Performing a Credit Analysis of CRE Loans Under Revised Lease Accounting Standards
In February 2016, the FASB issued a revised leasing standard under ASC 842 in their Accounting Standards Update 2016-02. The most significant change is for lessees who will need to recognize operating leases on their balance sheet. However, what seems like a minor change could have dramatic implications for commercial real estate lenders. ASC 842 will take effect in 2019, so now is the time for lenders to prepare for the change. Some of the issues that lenders and credit analysts may face include:
- Borrower cash flows could be distorted
- Financial ratios may be inappropriately impacted
- Lessees could renegotiate lease terms possibly resulting in shorter lease terms
- Lessors and lessees may be less likely to invest in tenant improvements
In addition, if the new accounting standard moves lessees towards shorter term leases, appraisers serving real estate lenders and investors may have to consider reductions in their opinions of value. Some of the issues that appraisers may face include:
- The need to estimate potential leasing activity under less reliable short-term leases instead of available data on existing long-term leases.
- The potential for more frequent lessee turnover causing additional leasing costs for property owners as they attempt to stabilize occupancy levels.
These and other related issues could destabilize property values and increase real estate market volatility. That’s why lenders need to understand the potential impact of the new lease standard on their portfolios of commercial real estate loans as well as their approach to underwriting new loans as the new standard is implemented.
Please join Gary Deutsch, CPA MBA, as he addresses these risk issues and discusses how to adjust lending, underwriting and valuation practices to consider the FASB’s new lease accounting requirements.
WHAT YOU’LL LEARN
This webinar will cover:
- The implications of new operating lease requirements under which lessees must recognize a liability to make lease payments and a right-to-use (ROU) asset representing their right to use the underlying asset for the lease term.
- The implications of determining whether an arrangement is a lease.
- Which leases lessees can leave off their balance sheets.
- What costs are included in lease payments and why this is important to lenders.
- When a transaction may not qualify for sale-leaseback accounting and the implications for lenders.
- AND MUCH MORE!
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