How Will New Accounting Rules Affect Office Leasing Terms?
You may have been operating under the impression that the office space you lease for your company is your own business, but as of 2020, it will no longer be. That’s when new accounting laws go into effect for private businesses. These businesses will be required to record the cost of their office lease on their Generally Accepted Accounting Principles balance sheets.
Currently, office leases can be listed on balance sheets as a footnote, but that will change, undoubtedly affecting the market for office space and office leases.
Office Lease Terms
Commercial leases are notoriously longer than residential leases, which are typically no longer than a year.
While it is not impossible to find a commercial lease for a year, five- and 10-year leases are more typical. That’s partially because businesses tend to stay in the same location, where their customers can find them. Picking up and moving every year could be problematic for many businesses.
The Domino Effect
However, a lease is an obligation, and ten years is a long time. For this reason, the new Financial Accounting Standards Board rules will force businesses to list their office lease obligation as a liability. This will, in turn, affect the company’s bottom line and possibly investors’ or potential customers’ impression of them. Which may have many other repercussions.
Further, banks will be forced to consider the new liability when approving loans. Even though little about a company may have changed from one year to the next, the change in accounting rules can make a company's bottom line less rosy and will likely exclude some otherwise qualified candidates from gaining approval.
Complexities of the Change
This is just the basic premise the new change. The rule is full of exceptions and footnotes regarding such determinations as whether a month-to-month lease truly qualifies as such, how and when to count property taxes and insurance, and other caveats.
Industry analysts expect that many small-business owners will bypass this whole issue by renting temporary office space instead. This type of space is typically let for short periods of time — a month, a week, a day or even an hour. This flexibility eliminates the liability of an office lease.
Options for Small Businesses
Business owners can use other methods as well. For instance, they can attempt to negotiate a five-year lease with an option to renew, or an even shorter term. However, if they have occupied the premises for so long that there is a reasonable expectation that they will renew the lease, they might be required to count all ten years.
Businesses can also ask landlords to separate out the cost of utilities and other expenses in an effort to bring down the total liability figure.
Office Lease Rules and Occupancy Rates
While this may help those already locked into leases, the truth is that the new laws may cause business owners yet to sign leases to balk at doing so. Especially in a business’s early days, a lease can carry a heavy obligation, accounting rules notwithstanding. A shorter-term rental allows business owners more control over their cash flow and their business’s future.
If your office lease will be up this year or next, or if you are looking to move your business into rented office space, talk to us here at Premier Workspaces. We have a wide variety of options for you, not just in terms of how long you want to rent the space, but what type of space you are looking for as well.