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Alternative Workplace Strategy’s New Best Friend: The New Lease Accounting July 12, 2010

Posted by Bob Cook in Alternative Workplace Strategies, Financial Planning & Analysis, Lease Accounting, Profession of Corporate Real Estate.
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How is that? How could lease accounting impact workplace strategy?

If you’ve been reading this blog … or if you’ve tuned into my lease-accounting webinars (which are available on-demand on Tririga’s website), you’re already aware about how the new lease accounting is going to have implications far beyond accounting… about how it’s going to shine a huge spotlight on corporate real estate, force a re-thinking of real estate strategies, and require creation of new processes, systems and careers. Alternative Workplace Strategy is an area where all three of these effects will come to play at once.

Many companies have nascent programs to implement Alternative Workplace Strategies … such as office hoteling and work-from-home … but many of these programs just haven’t gotten very far. While these programs have as their goals worker productivity and satisfaction gains, the bugaboo is usually around a companion goal to save money, to show a positive ROI from cost savings. There seems to be a Catch-22: it’s difficult to show a positive ROI on a single implementation because you usually need the mass of many implementations before net cost savings can be shown … but without an ROI-positive demonstration pilot, most companies are leery to commit to the many implementations needed to show a positive ROI.

The new lease accounting, though, provides a way around this conundrum.  To see how, I need to explain a bit of the new accounting….

Basically, the present value of all likely lease obligations will be going onto company balance sheets to better inform the public about the financial obligations of companies. The operative word for this discussion is “likely”. If you have a lease with a right to renew, you will have to decide whether it is likely that you will be renewing the lease or unlikely. If you decide “likely”, the lease payments due during the renewal period(s) need to be included in the present value calculation. This will increase the amount that goes on the balance sheet … something that company managements won’t like because it will make their companies look more risky to investors and will, at least in the early years of the new accounting, hurt their P&L. Company managements will want to assume renewals are unlikely, but auditors will be closely scrutinizing the renewal vs non-renewal assumptions. Managements will have to substantiate their assumptions.

And because of the spotlight the new lease accounting is going to shine on lease obligations, assumption-making about leases is going to get upper management attention … as will the real estate strategies that affect the amount of those obligations. Among these, Alternative Workplace Strategy is one that can make a big difference.

Think about it. If a company were to commit to the “likely” implementation of an Alternative Workplace Strategy and if that strategy allowed it to reduce its space and plan to forgo renewing some of its leases, it should be able to assume those leases will not be renewed. Voila….the company would avoid including the renewal period obligations on the balance sheet.

Now, the commitment would have to be sincere. Auditors would want to see evidence that, in fact, the company has set the course to implement the Alternative Workplace Strategy. They’d want to see demonstration projects, budgets, detailed plans, implementation processes, ROI calculations, executive sponsorship, etc. But if a company can show these things … my oh my … just a commitment to implementing an Alternative Workplace Strategy will create an immediate financial-statement benefit!

That’s why I’m saying, “Alternative Workplace Strategy, meet your new best friend …. The New Lease Accounting.”

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Comments»

1. Laurent Dhollande - July 12, 2010

Outstanding analysis Bob! The workplace landscape will indeed change dramatically. We already see with a surge in corporate inquiries for Virtual Offices, as a supplemnent/complement to telework programs, even though our Cloud Virtual Office Program was initially directed mostly at start-ups and entrepreneurs.

2. Paul Peeters - July 14, 2010

There is a downside to this reasoning: after the original downsizing (or should i say “rightsizing”) you will be left with a core portfolio which would have to be deemed “likely to keep”

The reason why i think you could be right though is that the new accounting rules will make companies reconsider their strategies for this core portfolio: the “buy vs lease” discussion will get a whole new dimension and “buy” will become a more interesting option. With owning real estate the likelyhood of expanding footprint for short to mid term projects becomes more unlikely: so it will help companies to confine their footprint to the owned building: grow the company without growing the footprint: flexible working!

3. Keith Perske - July 14, 2010

Completely agree, Bob. Nice perspective. If wanting to attract and retain workers, remain sustainable, increase productivity, reduce risk AND saving a bunch of money were not enough to get companies to jump on the mobility wagon with both feet, this added financial incentive may do it.

4. Lease expenses up 5 to 15% … how to manage the budget effect of the new lease accounting « Corporate Real Estate Strategy - July 22, 2010

[…] decrease the budget challenge in the year of adoption of the new accounting. I’ve written previously of how adopting alternative workplace strategies might let you justify consolidation plans and reduce the financial statement impact of the new […]

5. Dale lazerson - July 23, 2010

Great correlation and synopsis Bob. Thanks.

6. Shawn Gilreath - July 26, 2010

Well said, Bob! I think, for the same reasons you mentioned, more attention will be paid to furniture that allows companies to reduce their footprint. Perhaps even fewer hard wall offices, smaller cubes, etc.

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