The new lease accounting standards are fundamentally transforming the rules that govern accounting for almost all types of leases. Under the new rules, operating leases now appear on the balance sheet as an obligation and a related right of use (asset). For some companies, this means anywhere from $5 billion, $10 billion or more on their balance sheets. This hefty liability creates a unique opportunity for corporate real estate (CRE) to align with finance as visibility into leases and the resulting financial implications become more important than ever.
A New Alignment: CRE and Finance
As a corporate real estate professional, your role is to optimize your real estate portfolio, constantly evaluating the under performing leases across your company’s portfolio to determine which are causing the biggest pain. When are they up for renewal? What are the options for those leases? What is the current utilization? For example, a really poor performing building (underutilized) with a 10-year lease signed last year, may require you to do something different with that space. At the same time, finance is responsible for minimizing the impact of these liabilities on your organization’s P&L.
Most organizations are realizing that this requires CRE to align with finance to cost-effectively evolve the portfolio. Together, they’re asking questions to understand which leases have the highest exposure on financial statements, which business units occupy them, how densely those spaces are populated and how they’re being utilized. And, with the spotlight on efficiently and proactively managing real estate portfolios, many are placing greater importance on understanding occupancy and space utilization.
Visibility into Space Utilization is Key
The more efficiently space is utilized across your real estate portfolio, the less of an adverse impact it will have on your balance sheet. On average, office work space density is between 40 and 60 percent. This leaves a great deal of wasted space that, if leased, now shows up as a liability on an organization’s P&L.
The new standards provide an opportunity to re-evaluate that space by looking at office utilization alongside lease debt. When you know which leases are problematic, it’s easy to identify potential solutions and work with finance to minimize their impact on the balance sheet. As an example, you may have the option to relocate people from other business units and consolidate buildings in the same area that are nearing lease expiration. Or, you could sublease space. If you’re paying $70 per square foot but can sublease it for $75 per square foot, your liability shifts to a net profit. Market data can help evaluate if this is a good option. Other possibilities are buying out the lease or terminating early. While this may involve a short-term penalty, it could result in a long-term gain.
A Single Source for Greater Visibility
None of this is easy to do well without the right technology in place. A growing number of organizations are moving to an integrated workplace management system (or IWMS) for capturing lease, compliance, space and other building information. Rather than maintaining separate processes, practices and silos of information across departments, an IWMS provides visibility into all pertinent information and knowledge in a single source of truth that is accessible to and shared by everyone. With this information on hand, you can:
form a complete and accurate picture of the entire real estate portfolio
access detailed leasing information alongside real estate portfolio performance and utilization data
surface all relevant data about your properties and spaces to more easily capture and analyze needle-moving metrics
break down silos across teams to enable greater agility
prepare for and respond to ever-changing standards
easily identify cost savings and increase the efficient use of space
The new lease accounting standards are a step change for CRE’s engagement with the broader organization. By working cross-functionally, utilizing purpose-built tools and following a well-developed plan, you can work with finance and other key teams and stakeholders to efficiently manage real estate liabilities and optimize the entire portfolio.
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