Presenter Introduction

CB Richard Ellis | Page 2

Global Research and Consulting

Todd P. Anderson,MCR, SLCR, CASSenior Managing Director, Global Corporate Services

CB Richard Ellis, Inc.

Email: [email protected]

Presenter Introduction

Todd Anderson is Senior Managing Director of CB Richard Ellis’ Global Corporate Services group in Los Angeles, California. He is the Alliance Director for The Boeing Company providing the strategic oversight and account team management to serve their 88 million square foot global real estate portfolio.

Mr. Anderson is a regular real estate industry speaker and contributing author of articles, as well as, a “Top Rated” faculty member of CoreNet Global’s Executive Development Program in each consecutive year since 2000.


Presented by:Todd P. AndersonSenior Managing DirectorGlobal Corporate Services

Counselors of Real Estate

REAL ESTATE IMPACT ON FINANCIAL STATEMENTS

Hot TopicSFAS 13: Proposed Capitalization of Operating Leases



Agenda1. Evolving FASB/IASB Positions

• Capitalization of Operating Leases?

• SFAS 13/IAS 17 – Accounting for Leases

• Leases: Preliminary Views – March 19, 2009

2. Single Lease vs. PortfolioSingle Property Example Portfolio of Properties Example

3. Bottom LineStrategic Portfolio PlanningPreemptive Compliance


FASB Lease Definition

1.



SFAS 13 – Accounting for Leases• Capital or Operating lease; paragraph 7 a-d• Possession Date; 13-1 paragraph 2 & 3• Lease Term; FASB Technical Bulletin 88-1• Renewal Periods; paragraph 5 (f) and (o)• Straight-line rental rate; paragraph 15• CPI adjustments; paragraph 5 (n), SAB 101• Lease incentives; FASB Technical Bulletin 88-1, paragraph 7• Leasehold Improvements; paragraph 5 (f)• Other FASB Lease Reference Documents

SFAS 13, 23, 29, 98 Technical Bulletins 88-1, 85-3 FASB Staff Position 13-1 SEC Chief Accountant Letter February 7, 2005 to AICPA Chairman



SFAS 13 – Paragraph 7 a-d Capital Lease

Capital Lease (on balance sheet) if any one of 4 criteria:a. Automatic Transfer of Ownershipb. Bargain Purchase Option c. Lease term exceeds 75% of remaining useful lifed. The PV of rent exceeds 90% of fair market value

• Determined at inception of lease term• Minimum fixed term (extensions if highly likely)• Minimum lease payments, plus any cancellation payment• Discounted at Lessee’s incremental borrowing rate

Risk-free credit-adjusted rate Incremental borrowing rate



Primary Financial StatementsLease Purchase

(Capital/Finance Lease)

INCOME STATEMENT

Revenue Expenses Rent Depreciation

Interest

Net Income (Profit)

BALANCE SHEET

Assets Net Book Value Liabilities Debt Shareholders’ Equity



Future Balance Sheet ImpactAsset Increase, Liability Decrease, Equity Decrease

SFAS 13/IAS 17: Capitalization of Operating Leases? Currently off-balance sheet Proposing on-balance sheet treatment (capitalization) $1.3 trillion “estimate” for U.S. Companies



SFAS 13/IAS 17 – Capitalize Operating Leases Eliminate rent expense Add depreciation expense (over lease term) Add imputed interest expense (amortized over lease term)

Future Income Statement Impact Expense Increase, Earnings Decrease



Operating Lease vs Capitalized Lease



Income Statement Expense Impact

Scenario: 20-Year Term

0

200

400

600

800

1,000

1,200

1,400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Years

Amou

nt (I

n Th

ousa

nd $

's)

RentDepreciation + Interest



Income Statement Expense Impact

Scenario: Comparison of 20 & 5-Year Terms

0

200

400

600

800

1,000

1,200

1,400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Years

Amou

nt (I

n Th

ousa

nd $

's)

RentDep.+ Int. (5-Yr Terms)Dep.+ Int. (20-Yr Term)


Single Lease vs. PortfolioLease Capitalization Implications

2.



0

200

400

600

800

1,000

1,200

1,400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Rent

Depreciation + Imputed Interest

BALANCE SHEET – Change in Equity

INCOME STATEMENT – Total Expenses

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Equity

One 20-Year Lease

0

200

400

600

800

1,000

1,200

1,400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Rent

Dep.+ Int. (5-Yr Terms)

Dep.+ Int. (20-Yr Term)



(2,500)

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Equity (5-Yr Terms)

Equity (20-Yr Term)

Four 5-Year Leases



(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

0

5,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Equity

0

4,000

8,000

12,000

16,000

20,000

24,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Rent




Renew with New 5-Year Leases

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

0

5,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Equity

0

4,000

8,000

12,000

16,000

20,000

24,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Rent




Renew with New 20-Year Leases



Incorporating future rent adjustments

Changing Incremental Borrowing Costs

Treatment of lease renewals and options

Triple net (NNN) rent equivalents

Challenges to Implementation


BOTTOM LINEHow CRE can Support/InfluenceCorporate Direction

3



Ratios (EPS, ROA, ROE, EBITDA, etc.)

Debt covenants

Capital requirements

Credit ratings

Taxes

Standards and Rules of Thumbs

Performance Measure Impacts



Pre-emptive Lease Capitalization Strategies

• Lease administration Centralized Comprehensive Consistent Format

• Financial Analysis Net Book Value assessment Performance Measure Impact Competitive Industry Position

• Portfolio Optimization Strategies Portfolio Composition Short or long term leases Lease vs. own considerations

