Mall Landlords Feel Earnings Pinch From Lease Accounting Change

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By Amanda Iacone and Che Odom

Some mall owners, such as Washington Prime Group Inc., might take about a 4 percent earnings hit from a change in lease accounting, according to a SunTrust Banks Inc. analysis.

The new leasing standard, which takes effect in January for public companies, generally requires both landlords and tenants to fully expense property or equipment as an asset.

Until the new rule, long-term leases were left off balance sheets, although companies generally disclosed those costs in notes to their financial reports.

As a result of the changes, real estate investment trusts that operate shopping malls will have to expense the salaries and benefits they pay to their staff leasing agents. Agents paid on commission or costs related to third-party brokers would still be capitalized, keeping those costs off the balance sheet, said Ki Bin Kim, managing director and REIT analyst for SunTrust Robinson Humphrey.

He described it as an unintended consequence.

“It hits the malls more so than other companies because by nature most of the leasing for malls is done in house,” Kim told Bloomberg Tax.

According to the SunTrust estimates, Washington Prime Group could see the largest dent to earnings at more than 4.5 percent. Macerich Co. and Pennsylvania Real Estate Investment Trust could see a decrease of roughly 4 percent. Some companies, like CBL & Associates Properties Inc., and DDR Corp., already expense costs related to their agents and would see no change to earnings, the report said.

REITs that lease office space or industrial property could see a smaller hit of less than 3 percent, the report found.

The changes won’t affect the cash flow of these public companies, but they could affect investors’ perception of their value, Kim said.

This change could hit what is considered funds from operations, or FFO, said Jack Rybicki, a certified public accountant and managing real-estate principal at California-based CliftonLarsonAllen LLP. FFO is a figure used by REITs to define the cash flow from operations.

A “higher churn of tenants and shorter average lease term” would also be drivers that could affect retail REITs more significantly by this change than REIT’s with commercial or industrial space with longer-term leases, Rybicki told Bloomberg Tax.

Going Forward

Mall owners, such as Tanger Factory Outlets and Washington Prime Group Inc.,should be able to continue capitalizing commissions to third-party vendors or termination fees paid to boot out a pretzel shop to make room for a business that attracts more customers.

“But other costs like internal leasing agent salaries and general legal advice that may currently be capitalized will have to be expensed,” Rybicki said.

Tenants might eventually rethink their leasing strategy, whether to rent or own, how much space they might rent, or even the length or structure of leases in order to minimize the effect on their balance sheets, said Jeff Beatty, director of CBRE’s global taskforce on lease accounting, in Phoenix.

For now, most companies, including retailers, are scrambling to identify and pull out the relevant details into new computer systems ahead of the January deadline, Beatty told Bloomberg Tax.

“Very few of them have really had time to even think about how they are going to change their strategies or will they change their strategies. They are right now just focused on being compliant,” he said.

With assistance from Bloomberg News reporter Lily Katz in New York.

To contact the reporters on this story: Amanda Iacone in Washington at, and Che Odom in New York at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

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