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April 1 was a key milestone on everyone’s mind—the first date that many payments would be due in a COVID-19-weary world on lockdown. In the weeks leading up to that date, the Federal government negotiated, passed, and signed a monumental $2 trillion relief package. Some CEOs, like Wayne Kent Taylor of Texas Roadhouse, announced that they would slash or surrender their salaries so employees could continue to be paid. Many banks began formulating new policies and programs, including payment deferrals and less-expensive lines of credit for small businesses and consumers.
Many stakeholders who could started pitching in, hoping to provide an economic bridge to weather this crisis. Then came reality, as the government signaled a continuation of the lockdown for 30 more days. May is now another critical milestone in fiscal responsibilities that may be missed.
What will the lending industry do as this crisis continues?
When experts are asked to predict the economic impact of the coronavirus pandemic, they usually have a range of answers and scenarios. There is simply no way to predict anything accurately—other than there will most definitely be a huge financial fallout. One recent study, for example, ran more than 12,000 bank-held commercial loans through a worst-case-scenario algorithm. Factoring in a 35% plunge in CRE prices over the next two years, it predicts a dramatic increase in commercial defaults, up to 8% from 0.4%.
This study sees the hotel industry taking the most immediate hit, with a 35% cumulative default rate. This is followed by retail, with 16%. Office, multifamily, and industrial sectors would also see a loss but at a more measured pace.
The fear, of course, is that once borrowers begin missing payments, defaulting on loans, or permanently locking doors, the lending sector will be the next domino to fall.
If there can be any kind of silver lining in all of this, it’s that today’s crisis is not like 2008, when the financial sector was blamed for wrecking the economy while its recovery was made the responsibility of taxpayers. And it’s believed that banks will be able to weather short-term loan losses, although some lenders may become overwhelmed should the economic crisis linger.
Many analysts also think the current situation is an opportunity for the lending industry to step up—to prove that it is not abandoning communities, employees, or borrowers. Among the efforts already underway are donations to charitable organizations, “fee waivers; deferred payments for credit cards, auto loans and mortgages; loan modifications; low-rate and zero-rate loans and other accommodations.”
In addition, the initial $2 trillion stimulus package gave banks strategies to provide aid to businesses, including $350 billion in government-backed, low-cost or forgivable Small Business Administration (SBA) loans. This initial round of funding, however, has run out. As of this writing, the second wave of small-business-loan financing—about $370 billion—is set to be passed by Congress. Many analysts project that this money, too, will run out. And “first come, first served” is the order of the day for small businesses seeking these funds.
Like many business and government sectors, simultaneous conversations are occurring to address the possible long-range implications and how best to prepare for them. Among the items up for discussion are executive pay cuts, suspending dividend payouts, and examining how long financial institutions can delay job cuts and changes to their business models. It is, without a doubt, a very delicate balancing act, and each effort will have its own share of consequences.
Naturally—and this can’t be stressed enough—it is simply too early to make any concrete predictions. While Congress is about to pass a fourth stimulus package—and more legislation may be on the way— it’s the progression of COVID-19 and the timing of a vaccine that will ultimately determine the longer-term response of the Federal Reserve, the stock market, and the lending industry.
Lenders have implemented steps to help consumers through the COVID-19 maze, including identifying at-risk borrowers and geographies, clarifying approval criteria and new procedures, and developing programs to assist those impacted by the pandemic. And consumers also have an opportunity to be proactive. They should reach out to their lenders to learn precisely what options are available while clearly communicating the financial impact of the pandemic and economic shutdown.
Commercial real estate property owners should collaborate with lenders and explore ways to provide relief to hard-hit tenants. Business owners with a mortgage may be able to seek some accommodations that salvage cash flow in the short term, as well. In most cases, lenders have a vested interest in hammering out arrangements that keep borrowers solvent—and to stop the potential fall of financial dominoes that could wreck the economy.
At Morris Southeast Group, we are holding firm to the belief that we are all in this together. To that end, we are here for you. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
As soon as the coronavirus began its relentless march around the world, one phrase was repeated by world leaders, experts, local officials, and neighbors: “We’re all in this together.” In many ways, that sentiment applies as we all try to negotiate the economic impacts of the COVID-19 pandemic. This is an all-hands-on-deck moment for an overwhelming majority of industries, including commercial real estate (CRE).
While many aspects of the emergency are unpredictable, it has certainly brought us together because we are all worried. The pandemic comes with a giant question mark: How do we do business today to prevent a domino effect tomorrow?
In many ways, landlords are caught between a rock and a hard place—wedged between compassion for the economic plight of tenants and their own financial obligations to lenders and tax collectors. Given that position, landlords may want to use a multi-pronged approach, one that can adequately balance both short- and long-term issues. Here are some crucial steps:
Review leases. Looking closely at the terms helps property owners understand their rights. Still, they should also know that some of those rights may be limited due to crisis-centered government regulations and social pressure. Miami-Dade is one locale that has already banned commercial evictions during COVID-19. That being said, this review will help landlords proceed in an informed way when meeting with tenants.
Review loan documents. Many CRE loan documents contain clauses
requiring lender approval for any lease amendments—which may be necessary when
instituting flexible arrangements.
Meet with tenants. Looking at the big picture, the coronavirus
shutdown is temporary. When life returns to normal, it will be important for a property
owner to have fully operational tenants rather than a row of vacant spaces. The
sooner tenants can be back in business, the quicker property owners can. Meet
with tenants to collaborate on strategies to smooth this transition.
Be creative and flexible. Learn what tenants need and explore ways to achieve a result that works for everyone. With an eye toward both tenant survival and owner loan obligations, solutions can take several forms:
Whatever is decided should be put in writing and signed by all parties.
CRE tenants also have their own concerns and responsibilities—to customers, employees, and their families. They have to develop a fiscal plan to survive. Depending on the business and the lockdown rules that are in place, this can mean operating on a limited basis or as a pop-up, or moving to an online format. Most potential steps involve talking with your landlord.
Be prepared. Just like the owner, the tenant needs to know the lease and all financial needs so the business can adjust and survive. Remember, it is usually in the landlord’s interest to maintain viable tenants long term, so carefully evaluate if you can weather the storm and communicate the steps you are taking to do it. As in any negotiation, both parties will have to find common ground.
Any discussion of how to prepare wouldn’t be complete without a word about business interruption insurance, civil authority clauses, and force majeure. As both owners and tenants seek ways to stay afloat, these three items are in the spotlight:
Because of the current situation, what constitutes a “natural disaster” is now more of a gray area. It’s unclear how insurance companies and the judicial system will interpret each of these categories, but be aware of how they may apply to your situation and any negotiations.
On March 27, the White House signed the CARES Act, a $2 trillion coronavirus stimulus package that includes economic stimulus funds to assist small businesses, consumers, industries, and state and local governments. While this is undoubtedly a tremendous fiscal help, receiving these funds will require aggressively pursuing small business loans and other assistance. And this money won’t go far if we fail in our relationships with one another.
It’s a bit like the scene at the end of the classic film It’s A Wonderful Life. The people who filled the Bailey house didn’t automatically show up to help George. That kindness was the result of his years of cultivating relationships. And as corny as all that may sound, our relationships with one another are going to help all of us manage this crisis—and serve everyone’s practical long-term business interests.
Relationships have always meant a lot to us at Morris Southeast Group. As we all look at the question marks ahead, our team is here for you. We will get through this together.
To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Ken Morris spoke with Dave Kustin of ContentBacon about the impact of the COVID-19 pandemic on commercial real estate. They talked about what property owners, landlords, and tenants are doing—and may do—during the current crisis, as well as the CRE outlook in the short and longer terms.
Key Takeaways: What You Need to Know About the Current CRE Climate
Our team at Morris Southeast Group is here to help support you during this difficult time if you have any commercial real estate questions or concerns. To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
When it comes to commercial real estate, railroads have long been considered a development incubator. Capable of moving people and goods across all distances, rail is a big reason why East Coast cities boomed, why the west was won, and why Henry Flagler was able to attract tourists and developers to South Florida. Wherever a station popped up, hotels, restaurants, retail, saloons, and homes were sure to follow.
But somehow, as the rest of the world developed its rail systems, embracing high-speed and efficiency, trains in the United States slowed in favor of an interstate highway system. Our network of highways had incredibly positive impacts on the country. But today, we’ve also seen some of the other consequences of that decision—suburban sprawl, downtowns that have deteriorated, and traffic congestion.
When Brightline entered the conversation in Florida, it offered a new glimpse into what rail could do for the region. The goal was a high-speed system linking major cities with centrally located stops along a good portion of the Florida peninsula. This grand but controversial plan held the promise of new development opportunities along the route and in a radius surrounding each of the stations.
While there was certainly some development, things seemed to slow as Brightline’s profits also became sluggish. That all changed, however, when the rail company entered into a partnership with Richard Branson and his Virgin Group, a globally recognized brand led by a globally recognized figure.
As a global travel giant, Virgin has already conquered air and sea and, perhaps someday, it will conquer space. It’s really no surprise then that Branson would turn his attention to rail, especially since his new adults-only cruise line, Virgin Voyages, leaves from Port Miami. By partnering with Brightline, he has expanded his ability to move people to his own products.
Within months after announcing the partnership, new station locations were announced. Joining the current stations—Miami, Fort Lauderdale, and West Palm—are Port Miami, Aventura, and Boca. In addition, tracks have already started to be laid from Orlando International Airport to the West Palm station, ultimately bringing Central Florida tourists and residents to Port Miami. In other words, Virgin Trains USA will become the only intercity rail system to link an international airport with a major cruise port in 2022.
Cities up and down the corridor are all vying for a piece of the rail pie. In locations where Virgin Trains USA stations already exist, projects are underway and open. Florida East Coast Industries, for example, has already completed two office buildings at Virgin’s Miami Central Station and is building two apartment towers in Miami. That same company also recently opened Park-Line Palm Beaches, adjacent to Virgin USA Train’s West Palm station. The 26-story building has 290 Alexa Smart Home System apartments and 14,000 square feet of ground-floor retail space.
At the same time, there is talk of Tri-Rail operating trains on Virgin’s rails to fill in the station gaps. That, along with a discussion of additional stops, travel hubs, and bus and light-rail linkages, has seen several new trackside plans incorporating space for possible terminals. One such location is University Station in Hollywood, where the city is looking for a mixed-use development on 2.5 acres of city-owned land. Other cities, meanwhile, are creating master plans for additional townhomes, apartments, hotels, and retail spaces.
There has been momentum building with the Virgin Trains USA entry into the Florida rail system. Proposals already on the table include extending the rail link from Orlando to Tampa, as well as a hyperloop, a freight-capable line between Orlando and Miami, traveling down the center of the peninsula along the western edge of Lake Okeechobee.
It will be interesting to see what rail may do for CRE development in South Florida—and the impact could be significant. To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
There’s no easy way to begin. As you all are very much aware, coronavirus is taking an incredible toll on lives and livelihoods. Anxiety is high, nerves are frayed, and because the situation is rapidly changing, there is no way to predict the short- and long-term outcomes accurately.
It wasn’t so long ago, in fact, that investors were excited because the Federal Reserve had decided to keep interest rates steady for 2020. As of this writing, rates have been slashed to near zero in an effort to support the economy.
If the pandemic has taught us anything, it’s that we’re all in this together. Each person has a role to play, from the truck drivers to the grocery store clerks, from the first responders and medical personnel to neighbors checking on neighbors, particularly the elderly, from a safe distance. The same holds true for the CRE sector, where property owners, landlords, and tenants are going to have to find a new way to do business to survive today and prepare for tomorrow.
The economic impact is already being felt in South Florida, with the recreational and tourism industries taking the initial punch. As other industries have moved employees to working from home, shortened hours of operation, or have closed until further notice, it only makes sense that CRE is going to feel—and is already feeling—the impact. Without foot traffic and shoppers with disposable income, for example, retail tenants will feel the pinch and start to fall financially. A mandated lockdown will likely make economic survival impossible for many.
For that reason alone, everyone in the CRE equation needs to be proactive now rather than wait for the day when the dust settles.
More than likely, your liability insurance does not have a pandemic clause. As a result, an allegation that a person became infected and developed COVID-19 while on your property will most likely fall under bodily injury or gross negligence. In March 2020, for example, a passenger on Princess Cruise Lines claimed the cruise line allowed passengers to board a ship when the company was already aware of other ships having been contaminated. Strongly worded exclusions, contractual terms, and a valid defense can often prevent a lawsuit from moving forward.
Another way to both help offset the possibility of a liability lawsuit and provide service to tenants and visitors is to practice environmental cleaning of common areas—regardless of whether there has been a confirmed or suspected case of coronavirus in the building. Using CDC guidelines, some areas may need to be cleaned several times a day. Enforcing social distancing rules by limiting occupancy is also a good step, if possible.
In addition, it’s imperative to work with the local health department and gather data to determine where in the building an infected individual may have been, as well as define other person-to-person contacts.
As the crisis continues,
local, state, and federal governments may intercede to protect commercial and
residential tenants from the economic fallout, and it may become difficult or
impossible for landlords to evict. Landlords and property owners must be sure
to understand their rights, some of which may be curtailed by new government
rules and social pressures.
Regardless of any executive orders or legislation, it’s a good idea to be
lenient and understanding with good tenants if you are in a position to do so. Not
only does it provide the opportunity to support businesses and individuals
during this trying time, but it also often makes good business sense. Great
tenants can be hard to find, and helping people and organizations recover can
reap long-term benefits.
All of this is unchartered territory, and the only way to successfully navigate it is to be informed, proactive, and creative. In Jonesboro, AR, a property investment company waived April rent for its tenant, explaining that it would rather see that money go to paying the salaries of the tenants’ employees. Similarly, Rosie’s in Wilton Manors, FL, hosted a pop-up drive-thru for free take-out food, only asking hat customers provide a donation to support the bar and grill’s staff.
While this solution may not work for all property owners, it’s imperative to find options that allow the landlord to meet his or her loan obligations while maintaining a strong relationship with a tenant. For example, the landlord may agree to temporarily relax lease enforcement, especially since some of the lease terms may be impossible to satisfy. At the same time, it may be beneficial to enter into short-term agreements that address rent abatement with defined reinstatement dates and methods to recoup losses once the economy returns.
Like you, Morris Southeast Group is concerned about our families, friends, and clients. Part of what keeps us going is being proactive and looking ahead. While things are intense now, coronavirus will abate, and it will eventually be time to heal and rebuild. By taking steps today, we can lay the groundwork for tomorrow—a future that’s based on goodwill and partnership, because we’re all in this together.
If you have questions about the impact of the crisis on CRE or need any of our services, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
To our friends, clients, and colleagues:
Like you, we are closely watching events unfold surrounding the COVID-19 pandemic and the resulting disruption to the financial markets and our society. This impact will likely continue for several more months as the Coronavirus eventually peaks throughout the United States and the rest of the world.
We remain in regular contact with infectious disease specialists who tell us that the best things you can do right now are wash your hands frequently, avoid touching your face, and try to avoid large groups of people. Elderly individuals and those with preexisting medical conditions such as diabetes and cancer should take extra precautions to avoid crowds. If you can avoid traveling at present, it is the safest course of action.
At Morris Southeast Group, we have been through many shocks to our society and financial systems since our company was formed. These include:
Each of these events was incredibly disruptive—and each caused a lot of fear about the future and our personal and collective ability to survive change. But in every case, we not only recovered, but our society and economy grew and became stronger. Stay safe and take appropriate precautions. But please keep this perspective in mind as the media bombardment of minute-by-minute Coronavirus updates continues. And remember that our team at Morris Southeast Group is here to help support you during this difficult time.
If you have any commercial real estate questions or concerns, get in touch with Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Let’s cut right to the chase. Across the country, there is an affordable housing crisis. And in Miami, despite robust development and investment opportunities, the city is a high-rent/low-income region, making it one of the least affordable cities in the country.
One study reports that 71% of the households in the City of Miami are renters. Of those, 61% are considered cost-burdened, with 30% of their income going to rent and very little of it available to spend elsewhere in the community.
In May 2019, the Connect Capital Miami report was released. The effort is the culmination of months of interviews and meetings with primary stakeholders, from city and community leaders to investors and residents. The report not only provides a glimpse into the difficult situation in Miami, but also offers suggestions on how to best address the problem.
The goal of the study was to discover a way for the City of Miami to create or preserve 12,000 affordable housing units by 2024. To accomplish that, the City would have to tackle the issue using a three-pronged approach:
Perhaps no other segment of the report garnered as much attention as the idea of enabling the environment—that is, clear recommendations that use Miami’s strengths and tools that already exist. Among the recommendations are:
With the release of the final Connect Capital Miami Report in May 2019, the City of Miami took the findings to heart. Working with the Jorge M. Perez Metropolitan Center at Florida International University, the city developed the Miami Affordable Housing Master Plan in January 2020. The effort took into account many of the recommendations from the Connect Capital Report, such as streamlining the permit process and reviewing zoning regulations.
The core of the plan is for small and mid-sized developers and builders to renovate or develop small- and medium-sized lots—“infill” projects. Much of the master plan relies on private enterprise, but the city would create an independent Miami Affordable Finance Corporation for loan coordination. It would also use the Miami Housing Innovation Fund, a pool of funds from public, private, and philanthropic sectors.
At Morris Southeast Group, we cannot say enough about the strength of partnerships and the power of community. It’s one of the reasons we’ve been proud to call South Florida home for more than 30 years. In partnering with affordable housing solutions, CRE developers enrich the community by providing jobs, goods and services, and increasing traffic to CRE properties. It’s good sense, all around.
To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
In the realm of commercial real estate (CRE), pop-ups are relatively new. What were once considered trendy have proven to be very popular, and there is no denying the positive impact they’ve had on CRE.
Thanks to short-term leases, building owners can generate income from properties that would have otherwise remained vacant. At the same time, these unique leasing opportunities allow a new business to introduce itself to the public and, if successful, become a long-term tenant.
Part of the fun of a pop-up is creating new ways to repurpose space. Pop-up art galleries became pop-up retail shops, which became pop-up museums and libraries. Recently, pop-up attention has been looking at available outdoor areas, from vacant lots to curbside spaces to underutilized properties—and all of this has given rise to the pop-up park.
Pop-up parks, or PUPs, are a spin-off of Park(ing) Day, a program that began in 2005 in San Francisco, when a design collective rented out a parking space for a few hours and installed a temporary garden. That idea literally and figuratively grew into PARK(ing) Day and is celebrated in countless parking spaces around the world.
The idea evolved at the same time many cities were eager to revitalize downtowns into pedestrian-friendly zones, and city dwellers craved greater contact with nature. Park space seemed like a logical idea, but many of these urban areas were already cramped with pavement and properties—with the exception of available space in curbside parking, vacant lots, and other underutilized areas.
What began as an initiative for local governments and city planners to create green spaces for residents has evolved into a partnership opportunity between municipalities, community groups, and developers.
Generally, PUPs are less expensive than traditional park projects and can often be completed more quickly. Rather than removing asphalt, for example, green paint can delineate the park area. The addition of benches, tables and chairs, and potted plants and raised beds make it a hub where people and nature can come together.
While there is little doubt that green spaces have tremendous benefits for the physical and psychological health of people, as well as boosting wildlife and bio-diversity, what are the pluses of PUPs—other than a lower development cost—for CRE?
Although PUPs are designed to be temporary, remember to keep a few key ingredients in mind. In addition to plant material and outdoor seating options, it’s important to include flexibility. While the PUP may serve as an outdoor lunch and meeting space during the workweek, what will it be after hours or on weekends? Can the space become a craft bazaar on a Saturday morning, a small venue for a Saturday afternoon concert, and then an outdoor yoga space on a Sunday morning?
In addition, each locale has its own rules and regulations—so it’s important to work with a team that can help negotiate the permit and zoning processes. At Morris Southeast Group, we are firmly planted in the belief that wonderful transformations occur—whether it’s a pop-up or something permanent—when developers and community work together.
To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Most people are familiar with the term “eminent domain”—a phrase that can instill fear and panic in residential and commercial property owners. It can also stoke impassioned protests and, naturally, lawsuits in neighborhoods around the country. In the collective mind’s eye, it’s often viewed as a public battle of David and Goliath proportions.
That, however, is only one side of the coin. Flip it over, and eminent domain can easily be something property investors don’t even think about. But if it’s ignored and you’re caught off-guard, it could suddenly place an entire investment at risk.
Also known as condemnation, eminent domain is a process by which the government—from the federal level down to the local level—or its agent can condemn and seize private property for the “public good” in exchange for “just compensation.”
The basis for it is found in the 5th Amendment of the United States Constitution. While condemnation laws have slight variations from state to state, every single piece of property in all 50 states is subject to being completely taken or damaged to support a public project.
While that seems like a very straightforward explanation, it is, in fact, a gray area. Just what is the “public good?” Traditionally, most people think of the public good as big infrastructure improvement projects, such as a runway expansion at the airport, a new highway interchange to ease traffic congestion, or, in the case of Miami, a 10-foot wall to protect the coast from a storm surge.
“Public good” became less clear following a 2005 Supreme Court ruling. In Kelo vs. City of New London, a Connecticut woman sued the city after it deemed her remodeled home as blight in an effort to condemn her property. The city was making way for an expansion of a private company to realize ensuing tax benefits and an economic boom in her neighborhood. The Court ruled (5-4) that economic improvements can be interpreted as being for the “public good.”
The result of this controversial decision was that more county and municipal governments embraced eminent domain and partnered with developers in efforts to ignite economic development. Many of these initiatives were met with legal challenges. The court system examined each case for condemnation with a very fine-toothed comb, often resulting in the gavel falling on the side of the property owners over governments.
Following Kelo, many states re-examined their own eminent domain rules and regulations in an attempt to protect property owners from the government’s potential abuse of condemnation. In Florida, for example, then-Governor Jeb Bush signed off on legislation that gave the state an “A” rating for protecting the rights of Florida property owners.
For developers looking to work with local governments that utilize eminent domain, it’s imperative to know the regulations in a specific state and to ensure that “public good” or “public purpose” is firmly established. Otherwise, the project can quickly become bogged down in lawsuits.
The impact of eminent domain on developers is only one side of the issue. The other side affects anyone who is looking to invest in commercial properties.
The risk of eminent domain must be incorporated into an investor’s due diligence checklist. Very often, this aspect is forgotten, and the consequence is a surprise that reveals itself after the deal is done. For example, consider a buyer who failed to check for any projected public projects in the area of his or her newly purchased strip mall. After the sale is complete and tenants move in, a road-widening project results in the loss of prime parking spaces. There is no “buyer beware” clause.
It’s essential for anyone—developers, investors, and sellers—to work with professionals who are knowledgeable in the processes of eminent domain and condemnation—and the due diligence required to mitigate these risks.
To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
For nearly 10 years, the Financial Accounting Standards Board (FASB), which regulates accounting standards in the United States, has been in negotiations with its international counterpart to bring a key standard into alignment. The result is ASU 2016-02, which the FASB formally introduced in 2016.
The regulation change is meant to increase transparency through the disclosure of lease assets and lease liabilities on balance sheets. It also satisfied the requirements of the International Accounting Standards Board (IASB), plus gets the FASB and the IASB on the same page.
Public companies implemented the new accounting standard in 2019, and 2020 will see private companies come into compliance. Although the regulation is specifically geared toward the accounting profession, it’s important for real estate investors, tenants, and brokers to understand the changes. These updated regulations directly affect business decisions when leasing or purchasing everything—from equipment to property.
Generally speaking, there are two types of leases: capital and operating. Most people are familiar with capital leases. It merely means that to own an asset (such as a building), an individual is taking on debt, like a mortgage. At the end of the mortgage, that individual owns the asset. Capital leases, now referred to as financial leases under the new regulation, always have and will continue to appear on balance sheets.
Operating leases, on the other hand, mean that the individual never owns the asset. Essentially, it’s a rented property. And as such, it was an off-balance-sheet item—until now. The ASU 2016-02 standard requires operating leases with terms longer than 12 months to show an asset or a liability—and this information must be recorded on the balance sheet.
The FASB regulation change has had and will to continue to have a lasting effect on the CRE sector. ASU 2016-02 impacts tenant and landlord business decisions, lease agreements, accounting data, and mindsets.
Ultimately, the FASB regulation change has made the leasing process more complicated for all parties. Therefore, it’s essential to work with experts who can advise owners and tenants on how best to proceed, no matter if it’s a lease or a purchase.
Morris Southeast Group has a long and successful history of working with investors, owners, and tenants. To learn more about what we can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
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