The Financial Accounting Standards Board has established new standards for office leases, taking effect in 2019. For businesses with leases that are a year or longer, businesses now have to report these leases as both assets and liabilities on balance sheets. This alters the categorization of the lease as debt rather than an expense, affecting taxation and potentially affecting the ability of a company to borrow money for equipment and expansion.
How New Accounting Rules Are Changing Coworking and Traditional Office Leases:
Here are four new ways these new accounting rules will impact coworking and traditional office leasing.
The changes in accounting rules mean that leases must now be recorded as other liability and not debt, reducing shareholder equity, reduced debt-to-equity and current ratios, and a reduction to regulatory capital. The leverage on balance sheets from both purchasing and leasing properties will be similar which will cause certain companies to reconsider long-term leasing versus buying space. In preparation of the new frontloaded changes established, some companies have already decided to purchase spaces instead of renting.
Coworking Spaces’ Shorter Lease Terms Will Gain Appeal
As companies now have to report office leases as debt, this may push more companies and corporations to seek out coworking spaces that offer leases for less than 12 months. There are now more professional options than ever before for your team, including coworking spaces. Flex and coworking spaces can help companies meet the FASB standards since there are term options as short as one month.
Coworking Spaces Can Gain New Types of Tenants
Because these new accounting rules are affecting office leases, this is an opportunity for coworking operators to seek out new types of tenants and use this in their pitches. If public companies sign a lease with a coworking space provider, and if the provider has a right to move the tenant, the lease won’t have to be listed as a liability. This can be an attractive benefit to all sorts of new companies who may have never considered coworking before.
Coworking Operators Who Often Obtain Longer Leases Will Be Impacted
Typically coworking companies sign leases from 10-15 years when it moves to a new location. The longer lease time is due to the often-extensive improvements demanded by tenants, which landlords willingly accept because it creates a positive image and revenue stream. Coworking companies then offer monthly leases to its tenants for various options from a ranging use of common area office space to guaranteed private offices.
These new accounting rules potentially offer great benefits to coworking operators. They can help attract larger tenants who are concerned about the effect of signing longer-term leases. However, coworking operators are also negatively affected because they long term 10-15 year leases now must be registered on their balance sheet potentially affecting the operator’s ability to obtain debt.
For both coworking and traditional office operators, the new accounting rules will leave a lot to be considered to best maximize value and productivity. Companies will need to determine if it makes sense to keep signing longer-term leases, utilize a coworking space or if potentially buying their space is the best option.
Atlanta Coworking Spaces
SharedSpace, is a regional coworking business focused on creating modern, professional, and energetic work environments to stimulate the creativity and productivity of entrepreneurial businesses and their teams! Please don’t hesitate to reach out if your business is looking for creative opportunities to reinvigorate your workforce and brand with a modern coworking environment like SharedSpace.