The Cost To Own or To Rent

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Whether Tenant or Property Owner, you want to make an informed decision

There is a complex proposal on the table being reviewed by the Financial Accounting Standard Board to change the lease rules by the Statement of Financial Accounting Standard 13, known as FAS13.

For those of you not familiar with FASB, they are responsible for establishing and improving standards of financial accounting and reporting for nongovernmental entities. Consistent with that mission, the FASB maintains the FASB Accounting Standards CodificationTM (Accounting Standards Codification) which represents the source of authoritative standards of accounting and reporting, other than those issued by the SEC, recognized by the FASB to be applied by nongovernmental entities.

If FAS13 is passed, it would change “Operating” leases to “Capital” leases, which could negatively impact companies who rent rather than own their business property. In short, the Financial Standards Accounting Board (FASB) has determined the current Operating lease meets the definition of a Capital Lease in two principle ways:

  1. The tenant under lease has a right to use the lease property, which meets the definition of an asset.
  2. The rent paid under lease is defined as a liability.

This paradox resulted in FAS 13’s proposed decision to treat all leases as Capital leases, which could result in the tenant reporting rent as both a liability and as an asset on their balance sheet.

 

This information provided here is not intended as legal or accounting advice concerning the proposed changes, but rather general information about the FAS13 that may be forthcoming.

Author’s note: you should view the FASB Lease Accounting project website at www.fasb.org/leases.

My opinion is that when one door closes, another opens, and this second door may be the SBA’s 504 Loan Program offered to small businesses. This program gives small businesses the opportunity to buy their own building or land with only 10% down versus 20% or more, if you can obtain financing. For example, a $1 (M) purchase price would mean a down payment of $100,000, instead of the typical $200,000. The small business owner would get the tax benefit of longer appreciation, while enjoying the advantage of locking in the occupancy cost. The eligibility requirements include the business net worth not exceeding $8.5 (M) and/or that the average income, after taxes, cannot be more than $3(M) for the last two years.

According to the Community Certified Development Corporation website, the loan limit for “underserved” business categories (i.e., rural-based or women/veteran/minority-owned business; projects located in an enterprise zone; and export businesses is up to $2 (M) in SBA funds, and for manufacturing firms, up to $4 (M) in SBA loan program assistance. The loan term is between 10-20 years depending on business type, with interest rates fixed below market rates, which are determined when the 504 bond is sold in New York. Collateral is normally the asset purchased under the plan, and a personal guarantee is required from the principal owner of the business.

Author’s note: you should view SBA financial assistance for the 504 Loan Program at www.sba.gov

Remember, whatever strategy you choose, either to own or lease property, you should discuss all the facts with an informed real estate professional, accountant, and attorney before making a final decision.

Connie Rankin, President
Customized Real Estate Services DBA LEAD 2 GREEN

The Author, Connie Rankin, is the President and Broker of Customized Real Estate Services, Inc. a full services commercial real estate firm helping companies make informed commercial real estate decisions. For further information call 281-931-7775 or e-mail crankin@cresrealestate.com.