Proposed accounting changes are a good time to take a look at your real estate portfolio strategy.

A key question, are you aware of the impact of the proposed changes to the Statement of Financial Accounting Standards No. 13, also known as FAS-13? If you answered no, don’t feel alone. In a recent survey done by CoreNet Global, some 99% of real estate executives do not fully understand the impact that FAS-13 will have on their companies real estate portfolio.

The Financial Accounting Standards Board, an entity that establishes standards for financial accounting including real estate leases, has called for an accounting change that requires corporations to reclassify current operating leases into capital leases. The premise for the change is to mitigate the risks to volatile and distressed financial markets by improving transparency, efficiency and the need for accurate financial reporting. Another way put, eliminating the often debated “off-balance sheet” transactions.

In the majority of the cases, this reclassification would have significant impact on a company’s financial statements. From an industry standpoint, approximately 70% of all operating leases are for real estate. A study by the Security and Exchange Commission in 2005 stated that FAS-13 would force corporations to reclassify approximately $1.3 trillion in operating leases to capital leases. Estimates show that this change could impact balance sheets by $1 trillion or more industry wide.

At this point you might be asking “How will FAS-13 impact my company’s real estate portfolio?” The changes that are currently under review would not go into effect until 2011 or 2012. Given the terms of leases and implementation timing for acquisition or divestment of facility assets, the corporate suite needs to evaluate real estate lease holdings and portfolio strategies to begin making real estate decisions that head off potential negative impacts well before the 2011 or 2012 timeframe.

Corporate real estate executives (CRE) will face a number of strategic decisions if FAS-13 becomes a reality. Without a clear understanding of how the real estate assets support the current and long term needs of the business, compromised decisions will be made. Given the potential negative impact of FAS-13 on a company’s financial metrics, it will be increasing important for CRE’s to get the real estate strategy right. Some of the key decisions that FAS-13 will drive are:

• Lease terminations and write-downs as a result of facilities that no longer meet the short and long term needs of the business.
• Divestment of underutilized owned facilities that alleviate pressure on the balance sheet.
• Leasing real estate vs. owning will be determined by the asset and expense implication to the income statement and balance sheet.
• Based on business needs, categorizing facility assets into short and long term lease obligations can mitigate potential negative impacts.

Development or review of your company’s real estate portfolio strategy and plan is an important step in understanding the impact of FAS-13 and making the correct strategic decisions. Have you considered the strategic impact of FAS-13 on your facilities portfolio? If so, what steps is your company taking?