WASHINGTON, DC-Bill Bosco, a consultant for the Washington, DC-based Equipment Leasing and Finance Association and principal of Leasing 101, provided the following primer on how the compromise will impact commercial real estate, providing the boards continue along this tract.
1. Lessees will capitalize all leases except for short-term leases, which can use the operating lease method and remain off-balance sheet. The lessee will record rent expense as under the current operating lease GAAP, which produces a straight-line cost pattern.
The exception, generally applying only to leases of an entire building or land, is to use current GAAP capital lease accounting if the lease term is for the major part of the economic life of the underlying asset or the present value of the fixed-lease payments equals substantially all of the fair value of the underlying asset. Capital lease accounting produces a front-ended cost pattern. Lessees had been opposed to the front-end pattern, since they do not view rentals as having an interest component that causes the front-ended pattern.
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