ELMTREE
ASC-842 Lease Accounting Standards
The anticipation of the potential changes to lease accounting standards incorporated in ASC 842 created some uncertainty throughout the commercial real estate industry and particularly within the net lease sector.
Landlords and investors were initially concerned that the new standards would remove previous guidance that incentivized corporations to often lease commercial real estate properties rather than invest their capital to own the properties themselves. In particular, landlords were concerned that the removal of the off-balance sheet treatment for operating leases wouldsignificantly change corporations’ decision-making. Additionally, landlords and investors were concerned that adding leases to the balance sheet would potentially result in a negative impact ontenants’ coverage and leverage ratios used in credit underwriting.
However, we believe the impact to both tenants’ decision-making and credit underwriting will be relatively muted. Tenants will continue to make decisions based on value creation and cash flow analysis and creditors and investors have historically already made adjustments for lease obligations in their underwriting.
Throughout this newsletter, we explore the new lease accounting standards in more detail as well as further expand on our thoughts regarding the potential impact on the net lease sector.
