The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...
By Denise Lugo
Fourteen real estate investment trusts (REITs)—including Boston Properties, Kilroy Realty Corp. and Forest City Realty Trust Inc.—say new revenue and lease accounting rules will bring burdensome and costly changes to how they report rent collected from multifamily apartment complexes.
“It wouldn’t rightly reflect current business practice for how those rental contracts are drawn up and would be burdensome to implement because there’s nowhere in the contract that says we know what the fee for the maintenance is,” Charles Obert, executive vice president, chief accounting officer and corporate controller at Forest City Realty Trust Inc., told Bloomberg Tax.
It is unclear whether the new accounting changes provide any benefit to investors, and the significant costs REITs would incur to comply with them wouldn’t be justified, the companies said.
The companies have asked the Financial Accounting Standards Board to provide implementation guidance so REITs won’t have to comply with portions of the standards that would require them to change the way they account for income earned from leased apartments.
The new revenue rules are effective in January for public companies. They eliminate all industry specific accounting rules and establishes a five-step model for reporting revenue. The leases standard is effective 2019, but a number of companies will adopt it next year with the revenue rules.
Lease accounting changes affect mostly lessees, requiring them for the first time to put on balance sheets leased assets and leased liabilities they previously could keep off them. Fewer changes are required for lessors.
For some larger REITs the process will require evaluation of more than 50,000 leases and splitting them up to reflect items that are inherent in a lease, but aren’t negotiated separately from it.
Each apartment might have multiple roommates and usage each month said a Sept. 29 letter to FASB signed by accounting chiefs from Apartment Investment and Management Co., BSR Trust, LLC, Camden Property Trust, Equity Residential, LEDIC Realty Company, LLC, Mid-America Apartment Communities, Inc., UDR, Inc., AvalonBay Communities, Inc., and Forest City Realty Trust, Inc.
The new accounting rules require REITs to split out community amenities such as on-site fitness centers or maintenance services like snow removal from walk ways—and report them separately from base rent on the income statement.
REIT investors currently use gross rent in a lease in evaluating the quality of revenue earned and haven’t actively requested any break-out.
Today, landlords don’t differentiate these items as they are all considered one performance obligation under the lease. “Right now let’s say we charged $1000 a month for a particular lease, it would show up in our financial statements as rent for $1000,” Obert said.
“But what this new pronouncement says is ‘go in and estimate how much of this $1000 is really your providing maintenance services and, or, amenities to your client,’"he said.
The changes also would require “lessors of office real estate to maintain two sets of accounting records, one for how we manage and operate our businesses and another one to meet the accounting and reporting requirements” of ASC 842, Leases and ASC 606, Revenue from Contracts with Customers, said a Sept. 28 joint letter to FASB from Boston Properties, Kilroy Realty Corp., Vornado Realty Trust, SL Green Realty Corp. and Alexander’s, Inc.
Companies also worry that the allocation of maintenance and amenity components, which aren’t a core part of their business streams, might bring unnecessary scrutiny from federal, state and local tax authorities as well as inquiries and audits regarding the qualification of REIT status under the Internal Revenue Code of 1986.
“What the fear is, is that somebody’s going to come in and say ‘oh you misstated how much is the common area maintenance versus how much is the amenities versus how much is the rent,” said Obert. “Whereas if you just put it all as rent, there is no debate about it.”
Current reporting requirements are an easily supportable measure that investors, regulators and auditors and the overall marketplace understands, Overt said. “Why spend significant time and effort to change this to a bunch of tough-to-support estimates that may not even be used by everyone?” he said.
Today under multifamily residential leases, residents have a 12-month lease, inherent in which is both the apartment and the requirement that the lessor support the general upkeep of the apartment community for a fixed monthly fee.
The leases are structured to include all expenses: usage of the apartment unit, executory costs such as real estate taxes and insurance, maintenance activities, and community amenities.
Community amenities may include the use of the on-site fitness centers, pools, clubhouses or other gathering centers, dog parks, and play grounds. The companies also maintain apartment complex landscapes, parking lots, and walk way snow removal and cleaning and maintenance of other community amenities.
“If they have to bifurcate rent and community maintenance activity fees across hundreds or thousands of leases, they would have to add headcount or contract with a consultant like an accounting firm or some other kind of consulting firm to get this done,” Matt Waters, Lease Accounting Specialist at CoStar Real Estate Manager, the lease management software division of CoStar Group Inc., told Bloomberg Tax.
“Smaller companies would add head count, large companies might have to add a department that focuses on this—this would be a pretty time intensive and man power intensive type of exercise,” Waters said.
To contact the reporter on this story: Denise Lugo in New York at email@example.com
To contact the editor responsible for this story: S. Ali Sartipzadeh at firstname.lastname@example.org
Copyright © 2017 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)