those changes could influence how properties will perform compared to income and expense data within the market.

As the senior general manager for property management at JLL in Austin, Franziska Jackson has started to explore how accounting changes will impact how she manages office and industrial properties. While tenants and building owners have yet to raise concerns about ASC 842, Jackson expects property managers will soon be involved in the process.

“The accounting side of the business has not yet asked us to weigh in on these changes in accounting standards,” Jackson said. “But any time there is something accounting needs from our perspective, we typically work closely with them.”

ASC 842 will impact how owners structure leases for tenants. Office and industrial leases can last for 10 years or longer, and companies might not want such a large financial obligation listed on their balance sheets. This has prompted owners to get creative with the length of lease terms, from offering shorter leases with renewal options to separating building operating expenses from the total rental cost. Property managers can act as a mediator between owners and tenants during these negotiations, ensuring that both parties understand the terms and conditions of the lease agreement.

While the leasing department at brokerage firms assembles leasing agreements, property managers can provide insight into whether the timelines and expectations laid out in the document are realistic, especially compared to similar property types in the market.

Jackson, as the incoming vice chair of the Institute of Real Estate Management’s Income/Expense Committee, has used the association’s database to stay ahead of the latest changes in her market and help property owners make informed investment decisions. Beyond data, Jackson’s involvement with IREM allows her to network with fellow property managers and discover how her peers are adapting to changes in the market.

“Property managers love to get involved with leasing because we look at it from a different perspective,” Jackson said. “Does this lease make sense? Can we have certain timelines for construction? We understand permitting, buildings codes. It’s always beneficial to give something a second look to make sure that what the tenant is asking for is feasible.”

Monitoring how ASC 842 will impact relationships with tenants and owners is part of the larger responsibility property managers have to understand how each owner’s income and operating expenses compare to the overall CRE market. Lease terms play a role in how a property will perform when analyzing standard income and expenses alongside similar assets in a market. Increasing the value of an asset, whether through amenities or tenant improvement allowances, can coax tenants into longer leases. But these choices all factor into income and expense data.

Property managers can help connect financial information like lease obligations to overall market performance. IREM issues Income/Expense Analysis Reports for all major real estate property types, from shopping centers to office buildings. Property managers, asset managers, appraisers, assessors, owners and investors can leverage this benchmarking data to help spot future problems with building performance and prevent mistakes when reviewing their own income and expense data.

“Don’t just look at your budget or income, but look at this data as a whole,” Jackson said. “Look at all of your properties. Is everything in line? What are you spending on one property versus another? Here in Austin, you may have different income and operating expenses depending on whether you are in the suburbs or in the central business district. You have to look and make sure your property is in the right range.”

By looking beyond JLL to resources like IREM, Jackson is prepared to offer owners insights into how changes like ASC 842 could impact their building’s return on investment.

This feature was produced in collaboration between Bisnow Branded Content and IREM. Bisnow news staff was not involved in the production of this content.